i

A CRITICAL ASSESSMENT OF THE SURVIVAL STRATEGIES OF

DEPOSIT MONEY BANKS IN A DEPRESSED ECONOMY WITH
SPECIAL REFERENCE TO THE FIRST BANK OF NIGERIA PLC

BY

EIYA, MABEL CLARE

REG. NO: BF/2006/036

DEPARTMENT OF BANKING AND FINANCE

FACULTY OF MANAGEMENT AND SOCIAL SCIENCES
CARITAS UNIVERSITY, AMORJI NIKE, ENUGU

AUGUST, 2010

ii

A CRITICAL ASSESSMENT OF THE SURVIVAL STRATEGIES OF

DEPOSIT MONEY BANKS IN A DEPRESSED ECONOMY WITH
SPECIAL REFERENCE TO THE FIRST BANK OF NIGERIA PLC

BY

EIYA, MABEL CLARE

REG. NO: BF/2006/036

BEING PROJECT REPORT PRESENTED TO THE

DEPARTMENT OF BANKING AND FINANCE
IN PARTIAL FULFILMENT OF THE AWARD OF DEGREE OF
BACHELOR OF SCIENCE (B.SC) IN BANKING AND FINANCE
CARITAS UNIVERSITY, AMORJI-NIKE, ENUGU

AUGUST, 2010

iii

APPROVAL
This report has been received and approved for the Department of Banking
and Finance.

_____________________
I. G. OKAFOR
Project Supervisor

____________________
I. G. OKAFOR
Head of Department

iv

CERTIFICATION
I, Eiya Mabel Clare, an undergraduate of Banking and Finance, with the
Registration Number BF/2006/036, have submitted this project report for the
award of degree in Banking and Finance. This project report is my original
work and has not been submitted in part or in full for any degree or diploma
in this university or any other institution.

______________________
Eiya, Mabel Clare

___________________
Sign/Date

We certify that this project report has been successfully defended and
accepted for the award of the degree of Bachelor of Science (B.Sc) in
Banking and Finance

_______________________
I. G. Okafor
Project Supervisor

____________________
Date

________________________
I. G. Okafor
Head of Department

___________________
Date

_________________________
External Examiner

____________________
Date

DEDICATION
This project report is dedicated to Almighty God who gave me life that I may
enjoy all the benefit of living. To my eldest brother, Mr. Clement. E. Eiya,
who chose to be the moon that will shine on me in my darkest hour. And to
the entire Eiyas family for their immeasurable love, care and concern for
me.

vi

ACKNOWLEDGEMENT
I am most thankful to God who made it possible for me to climb up to this
present level of achievement. To Him be all the glory.
I am highly grateful to my eldest brother, Mr. Clement. E. Eiya, for his
tireless effort towards my academic pursuit. You are indeed a stunning
combination of all that is good. My special thanks goes to my mother, Mrs.
Felicia. E. Eiya, for her prayers, moral and material support for me; and to
my brothers and sisters who encouraged me.
This project would not have been a success if not for the positive
contributions of many people especially some staff of Central Bank of
Nigeria, Enugu, Union Bank Plc and Spring Bank Plc, Enugu, whose names
may not be mentioned because of space; and my supervisor, Mr. I. G.
Okafor, H.O.D., Banking and Finance Department, Caritas University,
Enugu, who criticized and appraised all the chapters. I cannot thank them
enough but I know that God will reciprocate this kind gesture.
I express my appreciation to Dr. Foster Ezenwa, Chief C. C. Okoye, Rev. Fr.
Remy Onyewuenyi, and all my coursemates especially Margaret Uche
Ogoma, for their support and encouragement throughout my stay in school.
I also express my profound gratitude to my departmental lecturers, Mr. I. G.
Okafor (HOD), Prof. F. O. Okafor, Mr. A. O. Nwadiubu, Mr. M. C.

vii

Ezeamama, Mr. S. M. Takon and Miss E. S. Nsofor and to all the lecturers in
the Faculty of Management and Social Sciences, who enabled me.
I am highly indebted to the Management and staff of First Bank of Nigeria
Plc, Okpara Avenue, Enugu, for their assistance which made this project very
successful.
Finally, I am sincerely grateful to those people in my life who have so
skillfully used the game of power to manipulate, torture and cause me pain
over the years. I bear you no grudge but I thank you for supplying me with
the inspiration for life.

viii

ABSTRACT
Banking is in the midst of change that has arisen due to economic
depression. As government seek to improve economic efficiency and better
allocation of resources to solve the problem of economic depression, policy
makers are shifting towards openness, competitiveness and market
discipline.
In response to the developments, Deposit Money Banks in Nigeria engaged
in financial sanitizing, management strengthening, corporate refocusing,
Business Process Reengineering (BPR), mergers and acquisitions in order to
survive the depressed economy. This whole process is called survival
strategies through corporate restructurings.
The writer made efforts to discuss issues, facts and environmental factors
surrounding the wave of deposit money banks survival in a depressed
economy like Nigeria.
The impact of this research in banks was gleaned from five performance
indicators namely total assets, total deposits, loans and advances, profit
before tax and shareholders funds, of First Bank of Nigeria Plc. The
research looked at the position of these indicators before and after the
sanitizing exercise undertaken by the banks for survival and also, its impact
on the entire banking system bearing in mind the effect of globalization on
the financial market in particular and the economy at large.
Chapter four shows the presentation and analysis of First Banks financial
statement with the use of chart, tables, bar chart and graph.
Chapter five summarizes all that was discussed from chapter one to four and
gave suggestions on how deposit money banks can survive in a depressed
economy.
Finally, this researcher leaves this work open to constructive criticisms and
expects future scholars to delve into further research and improve on this
work.

ix

TABLE OF CONTENTS
Page
Title Page

ii

Certification Page -

iii

Dedication -

iv

vii

Table of Contents -

viii

Approval Page

Acknowledgement
Abstract

CHAPTER ONE:INTRODUCTION
1.1

Background of the Study -

1.2

Statement of the Problem-

1.3

Objectives of the Study -

11

1.4

Research Questions

12

1.5

Scope of the Study -

12

1.6

Significance of the Study -

13

1.7

Limitations of the Study -

14

1.8

Definition of Terms

15

CHAPTER TWO:
2.0

Review of Related Literature

2.1

Issues in Bank Survival -

17

2.2

An Overview of the Operating Environment for

Nigerian Deposit Money Banks -

19

2.2.1 The Macro-Economic Environment

20

2.2.2 Industry Environment

29

2.2.3 The Regulatory Environment/Legal Framework - 32

2.3

The Business Process Re-Engineering (BPR) Option -

2.3.1 Origin and Meaning of the BPR Concept

35

35

2.3.2 Fundamental Breakthrough Required for Reengineering

Services in Banks -

36

2.3.3 Key and Methodology for Carrying Out a BPR Project in Banks 42
2.3.4 The Role of BPR in the Survival and Sanitizing of the Nigerian
Deposit Money Banks

2.3.5 Positive Effects of BPR To the Banking Sector

50

2.4

52

2.4.1 Meaning of the Concept Merger and Acquisition

52

2.4.2 Legal Issues in Merger and Acquisition

55

The Merger and Acquisition Option

47

2.5

Synergy: An Efficiency Indicator in Bank Sanitizing -

56

2.6

Nature of Deposit Money Bank in Nigeria

59

2.7

A Historical Overview of First Bank of Nigeria Plc -

60

2.8

Depressed Economy

2.8.1 Causes of Economic Depression -

62

63

CHAPTER THREE:
3.0

Research Methodology - -

65

3.1

Research Method -

65

3.2

Determination of Population size of the Study

65

3.3

Determination of Sample size -

67

3.4

Method of Data Collection

68

3.5

Method of Data Analysis/Interpretations

69

71

Plc for the Month ended 31st March -

CHAPTER FOUR
4.0

Data Presentation and Analysis--

4.1

Financial Statement of First Bank

71

xi

4.2

Analysis of Total Assets -

73

4.3

Analysis of Total Deposits-

77

4.4

Analysis of Loans and Advances-

80

4.5

Analysis of Profit Before Tax

86

4.6

Analysis of Shareholders Funds-

89

CHAPTER FIVE
5.0

Summary, Conclusion and Recommendation-

5.1

Summary - -

93

5.1.1 Total Assets -

93

5.1.2 Total Deposits

93

5.1.3 Loans and Advances

- 94

5.1.4 Profit Before Tax (PBT) -

- 95

5.1.5 Shareholders Funds

- 95

5.2

Conclusion -

5.3

Recommendation

96

Bibliography -

99

93

96

CHAPTER ONE
INTRODUCTION
1.1

BACKGROUND OF THE STUDY

Nigerian economy is faced with national and global economic
challenges and as such, the financial institutions, especially the
banking sector has an option of sanitizing and restructuring its
operational processes in order to survive the depressed economy, as
well as embarking on a consolidation exercise which would have
some wider structural effects on the industry and on the economy as a
whole.
Basically, banking is a service industry operated by human beings for
the benefit of the general public while making returns to the
shareholders. As such, it is natural that the services provided thereof
by the industry cannot be 100% efficient; however, there is always a
room for improvement. It is on this statement that the index of our
further discussion on this study is based.
The banking sector in the third world economies has been grossly
under managed when compared with their counterparts in the
developed countries of the world. This has made it imperative for
Nigerian banks to sanitize and restructure their operational processes

so as to be in line with the global trends, and to survive the depressed

economy.
Before the introduction of Structural Adjustment Programme (SAP) in
1986, the banking sector was characterized by few banks.

The

operators of these banks had almost total control of the business of

banking as customers had to look for their services which most of the
times were of poor quality. The managers, because of the pressure to
provide banking services, had little time to market their bank services
or design new products to improve their customers service and at the
same time, they received changes based on the approved tariff.
Competition was minimal and customers could spend long hours
trying to obtain service in the banking hall due to long queues.
The quality of the bank staff was poor. They were rude to their
customers and most of the time; they felt they were doing a favour to
their customers. As at that time, no Nigerian bank had neither a
simple computer nor a network of computers for online banking. In
the area of credit appraisal, Ezeikpe (1993) observed that they were
two conservative in extending credit facilities. The system was highly
under banked while the payment mechanism was filled with

imperfection such that locally drawn cheques took more than one
week to clear.
However, with the introduction of Structural Adjustment Programme
(SAP) and its policy of deregulation and liberalization, some
structural reforms were ushered into the banking sector. By this
policy, direct management and rigid controls in banking and security
business by the government were de-emphasized for a broad based
and private sector driven process. Laws inhibiting competition were
removed to ensure that banks are reasonably sound, competitive and
efficient.
The traditional reforms were aimed towards achieving the following
objectives:
1.

A strategy for competition.

2.

A sound organizational structure and effective management to

support the strategy.

3.

To ensure management of critical financial and operating risks

in banking.

4.

A system for planning, budgeting and measuring performance.

5.

Entrenching a programme for human resource management.

6.

Ensuring a strong and effective internal control.

7.

