EFFECT OF BANK CONSOLIDATION ON KEYSTAKEHOLDERS OF COMMERCIAL BANKS IN NIGERIA’S NIGER DELTA REGION BYDICKSON, RACHEALPG/Ph.D/04/38060DEPARTMENT OF MANAGEMENT, FACULTY OF BUSINESS ADMINISTRATION, UNIVERSITY OF NIGERIA, ENUGU CAMPUS

EFFECT OF BANK CONSOLIDATION ON KEYSTAKEHOLDERS OF COMMERCIAL BANKS IN NIGERIA’S NIGER DELTA REGION BY DICKSON, RACHEAL PG/Ph.D/04/38060 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF TH

EFFECT OF BANK CONSOLIDATION ON KEY STAKEHOLDERS OF COMMERCIAL BANKS IN

NIGERIA’S NIGER DELTA REGION

BY

DICKSON, RACHEAL PG/Ph.D/04/38060

EFFECT OF BANK CONSOLIDATION ON KEY

STAKEHOLDERS OF COMMERCIAL BANKS IN NIGERIA’S

NIGER DELTA REGION

BY

DICKSON, RACHEAL PG/Ph.D/04/38060

A THESIS SUBMITTED IN PARTIAL FULFILLMENT

OF THE REQUIREMENTS FOR THE AWARD

OF Ph.D IN MANAGEMENT,

DEPARTMENT OF MANAGEMENT, FACULTY OF BUSINESS ADMINISTRATION,

UNIVERSITY OF NIGERIA,

ENUGU CAMPUS.

SUPERVISOR: Prof U.J.F EWURUM

2013

I, Dickson, Racheal, a postgraduate student in the Department of Management with Registration

Number PG/Ph.D/04/38060 do hereby declare that the work incorporated in this thesis is original

and has not been submitted in part or in full for any other Diploma or Degree of this University

or any other Institution of higher learning

DICKSON, RACHEAL PG/Ph.D/04/38060

This project is dedicated to my Husband, Hon Henry Seriake Dickson, the Executive Governor

of Bayelsa State, who sponsored my programme, for his love, care and understanding andunrelenting efforts at making sure the Ph.D programme was a success

I wish to acknowledge firstly the Almighty God for His favour and mercy in seeing me throughthis study; praise be His name I also want to thank my Supervisor Prof UJF Ewurum, formerDean, Faculty of Business Administration, University of Nigeria, Enugu Campus for his untiringeffort in going through this study

I also wish to express my profound gratitude to Dr V.A Onodugo, Ezigbo, Head, Department

of Management and to all the lecturers in the Department of Management, notably Dr O Ugbam,

Dr Charity, Dr E.K.Agbaeze, Dr Ann Ogbo, Dr B.I Chukwu and C.O Chukwu, for theirimmense contribution towards the successful completion of my PhD programme Other staff ofthe Department and Faculty, particularly the current Dean, Prof (Mrs) Ugwuonah, also deservespecial mention for facilitating the completion of the programme May the good Lord bless youall and reward you abundantly for your encouragement and moral support

I also appreciate the contributions of the Board and staff of School of Postgraduate Studies andthe university community in general who laboured in various ways to see me through thisdoctoral programme God bless you all

My profound gratitude goes to the Library of University of Nigeria, ICT, and Afrihub all ofEnugu campus of UNN for their assistance in my secondary data collection as well as mycomputer typists for their efforts in the preparation of drafts and production of the thesis

Racheal Dickson

TABLE OF CONTENTS

Approval ii

Certification iii

Dedication iv

Acknowledgements v

Abstract vi

List of Tables x

CHAPTER ONE: INTRODUCTION 1.1 Background of the Study 1

1.2 Statement of the Problem 6

1.3 Objectives of the Study 7

1.4 Research Questions 8

1.5 Research Hypotheses 8

1.6 Significance of the Study 9

1.7 Scope of the Study 10

1.8 Operational Definitions of Terms 10

1.9 History of Nigerian Banking Industry and the Nigeria Niger Delta Region 11 1.10 Profile of the Nigerian Niger Delta Region 15

References 17

CHAPTER TWO: REVIEW OF RELATED LITERATURE 2.1 Introduction 20

2.2 Conceptual Framework 20

2.3 Theoretical Framework 23

2.4 Empirical Review: Prior Researches on Bank Consolidation 27

2.4.1 Bank Consolidation and Human Resource Issues 27

2.4.2 The Value Effects of Bank Consolidation 28

2.4.3 Bank Consolidation and Efficiency of Financial Intermediation 40

2.4.4 Bank Consolidation and Organisational Performance 48

2.4.5 Bank Consolidation and Managerial Role and Commitment 58

2.4.6 Bank Consolidation and Commercial Borrower Welfare 64

2.5 Summary of the Review of the Related Literature 68

References 70

CHAPTER THREE: RESEARCH METHODOLOGY 3.1 Introduction 83

3.2 Research Design 83

3.3 Nature and Sources of Data 83

3.4 Population of the Study 83

3.5 Pilot Survey 84

3.6 Sample Size Determination 85

3.7 Sampling Procedure 86

3.8 Research Instrument 87

3.9 Validity of the Instrument 88

3.10 The Reliability of the Instrument 88

3.11 Techniques for Data Analysis 90

References 91

CHAPTER FOUR PRESENTATION AND ANALYSIS OF DATA 4.1 Introduction 92

4.2 Presentation of Data 92

4.3 Test of Hypotheses 135

4.4 Discussion of Results 143

References 147

CHAPTER FIVE SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS 5.1 Summary of Findings 148

5.2 Conclusion 149

5.3 Recommendations 149

5.4 Contribution to Knowledge 151

5.5 Suggestion for Further Studies 151

Bibliography 152

Appendices 170

LIST OF TABLES

Table 4.1 Response Rates of Respondents in the Niger Delta Region 92

Table 4.2: Do you agree that Bank Consolidation have had an effect on

Table 4.3: With Bank Consolidation, Bank Managers now perform

their Managerial Functions of Planning, Organising, Directing

Table 4.4: With Bank Consolidation, Bank Managers Discharge their

Table 4.5: With Bank Consolidation, CEOs now see great Reputational

Table 4.6: Managers in the Post-Consolidation Era of Banks are now

Table 4.7: With Bank Consolidation, Managers are no longer committed

Table 4.8 Consolidated Response to Objective one 101Table 4.9: Consolidation Policy of the Central Bank has an effect on the

Table 4.10: Banks in this Post-Consolidation Era are now doing well in

Terms of Profitability and Services to Customers? 104Table 4.11: With bank Consolidation, Profit has Increased due to the Increase

in Capital Necessitated by the Consolidation Policy of the Central

Table 4.12: Bank Consolidation has Improved the Operating Efficiency of Banks? 107Table 4.13: Operating Costs are well Managed as a Result of the Bank Consolidation? 108Table 4.14 Consolidated Response for Objective Two 109Table 4.15: To what extent do you agree that the Consolidation Policy of the

