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1.1   Background of the Study

In the recent years, the issue of adequate capitalization of banks has assumed international concern because of the importance of banking institution in the facilitation of domestic economy and international trade. There is no need denying the fact that banking is a central institution in the effective functioning of any economy. It is well known that the survival and growth of banks in Nigeria are contract linked to the growth of national economy.

Financial systems all over the world play very important roles in the development and. roles and growth of the economy (Okorie and Uwaleke, 2010).  However, the effectiveness and efficiency of the systems as well as its scope and capacity varies quite considerably among economies. This is partly because of the varied level of development. More developed financial systems tend to be associated with the more developed economies.

Evidently, this relationship between the survival of banks and the national economic well being is borne out of the Central institutions and crucial roles played by banks in any economy. By playing the intermediate role between surplus and deficit spending units in any economy, banks increase the quantum of national savings and investment and the volume of national output is enhanced.

The survival and growth of banks therefore are of great interest to the government, the public and banks’ promoters. This interests group generally who like to see a safe, sound and socially conscious banking system, promoters of banks also eyes much on profitability and safety of the depositors’ funds. These have necessitated banks to be adequately capitalized in order to live up to expectation.

The Nigerian economy has had a truncated history. In the period 1960 – 70, the Gross Domestic Product; GDP) recorded 3.1% growth annually (CBN, 2006), During the oil boom era, roughly 1970 – 78, GDP grew positively by 6.2% annually which was a remarkable growth. However, in the 1980s, GDP had negative growth rates. In the period 1988-97 which constitutes the period of structural adjustment and economic liberalization, the GDP responded to economic adjustment policies and grew at a positive rate of 4%. In the years after independence,

Industry and manufacturing sectors had positive growth rates except for the period 1980-88 where industry and manufacturing sectors grew negatively by -3.2% and 2.9% respectively. The growth of agriculture for the periods 1960-70 and 1970-78 ‘was unsatisfactory. In the early 1960s, the agricultural sector suffered from low commodity -prices while the oil boom contributed to the negative growth of agriculture in the 1970s, the boom Lured labour away from the rural sector to urban centres.

Capital formation in the economy has been satisfactory (Ekpo and Umoh, 2010). ‘Gross   domestic investment as a percentage of GDP, which was 16,3% and 22,8% in the periods 1965-73 and 1973-80 respectively decreased to almost 14% in 1980-88 and increased to 18.2% in 1991-98. Gross National saving has been low and consists mostly of public savings especially during the period 1973-80.

The current account balances before official transfers are negative for 1965-73, 1980-88 and 1990-98. The economy never experienced double-digit inflation during the 1960s. By 1976, however, the inflation rate stood at 23%. It decreased to 11.8% by 1979 and jumped to 41% and 72.8% in 1989 and 1995 respectively. By 1998, the inflation rate had however, reduced to 9.5% from 29.0% 1996.

The relevance of the study cannot be overemphasized as banking sector is partly responsible for the state of the economy. It has reneged on its role of financing sustained economic development by rather supporting the impact of dependence nature of the economy. It is obvious that   no government or any economy of any sort can perform very well or extend to a reasonable period of time without adequate bank capital from the outset.


1.2 Statement of the Problem

Government as well as every Nigerian citizen  has continued to express considerable concern about Nigerian economy and failure evidenced in 2009 fiscal year as six Deposit Money Banks were rescued, by CBN resulting from the inadequacy of capital for their efficient functioning. The fundamental problems of the banks particularly range from persistent illiquidity, poor assets quality and unprofitable operations.

The ability of the financial system to mobilize savings and hence contribute to investment and economic growth depends on the quality of financial services, and the effectiveness and efficiency of the financial system. Since one of the objectives of the financial system is to mobilize finance for investment, the system can be judged to be effective when it is able to contribute to or raise the level of investment needed’ to achieve growth in the economy (Ndekwu, 2008).

Capit’al inadequacy is a problem that has affected the operation of banking industry and the economic growth as well. Prior to the establishment of CBN; the Nigerian economy witnessed a flurry of bank failure particularly in the late 1940s. In all, a total of 25 indigenous banks failed during the period (CBN/NDIC, 1995). At that period, there was no banking regulatory framework in place and the period is often referred to as the era of free banking.

The introduction of SAP in 1986 saw an increase in the number of banks from 41 in 1986 to 120 in 1990, without a corresponding growth in skilled manpower and inept management in the form of inadequate strategic plan and poor risk management among others (Ogunlay, 2002). This led to distress in some financial institutions. Thus, from 1994 to 2003, 39 banks failed.

Furthermore, as a result of recapitalization exercise embarked upon in 2005, 13 banks failed due to their inability to meet up with the minimum paid up of N25b introduced. In 2009, some banks were dictated to have serious liquidity problems, as there were lots of non-performing loans in the banks, which is a symptom of distress (NDIC, 2009). The CBN Decree 21, 1990 and BOFID 1991 represent significant watersheds in capital regulation for the Nigerian banking system.

From a modest value of NI0m minimum paid up capital in 1989, DMBs in Nigeria were required to maintain capital not below N50m 1991. Between 1991 and 2005, subsequent increases have also been, made ranging from N500m in 1997, N2b in 2002   and   N25b   in   2005.   While,   various   regulatory approaches starting from deregulation to consolidation nave brought about growth in the size, structure and functions of the Nigerian -banking system, capital regulation cannot be said to have been efficient in ensuring a stable banking system or a corresponding level of economic growth. In line with the foregoing, the researcher seeks to examine if the bank capitalization (pre and post) have been effective in Nigerian economy or not and to make recommendations where necessary.

1.3 Objectives of the Study

The broad objective of this study is to examine the implication of bank capitalization on economic growth in


Other specific objectives include the following:

  1. To ascertain the relationship between the level of bank capitalization and economic growth in
  2. To ascertain the effect of the volume of lending on economic growth in Nigeria.

1.4 Research Hypotheses

Based on the above objectives, the following hypotheses were formulated:

H0: There is no significant relationship between the level of bank capitalization in Nigeria.

H1: There is a significant relationship between the level of bank capitalization and economic growth in Nigeria.

H0: There is no significant effect of volume of lending on economic growth in Nigeria.

H1: There is significant effect of volume on economic growth in Nigeria.

1.5   Significance of the Study

This study will be of immense benefit to bankers, students, customers of banks and prospective investors. It will enable both the businessmen and operators in the financial industry to appreciate the historic role of sound capital base in efficient performance of banks and economic growth.

The study will encourage investors to invest in those banks whose capital discipline could be made. It will also help the government in making short and long-term planning.

Finally, it will serve as a cradle for future researchers and people who will have interest in the subject matter.

1.6 Scope of the Study

This study is on the bank capitalization and economic growth in Nigeria (2004-2009). It studies the capitalization of DMBs in Nigeria and the economy at large.

1.7   Limitations of the Study

Notably, some constraints are encountered in the process of this research work. Notable among them is the dearth of statistical data which limited -the study within the time frame between 2004-2009. Notwithstanding, the researcher did his best to ensure the validity and reliability of this research work.

1.8   Definition of Operation Terms

Capital: It is money that is used to start up a business Minimum paid-up capital: This is the minimum capital required by the government for any bank to continue its operation in. the country. The minimum paid-up capital for

DMBs in Nigeria is N25b.

Globalization: This is the process of being sensitive and responsive to issues worldwide.

Recapitalization: This can be defined as the enhancement and restructuring of the financial resources of an organization with a view to enlarging the size of long term fund available to a corporation,

Economic growth: This is defined as the quantitative increase in a country’s gross national product or per capita income over a given period of time usually a year.


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