Putting in place the most appropriate Information Technology

(IT) to automate the process. Without any doubt, this policy
was geared towards enabling banks to respond flexibly to
monetary conditions and to facilitate an effective mechanism
for transmitting the effect of monetary policy to the real sector.
The policy of liberalization ushered in an era of bank
proliferation and reduction in professionalism. Investors rushed
into banking business with about the same zeal with which they
embraced contracts during the oil boom era of the 1970s. In no
distant time, signals of distress started manifesting in the
banking sector by way of liquidation.

Some factors were

identified as the causes of the distress that besieged the banking

system. These factors included:
1.

Under capitalization which made the capital structure of some

of the banks to be inconsistent with their risk asset profile.

2.

No clearly defined lending policies and credit appraisal

techniques.

3.

Unprofessionalism in the conduct of bank staff.

4.

High incidence of bad debts and non-performing facilities.

5.

Boardroom squabbles and undue interference of the board in

the day-to-day management of the bank.

6.

Poor staff quality which arose due to the absence of retraining,

and giving lip service attention to human premium.

7.

Incompetent management.

8.

Conflict of interest and insider abuse.

9.

Policy

problem

or

delay

and

inadequate

institutional

arrangement and structures on the part of the regulatory

authority before implementing policy changes thereby creating
unhealthy and avoidable suspense and uncertainties.
10.

Inadequate prudential regulation and framework for credit

classification.

11.

The sudden withdrawal of public sector deposit from the

banking system to Central Bank in June, 1989.

12.

The epileptic stabilization securities and their lack of clear

guidelines or modalities with respect to timing, mode of
computation and amount
The list is almost unending but one can observe from the above
that apart from the last four (4) points which are externally
induced stock, the rest are problems that can be controlled with

appropriate in-built mechanism of internal control in the

individual banks.
In the face of all these problems and uncertainties, the option
available for the system to have a better control of these factors
is to sanitize the bank internally and externally for survival.
Aderingbe (1997) observed that for Nigerian banks to remain
relevant in the next century with the current incursion of
technology and globalization of the world market, they have to
learn how to sanitize their operations for survival.

Also

Elumelu (1998: 26-27) observed that the recent N25 billion

recapitalization of Nigerian banks has made banks to go into
several arrangements for its continued relevance.

This has

resulted into arrangements like mergers, acquisitions, takeovers, re-engineering etc.

The issue of bank survival through restructuring and sanitizing
does not exist only as a failure resolution strategy. However, it
can be adopted in solving so many operational problems of
corporate organizations.

The financial service industry has

applied it in many operational problems. In acknowledging the

strategies and its impacts in the banking sector, a world bank

report in the United States of America shows that for the year
1992-96, the banking industry accounted for 13% of mergers,
acquisitions and other survival activities by number of
institutions and 12% by dollar amount and ranked first among
other

industries

survival

through

sanitizing

activities.

However, certain global factors have been identified as haven

contributed to the result in an upward trend in survival and
sanitizing activities; these included:
1.

The dismantling of regulatory barriers and regional economic

groupings which jerked up the pace of globalization.

2.

The recent advancement Information Technology (IT) and the

new rate of interest in banking.

3.

Continued institutionalization of the market participants as

opposed to individualization.

4.

The need for an enhanced payment mechanism.

5.

The increase competition in the financial services delivery. The

survival strategies and the impact of sanitizing the Nigerian
banks have resulted in emergence of strong new local banks
fully 100% owned foreign banks or both local and foreign
participation in owners such as Citibank and NBM, Stanbic

Merchant bank within the limited availability of component

manpower.
Mike Hunder

(1997:12) in his crusade

for re-engineering,

restructuring, sanitizing and survival, opined that, as competition

among banks become keener in the face of declining market margins,
banks management have to manage the hard way of re-engineering.
As the banks are devising ways of improving efficiency and ensuring
the optimization of the available resources, policy makers and
regulatory authorities are moving towards openness, competiveness,
and at the same time ensuring market discipline. This is in tandem
with the trend in the banking sector globally.

Ahmed (2000:33)

described this development as a magic one which caused quite a

substantial number of Nigerian banks to be sick while some became
healthier. In his view, he contended that growth in the banking sector
should be transmitted easily into growth of the real sector. But as
banks continued to record impressive growth in all economics, indices
show a declining margin of economic growth. This makes one begin
to wonder where the impacts of the impressive performance of the
banks as reported in the financial reports are being felt. Even the
NDIC which is established to insure the deposit liabilities of licensed

banks has liquidated some distressed banks. The action, Ezeikpe

(1993: 36-38) commended while arguing that some distressed banks
should be liquidated as a way of survival for the banking system.
It is on this argument that this work lies to assess the survival
strategies of deposit money banks in a critically depressed economy
with special reference to the First Bank of Nigeria Plc, paying
attention to its performance, growth and stability.
1.2

STATEMENT OF THE PROBLEM

Evidence has shown that the banking business is undergoing several
transformations. With the increased deregulation and liberalization of
the business, their structural changes are unavoidable; hence, the
current wave of restructuring in the sector is to respond adequately to
the fast changing and increasingly competitive business in order to
survive.

Banks that are unable to restructure in line with the global

revolution in the industry should be ready to go down the drain in the

process and be liquidated.
Between 1991 and 1997, a total of 31 Nigeria banks have been
liquidated by the NDIC due to their protracted problem of distress, but
some of the casualties would have been averted if appropriate
restructuring strategies were implemented.

10

In this era of customers sophistication and advancement in

information technology, bank management should learn to be
proactive and more efficient in product/service delivery. They should
continually review their operational strategy in readiness for the ongoing global challenges, more so, as customers are becoming aware of
their environment and ready to move their funds to where their
demands would be adequately met while yearning for more
personalized services.
In consideration of the above challenges, one may ask, how effective
are the various survival/options and sanitizing strategies adopted by
banks in the face of economic depression?

Has information

technology been given adequate attention? Do bank mergers achieve

the desired synergy? Has survival strategy through restructuring led
to an improved bank performance? How far could the result of the
exercise be sustained without abandoning the strategy?
These stated problems together with the research questions below are
what the researcher tries to encapsulate in the research topic with a
view to providing their answers in the course of this research.

11

1.3

OBJECTIVES OF THE STUDY

In dealing with the above stated problems, the study seeks to achieve
the following objectives;
1. To find out if the volume of assets of banks improved after survival
strategies were employed through sanitizing and restructuring.
2. To find out how survival strategies adopted by the banks have
affected deposit mobilizations.
3. To ascertain the extent the depositors confidences have been
restored in the survival strategies employed by banks in a
depressed economy.
4. To examine how survival strategies adopted by banks impacted on
the shareholders funds of the affected banks.
5. To find out if the volume of loans and advances improved after
adopting

the

survival

strategies

through

sanitizing

and

restructuring.
6. To know whether profitability of banks improved as a result of
survival strategies adopted by banks after sanitization and
restructuring.

1.4

RESEARCH QUESTIONS

12

In trying to make a critical analysis of survival strategies for deposit

money banks through sanitization of the banking industry for growth
and stability, the following questions will be very important as the
researcher tries to provide answers to those mind bugging questions
which are:
1.

Has there been any improvement in the banks assets as a result

of the restructuring?

1.5

2.

Has there been increase in deposit mobilization?

3.

To what extent has depositors confidence been restored?

4.

Has there been increase in the size of loans and advances?

5.

How has the strategy impacted on the banks profitability?

6.

What impact has the strategy made on the shareholders funds?

SCOPE OF THE STUDY

This study attempts to study survival strategies through corporate
restructuring and sanitizing as they are applied in enhancing the
performance of deposit money banks in a depressed economy. The
study covers the activities and impacts of sanitizing in Nigerian banks
using First Bank of Nigeria Plc as a case study. Acquisitions and
business reengineering are discussed.

13

The period chosen is from 2003 2008 in First Bank Plc of the
Nigerian Banking Sector. This is to enable the researcher study the
trends for about three years before sanitizing and three years after
sanitizing. This is with the understanding that the time frame will only
be fair and balance for comprising their performance. It is also
extended to 2008 to ensure that the information and data used are
timely, up to date and accurate enough to represent the current
position of the bank under study.
1.6

SIGNIFICANCE OF THE STUDY

Although much have been written about banks survival in a
depressed economy and sanitizing of banks in recent times, much of
these literatures approached the issue only as a failure resolution
option. Though banks survival through sanitization can sometimes is
appropriate approach for failure resolution, it can also be embarked
upon to enhance performance in good performing banks.
In view of the above reason, this study does not limit its scope to the
distressed banks or resolution of distress. A good performer may also
be required to sanitize for survival of its business process or reposition
for further challenges in the market or to respond to certain global
developments. In this regard, bank directors, corporate bodies and

14

management that want to embark on banks survival strategies and

corporate refocusing to achieve better results will find this as an
interesting piece. For academicians, it will serve the purpose of
arousing deep thoughts and genuine interest on the subject matter for
further research.
Consequently, upon completion, this work will:
1. Detail out the various forms of survival and sanitizing strategies
that are desirable for banks using the First Bank as a case in point.
2. Recommend the approach or methodology to be followed in
sanitizing and reengineering the business process in banks for
survival in a depressed economy.
3. Determine if survival strategies and sanitizing have restored
confidence among Nigerian banking public.
1.7

LIMITATIONS OF THE STUDY

The major constraints encountered in this research work are:
The obvious attempt by banks to classify most of their information
that is necessary for the completion of this work due to certain
management policies.
The escalating cost of transport and financial impediments which
made the cost of carrying out the research to be expensive.

15

The inability to collect the annual reports of many banks for various
years was a slow down to this research as the staff refused to disclose
the figures for analysis which necessitated the use of First Bank Plc as
a case study.
On the whole, academic stress and time factor also added to the
problems but the researcher made the best efforts in optimizing the
available resources and information without allowing the limitations
to make the researcher lose sight of the quality of the final output. In
essence, these limitations do not impinge on the validity of this work.
1.8

DEFINITION OF TERMS
SURVIVAL: The state of continuing to live or exist often in spite of
difficulty or danger.
STRATEGY: A plan designed for a particular purpose. The process of
planning something or carrying out a plan in a skillful way.
DEPOSIT MONEY BANKS: The resident depository corporations
and quasi-corporations which have many liabilities in the form of
deposits payable on demand, transferable by cheque or otherwise
usable for making payments.

16

DEPRESSION: The state of being depressed. It is a period when

there is little economic activity, and many people are poor or without
jobs.
ECONOMY: The relationship between production, trade and the
supply of money in a particular country or region. It is the system of
trade and industry by which the wealth of a country is made and used.
DEREGULATION: It is a way to free a trade, business activity etc
from certain rules and controls.
LIBERALIZATION: This is a way to free somebody or something
from political, religious, legal or moral restrictions.
LOAN AND ADVANCE: Loan is a sum of money which is
borrowed, often from a bank, and has to be paid back usually together
with an additional amount of money known as interest, while Advance
is bank lending which may be via term loan, overdraft, or bill
discounting.