Central Bank has positively influenced the Rate of Job Creation

Table 4.16: With bank Consolidation, Employees are no Longer comfortable

with their jobs; they always fear losing their jobs? 113

Table 4.17: Bank Consolidation has led to Job Losses at the Executive

General Management, Senior and Junior Staff Cadre? 114Table 4.18: With Consolidation, Employees now Resort to Active and

Passive Resistance to protest and resist Job Losses? 115Table 4.19: Consolidation Response for Objective Three 117Table 4.20: The bank Consolidation policy has Enhanced Employees’

Table 4.21: With Bank Consolidation, Salaries are paid regularly and

Worker’s needs are well attended to? 120

Table 4.22: With Bank Consolidation, Workers derive greater pleasure in

Table 4.23: Consolidated Response for Objective Four 122Table 4.24: Bank Consolidation has Greatly improved the Value of

Table 4.25: Bank Consolidation has led to Higher Returns to

Table 4.26: Consolidated Response for Objective Five 127

Table 4.27: Bank Consolidation has Greatly Improved Commercial

Table 4.28: Commercial Borrowers are Dissatisfied with the

Table 4.29: Bank Consolidation has led to a Decline in Customers’

Table 4.30: Bank Consolidation has Enhanced Customers’ Welfare? 132Table 4.31: Consolidated Response for Objective Six 133Table 4.32 Consolidated Response to Objective One 136Table 4.33: SPSS Chi-Square Tests Result for Hypothesis One 136Table 4.34 Consolidated Response for Objective Two 137Table 4.35 SPSS Chi-Square Tests Results for Hypothesis Two 137Table 4.36: Consolidation Response for Objective Three 138

Table 4.37: SPSS Chi-Square Tests Results for Hypothesis Three 138Table 4.38: Consolidated Response for Objective Four 139Table 4.39: SPSS Chi-Square Tests Results for Hypothesis Four 140Table 4.40: Consolidated Response for Objective Five 141Table 4.41: SPSS Chi-Square Tests Results for Hypothesis Five 141Table 4.42: Consolidated Response for Objective Six 142Table 4.43 SPSS Chi-Square Tests Results for Hypothesis Six 142

This study examined the effect of bank consolidation on managerial roles and commitments, performance, employment of human resources, worker job satisfaction, shareholders wealth value creations and commercial borrower welfare in commercial banks in the Nigeria’s Niger Delta region The study adopted the survey research design and oral interview The respondents were drawn from managers, non-managers, commercial borrowers and shareholders of commercial banks in Nigeria’s Niger Delta region A sample size of 730 respondents was used for the study Data collection was through questionnaire structured in five point Likert-scale and oral interview The reliability test was by Cronbach alpha correlation at 0.97 Six hypotheses were stated and analysed using the Chi-square (x ) statistic.2

The results from the study reveal that bank consolidation had significant positive effect on managerial roles and commitment of commercial banks in Nigeria’s Niger Delta region Bank consolidation had significant positive effect on performance of Nigerian commercial banks in the region Bank consolidation had significant negative effect on employment of human resources in Nigerian commercial banks in the region Bank consolidation had significant negative effect on worker job satisfaction in commercial banks in the region Bank consolidation had significant positive effect on shareholder wealth value creation in commercial banks in the region Bank consolidation had significant negative effect on commercial borrowers’ welfare in commercial banks in the region The conclusion of the study is that, though bank consolidation exercise had significant positive effect on managerial role, commitment and performance as well as shareholders’ wealth value creation in commercial banks in the Niger Delta region, it had significant negative effect on human resources employments, workers job satisfaction and commercial borrowers’ welfare The study therefore recommends that for the region’s industrial base to grow, government should implement policies that will enhance employment creation Also, policy framework that will enhance growth of consolidated banks in Nigeria should be pursued

CHAPTER ONE INTRODUCTION 1.1 Background of the Study

The banking system consolidation is a global phenomenon, which started in the advancedeconomies Two notable examples of countries experiencing a wave of mergers andconsolidation in the banking industry in recent times are the United States of America (USA) andJapan (Hall, 1999:204-216) According to Kwan (2004:2), since the enactment of the Riegle-Neal Act, which allows interstate branch banking beginning from 1997, the number of large bankmergers in the USA has increased significantly Further research on mega mergers in the USAsuggests that merged banks experienced higher profit efficiency from increased revenues thandid a group of individual banks, due to the fact that they provide customers with high valueadded products and services (Akhavin et al, 1997:95-135) Furthermore, consolidation may allow

a mega bank to enjoy a hidden subsidy which Kwan (2004:5) refers to as “too-big-to- fail”subsidy due to the market’s perception of an illusion of government backing of a mega bank intimes of crisis The Japanese experience also shows that the consensus has been that significanteconomies of scale existed in the banking industry before the onset of the crisis and subsequentreforms in the ‘90s at all levels of output throughout the industry (Fukuyama, 1993:1102-12;McKillop et al, 1996:1651-71)

Consolidation in financial services in the USA and other industrialized countries has occurredalong three lines, namely: within the banking industry, between banks and other non-bankfinancial institutions, and across national borders In the USA, most of the consolidation thattook place occurred within the banking sector (McKillop et al, 1996:1651-71) For instance, inthat country, the number of banking organizations fell from about 12,000 in the early ‘80s toabout 7,000 in 1999, a decrease of over 40 per cent In the USA and Canada, there has been atrend towards consolidation of commercial banks and investment or merchant banks, whereas inEurope, where the universal banking model is more prevalent, the trend has been to combinebanking and insurance business While most of the bank consolidations in the developedeconomies have occurred within the domestic front, there are signs of increased cross-borderactivities Such cross-border activities have been facilitated in Europe with the launch of theEuro (Fukuyama, 1993:1102-12)

The trend towards financial consolidation in Europe, USA and Asia could be traced to severalfactors In the USA, one reason was the need to eliminate weak or problem financial institutionsduring the thrift and banking crisis of the late ‘80s and early ‘90s Some European countriesexperienced similar problems with institutions weakened by exposure to real estate lending.Advancement in telecommunication and information technology is another factor that hasaccelerated the pace of bank consolidation This is due to the fact that this factor has radicallyreduced the cost of providing a host of financial services The lessons to be drawn from the bankconsolidation in the advanced economies are that consolidation would result in fewer bankinginstitutions and more branches It could also be an active instrument of capital marketdevelopment which could lead to financial sector stability Apart from domestic M&As,consolidation could lead to increase in cross-border M&As which could facilitate the inflow ofForeign Direct Investment (FDI) Consolidation would certainly result in larger banks withimplications for bank concentration and the “too big to fail” syndrome (Adeyemi, 2010:13).

