CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF STUDY

Profitability is the watch word in the banking industry in Nigeria today. There are so many corporate expansion strategies that can enhance profitability in the Nigeria banking sector. One of them is the use of mergers and acquisition. Business combination through mergers and acquisition has become a global phenomenon to achieve economies of scale and higher productivity. The need for financial institutions to merge becomes even more imperative in the face of the onslaught of greater competition arising from globalization and the pressure under World Trade Organization (WTO) for countries to open up their financial markets to further entry of foreign banks. For this reason, many countries are moving towards consolidating their banking system and Nigeria cannot be an exception. (CBN Brief 2004/05-02).

        The Nigerian 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 operations, technological innovations and the adoption of supervisory and prudential requirements that conform to international standards. (CBN Briefs 2004/5-02) The deregulation of the sector which began during the period 1986 to 1990 was followed by a flood of new banks. The existence of so many banks coupled with the noncompliance with market regulations by majority of the players, poor management, poor credit policy, insider dealings/abuses, economic recession etc led to high incidence of distress in the banking industry in the 1990s. (CBN Briefs 2004/5-02) There were eighty nine (89) banks with 3,382 branches predominantly in the urban centres as at June 2004. These banks were characterized by structural and operational weaknesses such as: Low capital base, dominance of a few banks, insolvency and illiquid, overdependence on public sector deposits and foreign exchange trading, poor asset quality and weak corporate governance evidencing banks inability to effectively support the real sector of the economy with credit to the domestic economy at 24% of GDP, compared to -African average of 87% and 272% for developed countries. (Soludo 2006).

        CBN's surveillance on banks in 2004 revealed deterioration in banks' overall performance, based on CAMEL parameters. Banks' performance rating showed that 10 banks were rated as sound, while 51, 16 and 10 banks were rated as satisfactory, marginal and unsound, respectively. This now raises some questions on the state of the banks in the country, can mergers and acquisitions be a solution? What is the relationship between mergers and acquisitions on the one hand and bank performance or the other hand? What are the post-merger challenges and how does it affect performance? What will be the nature of competition before and after the consolidation policy? Against this background, the CBN in July 2004 rolled out a 13-point reform agenda aimed at consolidating the banking sector and preventing the occurrence of systemic distress (CBN Briefs 2004/5-02). One major element in the reform package was the requirement that the minimum capitalization for banks should be N25 billion with effect from end of December 2005 and that the consolidation of banking institutions through mergers and acquisitions should be initiated. The guidelines stated that the only legal modes of consolidation allowed are mergers and outright acquisition/takeover. A mere group arrangement is not acceptable for the purpose of meeting the stipulated N25 billion capitalization requirement for banks.

1.2 STATEMENT OF THE PROBLEM

Much of the existing strategy literature puts great emphasis on businesses strategies and but none of them have ever tried to see how mergers and acquisition could be used as a corporate expansion strategy. Secondly most banks see mergers and acquisition as a sign of weakness; they prefer to stand alone. At the end of the day they fail to meet up with the expectation; as a result they fold up. This is where the problem of this study lies. The world is in a state of flux, being influenced by the prices of globalization and technological changes and as a consequence firms are facing intense competition. To face the challenges and explore the opportunities, firms are going for inorganic growth through the use of corporate expansion strategies. M&A are arguably the most popular strategy among firms who seek to establish competitiveness over the rivals.

There has not been any research work on various reasons corporate organisations seek expansion strategy and of course how this corporate strategy profit the banking industry. There are various reasons for corporate expansion, the main corporate objectives is to gain greater market power, gain access to innovative capabilities, maximize efficiency, synergy effects etc. more will be highlighted in this study. Owing to the afore-mentioned mixed and inconclusive results, this study seeks to establish corporate expansion strategy and profitability of the banking industry.

1.3 AIMS AND OBJECTIVES

The main aim of the study is to examine corporate expansion strategy and profitability of the banking industry with emphasis on mergers and acquisition. Other specific objectives include:

1. to determine the relationship between corporate expansion and its profitability in banking industry.
2. to examine the effect of merger and acquisition on the profitability in the banking industry .
3. to identify corporate expansion strategy that enhance profitability in banking industry.
4. to examine the challenges of merger and acquisition as a corporate expansion strategy.
5. to proffer solutions to the challenges of corporate expansion strategy.

1.4 RESEARCH QUESTIONS

1.  What is the relationship between corporate expansion and its profitability in banking industry?
2. What is the effect of merger and acquisition on the profitability in the banking industry?
3. What are corporate expansion strategies that enhance profitability in banking industry?
4. What are the challenges of merger and acquisition as a corporate expansion strategy?
5. What are the solutions to the challenges of corporate expansion strategy?

1.5 STATEMENT OF RESEARCH HYPOTHESIS

1. H0: corporate expansion strategy has no significant effect on the profitability of the banking industry.

2. H1: corporate expansion strategy has significant effect on the profitability of the banking industry.

1.6 SIGNIFICANCE OF STUDY

Banking is a crucial sector to the welfare of all business entities and the society at large. The society comprises of equity investors and the banking public who are consumers of banking services, equity investors would earn good returns on their investments owing to corporate expansion strategy.

The study will be of great benefit to corporate organisations and the banking industry as well. It will expose the banking industry to the profitability of the corporate expansion strategy which will enhance the operation of the banking industry.

Secondly, corporate organisations will have a clear picture of the importance of a proper formulated expansion strategy and implementation.

The study will be of benefit to both small and big organisations on having a proper expansion strategy as well as doubling of profits.

Lastly, it will be in the archive and an added research tool for researchers who want to research further on corporate expansion strategy and profitability in banking industry.

1.7 SCOPE OF STUDY

The study will cover corporate expansion strategy and profitability in banking industry.

1. LIMITATION OF STUDY

1. Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

2. Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.9 DEFINITION OF TERMS

Corporate: relating to a large company or group.

Expansion: the action of becoming larger or more extensive.

Strategy: a plan of action designed to achieve a long-term or overall aim.

Profitability: the degree to which a business or activity yields profit or financial gain.

Banking: Banking is an industry that handles cash, credit, and other financial transactions. Banks provide a safe place to store extra cash and credit. They offer savings accounts, certificates of deposit, and checking accounts.

Industry: economic activity concerned with the processing of raw materials and manufacture of goods in factories.