17

CHAPTER TWO
2.0

REVIEW OF RELATED LITERATURE

2.1

ISSUES IN BANK SURVIVAL

In different economic periods, banks and businesses may see the need
to sanitize their operations for survival and growth in response to the
uncertain macro-economic environment. Mergers, take-overs, reengineering and corporate-turn-around issues have become the central
public and corporate policy issues in Nigeria banking.
Corporate-turn-around issues come into play when the top
management team of a bank undertakes restoration of an ailing
corporate business portfolio to good health, or to improve on the
already performing portfolio or repositioning and redefinition of the
business focus for future market changes. The chief executive of the
management team and every staff in the firm must resolve to make a
firm resolution, that is, a firms commitment to re-evaluation the
current belief in the light of new evidence. The management team
should be courageous to carry on the project to conclusion, adopting
all the recommended strategies in the face of surmounting challenges.
Management actions and decisions should be such that will optimize
the available resources. That is why Drucker (1994:26) sees

18

managerial action as having synergistic effect in which they should

create a productive entry that turns out more than it receives as input.
The first task here is always the diagnosis of the underlying reasons
for poor corporate performance, and curative strategies will
immediately be large losses in some units like poor and nonperforming portfolio, unattractive and improper or in some cases, non
existing products, ineffective products/services system etc. These
factors pull together with unfriendly operative environment to result
in poor performance of the organization.
Depending on the roots and urgency of any problem, some of the
following approaches can be used either singly or combined to
achieve sanitizing objectives of banks; according to Drucker.
1.

Focus mainly on restoring profitability in the money leasing

units.

2.

Implement harvest /divest strategies in the poorly performing

units and allocate money and resources to expansion of better
performing units.

3.

Institute across the board, economies in all business units.

19

4.

Revamp the composition of the business portfolio by selling off

weak businesses and replacing them with new acquisition in
attractive investments (investment strategy).

5.

Replace key management personnel at the corporate level.

6.

Launch profit improvement product in all units.

7.

Go into a combination (merger and take over) arrangement.

In this chapter, the researcher seeks to review the related literature to

seek out what is involved in banks survival through sanitizing, how
and to what extent they are done. Hence, the literature review is to go
into relevant works to find out what and how banks achieve economic
survival and growth through sanitizing strategies. To this end, the
relevant and related works of various authors in the subject matter
shall be reviewed. However, the operating environment for banks in
Nigeria shall first be discussed.
2.2

AN OVERVIEW OF THE OPERATING ENVIRONMENT FOR

NIGERIAN DEPOSIT MONEY BANKS
An environment can be defined as those factors that are largely or
totally outside the managements control. It refers to certain
uncontrollable variables that impact on an organization and therefore,
must be taken into consideration in management decision making. The

20

nature, quality and type of decision in a business organization is

directed towards adapting to the environment.
Nigeria banks operate in a dynamic environment and must therefore
adapt to survive, because the environment creates opportunities and
imposes constraints on their activities. The continual profitability and
the survival of banks is therefore dependent to a large extent on
managements ingenuity in making decision that will enhance the
earnings of a bank.
However, for the purpose of clarity, this study would review operating
environment for banks from three perspectives. They include.
1.

The macro-economic environment

2.

The institutional/industry environment

3.

The regulatory/supervisory environment/legal framework

2.2.1 THE MACRO ECONOMIC ENVIRONMENT

The existence of a stable undistorted macro economic environment is
the foundation of strategy for economic growth, better policy
formulation and implementation, which means faster growth and
therefore, shows the need to maintain good macro economic policies
as measured by low inflation, prudent fiscal stance and realistic
exchange rate. In its widest sense, macro economic environment

21

refers to those domestic policies as well as the outside policies

(international macro-economic environment) which affect the
performance of domestic economy.
Ajayi (2005: 26) summarizes what constitutes a conducive macroeconomic environment as :
1.

A realistic exchange rate

2.

Balanced budget and a small ratio of government consumption

to GDP

3.

Open trade policy as opposed to inward looking import

substitute strategy and tariff regimes.

4.

Political Stability and good governance development and

adequate investments in human capital.

5.

Financial Strength.

Evidence from successful economies shows the need to maintain good

macro prudent fiscal stance, realistic exchange rate and absence of
parallel exchange rate. Evidence of Middle East East Asia Miracle
is useful where policies to increase the more accessible to nontraditional savers increased the level of financial savings.
For the purpose of this research, the analysis of the Nigeria macroeconomic environment is broken down into four phases.

22

Period 1

1960-1965

Period II

1966 1970

Period III

1971 1985

Period IV

1986 2005

PERIOD I 1960 1965

This period which was during and after independence was regarded as
the one of the high expectations. Although available resources were
low, foreign aids were enjoyed in the form of exchange of
professional staff, scholarship and grant. The agricultural sector was
dominant at that time in terms of number of sources of government
revenue and GDP contribution. The monetary and fiscal policies were
geared towards promoting industrialization and development through
credit ease and tax holidays. The country was able to lay the necessary
foundation in areas of infrastructures and education. Banking sectors
was then characterized by few banks operating in the system. The
Central Bank of Nigeria was just then established and there were strict
regulations. Foreign owned banks operated with weak capital base and
were not sound in staff and management.

23

PERIOD II

1966 1970

Two major events that had significant impact on the macro economic
environment and which still haunt the countrys operating
environment for business till date happened this period. The first event
was the January 1966 military coup detal amidst blood bath. The
second event was the out break of civil war which created disruption
and destruction of already existing infrastructures. The period
witnessed the merging of the two then existing merchant banks into a
single institution in July 1969.
PERIOD III

1971 1985

After the civil war, the nation embarked upon a reconstruction

programme. Incidentally, the discovery of oil resources in Nigeria and
increase in oil price changed the direction of the nations economy.
Crude oil became the chief export earner and therefore served as the
main source of government revenue. The government then had the
financial muscles to participate in economic activities and it became
prominent in almost all sectors of the economy. At this time, there was
a dearth in entrepreneurship which added impetus to the governments
participation in economic activities. The oil boom changed the pattern
of production, investment and consumption, making the economy to

24

depend more on imports. This was reflected in the third development

plan document that the importance of mining and quarrying sector in
Nigeria has substantially increased in recent years. FGN (1980).
Thus, the oil has become the main engine of growth of the Nigerian
economy. Due to enhanced level of experience and unprecedented
growth, the boom in economic activities resulted in increase in the
number of banking institution in Nigeria to finance the huge imports
and merchandizing activities. Subsequently, the number of deposit
money banks rose sharply while that of merchant banks rose to twelve
by 1985.
The dawn of oil boom altered the macro-economic environment in
many ways as:
1. Illusion was created that finance was no more a constraint in the
economy.
2. The economy shifted from one based on subsistence agriculture to
the monetized activities.
3. The oil boom changed the pattern of production, investment and
consumption which resulted in an airport oriented economy.

25

4. The massive investment led to change in the structure of wages

and prices resulting in growth of inflation from 3.3 percent in 1973
to 33 percent in 1975.
The crash of oil prices in 1978 marked the beginning of the
Nigerian financial crises as the future of the oil prices varied
inversely with control measures which basically were of three
types namely imports, foreign exchange and credit controls. These
controls had severe effect on the entire financial sector. The
financial sector however witnessed a serious setback due to the
reforms or deregulation of banks in Nigeria by the government.
PERIOD IV 1986 2005
With the launching of the Structural Adjustment Programme (SAP) in
July, 1986, which relied largely on market forces for the efficient
allocation of resources contrary to the rigid controls of the previous
period, deregulation and liberalization became the policy option. The
effects of SAP were generally mixed with both positive and negative
results as inflation grew out of control; agricultural production and
GDP recorded improved but low growth rates. However, the modest
gains in the first two years of implementing the SAP policies were lost
after the reflectionary budget of 1988. The balance of payment

26

remained under considerable pressure owing to excessive demand for

foreign exchange and over valuation of exchange rate, declining
export receipts and increasing external debt burden. Additionally,
many banks became distressed by being grossly under capitalized,
illiquid and over burden with high ratio of non performing loans.
Looking closely at a distressed bank, three explanations can be
offered. First is the over valuation of naira in real terms given the
discrepancies, round tripping between official and parallel market
became lucrative and many banks came on board to take advantage of
the

foreign

exchange

arbitration.

Secondly, the

volume

of

accumulated bad debts and non performing facilities due to

inappropriate and unclear lending policies. Thirdly, the scarcity of
trained professionals relative to the fast growing number of banking
institutions. This led to inadequate audit procedures and high
incidence of bad debt. There was equally low emphasis that was being
paid to human premium.
With

persistent

unfavourable

macro-economic

indices,

the

government suspended the policy of deregulation and introduced the

option of guided deregulation in 1995. The policy tried to allow
market forces to interplay within tolerable limits, with appropriate

27

level of intervention by the regulatory authorities. The policy aimed

towards reversing the upward trends and unfavourable macroeconomic indices, curbing the volatility of interest and exchange rates
occasioned by deregulation and re-introduction of appropriate
regulations to the areas, where market forces had adverse effect while
deregulating with caution in order to achieve the full benefits of
deregulation with little or no hiccups. It was also seen as an adequate
measure for curtailing the persistent fiscal deficits and wasteful extra
budgetary expenditure, harmonizing monetary and fiscal policies and
ensuring an era of fiscal disciplines.
However, the policy of guided deregulation was dropped in 1998 with
the little modifications. The economy was opened up more in
readiness to attract more foreign investors while private sector was
given the opportunity to play the leading role. The essence of this was
that banks would beef up their performances in order to finance the
level of investment and capital flows that was expected to move in
with the private sector driven regime. This led to the resuscitation and
re-engineering of the ailing banks. More banks started shopping for
more capital to meet up with the then CBN minimum capital
requirement of N500 million.

28

The 1999 2005 periods ushered in a more conducive environment

with the democratic government in place. The dual exchange rate was
abolished and everybody was expected to source their foreign
exchange needs. New and more foreign banks were already in the
system. This was expected to usher in more competition in product
/service delivery. The CBN autonomy was restored while merchant
banks that wished to convert to commercial banks were allowed to
apply and licenses for conversion were granted by CBN. This led to
the conversion of merchant banks like Intercontinental Merchant
Bank, Merchant Bank of Commerce, Manny, Fidelity, Union
Merchant Banks and others.
A lot more is needed to be written on the issue of the Nigerian macroeconomic environment, but it is an issue that needs a separate paper
for more detailed analysis. However, the summary of this is that the
country had an environment full of political instability, policy
inconsistencies and hiccups, inadequate infrastructure, high level of
unemployment, low domestic savings, low capacity utilization and
high rate of crime and corrupt practices, hence, the state of macro
economic instability. But since the death of late Gen. Sani Abacha in
1998, a lot of policy changes have been made at creation level; and

29

with the democratic government in place, these efforts need to be

sustained in future. Also, the recent issue of N25 billion
recapitalization base as minimum capital requirement for banks would
stabilize the economy.
2.2.2 INDUSTRY ENVIRONMENT
The environment of the banking industry is a component of the
institutional environment provided by the financial system which
cannot

be

divorced

completely

from

the

macro

economic

environment. The institutional environment is made up of financial

institutions, markets, instruments and other framework under which
the transfer of financial resources from the surplus to deficit units of
the economy operates. The components of the institutional
environment are:
1.

The Apex Institutions: The Central Bank of Nigeria (CBN),

Nigeria Deposit Insurance Corporation (NDIC), National
Insurance Commission (NIC) and the Securities and Exchange
Commission (SEC).