It is against this background that the former Governor of Central Bank of Nigeria, Prof CharlesSoludo, in his maiden address, outlined the first phase of the banking sector reform designed toensure a diversified, strong and reliable banking industry (Adeyemi, 2010:7) Thus, ProfChukwuma Soludo pioneered the consolidated exercise on 1st July 2004 and it lasted for 1 ½years till 31st December The primary objective of the reform was to guarantee an efficient andsound financial system The reform was designed to enable the banking system develop therequired resilience to support the economic development of the nation by efficiently performingits functions as the fulcrum of financial intermediation (Lemo, 2005:2) Thus, the reforms were

to ensure the safety of depositors’ money, position banks to play active developmental roles inthe Nigerian economy,

Furthermore, twenty-four out of the eighty-nine deposit-money banks that existed were said tohave exhibited one form of weakness or the other (Adeyemi, 2010:1) Prominent among suchweaknesses are under-capitalization and/or insolvency, illiquidity, poor asset quality, weakcorporate governance, boardroom squabbles, dwindling earnings and, in some cases, lossmaking The unhealthy competition that existed in the market, which was engendered by therelative ease of entry into the market as a result of the low capital base, necessitated some banksgoing into rent-seeking and non-banking businesses, which are not related to core banking

functions Some of the banks were said to be preoccupied with trading in foreign exchange,government treasury bills and sometimes, indirect importation of goods through surrogatecompanies

A review of the banking system as at June, 2004, reveals that marginal and unsound banksaccounted for 19.2% of the total assets, 17.2% of total deposit liabilities, while industry non-performing assets were 19.5% of the total loans and advances The implication of thisunsatisfactory statistics as noted by Lemo (2005:7) is that there existed threat of a systemicdistress judging by the trigger points in the CBN Contingency Planning Framework of December

2002, which stipulated a threshold of 20% of the industry assets, 15% of deposits being held bydistressed banks and 35% of industry credits being classified as nonperforming From theforegoing, it was apparent that a reform of the banking system in Nigeria was inevitable; it wasonly a question of time (Lemo, 2005:7)

Consolidation in the banking sector has become a highly popular strategy in recent years Thus,more attention has been focused on its outcomes Specifically, the extent consolidation serves as

a substitute for innovation, energy and attention required during negotiations, increased use ofleverage, increased size, and the greater diversification may have on managers' risk orientations.Because of these effects, managers may reduce their commitment to innovation (Hitt, Hoskissonand Ireland, 1990:22-26)

Consolidation may be an efficient way to eliminate the widely documented excess capacity in thebanking markets (Davis and Salo, 1998:17) In the presence of excess capacity, some banks arebelow efficient scale, have an inefficient product mix, or may be inside the efficient frontier.Consolidation may help solve these problems more efficiently than outright bankruptciesbecause they preserve the franchise values of the merging firms Moreover, there are severalreasons to doubt that the management efficiency effects of consolidation in financial institution

as the 1990s may differ from those in the 1980s Gradual deregulation, technological innovationsand the associated increase in competition have induced banks to adapt their strategies Theresulting focus on an optimal organizational design and improved efficiency tends to predictmore pronounced merger gains in the 1990s On the other hand, consolidation also leads toincreased concentration, which may entail negative consequences for different bank customersegments Therefore, bank regulators and competition authorities, among others, are interested in

gaining a better understanding of the potential consequences of enhanced bank consolidation.Also the competition for bank products which consolidation enhances may be detrimental to thebank excessive competition is likely to create an unstable banking environment The situationwill compel bank managers to undertake higher levels of risk in order to fully utilize the funds attheir disposal The bank would take the place of the servant; while the customer would take theplace of the king (as it is meant to be) But, in the corrupt and fraudulent Nigerian scene (Uche,1996:436-441), this may result in higher loan default rates, all amounting to inefficiencies in theshort term One can only hope that, as time unfolds, the situation would gradually change for thebetter as the banks start developing new ways of doing business.

As pointed out by Berger et al (1999:135-94), a substantial amount of literature investigates thecauses and consequences of bank consolidation Bank consolidation may be geared to exploiteconomies of scale or scope, improve the X-efficiency of the consolidating banks, may enablethe merged banks to exercise increased market power, or may simply be motivated by themanagement’s desire for increased size Consequently, bank mergers may entail divergingeffects on cost and profit efficiency, as well as on loan and deposit pricing To date, most of theavailable knowledge on the performance effects of bank consolidation comes from scrutiny ofthe US market (Piloff and Santomero, 1998:13)

Over the past decade, substantial research has been devoted to the question whetherconsolidation in the banking industry enhances quality of management by the merging andacquiring banks Although the results show a great deal of cross-sectional variation, thesefindings are consistent with management efficiency explanation of bank mergers The authorsascribe the fact that their results differ from those reported for US bank mergers to the differentstructure and regulation of EU banking markets These researches tend to be limited to EU andUS

The literature suggests that there is a substantial potential for financial institutions improvements

in management from consolidation of banks Most recent analyses find unexploited scaleeconomies even for fairly large bank sizes, both in the US (Berger and Mester, 1997:895-947;Berger and Humphrey, 1997:175-212) and in Europe (Allen and Rai, 1996:655-672; Molyneux

et al, 1996:2; Vander, 2001:123-145) The prospects for scale efficiency gains appear to begreater in the 1990s than in the 1980s This finding is usually ascribed to technological progress,regulatory changes and the beneficial effect of lower interest rates (Berger et al, 1999:135-194).This evidence suggests that consolidation may substantially improve the management structurewhen relatively efficient banks acquire relatively inefficient banks.

Yet, a lot of studies conclude that the potential gains are seldom realized Studies on US bankmergers find little or no improvements in management efficiency on average (DeYoung, 1997:1;Peristiani, 1996:326-337; Berger, 1998:79-111) Apparently, the potential gains fromconsolidating branches, computer operations, etc., may have been offset by managerialinefficiencies or problems in integrating systems Case study evidence suggests that theefficiency effects of consolidation may depend on the motivation behind the mergers and theconsolidation process (Rhoades, 1998:273-291) Haynes and Thompson (1999:825-846) explorethe productivity effects of acquisitions for a panel of 93 UK building societies over the period1981-1993 In contrast to much of the existing bank merger literature, the results indicatesignificant and substantial productivity gains following acquisition These gains were not theresult of economies of scale, but are found to be consistent with merger processes in which assetsare transferred to the control of more productive managements Resti (1998:157-169) reportsincreased levels of intermediation for Italian bank consolidation, especially when the dealsinvolved relatively small banks with considerable market overlap

This study is an attempt to fill the gap by investigating the impact of bank consolidation on thekey stakeholders of financial institutions in the Nigerian banking industry This is especiallyimportant given the need to boost the productive base of the Nigerian economy and at the sametime empower the Nigerian citizens The Niger Delta region until recently has witnessed youthrestiveness which has necessitated government to introduce several policies aimed atempowering the youths as well as expanding the economy of the region given the region’scontribution to the nation’s economy Banks through their intermediation functions are expected

to play a significant role in the process This process cannot be achieved without the banks’ability to give out loans and advances to the deficit units of the region for productive investment

