Small business play vital role in the process of industrialization and economic growth. Apart from it increasing per capita income and output, small businesses creates employment opportunities and usually promotes successful resource utilization considered critical to the engineering of economic development and growth. It is presumed that the lower income segments of Nigeria benefit when SMEs have better access to finances because they alleviate poverty by creating more jobs and better wages. ( Emeni and Okafor 2008). Many economies, developed and developing have come to appreciate the value of small businesses. This is because small businesses are characterised by dynamism, innovations, efficiency, and their small size allows for faster decision-making process. In most emerging economies of the world, small and medium enterprises (SMEs) have become major drivers of economic growth. They serve as major employers of labour and contribute significantly to economic growth and development. Even in big economies, SMEs play a significant role in shaping the economy. In China for instance, SMEs are said to be responsible for about 60 percent of the industrial output and employ about 75percent of the workforce in urban centres. (Anas A. Galadima, 2006).
Governments all over the world have realised the importance of this category of companies and have formulated comprehensive public policies to encourage, support and fund the establishment of SME's. Developments in small and medium enterprise are a plus for employment generation, solid entrepreneurial base and encouragement for the use of local raw materials and technology. (Oladele, 2009).
The challenges facing SME's in many developing countries are enormous. The most worrying among these challenges is funding. Most new small business enterprises are not very attractive prospects for banks, as they want to minimise their risk profile. In Nigeria, the situation is not very different, until recently when the Banker's Committee intervened in 2001 with a scheme themed the Small and Medium Industries Equity Investment Scheme (SMIEIS). The scheme relegated to the background government credit schemes that are not well thought-out and implemented. (Aina, O. 2007)
Consolidation of the Nigerian Banking sector is one of many reforms of the government administration that Nigerians have had to embrace happily. This consolidation wave has contributed to a dramatic increase in the average size of banking institution. The mean size of the total assets of banks has increased by 439% in real terms from the beginning of 2003 to the end of 2009, recording =N=2767.78 billion to =N=14,923.00 billion banks total assets figure (CBN report 2009).
Before the advent of this reform, the Nigerian Banking Sector was grossly underdeveloped, leading to so many setbacks to the Nigerian Economy. Apart from the anticipated benefits of consolidations to small businesses, M&A have contributed to a remarkable increase in the average size of banking institutions in Nigeria. These includes mobilization of domestic savings, improved allocation of resources, elimination of deep-rooted inefficiency , mobilization of foreign savings and above all enhanced accessibility of small scale funding. What is less understandable, is the effect of bank M&A on the supply of credit to small businesses in Nigeria.(Emeni and Okafor, 2008).
In a recent article Berger, Allen N., R. Demsetz and P. Strahan. (1999) suggest there seems to be a general consensus that consolidation in the financial industry is beneficial up to a certain (relatively small) size in order to reap economies of scale. The consequences of consolidation include not only the direct effects of increased market power or improved firm efficiency, but also some indirect effects. One potential indirect consequence may be a reduction in the availability of financial services to small customers. (Berger, Allen N. R. Demsetz and P. Strahan. 1999).
Other studies Vera and Onji (2010) illustrate that since small businesses typically rely on small banks as their primary source of financing, there are concerns that the wave of bank consolidation of the 1990s may have reduced the availability of loans to small businesses in the US.
Previous researchers have examined the effects of bank mergers and acquisitions on the availability of loans to small businesses, finding that the small businesses have not been adversely affected (Peek and Rosengren 1995, 1998; Berger et al. 1995). However, since all these studies use the data on bank lending up to the mid-1990s, the new wave of bank consolidations that peaked over 1995-1997 has not been fully addressed. It would be of interest to examine whether the new wave of consolidations affected small businesses differently. The role of banks in economic development has been richly articulated in the literature. Pioneer contribution of Schumpeter (1934) was of the view that financial institutions are necessary condition for economic development. This view has been variously corroborated by other scholars like Goldsmith (1969), Cameron et al (19720, Patrick (1966). In view of the importance of the banking sector in economic development and the imperfection of the market mechanism to mobilise and allocate financial resources to socially desirable economic activities of any nation, Governments regulate them more than any sector in an economy.
What is less clear is the effect of consolidation on the supply of credit to businesses, particularly small businesses that depend on banks for external credit.
Based on the above background, the motivation of this research therefore is to examine the relationship of bank M&A and lending to small and medium enterprises in Nigeria. This paper, therefore, explores to document the impacts of the Nigeria banking deregulation of 2004, focusing on the changes in the matching between banks of different sizes, and to examine whether the structural changes in the banking sector adversely affected small business lending. Why did we choose to examinethe effect of M&A lending to small and medium entrepreneurs? Mostindustrialized economies, such as United States, England and Germany,attained industrialization through cottage industries andsmall business. Nigeria can only go through the samepath to industrialization. (Emeni and Okafor , 2008)
The main purpose of this dissertation is to examine whether bank mergers and acquisitions are a resourceful solution to lending to SMEs. As a result the main research question is:
Do banks mergers and acquisitions increase or decrease credit availability to SMEs?
