Effects of Bank Mergers and Acquisitions on Lending to Small Business Borrowers in Nigeria


Effects of bank mergers and acquisitions on bank loans to small businesses have raised significant concern among policy makers in Nigeria. Small business lending is a prime example of a banking product likely to be affected by bank consolidations. Although bank consolidations are likely to bring evolution in the banking product market, this kind of product had remained local in nature. By remaining local, the product may not likely appeal to consolidated banks that are forward looking. This scenario has raised questions for instance; to what extent do banking consolidations affect their ability to supply small credit loans. The information regarding this question has remained asymmetrical implying that policy capable of pulling down the economy may likely arise in near future. Therefore, this study seeks to mitigate such likely economic catastrophe by trying to analyze empirically the effects of bank mergers and acquisitions of emerging mega banks on small business lending. All the 24 banks that emerged successfully after the N25billion bank recapitalization mandate were selected for study as all of them were involved in the consolidation and recapitalization exercises. An Ex-Post Facto Research Design was engaged and secondary data were obtained from the CBN Statistical Bulletins and database of banks selected for study. Multiple regression analysis was used to analyze the data with the aid of E-View Software. The result indicated that changes in bank size after bank consolidation negatively affected banks’ decision to lend, which is not statistically significant (β=-0.62; p-value >0.05). This means that as bank gross asset increases as a result of bank consolidation, bank loans to small businesses would likely fall. Changes in consolidated banks’ deposits negatively affected small business lending and it is insignificant (β =-0.063; p-value> 0.05). This shows that as bank deposits of the consolidated banks increase, the credit availability to Nigerian small businesses begins to drop by 6% for every 1% positive changes. Changes in bank Market share after bank consolidation affected bank lending positively and it is insignificant (β=0.02; p-value >0.05). The effect indicates that as banks increase their competitive stands due to consolidation, loans to small business as well increase. Finally, changes in equity positively affected banks’ decision to lend after consolidation, which is insignificant (β=0.0197; p-value >0.05). This means that increases in shareholders’ funds encouraged banks to supply loans to small business borrowers after mergers and acquisitions. We concluded that bank mergers and acquisitions do not largely advance the interest of small business borrowers in Nigeria. Based on the conclusion, we recommended that government should encourage bank capital adequacy. Most importantly, they should encourage micro finance banks and other non-bank financial institutions to pick up loans dropped by the consolidating banks.




1.1Background of the Study

Bank mergers and acquisitions remain complex corporate events that affect bank customers in particular markets for banking services they seek to purchase (Samolynk and Avery, 2000). This assertion agrees with both the Structure-Conduct Performance (SCP) and Efficient-Structure Performance (ESP) theories of banking consolidation, which state that changes in bank market structures and concentrations due to banking consolidation affect the way banks behave and bring about gain in overall bank efficiency respectively (Shaik et al 2009). This theory was generally based on general bank lending and was not narrowed down to specifics such as small business lending. At present, the dynamic effect of a merger-driven collusion power on the banks’ ability to create small risk assets has remained a contentious issue among Nigerian policy makers. Therefore, with subsequent banking consolidations and recapitalizations that have resulted in the emergence of huge banks, the policy makers have raised great concern and fear that small business borrowers’ may not have been benefiting from banking consolidation. Determining the reality of this fear is a necessity that cannot be ignored in order to mitigate any likely risk of bad economic policy.

What then are mergers and acquisitions that could make the phenomena have the potential to influence the behaviour of banks if we may ask before we proceed? As a concept, a merger according to Ofoegbu, (2003), takes place, where shareholders or business enterprises combine their operations in order to achieve mutual sharing of risks and rewards attached to the combined enterprises. This means in relation to banks, it is a combination of two or more separate banks into a single bank. On the other hand, an acquisition involves the purchase of controlling shares in another company (Oye, 2011). In this case, the acquiring entities obtain control over the action of the entities taken over and this control gives the acquirers the power to govern the financial and operating policies of the acquired, which enables them to obtain benefits from their activities (David, Britton and Ann 2009). Both mergers and acquisitions can be used interchangeably as forms of business combinations and are consummated through consolidations.

Banking consolidation brings about evolution in banking product market. However, despite the potential product evolution, small business lending is likely to be one of the banking products that would remain local amidst the evolution (Samolynk and Avery 2000). Traditionally, according to the scholars, small business lending as a banking product has inherently been local in nature, which means the product would likely be supplied to firms and borrowers having idiosyncratic credit needs and risks embedded to the prospects of the local economy. This implies that small business lending would generally require local expertise for monitoring borrower-specific risks. In contrast, it is a well-known fact that large commercial loans, consumer credits, treasury bills, government bonds, open market operation (OMO) bills, multinational lending and home mortgage lending have become increasingly standardized and evolving products transacted in what have become national or international markets. Although these types of loan products require expertise, we should realize that they might no longer require the same sort of local presence that small business loans require according to scholars.