It is against this background that this study sought to investigate the impact of consolidation onkey stakeholders of commercial banks in the Nigeria’s Niger Delta region in Southern Nigeria

1.2 Statement of the Problem

In 1894, there was a merger when First Bank Ltd was metamorphosed and there were bankdistresses in the 1903s The years, 1995 and 2005, were particularly traumatic for the Nigerianbanking industry; with the magnitude of distress reaching an unprecedented level, therebymaking it an issue of concern not only to the regulatory institutions but also to the policy analystsand the general public Thus, the need for a drastic overhaul of the industry was quite apparent

In furtherance of this general overhauling of the financial system, the Central Bank of Nigeriaintroduced major reform programmes that changed the banking landscape of the country in 2004

The primary objective of the reform was to guarantee an efficient and sound financial system.The reform was designed to enable the banking system develop the required resilience to supportthe economic development of the nation by efficiently performing its functions as the fulcrum offinancial intermediation Thus, the reform was to ensure the safety of depositors’ money,position banks to play active developmental roles in the Nigerian economy, and become majorplayers in the sub-regional, regional and global financial markets as well as enhancemanagement Prior to the banking sector consolidation programme induced by the CBN 13-pointreform agenda, the Nigerian banking system was highly oligopolistic with remarkable features ofmarket concentration and management inefficiency The system was characterized by generallysmall-sized fringe banks with very high overhead costs, low capital base, heavy reliance ongovernment patronage

There were challenges in examining how bank consolidation affected managerial role andcommitment of commercial banks in Nigeria’s Niger Delta Region, and difficulty in ascertainingthe effect of bank consolidation on performance of banks in Nigeria’s Niger Delta Region, thedifficulty in determining how bank consolidation affected employment of human resources in thecommercial banks in Nigeria’s Niger Delta Region, difficulty in ascertaining how bankconsolidation affected shareholders wealth value creation in commercial banks in Nigeria’sNiger Delta Region, and the difficulty in determining the effect of bank consolidation on

commercial borrower welfare in commercial banks in Nigeria’s Niger Delta Region Thesechallenges lead to lack of gateways or barriers

All these practices and daunting challenges are said to be associated with the handicaps faced byNigerian bank managers in striving to address the core roles of bank management which willenhance operating efficiency, create value for shareholders, grow and thus create employmentopportunities as well as enhance job satisfaction of employees An empirical investigation intothe effect of consolidation on bank management and key stakeholders, therefore, becomespertinent

1.3 Objectives of the Study

There is need to address the above issues as they relate to consolidation of banks in Nigeria.This study takes a holistic view of bank consolidation as an independent variable which ischaracterized by recapitalization, increase in the capital base, merger and acquisition, depositequity swap, increase in shareholders’ forum and internal and external investors In line with thisholistic perspective of bank consolidation the specific objectives of this study are stated below:

i To examine how bank consolidation affected managerial role and commitment ofcommercial banks in Nigeria’s Niger Delta region

ii To ascertain the effect of bank consolidation on performance of commercial banks inNigeria’s Niger Delta Region

iii To determine how bank consolidation affected employment of human resources incommercial banks in Nigeria’s Niger Delta region

iv To find out how bank consolidation affected worker job satisfaction in commercialbanks in Nigeria’s Niger Delta region

v To ascertain how bank consolidation affected shareholders’ wealth value creation incommercial banks in Nigeria’s Niger Delta region

vi To determine the effect of bank consolidation on commercial borrower welfare incommercial banks in Nigeria’s Niger Delta region

1.4 Research Questions

Based on the research objectives stated above, the following are the research questions for thisstudy, with the holistic view of bank consolidation:

i To what extent and in what way has bank consolidation affected managerial role and

commitment of commercial banks in Nigeria’s Niger Delta region?

ii How far and in what way has bank consolidation affected performance of commercial

banks in Nigeria’s Niger Delta Region?

iii How and to what extent has bank consolidation affected employment of human resources

in commercial banks in Nigeria’s Niger Delta region?

iv To what extent and in what way has bank consolidation affected worker job satisfaction

in commercial banks in Nigeria’s Niger Delta region?

v To what extent and in what way has bank consolidation affected shareholder wealth value

creation in commercial banks in Nigeria’s Niger Delta region?

vi How far has bank consolidation affected commercial borrower welfare in commercial

banks in Nigeria’s Niger Delta region?

1.5 Research Hypotheses

The following research hypotheses are formulated to guide the study, taking a holisticperspective of bank consolidation:

H1 Bank consolidation has significant positive effects on managerial roles and commitments

of commercial banks in Nigeria’s Niger Delta region

H2 Bank consolidation has significant positive effects on performance of commercial banks

in Nigeria’s Niger Delta Region

H3 Bank consolidation has significant negative effects on employment of human resources in

commercial banks in Nigeria’s Niger Delta region

H4 Bank consolidation has significant negative effects on worker job satisfaction in

commercial banks in Nigeria’s Niger Delta region

H5 Bank consolidation has significant positive effects on shareholder wealth value in

commercial banks in Nigeria’s Niger Delta region

H6 Bank consolidation has significant negative effects on commercial borrower welfare in

commercial banks in Nigeria’s Niger Delta region

1.6 Significance of the Study

This study is significant in many ways with particular reference to the following groups:

i Management: The decision making authority in banks lies in the hands of managers.

Shareholders as owners of the company are the principals and managers are their agents.Thus, there is principal-agent relationship between shareholders and managers Thereforemanagers should and must act in the best interest of shareholders as consistent withshareholders’ wealth maximization objectives of the bank Therefore, this research willenable management to understand what must be done in order to act in the best interest ofshareholders in choosing expansion measures which will help the bank achieve anoptimal structure that will maximize shareholders’ value

ii Investors and Potential Investors: The major beneficiaries of an enhanced performance

of banks are shareholders otherwise called investors or potential investors Theircontribution in monetary terms in the promotion, incorporation, continual existence to thegrowth of the bank must be rewarded with a premium above their risk free rate, thus,acting as a compensation for time and risk inherent in these firms The choice of whether

to merge or acquire other banks ultimately affects the banks role in intermediation.Therefore, this research will contribute along with other similar literature available in thisarea of finance in enhancing the maximization of investors and potential investors’objectives as concern the performance of the bank in their financial intermediation role

iii The Academia: Essentially, this research shall contribute significantly to the volume of

literature available In academics, the unknown is never exhausted, as the list of what we

do not know could go on forever Therefore, as a contribution to this area, it will help topush back the frontiers of knowledge Localizing the research to the Nigerian settings andenvironment is also particularly important.