This leads to a number of sub-questions:
There are several research methods that could have been used in this work, such as a Questionnaire based surveythrough the distribution of questionnaire. A structured interviews can be used in survey research to gather data, which will then be the subject of quantitative analysis.
The main purpose of this study is to examine if bank mergers and acquisitions increase or decrease credit availability to SME by using accounting based financial ratio analysis. The use of financial ratio in measuring a bank's performance and its effectiveness to distinguish high-performance banks from others is quite common in the literature (Abdulla, 1994a; Samad, 2004a).
Ten Nigerian commercial banks which have effectively been consolidated with other smaller banks will be considered in this study over the period of 2002-2009 based on the following reasons: First, these banks are long established locally incorporated banks in Nigeria. Secondly they have been involved in the consolidation process from small bank to mega banks, passing through the premerger phase up to the post merger phase. Thirdly the period covers the span before consolidation and after consolidation.
We first focus on the number of commercial banks, particularly small banks, distinguishing those involved in small business lending and those that are not. We then examine whether the M&A affected the share of loans directed towards small businesses, distinguishing types of loans provided to them. To summarize our empirical approach, we utilize the M&A as a ‘‘natural experiment'' to identify the extent to which banking structure and small business loans are affected.
Since one of our aims is to examine whether the amount of small business lending is affected by the new consolidation legislation passed by Nigeria government on bank reform, we use the data on commercial banks that have been involved in this consolidation exercise and compare them with data of banks which did not consolidate by aggregating the small business lending of commercial banks in the consolidated banks, it is more likely that we will capture the total amount of small business lending that is actually supplied to small businesses within Nigeria.
The dissertation is split into five chapters:
This last chapter, Chapter six concludes and highlights the limitations of the study and recommendations for the future research
We have been able to introduce the topic of the dissertation and the motivation behind why it was considered important to investigate funding of the small and medium enterprises. Small business play vital role in the process of industrialization and economic growth. It is presumed that the lower income segments of Nigeria benefit when SMEs have better access to finances because they alleviate poverty by creating more jobs and better wages. Developments in small and medium enterprise are a plus for employment generation, solid entrepreneurial base and encouragement for the use of local raw materials and technology. Governments all over the world have realised the importance of this category of companies and have formulated comprehensive public policies to encourage, support and fund the establishment of SME's. The most worrying challenges facing SME's in many developing countries is funding.
In the next chapter we will be reviewing the Nigerian banking system. We will be looking at a brief history of the Nigerian banking system dividing its growth into four phases, and see how it has evolved from many smaller banks into fewer mega banks. We shall also be looking at the major regulators of this industry and see how they have effectively influence the actions that has lead to merger and acquisition in the banking industry. Also see how the merger and acquisition phase has influenced lending to the small business through the new monetary policies on SMEEIS and Microfinance banks to aid economic growth, which is the main aim of this dissertation.
The Nigeria Banking System has over the years observed a remarkable transformation in growth. Merger and Acquisition being the major reform of this industry. But has this in anyway influence the availability of Bank lending to Small & Medium Enterprises?
The principal objective of this chapter is to review the Nigerian bank industry, and how it has progress over the years. We will be looking at a brief history of the Nigerian banking system dividing its growth into four phases, and see how it has evolved from many smaller banks into fewer mega banks. We shall also be looking at the major regulators of this industry and see how they have effectively influence the actions that has lead to merger and acquisition in the banking industry. Also see how the merger and acquisition phase has influenced lending to the small business through the new monetary policies on SMEEIS and Microfinance banks to aid economic growth, which is the main aim of this dissertation. Lastly we will review the future of the banking sector in Nigeria.
There has been a remarkable change in the Nigerian banking system over the years, and this can be justified in terms of the amount of institution, ownership structure and also in operations. This transformation has been greatly influenced by deregulation of the financial sector, global operations, new innovation and the adoption of international standards (Charles Soludo, 2004). This sector has witness a very wide span of time, ranging from free banking lacking dictate of the economies of classical liberalism, to the time of firm prudential regulations. ( Agbaje, 2008). With free banking, this era saw entry of many new banking institutions. The Nigerian banking system is one of the most active sector of the economy, which respond immediately to policy adjustments. And they are the most regulated sector because of their role as financial intermediaries.
