Bukar Umar Bolori

Department of Banking and Finance,

 Ramat Polytechnic, Maiduguri, Borno State, Nigeria



As the prime movers of economic life, banks occupy a significant place in the economy of every nation. It is therefore not surprising that their operations are perhaps the most heavily regulated and supervised of all businesses entities. This paper looks into the impact of capital adequacy on the profitability of banks in Nigeria. It brings into account the Nigerian banking system and the regulatory framework, the history of recapitalization and the introduction of capital adequacy in the Nigerian banking system. The paper also looks into the notions on capital adequacy and bank failures. It highlights the Basel Accord and analyse the pitfalls of Basel I, a guide to capital adequacy standards for lenders of Basel II and the impacts of Basel III on banking and financial institutions.

Keywords: Capital Adequacy, Recapitalization, Profitability and Risk.



The Nigerian banking system has undergone remarkable changes over the years, in terms of the number of institutions, ownership structure, as well as depth and breadth of operations. These changes have been influenced largely by challenges posed by deregulation of the financial sector, globalization of operations, technological innovations and adoption of supervisory and prudential requirements that conform to international standards. Prior to the recent reforms, the state of the Nigerian banking sector was very weak. ‘‘The Nigerian banking system today is fragile and marginal. The system faces enormous challenges, which if not addressed urgently, could snowball into a crisis in the near future (Soludo, 2004).  Many banks appear to have abandoned their essential intermediation role of mobilizing savings and inculcating banking habits at the household and micro enterprise levels. The indifference of banks towards small savers, particularly at the grass-roots level, has not only compounded the problems of low domestic savings and high bank lending rates in the country, it has also reduced access to relatively cheap and stable funds that could provide a reliable source of credit to the productive sectors at affordable rates of interest. The current structure of the banking system has promoted tendencies towards a rather sticky behaviour of deposit rates, particularly at the retail level, such that while banks' lending rates remain high and positive in real terms, most deposit rates, especially those on savings, are low and negative (Imala, 2005). In addition, savings mobilization at the grass-roots level has been discouraged by the unrealistic requirements by many banks for opening accounts with them.


The issue of recapitalization is a major reform objective. Recapitalization literarily means increasing the amount of long term finances used in financing the organization. Recapitalization entails increasing the debt stock of the company or issuing additional shares through existing shareholders or new shareholders or a combination of the two. It could even take the form of merger and acquisition or foreign direct investment. Whichever form it takes, the end result is that the long term capital stock of the organization is increased substantially to sustain the current economy trend in the global world. ‘‘Recapitalization may raise liquidity in short term but will not guaranty a conducive macroeconomic environment required to ensure high asset quality and good profitability’’ (Asedionlen, 2004). Through the transformation process, the number of banks was reduced from 89 to 25 by end of the year 2005. The number of banks has now reduced to 22 (this include a newly licensed non-interest bank – Jaiz International Bank) following Standard Bank’s takeover of IBTC. The banking licenses of 14 banks were revoked. Guaranty Trust Bank PLC (GTB), Zenith Nigeria International Bank (the City Group subsidiary), Stanbic Nigeria and Standard Chartered were the only banks that did not engage in Merger and Acquisition (M & A) activity over this period. In addition, only Zenith Bank and GTB were among the local banks not involved in M & A activity. Apart from the foreign-owned banks, ownership of the banks is broad-based with direct and indirect government ownership limited to 10%. For analytical purposes, the International Monetary Fund (IMF) divides the banks into four groups as follows:

  • Group 1 comprises the first generation banks, which were the largest traditional banks that achieved the capital threshold mostly on their own and may have also consolidated long established affiliates and acquired one or two smaller banks. Group 1 banks, therefore, have significant advantages in terms of franchise and a large resource base. They include First Bank, Guaranty Trust Bank (GTB), United Bank for Africa (UBA), Union Bank of Nigeria (UBN), Intercontinental Bank - now merged with Access Bank , Oceanic Bank ( now acquired by Ecobank) and Zenith Bank.
  • Group 2 constitutes banks that achieved the capital threshold by merging through voluntary partner- ships. They include Access Bank, Diamond Bank, Ecobank, Equatorial Trust Bank now acquired by Ecobank),  Fidelity Bank, IBTC-Chartered Bank, Platinum-Habib Bank now nationalized by Nigeria Deposit Insurance Corporation (NDIC)  and christened as Keystone Bank , WEMA Bank, and Afribank also acquired by NDIC and now known as Mainstreet Bank. ............more>>>>


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