2.

The Banking Institutions: Universal Banks, Development

Banks, Community Banks and Peoples Bank.

30

3.

Non-Bank Financial Institutions: Insurance Companies,

Finance Homes, Pension Funds, Mortgage Finance Companies,
etc.

4.

The Financial Market: Comprising the money and capital

markets, stock exchange, stock brokers, Issuing Houses,
Registrars, etc.

To review the industry environment, it is necessary to state that the

institutional environment has a direct bearing on the banking sector
environment. This paper will only outline the impact of various
players (banks) in the industry as a full scale review will tend to make
us lose sight of the original topic. Before 1960s, the banking sector
was characterized by:
1.

Entries and exits of many banks due to reasons ranging from

capital inadequacy to incompetent management.

2.

Domination of the sector by foreign banks.

3.

Branch banking system, conservative lending, urban bank

orientation and risk aversion.

From 1960 1985, the creation of states resulted in the emergence of

states owned banks due to the inability of the foreign owned banks to
meet the needs of the new states. The oil boom of the 1970s led to the

31

influx of banks to finance the growing economy. However, the

indigenization policy by 1977 changed the ownership structure of the
foreign banks. There were lack of innovation and competition among
banks as at the period. The period was characterized by arm-chair
banking. However, from 1986, the trend changed with the
introduction of SAP and its attendant reform. The impact was felt in
the banking industry by way of:
1.

Proliferation of banks.

2.

The introduction of electronic banking and computerization

with the coming on board of new generation banks.

3.

Globalization of the economy and banking as the operating

environment is now seen beyond the locality. There is the deemphasization of geography.

4.

Some developments were witnessed in the money and capital

markets which exposed banks to more risks or the impact of the
global economy.

5.

Distress syndrome which besieged the sector in the early 1990s.

The changes led to the continual sanitizing and re-engineering
of the Nigerian loan, adopting success for strategies rather than
a retention management style which permeated banking during

32

the period of financial repression in order to survive the

depressed economy.
2.2.3 THE REGULATORY ENVIRONMENT/LEGAL
FRAMEWORK
Throughout the world of business, it is a well known fact that banking
sector is the first regulated sector of any economy. The reason for this
is not far-fetched. It stems from its critical role which is crucial to the
survival of deposit money banks and other financial institutions in a
depressed economy. This role consists of collecting deposits from
surplus units, safeguarding them and lending them to the deficit
segments for investment purposes. In doing this, the banks must also
make such funds available to the true owners on demand. For the
financial sector particularly banks to be effective in doing this, it has
to be regulated to safeguard market failure, ensure social equity and
stability and protect market operators, Nwankwo (2004:18) views the
objective of the regulation as to ensure a sound and healthy banking
and financial system, protect depositors effectively, address the
indigenous communitys savings and investment requirements and
accelerate the economic development of the country. Other objectives

33

include developing the banking habit, the financial system and

manpower for the banking industry.
The legal basis is the various banking legislations enacted by
government at various times which include:
1.

The CBN Act of 1958 (as amended) in 1998.

2.

Banks and Other Financial Institutions Decree No 25 of 1991

(as amended)

3.

NDIC Decree No 22 of 1988.

4.

Failed Banks (Recovery of Debts) and Financial Malpractice in

Bank Act of 1994 (as amended)
There are other Central Bank of Nigeria laws and directives
which are issued to banks and the public through their periodic
circulars. They include:

5.

The monetary credit, exchange rate policy circulars

6.

The prudential guidelines

The laws were put in place to ensure the stability of the banking
sector. They were also designed to saddle the banking industry
with

important

responsibilities

with

regards

to

the

implementation of SAP and the urgent need to reform the

nations financial system for more orderly and efficient growth

34

of the economy. The streamlining of the monetary policy

formulation and implementation enhances capacity of Central
Bank of Nigeria to monitor the activities of all operators in the
financial system and effectively managing the naira exchange
rate. BOFID has restrictions on insider abuse, accepting
gratification by banks staff, interlocking directorship. It also
prohibits people of questionable characters from being staff of
banks. The prudential guideline was issued by Central Bank of
Nigeria in 1990 to curb the impact of cosmetic reporting and
ensuring reliability of banks financial statements. It classified
the loan portfolio of banks into performing and non-performing
facilities. The non-performing facilities are further classified
into substandard, doubtful and lost. While the NDIC was
established to insure bank deposits, provide assistance in the
interest of depositors, in the event of imminent actual financial
collapse of banks and guarantee payments to depositors subject
to a maximum amount of two hundred thousand naira
(N200,000) per depositor.

35

2.3 THE BUSINESS PROCESS RE-ENGINEERING (BPR) OPTION

Reengineering offers the promise of drastic improvement in banks
performance through streamlining the end to end process by which the
business creates and delivers value for its customers. However,
Lawrekovich (1996:88) argues that, reengineering concept has
become the latest management strategy in the corporate pursuit of a
quick-free for organizational decay and loss of market share. I
submit that reengineering is an old potentially dangerous management
strategy. It has failed in the manufacturing industry and its poised to
be unsuccessful in service industries like banks. The authors took an
old concept known as strategic leap, added a few customer driven
company elements and renamed it reengineering.
While many service industries all over the world including Nigerian
banks have embraced the concept wholeheartedly, others have
rejected it out-rightly because of the excessive types and drastic
claims of those seeking to sell reengineering products and services. In
fact, many outstanding organizations are battling it, using contrasting
images and buzz words to sell their reengineering services.
Efforts have been made to highlight important issues as it concerns the
BPR project in banks as a restructuring strategy that has been

36

welcome by many Nigerian banks. Issues discussed under the

reengineering process include:
1.

Origin and meaning of the BPR concept.

2.

Fundamental breakthrough required for reengineering services

in organizations.

3.

Key steps and methodology on how to carry out BPR project in

banks.

4.

The role of BPR in restructuring Nigerian banking system.

5.

The benefit of BPR for the banking sector in Nigeria.

2.3.1 ORIGIN AND MEANING OF THE BPR CONCEPT

There was clearly a greater debate over the origin of the reengineering
concept. Lawrekovich (1996: 88) insists that it is an old concept
because, according to him, nothing is new under the sun and that the
concept

has

simply

been

resurrected

by

two

intelligent

professors/consultants. In his words, Hammer and Champy

(1990:22) have repackaged old concept and gave it a new name. The
big question now is, what are these old concepts and how have they
been applied?
Heyes

and

Whechwright

(1994:16)

argued

that

American

manufacturing companies have reduced their commitment to process

37

engineering and went further to discuss the concept they call tortoise
and the hare approach to industrial competition. The hare connotes
strategic leap or BPR while the tortoise refers to the incremental
improvement or what is called Total Quality Management (TQM).
On the whole, re-engineering as a concept was first introduced into
common usage in 1990 in a seminar of Harvard Business Review by
Michael Hammer who opined that, it is time to stop paving the cow
paths. Instead of embedding outdated processes in software, we
should obliterate them, reengineer our business process, use the power
of information technology to radically redesign our core process in
order to achieve drastic improvement performance. Also Hammer
and Champy (1993) developed the concept further in a book,
reengineering the corporation, and they provided the definition that,
reengineering is the fundamental reconsideration and radical
redesign of organizational processes in order to achieve drastic
performance in cost, service and speed. Value creation for the
customer is the leading factor for BPR and information technology
often plays an important enabling role. The implication of this
definition is that reengineering focuses on the core process. It looks at
how the work or business is done and selects the core end-to-end

38

process. It involves rethinking, redefining and redesigning the core

process. In fact, it concentrates on the process rather than functions. In
some cases, it may lead to a corporate refocusing and design. That is
why Saddler (2003) sees business process reengineering as an
approach to eradicate or transform change while focusing on
questioning the need for the means of carrying out each of the many
processes involved in the organizational task. However, the essential
elements as principles of BPR in banks according to Abolo (1996) and
Thomas (1996) are:
1.

Challenging old assumptions and discarding old rules that are

no longer applicable.

2.

Breaking away from conventional wisdom and the constraints

of organizational boundaries.

3.

Letting rigid specification give way to broad based and cross

functional competencies

4.

Using information technology not to automate outdated process

but to radically redesign new ones.

5.

Externally focus on end customers and generation of greater

values for customers.

39

6.

Give customers and users a single and accessible point of

contract through which they can harness whatever resources
and people that are relevant to their needs and interest.

7.

Internally focus on harnessing more of the potentiality of

people and applying it to those activities which identify and
deliver value to customers.

8.

What matters is that people and resources can be assessed and

applied when required not where they are located.

9.

Encourage learning and developing by building creative

working environment.

10.

Think and execute as much activities as possible horizontally,

concentrating on flows and processes through the organization.

11.

Remove non-values activities, undertake parallel activities and

speed up responses and development times.

2.3.2 FUNDAMENTAL

BREAKTHROUGH

REQUIRED

FOR

REENGINEERING SERVICES IN BANKS

Abolo (1998) has summarized six critical areas in order to reap
quantum gain from BPR.
1. Traditional

hierarchical

and

inward

looking

management

philosophy needs to give way to an obsessive commitment to

40

adding value to customers. In other words, the bank has to be

looked at from the outside and concentrate on the end-to-end
process management which serves those customers.
2. Need to adopt a fundamental or zero based approach to the
redesign of new processes.
3. All too soon, grand ambition and radical options to change are
gradually scaled down in the face of organizational politics and
apparently immovable road blocks, and this has to be reduced or
completely eliminated through radical improvement.
4. There has to be an integrated approach to close process of selfish
and personal ambition and these should not be allowed to blur the
entire process, hence, the best approach is one that delivers a
balanced and holistic solution for which the relevant system,
people and training have been put.
5. BPR must be people oriented for it to be successful, it must be
people centered and managers need to be truly empowered. Open
culture and support for innovation should be the reality.
6. There should be the need to jettison most of the intellectual
baggage and condition that binds us to the past for this to happen.
This requires the banks ability to build and communicate a shared

41

understanding of organizations preferred vision and create an

environment with infrastructures that will actually promote
learning and allow imaginations.
In collaborating with Abolos (1998) views, Battram P. (1992) sets
out a number of success factors which include:
1. Establish a clear view of strategic purpose.
2. Ensure top management commitment
3. Set challenging goals
4. Redefine the core process
5. Redesign the process so as to create higher level processes
which form major end-to-end activities.
6. Manage the change process effectively
7. Create way of facilitating team work between staff from
different functions.
8. Use effective management techniques and information
technology and
9. Adopt a stakeholders approach.

42

2.3.3 KEY AND METHODOLOGY FOR CARRYING OUT A BPR

PROJECT IN BANKS
A THEORETICAL FRAMEWORK
A wide range of approaches, methods, tools and techniques exist in
literature. Davenport (1992) prescribes a five step approach to
implement a BPR project.
1.

Develop the business vision and process objectives.

2.

Identify the business processes to be redesigned

3.

Understand and measure the existing processes.

4.

Identify and select the most suitable and appropriate

information technology levers.

5.

Design and build a prototype of the new process. There appear

to be some consensus from the discussions so far on the
activities that constitute a BPR project.