1.7 Scope of the Study

Given the homogeneity of banking products, this study examined the impact of the consolidationpolicy on the management of commercial banks in Nigeria’s Niger Delta Region In this regard,dependent variables are managerial role, managerial commitment, organizational performance,employment generation, shareholder wealth value, worker job satisfaction, and commercialborrower welfare The independent variables are bank re-capitalization, banks’ increase incapital base, banks’ increase in shareholder’s funds, merger, acquisition, and increase in the use

of investors, all encapsulated in bank consolidation The geographical scope is Nigeria’s NigerDelta Region The Niger Delta region is the hub of oil production in Nigeria; as such the policywas expected to have an impact on the lives of citizens in the region through enhanced creditavailability to deficit earners in the region However, without human element in management theconsolidation policy objectives though laudable may not achieve the desired result, hence therationale for this research The period covered by this study is 2005-2010

1.8 Operational Definition of Terms

Acquisition: A merger in which the seller corporation continues to operate and maintain its

identity (Baumback, 1992:518)

Consolidation: This is the coming together of two or more banks with all loosing their identity

and a new identity formed with the aim of increasing the capital base of the bank

Employment Creation: This refers to the ability of banks to employ indigenes and community

if two or more companies combine in such a way that one of the firms remains in business afterthe combination (Unamka and Ewurum, 1995:46)

Operating Efficiency: This involves using minimal resources to achieve maximum results.

Shareholder Wealth Value: This refers to the net present value of investment of owners of

business

1.9 Brief History of Nigerian Banking Industry

Federal Government of Nigeria has been operating series of bank ‘changeovers’, ‘takeovers’ and

‘buyouts’ since 1892 The history of the Nigerian Banking industry could be divided into threestages based on development in these stages There are:

a First Stage: The embryonic Phase

The African Banking Corporation, headquartered in South Africa pioneered the Nigerianbanking system in 1892 followed by the British Bank for West Africa’ (now First Bank ofNigeria Plc) in 1894 while Barclays Bank D.C.O (now Union Bank of Nigeria Plc) and theBritish and French Bank (now United Bank for Africa Plc) were established in 1925 and 1949respectively (Danjuma, 1993:5; Ebhodaghe, 1990:32; Ibru, 2006:3) The story of indigenousbanking in Nigeria began with the establishment of the National Bank of Nigeria Limited inFebruary 1933, Agbonmagbe Bank Limited (now Wema Bank Plc) in 1945, and AfricanDevelopment Bank Limited, which later became known as African Continental Bank Plc in

1948 The establishment of these indigenous banks ushered in the era that saw the constantmonopoly erstwhile enjoyed by the foreign owned banks challenged (CBN, 2008:; Ebhodaghe,1990:13)

b Second Stage: The Expansion Phase

The chain in banking industry stepped up to stage two (2) which is the expansion of the Nigerianbanking sector to the Rural Banking Scheme in1977, Peoples’ Bank in 1989, and CommunityBanks (now Microfinance Banks) in 1990 to encourage community development associations,cooperative societies, farmers' groups, patriotic unions, trade groups, and other local

organizations, especially in rural areas while between 1985 and 1991, banks sprout from 40 to

120 (Agbaje, 2008; Bichi,1996:28-29; Ebhodaghe, 1995:15; Mordi, 2004:25-30)

c Third Stage: The Consolidation/Reform Stage

The phase staged on January 1, 2006 when the Nigerian eighty nine (89) banks shrunk to twentyfive (25) The consolidation exercise then required banks to raise their minimum capital basefrom N2 billion to N25 billion, with December 31, 2005 as deadline This increase representingabout 1,150% was to amongst other things encourage the consolidation of the banking sector toproduce mega-banks from the then existing 89 banks as most of them were just fringe playersand financially unsound (Soludo, 2004:14) Other financial institutions included government-owned specialized development banks: the Nigerian Industrial Development Bank, the NigerianBank for Commerce and Industry, and the Nigerian Agricultural Bank, as well as the FederalSavings Banks and the Federal Mortgage Bank Also active in Nigeria were numerous insurancecompanies, pension funds, and finance and leasing companies

Somoye (2008:627-636) traces the Evolution of the Nigerian Banking Sector and says that

banking operation began in Nigeria in 1892 under the control of the expatriates and by 1945,some Nigerians and Africans had established their own banks The first era of consolidation everrecorded in Nigeria banking industry from 1959-1969 This was occasioned by bank failuresduring 1953- 1959 due mainly to liquidity of banks Banks, then, do not have enough liquidassets to meet customers demand There was no well-organized financial system with enoughfinancial instruments to invest in Hence, banks merely invested in real assets which could not beeasily realized to cash without loss of value in times of need This prompted the FederalGovernment then, backed by the World Bank Report to institute the Loynes commission onSeptember 1958 The outcome was the promulgation of the ordinance of 1958, which establishedthe Central Bank of Nigeria (CBN) The year 1959 was remarkable in the Nigeria Bankinghistory not only because of the establishment of Central Bank Nigeria (CBN) but that theTreasury Bill Ordinance was enacted which led to the issuance of our first treasury bills in April,1960

The period (1959–1969) marked the establishment of formal money, capital markets andportfolio management in Nigeria In addition, the company acts of 1968 were established This

period could be said to be the genesis of serious banking regulation in Nigeria With the CBN inoperation, the minimum paid-up capital was set at N400, 000 (USD$480,000) in 1958 ByJanuary 2001, banking sector was fully deregulated with the adoption of universal bankingsystem in Nigeria which merged merchant bank operation to commercial banks systempreparatory towards consolidation programme in 2004 In the ’90s proliferation of banks, whichalso resulted in the failure of many of them, led to another recapitalization exercise that sawbank’s capital being increased to N500million (USD$5.88) and subsequently N2 billion(US$0.0166billion) on 4th 2004 with the institution of a 13-point reform agenda aimed ataddressing the fragile nature of the banking system, stop the boom and burst cycle thatcharacterized the sector and evolve a banking system that not only could serve the Nigeriaeconomy, but also the regional economy The agenda by the monetary authorities is also agenda

to consolidate the Nigeria banks and make them capable of playing in international financialsystem

However, there appears to be deliverance between the state of the banking industry in Nigeriavis-à-vis the vision of the government and regulatory authorities for the industry This, in themain, was the reason for the policy of mandatory consolidation, which was not open to dialogueand its components also seemed cast in concrete In terms of number of banks and minimumpaid-up-capital, from 1952-1978, the banking sector recorded forty-five (45) banks with varyingminimum paid-up capital for merchant and commercial banks The number of banks increased tofifty-four (54) from1979-1987

The number of banks rose to one hundred and twelve (112) from 1988 to 1996 with substantialvarying increase in the minimum capital The number of banks dropped to one hundred andten(110) with another increase in minimum paid-up capital and finally dropped to twenty-five in

