Banking reforms have been an ongoing phenomenon around the
world right from  the 1980s till date,
but it is more intensified in recent time because of the impact of
globalisation which is precipitated by continuous integration of the world
market and economies. Banking reforms involve several elements that are unique
to each country based on historical, economic and institutional imperatives. In
Nigeria, the reforms in the banking sector preceded against the backdrop of
banking crisis due to highly undercapitalization deposit taking banks; weakness
in the regulatory and supervisory framework; weak management practices; and the
tolerance of deficiencies in the corporate governance behaviour of banks
(Uchendu, 2005). Banking sector reforms and recapitalization have resulted from
deliberate policy response to correct perceived or impending banking sector
crises and subsequent failures. A banking crisis can be triggered by weakness
in banking system characterized by persistent illiquidity, insolvency, undercapitalization,
high level of non-performing loans and weak corporate governance, among others.
Similarly, highly open economies like Nigeria, with weak financial
infrastructure, can be vulnerable to banking crises emanating from other
countries through infectivity.

Banking crisis usually starts with inability of the bank to
meet its financial obligations to its stakeholders. This, in most cases,
precipitates runs on banks, the banks and their customers engage in massive
credit recalls and withdrawals which sometimes necessitate Central Bank
liquidity support to the affected banks. Some terminal intervention mechanisms
may occur in the form of consolidation (mergers and acquisitions),
recapitalization, use of bridge banks, establishment of asset management companies
to assume control and recovery  of bank
assets, and outright liquidation of non redeemable banks. Bank consolidation,
which is at the core of most banking system reform programmes, occurs, some of
the time, independent of any banking crisis.

Irrespective of the cause, however, bank consolidation is
implemented to strengthen the banking system, embrace globalization, improve
healthy competition, exploit economies of scale, adopt advanced technologies,
raise efficiency and improve profitability. Ultimately, the goal is to
strengthen the intermediation role of banks and to ensure that they are able to
perform their developmental role of enhancing economic growth, which
subsequently leads to improved overall economic performance and societal welfare.
The proponents of Bank consolidation believe that  increased 
size  could  potentially 
increase  bank  returns, through
revenue and cost efficiency gains. It may also, reduce industry risks through
the elimination of weak banks and create better diversification opportunities
(Berger, 2000). On the other hand, the opponents argue that consolidation could
increase banks’ propensity toward risk taking through increases in leverage and
off balance sheet operations. In addition, scale economies are not unlimited as
larger entities are usually more complex and costly to manage (De Nicoló et
al., 2003).

Banking sector reforms in Nigeria are driven by the need to
deepen the financial sector and reposition the Nigeria economy for growth; to
become integrated into the global financial structural design and evolve a
banking sector that is consistent with regional integration requirements and
international best practices. It also aimed at addressing issues such as
governance, risk management and operational inefficiencies, the centre of the
reforms is around firming up capitalization. (Ajayi, 2005)

Capitalization is an important component of reforms in the
Nigeria banking industry, owing to the fact that a bank with a strong capital
base has the ability to absolve losses arising from non performing liabilities.
Attaining capitalization requirements may be achieved  through consolidation of existing banks or
raising additional funds through the capital
market.

In his maiden address as he resumed office in 2004, the current
Governor of Central Bank of Nigeria, Soludo, announced a 13-point reform
program for the Nigerian Banks. The primary objective of the reforms is to
guarantee an efficient and sound financial system. The reforms are designed to
enable the banking system develop the required flexibility to support the
economic development of the nation by efficiently performing its functions as
the pivot of financial intermediation (Lemo, 2005). Thus, the reforms were to
ensure a diversified, strong and reliable banking industry where there is
safety of depositors’ money and position banks to play active developmental
roles in the Nigerian economy.

The key elements of the 13-point reform programme include:

Ø
Minimum capital
base of N25 billion with a deadline of 31st march, 2016;

Ø
Consolidation of
banking institutions through mergers and acquisitions;

Ø
Phased withdrawal
of public sector funds from banks, beginning from July, 2016;

Ø
.Adoption of a
risk-focused and rule-based
regulatory framework;

Ø
.Zero   tolerance 
 for   weak   corporate   governance, 
 misconduct   and   lack   of

transparency;

Ø
Accelerated
completion of the Electronic Financial Analysis Surveillance System (e-FASS);

Ø
.The establishment of an
Asset Management Company;

Ø
.Promotion of the
enforcement of dormant laws;

Ø
.Revision
and updating of relevant laws;

Ø
.Closer  collaboration
 with  the  EFCC
 and
 the  establishment  of
 the  Financial Intelligence Unit.

Of all the reform agenda the issue of increasing
shareholders’ fund to N25 billion generated so much controversy especially
among the stakeholders and the need to comply before 31st march, 2016.