However, experts differ on the sequence of carrying out these

activities. The main aspect of BPR project in the banking sector has
been summarized by Sonacks (1998) to include customer surveys to
understand both existing and potential customers expectations,
underlying needs and which criteria most influence their needs for

43

banking services. From these surveys can be derived those processes

of the banks that are best for reengineering.
BENCHMARKING
Benchmarking entails comparing the operating performance at the
banks business unit, process or activity with its direct competitors,
other industry players or best in class banks which have recognized
leadership in particular process. Benchmarking is carried out to
determine performance gaps for banks to cover up. There is internal
and

external

benchmarking.

The

internal

benchmarking

of

performance indicates identified performance gaps or varieties and

opportunities for information, while, external benchmarking measures
performance of core business processes against the performance of
industry members, direct competitors and best in class banks. When
benchmarking is carried out after a process has been selected for
reengineering, it provides basis for a vision of the new process being
formulated and enables the incorporation of best practiced
achievements elsewhere to set out targets performance, in order to
ensure that the radical improvements are achieved. Benchmarking is
one of the main techniques used in determining performance targets.

44

INNOVATION
Radical step change in performance requires innovation in the
redesign of core business processes. New ideas and ways of doing
things have to be developed, that is, ways that have never been tried
before, ways that challenge a business sacred cows, and ways that
will give the business a real edge over its competitors. This activity is
based on rigorous analysis of current process of benchmarking
exercise, distilled wisdom obtained from listening to customers innate
experience and common sense. It does not necessarily mean doing a
new thing altogether, rather, doing what others have been doing in a
way that is more unique, efficient, effective, different and attractive to
the end users.
PROCESS MAPPING AND SIMULATION
Detailed and rigorous analysis of the business processes will be
necessary at several stages of a BPR Project. Process mapping and
simulation is commonly used to describe what is happening at present
and to explore alternative option in terms of what could happen
instead. Process mapping will depict the process, identify their
components, breakdown large ones into sub processes, document their
performances and enable the uncovering of pathologies.

45

BUSINESS PERFORMANCE APPRAISAL

This covers the financial review. The financial review should be
emphasized mainly on cash flows. Since banks deal on money, their
activities and performances should better be understood and properly
appraised. It should ensure that financial reporting adheres to cash
flows. The cash flow analysis will provide a basis for proper
comparison and appraisal of any strategy adopted with regard to its
financial impact on the reengineering bank vis--vis the position
before the restructuring process. There should equally be a review of
the current information, management procedure and the review of the
key performance indicators over the period that is adequate enough
for a fair comparison. Such key performance indicators in banks
include total deposits, total assets, shareholders funds, gross earnings
profit after tax, analysis of loans and advances, etc.
CONFIRMATION

OF

THE

BANKS

STRATEGIC

ASSESSMENT
Without a strategic plan in place, a BPR Project will not have a sound
basis, it is important to compare process reengineering opportunities
and targets with strategic goals, to ensure that the former are not all

46

variance with the later. The confirmation covers an assessment of

industry position, critical success factor and so on.
INFORMATION TECHNOLOGY (IT)
The Information Technology (IT) has become all pervasive while
redefining the scope of the world business, were the words of
Kari(1999). Radical changes in the operation of the business
inevitably requires radical changes in IT system. Decisions need to be
taken on the most suitable IT Platform to be employed. Opportunities
created to the banks by the information technology should be clearly
defined, analyzed and optimized.
CHANGE MANAGEMENT
Radical change in business will have a great impact on the people in
the organization. Reconstruction of the business will result in the
installation of new facilities such as IT System, new organizational
structure, new system of working (empowering workers, working in
terms etc), performance evaluation and reward system. Its mechanism
must be put in place to impact these changes on the people. Change
management requires a clear behaviour pattern of the people in the
business and deliberate intention to change this into some form of

47

behaviours. The management has to be proactive and in tune with the

global changes.
2.3.4 THE ROLE OF BPR IN THE SURVIVAL AND SANITIZING OF
THE NIGERIAN DEPOSIT MONEY BANKS
In a review of the banking sector crises of the early 1990s, one would
appreciate the role of reengineering in the sanitizing of these banks.
This shows that most of the distress problems were due to the ways or
the processes of carrying out functions or the way a business is done.
It is only in few cases that government policies and rigid regulatory
framework led to bank failure, but an effective operational system
would have mitigated any harsh impact of regulation and government
policies.
At this juncture, it is necessary to explain the concept of business
process. This is where I agree with Obeng (1994) that a business
process is a set of activities or logically related tasks that must be
performed to accomplish a business objectives, example, loan
syndication, granting an overdraft facilities, granting of a term loan,
sourcing savings deposits, procurement of foreign exchange, sale of
foreign exchange, opening of letters of credit, informing clients on
status of account, sale of bank draft, effecting financial transfer,

48

withdrawal of deposit etc. while some processes are valued by

customers, others do not have much impact outside the organization.
However, business process reengineering has tried to look at core and
non-core business processes in Nigerian banks, tearing them apart
while isolating the ineffective strategies and re-emphasize and reinvigorate the areas with competitive edge. These were tendencies to
address the causes one by one. For example, attempt could be made to
address the high separating cost by instituting cost reduction
programmes. Such an attempt will not only fail to address the issue
comprehensively using interrelationship among activities in a way that
cut across departmental boundaries, it will also be expensive. It is
better to adopt an approach that sees the entire organization as a unit
and address all the issue comprehensively as a unit and address all the
issue comprehensively with a view to strengthening all the business
approaches for more robust returns.
The survival strategies adopted by most banks include:
1.

Taking part in the existing organizational structure and business

process.

2.

Throwing away those elements of them that do not help the

business meet its competitive goals.

49

3.

Putting what is left back together to form an efficient and

customer focused whole in order to create an organization that
focuses on the way that work is performed across functions
rather than concentrating on function itself.

4.

Where everyone understands the business goal and how it plans

to achieve them.

5.

Where there are no hidden criteria to the way in which success

is measured and working in the cross functional terms is
regarded as a norm by everyone.

6.

Where everyone knows that the overriding objective is the

production of a service that the market place perceives as the
best.
These survival strategies are what Nigerian deposit money
banks have adopted in reengineering their financial outfit. It
allows the owners of a bank, the luxury of constructing a
commercial entity totally for use on todays problem while
being proactive to future changes. It assumes a zero based
approach and builds the entire organization from the scratch. It
redesigns the organizational structure, job definition, reward
structures, business work flow and control processes while

50

continuing a revaluation of the organizational culture and

philosophy. This approach is very imperative to Nigerian banks
since both the new generation and their older counter parts
cannot claim to be in positive or efficient operation, given what
happens to the developed economies and the contribution of
globalization to the world economy.
2.3.5 POSITIVE EFFECTS OF BPR TO THE BANKING SECTOR
The adoption of any solution to survival strategy in any business
organization ought to be based on the gains expected be derived from
it.
The Nigerian banking sector in its present stage has some of the
benefits that have been delivered from BPR by each bank that adopts
the approach and such benefits can be summarized as:
COST SAVING
These usually arise from thrown away process and from having a
slimmer organization where information and action flow more easily.
The cost of resources such as staff used for thrown away process is
saved.

51

FREE AND EASIER FLOW OF INFORMATION

Through the new organization with appropriate information
technology (IT) being applied, this will create an early warning
system that can:
1.

Throw up incidence of fraud which can be more easily detected

before or immediately after being perpetuated..

2.

Indicate areas of operational problems and inefficiencies for

immediate corrective measures to be implemented.

3.

Identify problem loans, investments and funds placement for

urgent attention before they become sticky.

4.

A customer services in all the banks areas of service have

significantly improved and this is likely to enhance not only the
retention of existing customers but also the gaining of new
customers at the expenses of uncompetitive banks.

5.

Improvement in productivity can finance improvement in staff

remuneration.

6.

Improvement in organization culture and the reward system will

improve staff morale and further improve productivity in
enhanced human premium.

52

7.

All the above will result in significant improvement in financial

performance, in profit cash flow and asset liabilities
relationship.

2.4 THE MERGER AND ACQUISITION OPTION

As the macro-economic environment in the early 1990s put Nigerian
banks in difficulties which lead to the crises and failures of many
banks, some strong and surviving ones saw it as an opportunity for
business and take over activities like management. While some ailing
banks saw the restructuring and sanitizing strategy as a survival
strategy exercised as a means of consolidating their gains and
enlarging their organization. It was equally seen as a way of
rebuilding confident among the banking public.
2.4.1 MEANING OF THE CONCEPT MERGER AND ACQUISITION
Merger implies a combination or fusion of two or more formal
independent business units into one organization with a common
ownership and management such as in current usage. A merger is a
special ease of combination where both merging companies wish to
pin together on agreed term.

Lot (2003) defined merger as a

combination of two companies where only one of them survives and

53

continue its existence or at least continue to exist but in modified

term.
A consolidation is a type of merger which involves the combination of
two or more companies whereby an entirely new company is formed.
All of the old companies cease to exist and the shares are exchanged
for the shares in the new company. Vanhorne (1998) seems to be in
agreement with Hampton that merger is a combination of two or
more corporations where only one survives.

Firms assets and

liabilities are left to the new firm. Ahmed (1989) also viewed merger
as a unification of previously separate companies into a single
corporation. He explains that merger occurs when one or two of the
combining companies survive.
This is illustrated as follows:
If company X and company Y merged and a new company Z emerges,
it is called a merger, but where company Y dies and X survives, it is
an acquisition. The argument about identity sprang up in disagreement
with Ahmed as Joy (1990) in her write up argued that in merger, the
identity of both merging companies ceases to exist and the surviving
company takes any name as maybe wished by the new owner.
Acquisition according to her is a situation where management of

54

independently operating enterprises is brought under the control of a

single management.
According to Umari (1998), in merger, take over, amalgamation or
acquisition, two or more companies come together by the pulling of
their undertakings or resources, that is, material money, goodwill,
market, skilled personnel, and technology and so on. Acquisition can
also be by buying a controlling interest on the share capital of one of
the companies.
From the legal point of view, in section 590 of the companies and
allied matters decree of 1990, mergers have been described as any
amalgamation of the undertakings of any part or whole of the interest
of two or more companies or corporate bodies. Professor Cower
(2002:51) reviewed that under amalgamation, merger or take over,
two or more companies are merged either by a consideration of
controlling interest in the share capital of one by the other or in the
capital of both by a new company. He also stated that mergers and
acquisitions are not terms of act with clearly defined and
distinguishable legal meaning. They are intervention and can be used
interchangeably.

55

2.4.2 LEGAL ISSUES IN MERGER AND ACQUISITION

In Nigeria, there exists a peculiar economic and legal structure which
inhibits the practice of the merger game as it is played in other more
advanced countries. Even in United Kingdom, before 1988, there was
no formal regulation of the monopolys commission. Though these
laws have not had serious impact on proactive, the major statutory
provisions on mergers in Nigeria up to 1988 are contained in section
197 to 200 of the Companies Act, 1968. Other regulatory provisions
are derived directly from the provision of the Nigeria Enterprises
Promotion Decree, 1989 and Stock Exchange Commission Act, 1979.
The specific goals of both the Nigeria Enterprise Promotion Board
and Stock Exchange Commission are clearly spelt out in the Nigeria
Enterprises Promotion Act.
There are three routes to a merger as stipulated by the Companies Act.
A Company may propose a compromise or arrangement with its
members or creditors or only a class of them and submit the same
proposal for approval at a monetary meeting, conveyed for that
purpose. The majority required for approval of such a proposal is 70
percent of the members or creditors whose rights would be affected by
the proposal. Voting is either in person or by proxy at the meeting. If

56

approved, the court may sanction the action after satisfying itself on
the number of points namely:
1.

