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 I. G. OKAFOR
Project Supervisor 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 Date
Project Supervisor

________________________ ___________________
I. G. Okafor Date
Head of Department

_________________________ ____________________
External Examiner Date
 v

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 Eiya’s 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 Bank’s 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 - - - - - - - i
Approval Page - - - - - - ii
Certification Page - - - - - - iii
Dedication - - - - - - - iv
Acknowledgement - - - - - v
Abstract - - - - - - - vii
Table of Contents - - - - - - viii
CHAPTER ONE:INTRODUCTION
1.1 Background of the Study - - - - 1
1.2 Statement of the Problem- - - - 9
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 - - - 1
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
 x

2.3 The Business Process Re-Engineering (BPR) Option - - 35

2.3.1 Origin and Meaning of the BPR Concept - - - 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 - - - - - - 47
2.3.5 Positive Effects of BPR To the Banking Sector - - 50
2.4 The Merger and Acquisition Option - - - - 52
2.4.1 Meaning of the Concept Merger and Acquisition - - 52
2.4.2 Legal Issues in Merger and Acquisition - - - 55
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 - - - - - - 62
2.8.1 Causes of Economic Depression - - - - - 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
CHAPTER FOUR
4.0 Data Presentation and Analysis- - - - - 71
4.1 Financial Statement of First Bank
Plc for the Month ended 31st March - - - - 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- - - 93
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 - - - - - - - - 96
5.3 Recommendation - - - - - - - 96

Bibliography - - - - - - - - 99
 1

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

 2

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

 3

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.

 4

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

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
 6

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, take-

overs, 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

 7

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

 8

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

 9

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 on-

going 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.
 12

1.4 RESEARCH QUESTIONS

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 bank’s assets as a result

of the restructuring?

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 bank’s profitability?

6. What impact has the strategy made on the shareholders’ funds?

1.5 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, re-

engineering 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 firm’s 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 non-

performing 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 management’s 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

management’s 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 macro-

economic 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 non-

traditional savers increased the level of financial savings.

For the purpose of this research, the analysis of the Nigeria macro-

economic 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 country’s operating

environment for business till date happened this period. The first

event was the January 1966 military coup d’etal 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 nation’s 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

government’s participation in economic activities. The oil boom

changed the pattern of production, investment and consumption,

 24

making the economy to 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 macro-

economic 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 macro-

economic 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 People’s 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 de-

emphasization 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 community’s 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

nation’s 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 it’s 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 bank’s ability to build and communicate a shared

 41

understanding of organization’s preferred vision and create an

environment with infrastructures that will actually promote

learning and allow imaginations.

In collaborating with Abolo’s (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 stakeholder’s 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

bank’s 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-à-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 re-

invigorate 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 today’s 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

 54

of 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 monopoly’s 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 nation’s 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

23. Citizen Guardian

24. Unity Bank Group

25. Ecobank Nigeria

3.3 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 x 100
25 1

= 4%

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 2007 2006 2005 2004 2003

N’M N’M N’M N’M N’M N’M
Cash and short term 89,076 60,881 49,444 30,220 22,509
funds
Due from other banks
and financial 247,059 137,864 94,029 64,143 80,369
institutions
Bills discounted 147,680 159,832 108,316 100,135 92,922
Trading securities 93,396 71,477 - - -
Investments 71,532 64,048 63,729 24,655 16,825
Loans and Advances 437,768 219,185 175,657 114,673 78,040 53,689
Advances under 10,297 3,043 1,701 937 -
financial lease
Other assets 39,498 29,701 31,317 30,625 11,596
Equipment on lease - - - - 665
Fixed assets 29,155 16,850 13,952 12,108 9,564
Good will - - 1,984 - -
TOTAL ASSETS 1,165,461 762,881 540,129 377,496 312,490 260,580
LIABILITIES
Deposits and Current 661,624 581,827 390,846 264,988 206,643 168,298
Accounts
Due to other banks 44,281 14,448 323 390 538
Tax payable 5,091 5,710 4,148 3,954 4,022
Deferred taxation 6,712 2,671 2,751 2,010 1,533
Dividend - - 5,238 6,325 5,429
Other liabilities 78,492 58,773 75,843 55,157 55,704
Long term borrowing 29,414 22,101 - - -
825,614 685,530 479,149 332,824 273,869
SHAREHOLDER’S 339,847 77,351 60,980 44,672 38,621 33,580
FUNDS
1,165,461 762,881 540,129 377,496 312,490
 72

Gross earnings 130,600 79,299 61,243 49,475 45,121

Profit on ordinary
activities before 38,020 22,097 16,128 15,145 14,106 13,150
taxation
Extra ordinary item - - 3,703 - -
Profit on ordinary
activities after taxation 30,473 18,355 16,053 12,184 11,096
and exception item
Profit after taxation 30,473 18,355 16,053 12,184 11,096
Amortization of - 1,984 1,984 - -
goodwill
Profit attributable to 30,473 16,371 14,069 12,184 11,096
ordinary shareholders
Dividend - - 5,238 6,325 5,429
Return on shareholders 9% 21% 23% 27% 29%
funds
Earnings per share 223K 156K 269K 308K 381K
(basic): - Basic
Dividend per share –
actual - 100k 100k 160k 155k
Dividend cover (times) - 1.12 2.69 1.93 1.00
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
 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 bank’s 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 bank’s