There were no formal supervision between the year 1892 to 1951. In 1892 the African Banking Corporation was first established to replace the British Bank for West African that catered for the then colonial government. This bank enjoyed monopoly until 1971 when Colonial bank ( now Union Bank of Nigeria Plc) and British and French Bank ( now United Bank for Africa Plc) were established in Nigeria. (Ebhodaghe, 1990; Ibru, 2006). There were no banking legislation until 1952 at which point we had three foreign banks and two indigenous banks with a sum total of forty branches.
The Central Bank of Nigeria was established by the CNB Act of 1958, and begun operations on July 1959. It was statutorily independent of the federal government until 1968. At that period the three foreign banks; British Bank for West Africa, British and French Bank and Colonial Bank, were wholly foreign owned until in 1970 when the federal government purchased a majority share holdings.( Ibru, 2006). The indigenous banks as at this stage were the establishment of National Bank of Nigeria Limited in February 1933, African Development Bank Limited, which later became known as African Continental Bank Plc in 1948 and Agbonmagbe Bank Limited (now Wema Bank Plc) in 1945. The presence of these local banks challenged the monopoly enjoyed by the foreign banks.( Ebhodaghe, 1990). This phase of the banking system 1959- 1969 marked the establishment of formal money, portfolio management and capital markets. This was the genesis of real banking with the CBN in operation, the company acts 1668 were established. The minimum paid up capital was set at N400,000 ($480,000) in 1958. ( Somoye, 2008)
This phase of the Nigerian bankin system witnessed extraordinary expansion from 1986 to the 1990. There was a key shift in policy initiated by the monetary authorities, liberalisation of the Nigerian economy and relaxation of controls. The Structural Adjustment Program (SAP) established in 1986 was government policy to liberalise the economy with banking sector inclusive. There was a remarkable increase in the number of licensed banks at this point there was a total of 120 in 1991 as against 40 banks in 1985. ( Agbaje, 2008).
After the introduction of SAP, new generation banks emerged. These banks emerged in the late eights and early nineties brought a new level of competition into the banking industry by introducing new innovation, technology, better and speedy services delivery. This gave customers flexibility and ease in banking. The sudden invasion of banks into the banking sector brought stiff competition and made the sector more market driven. Seeing everyone scrabbling for available resources principally human resources, suggested that the bank was grossly inadequate to support this growth in the sector. This resulted to mal practices and unconventional banking culture to the point that the banking sector was seriously threaten, and the existence of some of these banks that could not fully cope with the volatile situation was equally threaten. This eventually drew the attention of the Central Bank of Nigeria (Bichi, 1996; Okoduwa, 1995; Umaru, 1993: 31). At the end of 1988, the banking system consisted of the Central Bank of Nigeria, forty-two (42) commercial banks, and twenty-four (24) merchant banks.
With the insecurity, volatile and unstable situation in the banking system, the government in 1990 invested N503million into set up community banks in order to promote community development. In 1990-1991 the Nigerian authorities established prudential guideline as a result of low financial intermediation. This guideline exposed the unhealthy nature of the banks in operation. Which lead to the fall in stock prices and stock market thereby leading to a major financial crisis? According to Caprio and Klingebiel (2003), Nigeria faced a systemic banking crisis throughout the 1990 and the extent of the non-performing loans became evident. The systemic shocks lead to the termination of 5 banks out of the 120 banks in 1994-1995. ( Buchi, 1996). Around this period also the Nigeria Deposit Insurance Corporation (NDIC) pronounce 24 banks insolvent and 26 in serious trouble. For that reason the CBN and the NDIC obtain a court order to acquire 12 distress banks in order to develop and implement the most cost effective way to resolve and revive these banks. (Augusto and Co., 1996: 7).
The common attribute of these distressed banks was found in their ownership structure, management challenges, other issues such as liquidity, assets, financial system deposit were noted to be very low. By 1998, 36 banks were eventually liquidated by NDIC.(Imala (2004
Even though the macroeconomic environment improved with the new civilian government regime after 1999, the Nigerian financial system was still characterized by high fragmentation and low financial intermediation.
In this phase of the Nigerian banking system the sector was fully deregulated with the adoption of universal banking system. In 2001, the operations of merchant bank were merged with commercial banks operations in readiness for consolidation program in 2004. Best practises were expected from banking practises. These included corporate governance, increase capital base, bank culture and risk appetite, better IT driven culture so that the banks could compete globally and have an international standard of operations. On the dawn of 2004, the governor of CBN, Prof Soludo, made pronouncements on Nigerian banking sector reforms. He announced a new capital base of N25 billion for Nigerian banks from the previous N2 billion ( Somoye 2008). The major elements of the reform in this phase of the banking sector were; capitalization for banks should be N25 billion with full conformity December 2005; Only banks that mets this requirement can participate in DAS and hold public sector deposit; the withdrawal of public sector funds from banks, starting in July 2004; Adoption of a risk focused, and rule-based regulatory framework and Consolidation of banking institutions through