The proposal is not ultra-vires the company or otherwise illegal.

2.

The prescribed statutory majority in support of the proposal

have been duly met.

3.

That the requirement stipulated by the act and other statues to

be exercised have been fulfilled.

4.

All conditions precedent contained in the proposal itself have

been fully met.

5.

The court must be satisfied that the arrangement is only fair and
reasonable.
Once the above conditions have been met, the court would
approve the proposal and it would become binding. The law
also provides that, unless otherwise agreed, the cost of merger
is usually borne by the participating companies.

2.5 SYNERGY:

AN

EFFICIENCY

INDICATOR

IN

BANK

SANITIZING
Efficiency theory contents that redeployment of corporate assets is
accomplished through many forms namely merger tender offers,
divestitures and spin-offs. It holds that corporate assets redeployment

57

requires improving the performance of the management after

sanitizing or achieving a form of synergy.
Looking at the Nigerian banking sector critically and considering the
wave of sanitizing going on in the system, opinions have been raised
that there are too many banks in the system and CBN still license
more new banks. The resultant effect of this move is intensifying at
the level of competition in the system which in their opinion is
considered to be highly competitive. They contended that banks
should go into mergers as a way of checking the level of corruption.
Meanwhile, another school of thought led by Adedotun and Anderson
{1996), consulting, opined that the Nigerian banking system have not
reached their optimal level in the number of banks. At optimal level,
everybody that needs banking services will get it at comparative rates.
At that level, every bank can still survive until it gets to a stage where
every bank must be effective and those that cannot cope must fall by
the way side. On the importance of synergy in the efficiency of any
prospective merger, Adedotun (1996) warned that for a merger or any
combination to make sense, there must be something in merger that
makes it necessary in synergy. Synergy should be seen as the primary
motive and purpose for merger which is to increase the value of the

58

combined enterprise in terms of raising the market value per share

over what they would have otherwise be. It is something that one
merging party has that the other party needs. For example, if bank A
has a good management, good products and satisfied customers but
with inadequate capital, while bank B has much capital but poor
management and lack of good product, when bank A and B merge, a
winning formula emerges. This is the work of synergy. Therefore,
synergy is that issue in merging companies which makes the
combined values of the company greater than the individual
companies taken separately. Many scholars have called it 2 + 2 = 5
effects. The effect of synergy can arise from various ways such as
operating economies which result from economies of scale in
management of product/service delivery, and staffing in which case
duplicating facilities can be eliminated.
In many cases, increased profits can be generated when a bank merges
with another , dealing with complementary products and services, that
is, a merchant bank can merge or go into a relationship with a
commercial bank to take advantage of the clearing house facilities
from the commercial banks. Synergistic effects can be achieved
through BPR. In this case, the various subsystems or departments in

59

the bank should be coordinated and focused towards achieving a

greater purpose than they would have achieved. This is the message
which the advocate of BPR is carrying which in the end would result
in higher performance than was obtainable before the project. All
would not make any sense if some level of synergy is not achieved.
2.6 NATURE OF DEPOSIT MONEY BANKING IN NIGERIA
In Nigeria, deposit money banking could be classified into two
categories. The first category comprises banks wholly owned by
indigenous Nigerians and are referred to as indigenous banks, while,
the second category comprises those jointly owned and managed by
Nigerians and private investors, usually foreign investors but majority
of their shares are owned by indigenous Nigerians and are therefore
referred to as mixed banks.
For deposit money banks to effectively carry out their intermediary
role, they mobilize funds from the surplus spending segments through
the following accounts maintained by them:
1.

Current Account

2.

Savings Account

3.

Time Deposit Account

60

Interests are payable on the balance standing to the credit of savings

account and time deposit account. The interest payable on time
deposit account is usually higher than that payable on savings
account, while, the bank charges commission for services rendered to
customers who own current account. For effective operations, certain
other services are rendered by them to their customers. Some of these
services are:
1.

Granting of credit facilities

2.

Granting of money through credit multipliers

3.

Safe keeping of valuables for customers

4.

Provision of foreign exchange services

5.

Giving business advice to customers

6.

Acting as referees to customers

7.

Transfer of money through standing order.

2.7 A HISTORICAL OVERVIEW OF FIRST BANK OF NIGERIA

PLC
First Bank of Nigeria Plc was founded in 1894 by Sir Alfred Jones, a
shipping magnate from Liverpool, England. The Bank has provided
excellent banking services since inception and hence, contributed to
the economic growth and development of Nigeria for 114 years.

61

Incorporated as a limited liability company with its head office

originally in Liverpool, the Bank commenced business on a modest
scale in the premises of Elder Dempster and Company Limited in
Lagos under the name Bank of British West Africa (BBWA) with
paid up capital of 12,000. This was after absorbing its predecessor
the African Banking Corporation, which was established in 1892. In
1912, the Bank also acquired its first competitor the Bank of Nigeria
(previously called Anglo-African Bank) which was established in
1899 by the Royal Niger Company.
In response to a rapidly changing economic and business
environment, the Bank has at various times restructured its operations.
For example, 1957, the Bank changed its name from Bank of British
West Africa (BBWA) to Bank of West Africa (BWA). In 1966,
following its merger with Standard Bank, UK, the Bank adopted the
name Standard Bank of West Africa Limited and in 1969, it was
incorporated locally as the Standard Bank of Nigeria Limited in line
with the Companies Decree of 1968. Changes in the name of the Bank
also occurred in 1979 and 1991 to First Bank of Nigeria Limited and
First Bank of Nigeria Plc, respectively.

62

First Bank is widely acknowledged as a national icon and a worthy

ambassador of the Federal Republic of Nigeria in the International
Financial Community.
2.8 DEPRESSED ECONOMY
An economy is a system that has to do with the creation, acquisition,
management and use of both human and material resources of a
household, community or nation. An efficient and prudent operation
of the systems of such nation certainly led to a buoyant economy. The
reverse would lead to a recession which often degenerates into a
depression. An economy is said to be buoyant when there is:
1.

Full employment

2.

Steady economic growth

3.

Stable Price

4.

Equitable distribution of income

5.

Favourable balance of payments

Having known the characteristics of a prosperous economy, then,

what does a depressed economy mean and what are its characteristics?
A depressed economy is the opposite of a prosperous one. An
economy is said to be depressed when there is a high degree of
unemployment of human and other factors of production of goods and

63

services, low level of national income, low investment and may have
a high rate of inflation.
Characteristics of a Depressed Economy
The following are among the characteristics of a depressed economy:
1.

Prevalence of unemployment of factors of production

2.

Dominance of unfavourable balance of payment

3.

High rate of inflation

4.

High price of goods and services which are now mostly

imports.

5.

Foreign intrusion on political matters.

2.8.1 CAUSES OF ECONOMIC DEPRESSION

1.

Over dependence on imported goods and services thereby

draining the importing nations precious funds that would
otherwise be used for domestic investment.

2.

Lack of technological know how for the production of goods

and services.

3.

Misplacement of priority by government in their investment

spending, where government spends yearly on unproductive
venture. It will certainly have adverse effect on the economy as

64

such dormant projects will not generate extra funds nor job
opportunities.
4.

Existence of low interest rate thereby discouraging savings. It is

well known fact that where there is no savings, there will
nothing to invest with.

5.

Bottle neck condition placements in bank loans which scare

away would be borrowers.

65

CHAPTER THREE
3.0

RESEARCH METHODOLOGY

3.1

RESEARCH METHOD
This study is an analytical one, while the scientific method of
investigation and reporting of research work is adopted. For this
reason, opinion of professionals and the public about the subject
matter was sought. Some of the data from this group are considered
necessary facts which form a good basis for the theoretical concepts
and analysis. It is only necessary that research questions be answered
on the basis of the data which is the major responsibility of the design
that will anchor the pragmatic solutions to the research questions.

3.2

DETERMINATION OF POPULATION SIZE OF THE STUDY

The population of the study in research statistics can be described as
an entire number of people, objects, events and things all of which
have one or more characteristics of interest to a study. It is the target
of study for collection of data.
The population of interest of this study is the 25 deposit money banks
that survived the N25 billion recapitalization exercise. These include:
1.

First Bank of Nigeria Plc

2.

UBA Plc

66

3.

Union Bank of Nigeria Plc

4.

Zenith Bank Plc

5.

Guaranty Trust Bank Plc

6.

Intercontinental Bank Plc

7.

Standard Chartered Bank Ltd.

8.

Oceanic Bank Plc.

9.

Access Bank of Nigeria Plc

10.

Afribank Group

11.

IBTC Chartered Bank Plc

12.

Diamond Bank Group

13.

Skye Bank Group

14.

Wema Bank Group

15.

First City Monument Bank Plc

16.

Platinum Habib Bank Plc

17.

Fidelity Bank Plc

18.

NIB/Citibank

19.

Sterling Bank Group

20.

First Inland Bank Plc

21.

North Omega Bank

22.

Devcom /ETB Ltd.

67

3.3

23.

Citizen Guardian

24.

Unity Bank Group

25.

Ecobank Nigeria

DETERMINANT OF SAMPLE SIZE

Sampling entails choosing to obtain information from a part of group
or population of interest. The motive behind sampling is to use the
information obtained from a part of the population to take decision on
the whole.
The method used for determining the sample size in this study was
based on simple percentage approach. Using simple percentage
approach, thus, the research is limited to one of the deposit money
banks constituting 4% of the entire population which can be illustrated
thus:
1
25

4%

100
1

Therefore, out of these survived banks, this study will be restricted to

one bank because a research of this nature would require sufficient
time, finance and material to carry it out effectively. But due to the
constraint, stress, time and dearth of material available, it becomes

68

increasingly necessary to anchor this research on one bank in order to

carry out a thorough and effective research of the bank under study.
More so, as a dependably dynamic bank in Nigerian economy and for
the fact that it survived the N25 billion recapitalization exercise, it has
also become imperative to use the bank as a case study. It is my
believe that the resultant effect of what is gleaned from the analysis of
the First Bank would be used to ascertain the survival of deposit
money banks in a depressed economy like ours, Nigeria. At the end of
the research, the researcher would have satisfied herself that the work
could be beneficial to other researchers..
3.4

METHOD OF DATA COLLECTION

This research relied mainly on the secondary data like already
published reports, financial reports or journals and CBN publications
etc. Secondary data sources are documented works of others (authors)
that are related to the subject matter of study.
In view of the nature of this study, the researcher extensively made
use of relevant data from previous works of other authors in the field
such as materials like financial journals, Central Bank of Nigeria
publications which include bullion, economic and financial reviews,
economic and financial indication briefs and CBN statistical bulletin.