2006 with a big increase in minimum paid-up capital from N2billion(USD$0.0166billion) inJanuary 2004, to N25billion(USD$0.2billion) in July 2004 Prior to the major policy shift by theCentral Bank of Nigeria (CBN), Nigerian banking experienced a steady increase in the number

of distressed deposit- money banks, i.e those rated by the CBN as marginal or unsound Thiscreated the fear that Nigerian banking could be heading towards systematic distress Themarginal and unsound banks increased in number from seventeen (17) in 2001 to twenty three(23) in 2002 and 2003, and then twenty-seven (27) in 2004 representing thirty (30) per cent of

the operating banks in the system This figure rose to seventeen (17) per cent only three yearsearlier It can be argued that sudden monetary policy shifts was partially responsible for theincrease in the number of marginal and unsound banks in 2004 The corollary is that theinstitutions concerned have had inherent and deep-seated weakness that the policy shift exposes,and no matter what, they would have eventually become distressed Goldfeld and Chandler(1981:4) and Somoye (2006:16) opine that any policy shift must be consistent with marketframework if the objective of the policy is to be achieved They decompose the total lag betweenthe need for policy and the final effect of policy into four parts

First, recognition effect, which refers to the elapsed time between the actual need for a policyaction and the realisation that such a need, has occurred Second, the policy lag, which refers tothe period of time it takes to produce a new policy after the need for a change in policy musthave been recognised Third, outside lag, which is beyond the comprehension of policy, refers tothe period of time that elapses between the policy change and its effect on the economy This lagarises because individual decision makers in the economy will take time to adjust to the neweconomic condition Decision of this nature must conform to monetary policy norms if it is toachieve its desired objective and fourthly, cultural lag, which measures the banking cultureresponsiveness to policy change in a predominantly poor banking habit population In thedeveloping nation, banking culture is still primitive and any changes that may affect their culturetake a great deal of education They concluded that the effect of policy change which could havebeen distributed over-time and its impact felt was jettisoned Such omission may bring negativecost to the economy For instance, Goldfeld and Chandler (1981:5) state that monetary policy,though affects the economy less directly, will have a longer outside lag and that monetary policytends to influence investment, and the lags in the physical process of building plants andmachinery are undoubtedly longer than the lags in producing consumer goods Therefore, thelonger outside lag of monetary policy must be balanced against the shorter policy lag in decidingthe optimal policy mix (Somoye, 2008:627-636)

However, the reason that may advance for the present poor state of the Nigeria banking industryafter consolidation could be viewed from the perspective of wrong planning Consolidationthrough merger and acquisition and or buy-out requires assets clarification and cleansing of thebalance sheets in a situation where unsound banks merge with sound banks Therefore,

strengthening the balance sheet is imperative for those who seek to be acquired and those whoare in pursuit of expansion Banks that are unable to show financial stability through theirbalance sheets are likely to perish in an increasingly competitive industry as amplified byShrivastava (1986:65-76); Somoye (2006:13) and Michiru and Sawada (2003:6) Shih (2003:13-49) points out the possibility that credit risk could increase in the event of a sound bank mergingwith an unsound one Also, most of empirical literature suggests that bank consolidations do notsignificantly improve the performance and efficiency of the participant banks Berger et al(1999:135-194), and Amel, Barnes, Panetta and Salleo (2002:25) They conclude that if avoluntary consolidation does not enhance the performance of the participating banks, anyperformance enhancing effect of the consolidation promoted by the government policy is morequestionable.

1.10 Profile of the Nigerian Niger Delta Region

The Niger-Delta Region is made up of the following states: Abia, Akwa Ibom, Bayelsa, CrossRiver, Delta, Edo Imo, Ondo and Rivers State Niger Delta Development Commission (NDDC)was established in 2000 with the mission of facilitation the rapid, even and sustainabledevelopment of the Niger Delta into a region that is economically prosperous, socially stable,ecologically regenerative and politically peaceful The aim is to establish in the Niger DeltaRegion (NDR) a strong and progressive society in which no body will have any anxiety aboutbasic means of life and work; where poverty and illiteracy no longer exist and are brought under

control; and where our educational facilities provide all the children of NDR with best

opportunities for the development of their potentials

The Delta region has a steadily growing population estimated to be over 30 million people as of

2005, accounting for more than 23% of Nigeria's total population The population density is alsoamong the highest in the world with 265 people per kilometer-squared This population isexpanding at a rapid 3% per year and the oil capital, Port Harcourt, along with other large townsare growing quickly Poverty and urbanization in Nigeria are on the rise, and official corruption

is considered a fact of life The resultant scenario is one in which there is urbanization but noaccompanying economic growth to provide jobs This has led to a section of the growingpopulace assisting in destroying the ecosystem that they require to sustain themselves

The Regional Development Master Plan

There have been many attempts and many plans made in the past to improve the lives of thepeople of the Niger Delta Region of Nigeria Sadly, each ended with very little to show for thetime and resources spent Therefore it is understandable that the people of the Niger Delta arequite disillusioned with ‘plans’ at this time The disenchantment of the people notwithstanding, itmust be stated that the Niger Delta Master Plan is different in its goals, focus and approach, andwill not suffer the fate of the others before it The Master Plan is basically conceived as a toolthat the millions of people of the Niger Delta Region can use to actualize their common visionand build their future to the standard they desire The Master Plan is designed to offerstakeholders at all levels (individual, group and community) the opportunity to participate fully

in the planning and decision making process specifically, the coordinating consultants requirethe ideas and opinions of stakeholders as basis for defining focus areas for development and forproducing a vivid picture of what the people want the Niger Delta region to look like within15years of the master plan implementation This implies that the input of stakeholders today iswhat will determine the state of affairs (both for individuals and communities) in the regiontomorrow

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CHAPTER TWO REVIEW OF RELATED LITERATURE 2.1 Introduction

In this chapter, literature related to this research comes under review The review is organized asfollows: Conceptual Framework, Theoretical Framework, and Empirical Review Effort is made

to structure empirical review (the prior studies) along the lines of the objectives of the study

2.2 Conceptual Framework

The Pan Reference Books Dictionary of Economics defines consolidation as the action ofreinvesting a capital gain made on a speculative share in a more conservative security The termcould also connote the selling of equities at a gain and reinvesting of the proceeds in fixed-interest securities Similarly, Afolabi (2004:3) conceptualizes consolidation as a fusion of theassets and liabilities, in whole or in part, of two or more business establishments to form anentirely new establishment From the above definitions, consolidation represents the idea ofinvestment and the coming together of firms or enterprises as a single entity

Consolidation also means larger sizes, larger shareholder bases and larger number of depositors.According to Agnor (2001) bank or corporate consolidation could be achieved by way ofmergers and/or acquisition, recapitalisation and proactive regulation Bank consolidation is morethan mere shrinking of the number of banks in any banking industry It is expected to enhancesynergy, improve efficiency, induce investor focus and trigger productivity and welfare gains(Nnanna, 2004:3) The main motivation behind consolidation is to maximize shareholders’ value.Value may be maximized through Mergers and Acquisitions (M&As) mainly by increasing theparticipating firm’s market power in setting prices or by improving their efficiency and, in somecases, by increasing their access to the safety net Imala (2005:7) identifies eight reasons forM&As in the financial services sector They include:

 Cost savings, attributable to economies of scale as well as more efficient allocation ofresources;

 Revenue enhancement, resulting from the impact of consolidation on bank size, scope, andoverall market power;

 Risk reduction, due to change in organizational focus and efficient organizational structure;

 New developments, which impose high fixed costs and the need to spread these costs across

a large customer base;

 The advent of deregulation, which removed many important legal and regulatory barriers;

 Globalisation, which engenders a more globally integrated financial services industry andfacilitated the provision of wholesale financial services and geographical expansion ofbanking operations;

 Financial stability, characterized by the smooth functioning of various components of thefinancial system, with each component resilient to shock;

 Shareholders’ pressure on management to improve profit margins and returns on investment,made possible by new and powerful shareholder blocks

Two primary approaches to defining mergers exist in the literature Mergers are defined at thebank level and at the holding company level A bank-level merger occurs when previouslydistinct banks are consolidated into one institution Consolidations of individual banks under thesame holding company are often included in samples of mergers defined this way Analyzingmergers at the bank level is appealing for several reasons Not only have there been a greatnumber of mergers at this level, but because the FDIC Report of Income and Report of Condition(call report) measure performance at the bank level, data are easily obtained for these types ofmergers However, studying bank-level mergers centers the study on the impact of changingorganizational structure It does not clearly assess the gains brought about by ne w ownershipwhich economists general view as the centerpiece of the analysis of mergers and acquisitions.Therefore, most studies focus on mergers of holding companies A merger at the holdingcompany level is defined by a change in ownership of a subsidiary bank or group of subsidiarybanks This type of merger is viewed in the same manner regardless of whether the newlyacquired banks are consolidated into a single institution or continue to operate as separate entitiesunder new ownership By construction, analysis of this type of merger is particularly useful i nexamining the effect of changes in ownership

The most important synergies to be derived through consolidation of firms in an industry are theability to enjoy economies of scale, ability to earn increased revenue and the potentials for taxgains (Adeyemi, 2010:9) These sources of synergy are discussed briefly hereunder:

Economies of Scale: One of the major advantages of the banking sector consolidation that is

often harped on is its potential for firms in the industry to enjoy economies of scale In hismaiden address to the Bankers’ Committee, the CBN Governor, Prof Charles Soludo, positedthat most banks in Nigeria have a capital base of less than US$10 million or about N1.3 billionand that the largest bank in Nigeria has a capital base of about US$298 million compared toUS$526 million for the smallest bank in Malaysia Without being dragged into the controversy

of the choice of N25 billion as the benchmark for the capitalization of banks or theappropriateness of the comparison between Nigeria and Malaysia, one obvious fact is that thesmall size of Nigerian banks, each with expansive headquarters, separate investments in softwareand hardware, coupled with the bunching of branches in a few commercial centers, resulted inheavy fixed costs and operating expenses, thereby giving rise to very high average cost for theindustry Another issue related to the small size of Nigerian banks is the high cost ofintermediation epitomized by the wide spread between deposit and lending rates It would berecalled that the desire of the government to have a single digit lending rate has remained amirage due, mainly, to the high cost of intermediation Globally, size has become an ingredientfor success An enhanced capital-base, all things being equal, is expected to confer competitiveedge on a bank It would enable the bank acquire relevant technology, engage high qualitypersonnel and absorb shock It would also position the bank to offer better and value-addedservices while increasing its earning capacity Furthermore, consolidation increases the potential

of banks to compete effectively at the national, regional and global levels

Revenue Enhancement: One of the important reasons for mergers and acquisitions is the ability

of combined firms to earn more revenue than two separate firms Improved revenue may comefrom marketing gains, strategic benefits and market power For instance, instead of advertisingseparately, the consolidated firm pulls its resources together to market the products and services

of the firm, thereby reducing the unit cost of production

Tax Gains: This may be a powerful incentive for mergers and acquisition The increased size of

a firm resulting from consolidation enables it enjoy tax gains resulting from the use of tax losses

which would have resulted from separate net operating losses, the use of unused debt capacityand the use of surplus funds which the individual small companies were not able to invest.However, having outlined the advantages of consolidation, it is important to note that in spite ofthe points adduced in favour of economies of scale as an advantage of consolidation, bankingand finance literature have amply documented the fact that diseconomies of scale are possible Infact, some studies have shown that the extent of economies of scale reported in the earlier studieswas exaggerated and there exist diseconomies of scale in the large banks However, a morerecent study (Tadesse, 2005:13) posits that in spite of observation of diseconomies of scale, therehas been an underlying change in bank technology that has increased the minimum efficient size

as well as favoured large banks to small ones From the foregoing, it is obvious that with theadvancement in technology, consolidation would remain a preferred option for cost effectivenessand business growth

2.3 Theoretical Framework

The degree to which banking market structure matters for competition and performance has beenhotly debated The outcomes of numerous researches have resulted in the existence of numerousbank concentration theories in the literature (Aburime, 2007:5) In the main, these theories could

be classified into pro-concentration theories and pro-deconcentration theories The theoreticalanalysis of the concentration implications of the Nigerian bank consolidation exercise is based

on these theories

Pro-Concentration Theories: Proponents of banking sector concentration argue that: “…

economies of scale drive bank mergers and acquisitions (increasing concentration), so that increased concentration goes hand-in-hand with efficiency improvements” (Demirguc-Kunt and

Levine, 2000:1) To buttress this point, Boyd and Runkle (1993:1-15) examine 122 U.S bankholding companies and found an inverse relationship between size and the volatility of assetreturns However, these findings are based on situations in which the consolidations werevoluntary, unlike the case with the concluded banks consolidation exercise in Nigeria (Aburime,2007:6)

Some theoretical arguments and country comparisons suggest that: ”…a less concentrated banking sector with many small banks is more prone to financial crises than a concentrated banking sector with a few large banks (Allen and Gale, 2000:14; and Beck, Demirgüç-Kunt and

Levine, 2004:15) This is partly because reduced concentration in a banking market results inincreased competition among banks and vice-versa Proponents of this ‘concentration-stability’view argue that larger banks can diversify better so that banking systems characterized by a fewlarge banks will tend to be less fragile than banking systems with many small banks, Thusaccordingly, Beck, Demirguc-Kunt and Levine, 2003: 1) argue that:

…concentrated banking systems tend to enhance profits and therefore lower bank fragility and high profits provide a buffer against adverse shocks and increase the franchise value of the bank, reducing incentives for bankers to take excessive risk, therefore, furthermore, a few large banks are easier to monitor than many small banks,

so that corporate control of banks will be more effective and the risks of contagion less pronounced in a concentrated banking system.

