CENTRAL BANK OF NIGERIA BAILOUT POLICY AND BANKS
PERFORMANCE: A T-Test ANALYSIS OF PRE AND POST BAILOUT OF
BRIDGED BANKS IN NIGERIA
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Banking services are the life blood of financial system of any country and a vehicle of sound
economic growth and development of any nation. Banks in theory and practice are financial
intermediaries by mobilization of funds from surplus unit of the economy, allocate credits to
the needy sectors of the economy, provide the payment and settlement system and implement
monetary policies of government at all times (Sanusi, 2012). The major rationale behind
banking business and even their economic successes is public confidence that they enjoy.
Emeka (1997) sees confidence as the peoples‟ faith in the banks, that is, the extent to which
people generally believe that their money is safe and that the possibility of loss is remote.
However, the Nigerian banking industry has witnessed crises of failures and default which
include weaknesses in credit administration; distress and failure and unnecessary takeovers
and mergers (Bello 2013). Similarly, banking crises in Nigeria have been a very long
phenomenon; for instance, credit and liquidity crises was first reported in 1930, where over
21 banks failures were recorded between 1930 and 1958 (Emeka,1997). Moreover, Nigerian
banking crises of 1990s has necessitated the transfer of government‟s deposits from licensed
banks to the Central bank of Nigeria (CBN) and also led to the bail-out of 13 banks by the
Nigerian Deposits Insurance Corporation (NDIC) and CBN.
An empirical examination of the Nigerian banking sector by Bello (2013) revealed that banks
in Nigeria have recently suffered wide spread of financial malfeasances which led to
declaration of many banks as distress, and takeovers and mergers have left a historical
landmark in the history of financial service sector of the country. Sunusi (2012) added that
this condition has necessitated the CBN to embark on second turnaround since 1998 banking
crises, which include the rescue of 8 banks through capital and liquidity injections. He further
states that such actions became necessary to restore confidence in the banking public and
bring sanity in the Nigerian banking system. This according to the CBN Deputy Governor,
Financial System Stability, Dr. Kingsley Moghalu has led to the injection of over N3 trillion
in resolving the banking crises that have seen 10 banks undergoing rigorous reforms
including change of leadership in eight (CBN, 2013). The cost includes the N1.725 trillion
spent by the Asset Management Corporation of Nigeria (AMCON) to acquire the non
performing loans of banks in the wake of the 2008 global financial crises. Before then, the
apex bank had injected N620 billion to rescue 10 banks at the heat of the financial crises in 2009.
Similarly, the Financial System Stability report revealed that another N679 billion was
expended by the AMCON to recapitalize the three Bridged- Banks (defunct Afribank, Bank
PHB and Spring Bank) in August 2010. However, the Deputy Governor lamented that unlike
other economies where financial stimulus and bailout packages came at huge cost to tax
payers, the CBN, banks and AMCON established the Banking Sector Resolution Cost Fund
(Sinking Fund) to absorb cost of crises. According to the terms and condition of the Fund the
24 banks in the country and the CBN have been designated to contribute 0.3% of their total
assets and N50 billion per annum to the Fund (CBN, 2010).
The establishment and promotion of AMCON by the CBN in conjunction with the Federal
Ministry of Finance was prompted by the need for a special purpose vehicle to free banks of
their toxic asset burden. It is believed that the establishment of AMCON constitutes the first
critical step towards the resolution of the non-performing loan problem in banks a process
that would eventually facilitate further consolidation of Nigerian banks. As a bold step taking
by the government in response to the persistent crises in the banking sector, Ikpepan and
Mukoro (2012) opine that the establishment of AMCON was in part as a result of the steady
growth of non-performing loans (NPLs) in the Nigerian banks, with the attendant undesirable
consequences on liquidity and solvency as well as the need to take proactive measures to
facilitate the implementation of the current restructuring of the banking system. They further
revealed that NPLs in the Nigerian banking system is alarming and has affected the
performance and going-concern of some of the deposit money banks in Nigeria, particularly
Afribank, BankPHB and Spring Bank among others.
However, the effectiveness of government intervention depends on the structure and viability
of the entire bail-out policy. Dam and Koetter (2012) found that certain regulatory actions
may limit or even reduce risk-taking and improve efficiency. According to them, existing
empirical literature is inconclusive regarding the form of the optimal resolution program and
the combination of mechanisms that would allow countries to minimize the negative
consequences of government interventions. As a result of lack of adequate empirical evidence
in this area, policymakers cannot properly understand and assess banking sector
performances. For instance, a study by Philippon and Schnabl (2013) found that the optimal
bailout program should include equity instead of cash injections. Additionally, they point that
optimal bailout program should not include asset purchases and debt guarantees; otherwise,
banks will have incentives to engage in opportunistic behavior. Bhattachrya and Nyborg
(2012) argue that both equity injections and asset purchase programs are optimal in resolving
banking sector problems. However, House and Masatlioglu (2010) find that debt guarantees
exhibit the best performance. While these studies attempted to provide an insight into the
bailout policy, their main interest lies in the determination of optimal strategies from the
perspectives of cost and banking sector recovery, with risk and performance a minor concern.