69

Also, Annual Reports of First Bank for various years was of great
importance.
3.5

METHOD OF DATA ANALYSIS/INTERPRETATIONS

The method of data analysis will include tabular presentation and
analysis, calculation of percentage and presentation of charts. Tables
and charts will be designed specifically for the subject matter.
However no table is reproduced directly from the source documents
but data obtained from the source are used to build tables and charts.
Sources of data in table are indicated by the source label at the bottom
of the tables.
The analyses of the underlisted performance are the criteria used to
ascertain the survival of deposit money banks in a depressed economy
with respect to the First Bank of Nigeria Plc.
a.

analysis of the structure of total assets

b.

analysis of the total deposits

c.

growth structure of shareholders funds

d.

analysis of loans and advances

e.

analysis of profit before tax.

70

It is believed that the result of the analysis of the above performance

indices will indicate the general performance of the bank studied with
regards to its ability to survive the depressed economy.

71

CHAPTER FOUR
4.0

DATA PRESENTATION AND ANALYSIS

4.1

FINANCIAL STATEMENT OF FIRST BANK PLC FOR THE

MONTHS ENDED 31 MARCH
2008
NM
89,076

Cash and short term

funds
Due from other banks
and financial
247,059
institutions
Bills discounted
147,680
Trading securities
93,396
Investments
71,532
Loans and Advances
437,768
Advances under
10,297
financial lease
Other assets
39,498
Equipment on lease
Fixed assets
29,155
Good will
TOTAL ASSETS
1,165,461
LIABILITIES
Deposits and Current
661,624
Accounts
Due to other banks
44,281
Tax payable
5,091
Deferred taxation
6,712
Dividend
Other liabilities
78,492
Long term borrowing
29,414
825,614
SHAREHOLDERS
339,847
FUNDS
1,165,461

2007
NM
60,881

2006
NM
49,444

2005
NM
30,220

2004
NM
22,509

2003
NM

137,864

94,029

64,143

80,369

159,832
71,477
64,048
219,185
3,043

108,316
63,729
175,657
1,701

100,135
24,655
114,673
937

92,922
16,825
78,040
-

29,701
16,850
762,881

31,317
13,952
1,984
540,129

30,625
12,108
377,496

11,596
665
9,564
312,490

260,580

581,827

390,846

264,988

206,643

168,298

14,448
5,710
2,671
58,773
22,101
685,530
77,351

323
4,148
2,751
5,238
75,843
479,149
60,980

390
3,954
2,010
6,325
55,157
332,824
44,672

538
4,022
1,533
5,429
55,704
273,869
38,621

33,580

762,881

540,129

377,496

312,490

53,689

72

Gross earnings
Profit on ordinary
activities before
taxation
Extra ordinary item
Profit on ordinary
activities after taxation
and exception item
Profit after taxation

130,600

79,299

61,243

49,475

45,121

38,020

22,097

16,128

15,145

14,106

3,703

30,473

18,355

16,053

12,184

11,096

30,473

18,355

16,053

12,184

11,096

12,184

11,096

6,325
27%

5,429
29%

308K

381K

160k
1.93

155k
1.00

Amortization
of
1,984
1,984
goodwill
Profit attributable to
30,473
16,371
14,069
ordinary shareholders
Dividend
5,238
Return on shareholders
9%
21%
23%
funds
Earnings per share
223K
156K
269K
(basic): - Basic
Dividend per share
actual
100k
100k
Dividend cover (times)
1.12
2.69
Source: First Bank of Nigeria Plc, 2008 Publication

TABLE 4.1: STRUCTURE OF ASSETS AND LIABILITIES OF

FIRST BANK
Table 4.1 shows the structure of assets and liabilities of First Bank Plc under
study. The bank is studied for various years of their operations before
adopting survival strategy and restructuring, and their operations after
sanitizing and restructuring.
In First Bank Plc, three years results which include 2003, 2004 and 2005 are
for periods before survival strategy was adopted, while, the other three years

13,150

73

results which include 2006, 2007 and 2008 are for periods after survival
strategy was adopted.
4.2

ANALYSIS OF TOTAL ASSETS

Question 1: Has there been any improvement in the banks assets
as a result of the restructuring?
Extracting table 4.2.1 below from table 4.1 above, one will observe
that the total assets in 2003 were N260, 580 million which forms the
base year of the analysis of the performance. In 2004, the banks
assets grew by 19.9 percent, moving from N260, 580 million to
N312,490 million. The 2005 performance needed to be improved
upon and also saw a percentage increase of 20.8 with the total assets
moving from N312, 490 million in 2004 to N377, 496 million in
2005, giving a growth of N65, 006 million from N51,910 million.
In 2006, after the adoption of survival strategy and restructuring the
banks assets grew by 43.1 percent, but there was a slight decline of
41.2 percent in 2007. This is likely to be as a result of the fact that the
bank was still finding it a little difficult to adapt fully to the survival
strategy and restructuring introduced in 2006. The 2008 performance
showed a remarkable improvement in the growth of total assets which
grew by 52.8 percent.

74

TABLE 4.2.1
YEAR

GROWTH STRUCTURE OF TOTAL ASSETS

AMOUNT

NM
2003
260,580
2004
312,490
2005
377,496
2006
540,129
2007
762,881
2008
1,165,461
Source: Compiled by the Researcher

GROWTH

GROWTH RATE

DECLINE
NM

51,910
65,006
162,633
222,752
402,580

19.9
20.8
43.1
41.2
52.8

75

FIG. 4.1: A BAR CHART REPRESENTING THE GROWTH

STRUCTURE OF TOTAL ASSETS OF FIRST BANK PLC.
Y
1,165,461

1400

400

540,129

377,496

600

312,490

800

762,881

1000

260,580

Amount in million

1200

200
0

X
2003

2004

2005

2006

2007

2008

YEAR

FIG. 4.2: GRAPHICAL ANALYSIS OF GROWTH PATTERN OF

FIRST BANK PLC TOTAL ASSETS

76

Y
1400
1200

Amount in million

1000
800
600
400
200
0

X
2003

2004

2005

2006

2007

2008

YEAR

4.3

ANALYSIS OF TOTAL DEPOSITS

QUESTION II: Has there been increase in deposit mobilization?

77

III: To what extent has depositors confidence been

restored?
In theory, banking is a very simple business. Banks take in deposits
from people and lend them out. If they do not make loans, they cannot
make profit, and if they do not have deposits, they cannot make loans.
So the whole process starts with deposit mobilization. According to
Albert Brown (1990:7), you cannot increase the size of a bank by
making loans but your bank can grow by increasing deposits. It is
based on high mobilization that a bank could create its assets and a
high profitability. So, the analysis of this variable could be seen as the
genesis of banking business as its growth will invariably transmit
growth to other indices.
TABLE 4.3.1: FIRST BANKS STRUCTURE OF TOTAL DEPOSITS
In the 2003 position which is the base year, the total deposit liabilities
of the bank stood at N168.298 million. It represents various types of
deposits held by the bank (Savings, Demand and Time Deposits). In
2004, the banks total deposits increased by N38, 345 million to close
at N206,643 million representing a growth rate of 22.8 percent. As
shown in table 4.3.1 below, the 2005 total deposits is N264, 988

78

million deposits which represented a growth rate of 28.2 percent and

an increase of N58, 345 million.
With the sanitizing and restructuring of the bank, the total deposits
rose to higher growth rate percentage of 47.5 in 2006 and 48.9 in
2007; but there was a drastic fall in 2008, when the growth rate fell to
13.7 percent reaching a total deposit of N661, 624 million with a
decrease of N79, 797 million in the banks total deposits. This could
be as a result of the banks carelessness as it felt it has won the
depositors confidence and so it had no need for more survival
strategy.
TABLE 4.3.1

FIRST BANKS STRUCTURE

DEPOSIT
Year
Amount
Growth Decline
Nm
Nm
2003
168,298
2004
206,643
38,345
2005
264,988
58,345
2006
390,846
125,858
2007
581,827
190,981
2008
661,624
79,797
Source: Compiled by the Researcher

OF

TOTAL

Growth Rate
%
22.8
28.2
47.5
48.9
13.7

OF FIRST BANKS DEPOSIT

581,827

661,624

FIG. 4.3: A BAR CHART SHOWING THE GROWTH STRUCTURE

79

700
600

200

390,846

264,988

300

206,643

400
168,298

Amount in million

500

100
0

X
2003

2004

2005

2006

2007

2008

YEAR

FIG. 4.4: GRAPHICAL ANALYSIS OF GROWTH PATTERN OF

FIRST BANK PLC TOTAL ASSETS

80

Y
700

Amount in million

600
500
400
300
200
100
0

X
2003

2004

2005

2006

2007

2008

YEAR

4.4

ANALYSIS OF LOANS AND ADVANCES

QUESTION IV: Has there been increase in the size of loans and
advances?
In section 4.3 above, it was agreed that the banking business starts
from deposit mobilization and goes into making the funds so
mobilized available to the deficit segment of the economy for
investment purposes. In as much as the banks mobilize deposits, their
ability to service these deposits depends highly on the level of income
that they make from investing these deposits. Investing deposits of

81

banks invariably involves creation of money through loans and

advances.
In doing this, banks should ensure that such facilities are performing
and in accordance with the prudential guidelines for credit
classification.

The

prudential

guidelines

on

loan

portfolio

classification were released by the Central Bank of Nigeria in 1990 to

guide banks on the classification of their credit facilities according to
the performances. The credit portfolio of banks according to
prudential guidelines, are classified as either performing or non
performing.
A facility is said to be performing when the payment of both the
principal and interest are up to date and in accordance with the terms
of the credit agreement.
A non performing facility is that which the terms of the loan
agreement have been factual and can further be categorized into:
i.

Sub-Standard: When both the interest and principal have

remained unpaid and outstanding for more than 90 days but less
than 180 days.

ii.

Doubtful Loans: Facilities which both the principal and

interest remain unpaid and outstanding for at least 180 days but

82

less than 360 days and are not secured by realizable collateral
or security.
iii.

Lost Loans: Facilities on which principal and interest are

outstanding and unpaid for 360 days or more and not secured
by legal title or realizable security.

TABLE 4.4.1:

ANALYSIS OF FIRST BANKS STRUCTURE OF

LOANS AND ADVANCES

Table 4.4.1 below shows that the bank granted loans and advances of
N53, 689 million in 2003 which later grew by 45.4 percent moving
up to N78, 040 million in 2004 which gave rise to a growth of N24,
351 million. In 2005, the loans and advances saw a growth rate of
46.9 percent which gave rise to N114, 673 million.
In 2006, when the process of survival strategy and restructuring was
adopted, the banks loans and advances rose up to N175, 657 million
with a growth rate of 53.2. However, the adoption had a negative
effect on the bank in 2007 by 24.8 percent in loans and advances
keeping the figures at N219,185 million with a growth decline of
N43,528 million. With the banks consistency in the strategy, the 2008
performance of the loans and advances experienced a high growth rate
of 99.7 percent reaching the level of N437,768 million.

