IMPACT OF BANK RECAPITALIZATION ON STOCK MARKET DEVELOPMENT

Background to the Study: The relevance of banks in the economy of any nation cannot be overemphasized. They are the cornerstones of the economy of a country. Banks play the important role of promoting economic growth and development through the process of financial intermediation; in this process, banks facilitate capital formation and lubricate the production process. This intermediation is important because in the absence of banks, the savings would have been fragmented and put in small packet here and there. By pooling together such savings, banks are able to achieve economic of scale with beneficial effects for their borrowing customers.

For banks to function effectively, it is imperative that they are visible and healthy and that the entire industry is stable and sound. It is in appreciation of this, that the industry worldwide is usually heavily regulated and supervised a major objective of regulation and supervision, therefore, is to ensure that the industry is sound and stable, thereby encouraging public confidence in the system. The need for banking sector regulation is further underscored by the fact that shareholders’ funds are usually only a small proportion of the financial resources available to a bank. The bulk of the funds available to a bank are depositors’ monies. These deposits usually constitute not less than 70% of a typical banks liability. Itis therefore crucial that the interest of these depositors is protected, especially those of them who are not well informed.

The Nigeria banking sector has undergone remarkable changes over the years, in terms of the number of institutions, ownership structure as well as the depth and breadth of operations. These changes have been influenced largely by the challenges posed by the deregulation of the sector, globalization of operation, technological innovations and the adoption of supervisory and prudential requirement that conform to international standards The deregulation of the sector which began during the period 1986-1990 was followed by a flood of new banks. The existence of so many banks, couple with the non-compliance with market regulation by majority of the players, inadequate capital, poor credit administration, etc led to high incidence of distress in the banking industry in the 1990s, bank sector in Nigeria are driven by the need to deepen the financial sector and reposition the Nigeria economy for growth; to be integrated into the global financial structural design and evolve a banking sector that is consistent with regona1 integration requirements and international best practices. It also aimed at addressing issues such as governance, risk management and operational inefficiencies, the center of the reform is around securing up capitalization. Against, this background, the Central Bank of Nigeria (CBN), on July 6, 2004, a day now referred to as “Back Tuesday” in the banking sector of the economy, announced a reform programme for the nation’s banking industry. The thrust of the reform required the 89 insured banks then in the system to raise their shareholders’ fund to a minimum of 25 billion each, with a deadline of 31st December, 2005 for full compliance. Bank were specifically required to achieved that through fresh capital injection where applicable, but were most importantly encouraged to consolidate through mergers and acquisitions arrangements with other banks.