The fundamental purpose of every business enterprise is to consistently outperform the
competitors and deliver sustained superior returns to the owners while satisfying other
stakeholders. The measurement of how successful firms are at achieving this purpose is a key
issue for practitioners and researchers. From a practitioner‟s perspective, financial metrics are
important because they are the primary way performance of both firms and top leaders are
evaluated and the inform decisions about the firm made by internal and external stakeholders,
(Verberten and Bonns,2009). From a research perspective, financial metrics are important
because they are extensively used as a criterion measure to evaluate the impact of firm
performance on a diverse range of interventions, such as human resources practices or
advanced manufacturing technologies.
This study is motivated by the need for optimal bailout policy that could improve the
performance and enhance the stability of the entire financial system. The evaluation and
determination of the optimal bailout policy is especially important and has been emphasized
by the Bank of England (2009), European Commission, (2011), and World Bank, (2012) at
present due to regulators‟ recent initiatives in implementing national directives regarding the
resolution of systemic banking crises. Therefore, this study critically evaluates the
effectiveness of the bailout policy in the Nigerian banking industry in relation to
performance.
1.2 Statement of the Problem
The global economy was hit by an unprecedented financial and economic meltdown of 2007
2009, tipped into recession by the subprime crisis in the US in August 2007. This has led to
the collapse of many world renowned financial institutions and resulted in the bankruptcy of
some countries (CBN, 2010). According to the CBN, the Nigerian economy faltered and the
banking system experienced a crisis in 2009, triggered by global events. The stock market on
the other hand lost approximately 70 per cent of its value in 2008-2009 and many Nigerian
banks had to be rescued. In order to stabilize the system and return confidence to the markets
and investors, the CBN injected 620 billion Naira of liquidity into the banking industry and
replaced the leadership of eight banks. This has led to a considerably stabilized banking
sector.
While the global financial and economic crises have significantly affected the mode of
operations of financial markets and the central banks regulations in most economies.
However, there is an absence of adequate monitoring and control in the financial service
industry. Consequently, the wave of global financial and economic crises together with the
dramatic growth in the post consolidation has led to the creation of an extremely fragile
Nigerian financial system. However, there were a series of government intervention to
cushion the ugly state of the Nigerian banking sector during the last decade. This includes
intervention in the form of government bailout with substantial amount of capital to save the
industry and enhance performances. Similarly, the goal of government bailout programs is to
stabilize the banking sector and stimulate lending by providing banks with emergency capital
and purchasing so-called toxic assets. This is due to the fact that the periods of financial crisis
are typically characterized by a dramatic decrease in lending due to decreases in deposits,
increased loan losses, and the hesitancy of banks to lend (Ivashina & Scharfstein, 2010).
Therefore, bailout programs typically aim to facilitate a recovery in lending through bank
balance sheets recapitalization, providing managers with the financial support to resume
lending.
While the intervention by the government through the bailout policy has been a historical
landmark in the banking sector and the entire financial system, there is absence of empirical
studies that examined the effect of the policy on the performance of banks. This constituted
the problem that this study attempt to investigate. To the best of the knowledge of the
researcher, this is the first study that attempts to empirically assess the total impact of
government bailout policy on the performance of bridged banks in Nigeria. Moreover,
existing studies have examined the impact of government interventions on bank behavior, the
studies have not related the intervention with performances and most of them are foreign
based with the exception of few.
Gropp, Hakenes, and Schnabel (2011), Dam and Koetter (2012) and Fischer, Hainz, Rocholl,
(2012) also investigated the role of government guarantees on bank behavior; Cordella and
Yeyati (2003), Corsetti, Guimaraes, Roubini (2006) and Martin (2006) examine the impact of
liquidity provisions; Berger, Bouwman, Kick, Schaeck (2011), Duchin and Sosyura (2013)
and Mehran and Thakor (2011) examine the effects of capital injections; and Black and
Hazelwood (2012), Bayazitova and Shivdasani (2012) and Harris et al. (2013), Ogboi and
Kenneth (2013), Kuye, Ogundele and Andrew(2013) consider the effects of the Troubled
Asset Relief Program (TARP). Recently, several studies like Bhattacharya and Nyborg
(2012), Landier and Ueda, (2008), Veronesi and Zingales, (2010) have focused on the
contributions of bailout programs to the cost of resolving the banking crisis but without
reaching a definitive conclusion. Hence, several gaps and limitations regarding the resolution
of banking crises are evident in the existing literature.
Moreover, the extant literature revealed that there are no bank-level empirical investigations
of the total impact of bailout programs on banking sector performances. These could
constraint policymakers on having clear guidance regarding how to respond to problems in
the banking sector.
1.3
Research Questions
Based on the foregoing, this study attempts to provide answers to the following research
questions
i. What is the impact of CBN bailout policy on the operating and financial performance
of bridged-banks in Nigeria?
ii. How does the bail-out policy affect credit activities of the bridged-banks?
iii. To what extent does the bail-out policy affect deposit mobilization of the bridged
banks?
iv. How does the bail-out policy affect capital adequacy of the bridged-banks?
v. What is the effect of bail-out policy on the risk assets quality of the bridged-b