83

TABLE 4.4.1

FIRST BANKS STRUCTURE OF LOANS AND

ADVANCES

Year

Amount
Nm
2003
53,689
2004
78,040
2005
114,673
2006
175,657
2007
219,185
2008
437,768
Source: Compiled by the researcher

Growth Decline
Nm
24,351
36,633
60,984
43,528
218,583

Growth Rate
%
45.4
46.9
53.2
24.8
99.7

FIG. 4.5: A BAR CHART SHOWING THE GROWTH STRUCTURE

OF FIRST BANKS LOANS AND ADVANCES
Y
437,768

500
450
400

300
219,185

Amount in million

350

84

175,657

250

100

78,040

53,689

150

114,673

200

50
0

X
2003

2004

2005

2006

2007

2008

YEAR

FIG. 4.6: A GRAPHICAL REPRESENTATION AND ANALYSIS OF

THE GROWTH STRUCTGURE OF FIRST BANKS LOANS AND
ADVANCES
Y

Amount in million

500
450
400
350

85

300
250
200
150
100
50
0

X
2003

2004

2005

2006

2007

2008

YEAR

4.5

ANALYSIS OF PROFIT BEFORE TAX

QUESTION V: How has the strategy impacted on the banks
profitability?
If we believe that the primary goal of the owners of a bank for going
into banking business is profit making then our thought process
logically leads us almost in the direction of profitability and liquidity.
In First Bank Plc, the performance of the bank in respect of
profitability followed the trend of marginal increase before adopting
the survival strategy. This is depicted in table 4.5.1 as the bank in

86

2003 posted a profit before tax (PBT) of N13,150 million which

immediately set into increasing trend in 2004 when the bank recorded
a pre-tax profit of N14,106 million which reflects an increase by 7.3
percent from the 2003 profit. Also, in 2005, the performance showed
that the bank improved and recorded 7.4 percent with growth of
N1.039 million, thereby bringing the total figure of pre-tax profit to
N15, 145 million.
However, in 2006 when the bank went into survival strategy and
restructuring, the performance went dwindling as the bank recorded a
decline of 6.5 percent, and a profit before tax of N16, 128 million. The
2007 recorded an enhanced performance. Profit before tax rose to
N22,097 million with 37 percent growth rate. The 2008 report saw the
bank recording a 72.1 percent growth in profit as it made a profit
before tax of N38,020 million with an increase of N15,923 million.
Looking at the structure, it could be seen that the gains of survival
strategy and corporate restructuring in First Bank started manifesting
in 2007 when the programme of re-engineering was fully
implemented.
TABLE 4.5.1: FIRST BANKS STRUCTURE OF PROFIT BEFORE
TAX (PBT)
Year
Amount
Growth /Decline
Growth Rate
Nm
Nm
%

87

2003
13,150
2004
14,106
2005
15,145
2006
16,128
2007
22,097
2008
38,020
Source: Compiled by the researcher

956
1,039
983
5,969
15,923

7.3
7.4
6.5
37.0
72.1

FIG. 4.7: A BAR CHART SHOWING THE GROWTH STRUCTURE

OF FIRST BANKS PROFIT BEFORE TAX (PBT)
38,020

Y
40
35

15

22,097

16,128

15,145

20

14,106

25

13,150

Amount in million

30

10
5
0

X
2003

2004

2005

2006
YEAR

2007

2008

88

FIG. 4.8: GRAPHICAL ANALYSIS OF GROWTH PATTERN OF

FIRST BANKS PROFIT BEFORE TAX (PBT)
Y
40

Amount in million

35
30
25
20
15
10
5
0
2003

2004

2005
YEAR

2006

2007

X
2008

89

4.6

ANALYSIS OF SHAREHOLDERS FUNDS

QUESTION VI: What impact has the strategy made on the
shareholders funds?
The major business of banks is financial intermediation that is,
collecting deposits and creating loans. Banks are seen as institutions
that play a very vital role in capital formation and financing of other
businesses by providing the needed funds to other sectors of the
economy for investment purposes. For this to be meaningful and for
banks to be effective in carrying out this odious responsibility, they
should be adequately capitalized. Capital is very necessary in the life
of a bank as it provides some form of buffer or cushion effects for the
institution in case of any serious loss without affecting the depositors
funds. So, capital can be seen as an inbuilt mechanism to cushion the
effect of losses on banks to mitigate its impact on deposits which
banks are obliged to pay back to the depositors on demand.
It is necessary to know that the shareholders funds in 2003 stood at
N33,580 million; and in 2004, there was an increase in the growth rate
by 15 percent bringing the total funds to N38,621 million. In 2005, the
funds grew by N6,051 million resulting to a total increase of 15.7
percent in shareholders funds to arrive at N44,672 million resulting to

90

a total increase of 15.7 percent in shareholders funds to arrive at

N44,672 million.
The 2006 marked out the first year into survival strategy and
restructuring of the bank. The fund was ready for capitalization as it
witnessed an addition of N16,308 million, raising the total funds to
N60,980 million with an increase of 36.5 percent. The 2007 also
experienced an increase of 26.8 percent in shareholders funds
bringing the total funds to N77,351 million.
Finally, in March 2008, when the bank released their annual report,
the funds rose extensively to N339,847 million with an increase of
339.4 percent and a growth of N262,496 million. This was achieved
through an offer for subscription which reflected the investors gain of
confidence in the banks survival strategy and restructuring exercise.
TABLE 4.6.1

FIRST

BANKS

GROWTH

STRUCTURE

OF

SHAREHOLDERS FUNDS
Year

Amount
Nm
2003
33,580
2004
38,621
2005
44,672
2006
60,980
2007
77,351
2008
339,847
Source: Compiled by the Researcher

Growth/ Decline
Nm
5,041
6,051
16,308
16,371
262,496

Growth Rate
%
15.0
15.7
36.5
26.8
339.4

91

FIG 4.9:

GRAPHICAL PRESENTATION AND ANALYSIS OF THE

GROWTH IN SHAREHOLDERS FUNDS

Y
350

Amount in million

300
250
200
150
100
50
0

X
2003

2004

2005

2006
YEAR

2007

2008

92

CHAPTER FIVE
5.0

SUMMARY, CONCLUSION AND RECOMMENDATION

5.1

SUMMARY
This study was designed to analyze the variables that affect banks
performance and the impact of survival strategy and corporate
restructuring on these variables. This chapter is organized in line with
the research objectives with a view to stating the findings the way
they are, while being mindful of the research questions.
Based on the above premises, the study made the following findings:

5.1.1 TOTAL ASSETS

In the total assets of First Bank Plc in 2006 there was a high increase
in the growth rate percentage of 43.1 percent as a result of the
adoption of survival strategy and restructuring exercise. In 2007, the
bank experienced a slight decline in the growth rate percentage of
41.2 percent showing that the bank had a little difficulty in the
process. In 2008, the bank rose again and showed a remarkable
improvement in the total assets which grew by 52.8 percent.
5.1.2 TOTAL DEPOSITS

93

According to the finding in total deposit of the bank between 2006

and 2007, there was an increase in the growth rate percentage of the
bank by 47.5 and 48.9 percent respectively which made the bank to
gain depositors confidence in the banks performance. But in 2008,
there was a drastic decline in the growth rate percentage of 13.7
percent. This is due to inability of the bank to adapt fully to the
survival

strategy

and

restructuring

exercise

thereby

loosing

depositors confidence in the bank gradually.

Due to the effect of the exercise being felt by 2006 and 2007, I will
predict that in future the bank will improve on its deposit mobilization
and will make much profit which will restore depositors confidence
in them because depositors are anxious to deposit their funds in a
good performing bank.
5.1.3 LOANS AND ADVANCES
The gains of survival strategy and corporate restructuring in First
Bank Plc started manifesting fully in 2006 when the programme of
reengineering was being implemented with an increase in the growth
rate percentage of loans and advances by 53.2 percent. Even though
there was a decline in 2007 when the growth rate fell to 24.8 percent,

94

the 2008 performance was highly encouraging when the growth rate
percentage rose sharply to 99.7 percent.

5.1.4 PROFIT BEFORE TAX (PBT)

In 2006, the bank recorded a decline in the growth rate percentage of
6.5 percent due to the effects of survival strategy exercise which has
not been fully felt by the bank. However, the impact of the exercise
started showing a positive result in 2007 when the Profit Before Tax
(PBT) rose sharply to 37 percent. Also, in 2008, the growth rate
percentage rose greatly to 72.1 percent.
5.1.5 SHAREHOLDERS FUNDS
With the introduction of survival strategy and restructuring in 2006,
the shareholders funds of First Bank Plc increased greatly by 36.5
percent. There was a decline of 26.8 percent in the growth rate in
2007. But the 2008 performance showed a remarkable improvement
when the growth rate percentage grew extensively by 339.4 percent.
5.2

CONCLUSION
In this era of an ever changing and competitive global economic
environment, especially now that the current economic approach of
the government is moving towards openness and enthronement of a

95

market based economic system and with globalization being the major
force that enhances growth and development, Nigerian banks cannot
afford to be left behind. The researcher strongly advocates that banks
should continuously review, redesign, refocus and reengineer their
core business processes on a period basis to ensure that they are
competitively relevant in the global market.
This is why this study undertakes to detail out the processes, methods
and gains of adopting survival strategies and restructuring and its roles
in the banking sector in a depressed economy.
It is my belief that with a good implementation of the approaches and
recommendation here in the issues of distress; inefficiency and its
associated problems will be a thing of the past.
Nigerian banks will be at the rank of global banks rating while
playing their lending role in resource mobilization, ushering in an era
of effective payment system and providing the necessary impetus for
economic growth in a depressed economy.
5.3

RECOMMENDATION
The results of this study indicate that the survival strategies and
restructuring brought about growth in the bank performance as

96

depicted by the performance indices. On this ground, this study

recommends that:
1.

There should be enthronement of efficiency in the delivery of

services through enhancement of technology in banking and
seeing it as a necessity that should be approached vigorously by
all banks.

2.

Banks should ensure that their business process is given a

global image. They should realize that competition is beyond
their location and should de-emphasize geography. Competition
among banks now is moving beyond the geographical
boundaries and banks should be forced and equipped to face the
challenges. They should equally be customer focused.

3.

The process should enthrone appropriate mechanism for

training and retraining both management and staff. This will
equip the banks with adequate manpower for new challenges
and competition.

4.

The executive committee which includes the chief executive

should ensure that adequate resources (human, material and
financial) for change process are assigned to the programme
while all barriers should be identified and removed.

97

5.

Performance targets should be set with appropriate monitoring

process which should be jointly agreed upon by both the
management and staff.

6.

Adequate attention should be given to staff motivation. The

management should recognize and appreciate high performance
and proper compensation should be ensured.

7.

Globalization is one of the major forces behind the rapid

changes. Bank executives should adopt a proactive and
visionary management style that identifies future changes and
be equipped.

8.

Survival strategies and restructuring should not be seen as an

end in itself, rather it is a means to an end. So, the process
should continually evolve with a review and amendment of the
existing process.

9.

Government

should

ensure

the

stability

of

operating

environment for banks. The liberalization policy should be

vigorously pursued to enable banks and business decision
makers to work freely within a wider horizon with reasonable
degree of certainty about the environment for speedy and more
effective decision making.

98

Finally, the researcher leaves the work open for further research
and criticism by other researchers.

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