On bank consolidation and soft information acquisition, as Hauswald and Marquez 1000) demonstrate, the return from the investment for information acquisition is more likely to

(2006:967-be recouped in the future in less competitive lending markets This theory indicates that

…bank consolidation that is likely to decrease competitive pressure in a lending market promotes soft information acquisition by banks Bank consolidation entails large-scale restructuring to realize the synergy effect mainly resulting from improved cost efficiency,

as found in the existing empirical literature (Yoshiaki and Hirofumi, 2007: 5)

Pro-Deconcentration Theories: Findings from a study carried out by Chong (1991:345-359)

indicate that bank consolidation tends to increase the risk of bank portfolios Proponents ofbanking sector deconcentration also argue that: concentration will intensify market power andpolitical influence of financial conglomerates, stymie competition in and access to financialservices, reduce efficiency, and destabilize financial systems as banks become too big todiscipline and use their influence to shape banking regulations and policies (Demirguc-Kunt andLevine, 2000:12; Beck et al, 2004:22; and Bank for International Settlements, 2001:15) Whileexcessive competition may create an unstable banking environment, insufficient competition –and contestability – in the banking sector may breed inefficiencies (Aburime, 2007:8)

In concentrated banking systems, bigger, politically connected banks may become moreleveraged and take on greater risk since they can rely on policymakers to help when adverseshocks hurt their solvency or profitability Similarly, large, politically influential banks may helpshape the policies and regulations influencing banks’ activities in ways that help banks, but notnecessarily in ways that help the overall economy For instance, concentrated, powerful banksmay argue against granting generous deposit insurance since that levels the playing field forsmaller banks that do not enjoy the too-big-to-fail policy of most governments in economieswhere concentration levels are high Concentrated banks may also seek to stymie stock marketdevelopment by pushing for higher taxes on capital gains and by discouraging regulations thatprotect the rights of small investors and promote accounting transparency To boost theprofitability of large clients, powerful banks may also seek to control “unruly” markets byweakening anti-trust laws and other policies designed to promote competition Furthermore, ifconcentrated powerful banks unduly influence the formation of policies and regulations, this mayhinder political integrity and reduce tax compliance (Demirguc-Kunt and Levine, 2000: 3)

In pro deconcentration, there is evidence linking increase in banking concentration to reductions

in credit supply In the United States, Berger et al (1995:39-65) provide evidence that theincrease in the proportion of banking industry assets controlled by the largest bankingorganizations in the 1990s, due to the liberalization of geographic restrictions on banking in theUnited States, may have been responsible for part of the credit crunch observed in 1989-92.There is also growing evidence linking increased concentration in a banking market to reducedlending to small and medium scale enterprises Peek and Rosengren (1996:18), combining asingle cross-section data on lending businesses in the New England states for 1994 with someinformation on mergers and de novo entry, find that after banking organizations merged withsmaller organizations, the consolidated organization typically reduced the amount of smallbusiness lending that was conducted earlier by the acquired institution Berger and Udell(1996:613-673) find that large banks not only tend to have a smaller proportion of their loansmade to small borrowers, but also tend to charge lower average prices than other banks to smallborrowers, indicating that large banks only issue business loans to higher-quality credits(Cañonero, 1997: 5)

It has also been argued that the higher the concentrations in the local banking market, the higherprices are for financial services and consequently the higher the banks’ profits This is becausebanks in less competitive environments charge higher interest rates to firms If concentration ispositively associated with banks having market power, then concentration will increase both theexpected rate of return on bank assets and the standard deviation of those returns (Beck,Demirgüç-Kunt and Levine, 2004: 2) The policy implication is that higher market concentration

is associated with lower socio-economic welfare and, therefore, higher concentration is

undesirable Hence, a country like the UK (Mueller and Elizabeth, 1993:430-453) is wary of a

concentration ratio that is 25 per cent or more of the banking market in terms of total assets ordeposits (Hofer, 2006:19-31)

Another pro-deconcentration position is that a more concentrated banking structure enhances

bank fragility Advocates of this ‘concentration-fragility’ view note that larger banks frequently

receive subsidies through implicit ‘too big to fail’ policies that small banks do not enjoy Thisoccurs when regulators fear potential macroeconomic consequences of large bank failures Thegreater subsidy for larger banks may in turn intensify risk-taking incentives beyond anydiversification advantages enjoyed by them, thereby increasing the fragility of concentratedbanking systems (Boyd and Runkle, 1993:47-67) Proponents of the concentration-fragility viewdisagree with the proposition that a few large banks are easier to monitor than many small banks

If size is positively correlated with complexity, then large banks may be more opaque than smallbanks, and therefore more difficult to monitor This would tend to produce a positive relationshipbetween concentration and fragility

An increase in the bank size and organizational complexity due to consolidation may deter softinformation acquisition Spindt (1993:460-682) shows that information-collecting sections ofbanks, such as bank branches, have smaller incentive to collect soft information when thedecision authority is alienated from them This is because soft information is hardly used whenmaking decisions, and, thus, it is rarely rewarded in such an organization Although Spindtoriginal theory (1993) does not include the impact of consolidation, Vander (2002:123-145)naturally extends the theory to predict that:

…bank consolidation that increases the size of an organization and widens the discrepancy between loan-decision sections and information-production sections is likely

to hinder soft information production, thus bank consolidation tends to create bank complexity… (Vander, 2002:127)

Findings of a study carried out by Vander (2002:123) support the theory by Spindt (1993) on thecomparative advantage of simple and flat organization in producing and processing soft

information from three angles First, small banks acquire more soft information than large banks

do in a typical operation Second, when a merger takes place, it complicates managerialorganization and deters the production of soft information or the maintenance of thataccumulated in small banks Third, such an effect is not observed in large banks that accumulatelittle soft information before mergers This is a detrimental effect of bank consolidation

Needless to say, bank consolidation increases bank size and complicates the decision-makingprocess within the organization Furthermore, merged banks have diverse historical backgrounds;thus, communication across different corporate cultures becomes harder within the neworganization This may also discourage soft information accumulation by a loan officer at abranch level Therefore, we can extend Spindt theory (1993) to predict that bank consolidationdecreases soft information acquisition by banks (Vander 2002:128)

2.4 Empirical Review: Prior Researches on Bank Consolidation

The recent wave of bank mergers and consolidation has raised concern with its effect oncompetition and other variables The empirical review in this study is thus, presented, based onexisting literature along the objectives of this study

2.4.1 Bank Consolidation and Human Resource Issues

A lot of human resource related issues arise with regard to the consolidation programme In thefirst instance, once two or more banks begin to talk about merger or acquisition, the staff of theaffected institutions become jittery about job security which invariably affect their productivity.Certainly, consolidation might lead to job losses at the executive, general management, seniorand junior staff cardre For instance, it is not feasible to have two Managing Directors/ChiefExecutives in an organization The second issue of concern is the variance level of