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CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The wave of banks‟ consolidation that recently swept through the banking sector started after the announcement by the Central Bank of Nigeria (CBN) on behalf of the federal government of Nigeria, that banks in Nigeria should beef up their minimum capital base to N25 billion on or before 31st December, 2005. As the termination date for banks‟ consolidation workout drew nearer, desperate efforts were made by the banks to meet the minimum capital fixed by the CBN before the expiration date. There were many options available towards solving the challenge of recapitalization. A bank could among other options merge with others or acquire smaller ones or volunteer to be acquired by others or do it alone or by combination of two or more of the options. Nevertheless, the strategies adopted by majority of these banks were mergers and acquisitions. These mergers and acquisitions brought about a fusion of the 89 banks in the country into mega banks units of only 25. According to CBN report, 25 banks emerged at the end of the consolidation exercise from the previous 89 banks, while 14 banks were liquidated.
Mergers are commonplace in developed countries of the world but are just becoming prominent in Nigeria especially in the banking industry. Before the recent consolidation, the Nigerian banks have not fully embraced mergers and acquisitions as expected because of their cultural background in terms of assets ownership, greediness, shame, fear of what people will say and lack of proficiency required for mergers and acquisitions, among other reasons. The issue of mergers and acquisitions in banking industry started in October, 2003 under the past president of CBN. Although the CBN rolled out incentives to encourage weaker banks adopt mergers and acquisitions. The incentives included concessionary cash reserve ratio on a case- by -case basis for a period of two years to the newly restructured banks, conversion of overdrawn positions of weak banks to long-term loans with concessionary interest and the acquired banks could be given up to 24 months grace period for complying with the minimum liquidity ratio requirement to enable it settle down as a newly recapitalized/restructured bank. However, most of the feeble banks were unwilling to listen until the new order on July 6, 2004 (Famakinwa, Oduniyi, Aminu, Obike and Ugwu 2004:10).