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

bank’s 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 GROWTH STRUCTURE OF TOTAL ASSETS

YEAR AMOUNT GROWTH GROWTH

DECLINE RATE
N’M N’M %
2003 260,580 - -
2004 312,490 51,910 19.9
2005 377,496 65,006 20.8
2006 540,129 162,633 43.1
2007 762,881 222,752 41.2
2008 1,165,461 402,580 52.8
Source: Compiled by the Researcher
 75

FIG. 4.1: A BAR CHART REPRESENTING THE GROWTH

STRUCTURE OF TOTAL ASSETS OF FIRST BANK PLC.
Y

1400

1,165,461
1200

1000
Amount in million

762,881
800

540,129
377,496
600
312,490
260,580

400

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

1400

1200

1000
Amount in million

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 BANK’S 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 bank’s 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 bank’s total deposits. This could

be as a result of the bank’s 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 BANK’S STRUCTURE OF TOTAL DEPOSIT

Year Amount Growth Decline Growth Rate
N’m N’m %
2003 168,298 - -
2004 206,643 38,345 22.8
2005 264,988 58,345 28.2
2006 390,846 125,858 47.5
2007 581,827 190,981 48.9
2008 661,624 79,797 13.7
Source: Compiled by the Researcher

FIG. 4.3: A BAR CHART SHOWING THE GROWTH STRUCTURE

OF FIRST BANK’S DEPOSIT
661,624

Y
581,827

700
 79

600

500

390,846
Amount in million

264,988
400

206,643
300
168,298

200

100

0 X

2003 2004 2005 2006 2007 2008

YEAR

FIG. 4.4: GRAPHICAL ANALYSIS OF GROWTH PATTERN OF

FIRST BANK PLC TOTAL ASSETS

Y
 80

700

600
Amount in million

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 BANK’S 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 bank’s 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 bank’s 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 BANK’S STRUCTURE OF LOANS AND ADVANCES

Year Amount Growth Decline Growth Rate

N’m N’m %
2003 53,689 - -
2004 78,040 24,351 45.4
2005 114,673 36,633 46.9
2006 175,657 60,984 53.2
2007 219,185 43,528 24.8
2008 437,768 218,583 99.7
Source: Compiled by the researcher

FIG. 4.5: A BAR CHART SHOWING THE GROWTH STRUCTURE

OF FIRST BANK’S LOANS AND ADVANCES
Y

500
437,768

450

400

350
Amount in million

300
219,185

250
175,657

200
114,673
78,040
 84

150

53,689
100

50

0 X
2003 2004 2005 2006 2007 2008
YEAR

FIG. 4.6: A GRAPHICAL REPRESENTATION AND ANALYSIS OF

THE GROWTH STRUCTGURE OF FIRST BANK’S LOANS AND

ADVANCES

500

450
Amount in million

400

350

300

250
 85

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 bank’s

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

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

immediately set into increasing trend in 2004 when the bank recorded
 86

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 BANK’S STRUCTURE OF PROFIT BEFORE TAX (PBT)

Year Amount Growth /Decline Growth Rate
N’m N’m %
2003 13,150 - -
2004 14,106 956 7.3
2005 15,145 1,039 7.4
2006 16,128 983 6.5
2007 22,097 5,969 37.0
 87

2008 38,020 15,923 72.1

Source: Compiled by the researcher

FIG. 4.7: A BAR CHART SHOWING THE GROWTH STRUCTURE

OF FIRST BANK’S PROFIT BEFORE TAX (PBT)
Y

38,020
40

35

30

22,097
Amount in million

25
16,128
15,145

20
14,106
13,150

15

10

0 X

2003 2004 2005 2006 2007 2008

YEAR
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FIG. 4.8: GRAPHICAL ANALYSIS OF GROWTH PATTERN OF

FIRST BANK’S PROFIT BEFORE TAX (PBT)

40

35
Amount in million

30

25

20

15

10

0 X
2003 2004 2005 2006 2007 2008
YEAR

4.6 ANALYSIS OF SHAREHOLDERS’ FUNDS

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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

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to 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 bank’s survival strategy and restructuring exercise.

TABLE 4.6.1 FIRST BANK’S GROWTH STRUCTURE OF

SHAREHOLDERS’ FUNDS

Year Amount Growth/ Decline Growth Rate

N’m N’m %
2003 33,580 - -
2004 38,621 5,041 15.0
2005 44,672 6,051 15.7
2006 60,980 16,308 36.5
2007 77,351 16,371 26.8
2008 339,847 262,496 339.4
Source: Compiled by the Researcher
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FIG 4.9: GRAPHICAL PRESENTATION AND ANALYSIS OF

THE GROWTH IN SHAREHOLDERS’ FUNDS

350

300
Amount in million

250

200

150

100

50

0 X

2003 2004 2005 2006 2007 2008

YEAR
 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

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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 depositor’s confidence in the bank’s 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 depositor’s 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

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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

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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.

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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.

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Finally, the researcher leaves the work open for further research

and criticism by other researchers.

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