Scholars have identified two major types of mergers and acquisitions effects, which are static and dynamic effects as shown in the work of Berger, Saunders and Udell (1998). In Nigerian setting, only the static effect has been substantially explored probably due to data limitation. Static effect just identifies the changes in lending propensities that result from simply combining the balance sheets of the participating institutions into larger pro forma institutions with combined characteristics within one year of consummating the merger (Berger et al 1998). On the other hand, the dynamic effect according to the scholars, identifies the change in lending that follows from decisions to restructure the institution in terms of its sizes, financial characteristics or equity conditions (ratio of equity to gross assets) and local competitive positions (market share or asset concentration, and market deposit demand) after the consummation of mergers and acquisitions. This kind of effect fully surfaces at least after three years. In relation to the static effect and with respect to Nigerian-banking sector, there is clear evidence of the effect in the works of Okafor and Emeni (2008), and Asuquo (2012). In these works, mergers and acquisitions were presented in substance as just a mere static event having mere static influences on banks’ ability to lend.

However, bank mergers and acquisitions are not just a mere combination of pro forma assets and liabilities of the consolidating institutions for which we may just add for instance; N20billion and N5billion worth of assets of banks A and B respectively, and then expect to always get N25billion assets for a new consolidated bank C or AB. If that is so, then we shall accept the fact that banking consolidation is a mere static event. However, this may not always be so. Unfortunately, the policy makers are not yet substantially aware of this. No wonder then there are counter- productive policies in Nigerian banking industry. We are afraid if that would not bring about total economic break down since according to Ove and Arksel (2011) the Great Depression of 1930s in US had a depth of its root in the destruction of local banking products because of information asymmetries. What we should understand is that most of the times, mergers between banks as illustrated above can result in bank C or AB worth of N15billion or N30billion in Assets in the end. For instance, the consolidated institutions may choose, according to Berger et al (1998), to divest some of the combined assets in order to reduce excess capacity in their markets. This reduction in size after the consolidations may change their abilities to create small risk assets in the end. On the other hand, where banks engage in acquisitions to obtain more market power or for diversification purposes, aggressive investments may be pursued which would in turn increase the consolidated banks’ market share and assets, and reduce risk that may positively affect their ability to lend. We can also look at it this way. After consummation of mergers, the business focus of the consolidated institutions may significantly change. This is likely to be the case where the reason behind the acquisitions is for value maximization. The consolidated banks may lose interest in participating actively in less profitable bank product markets, and then may begin to pursue new larger product markets and highly priced-ventures with promising future returns. They would be able to do these because of the liquidity pool or synergy likely to result from the consolidations. From this pool, the parent companies or the acquirers may engage in the act of liquidity siphoning where they would be moving or siphoning away funds from the acquired banks in pursuit of the investments objectives consistent with them, which may or may not include risk asset creation for small business borrowers. The extent and the direction of banking consolidation on small business lending remain a ground open for research.

1.2: Statement of Problem

Poor knowledge of the extent and the directions of the impacts of bank consolidations on small business lending have led to significant counter-productive policies capable of pulling down the entire economy in near future in Nigeria. Literatures have revealed that the Great Depression of 1930s in US had a depth of its root in the destruction of local banking products because of information asymmetries. Such signs of policy misconceptions and confusions regarding merger effects on local banking products are growing among Nigerian policy makers. It is quite unfortunate that just few years after the hailed bank recapitalization mandate that there are great regrets and fears by the apex bank that the structure of Nigerian banking industry has created a big gap in terms of institutions that serve different segments of the economy (Ebelo, 2013). This implies that the relationship between huge banks and small business lending has been in doubt to them before the recapitalization mandate. This is the problem; running an economy through assumption is costly and quite risky.

Evidently, researchers have previously studied how bank consolidations have affected small business lending in Nigeria. However, data limitation may have caused them to focus in substance only on the static effect as shown in Okafor and Emeni (2008), and Asuquo (2012). Although they tried to determine the dynamic effect using the 2004 bank data, unfortunately, Nigerian bank data obtained between 1996 and 2004 would in substance, only capture the extent and the direction of pre-merger and static effects. First, we have to realize that the significant bank consolidations that took place in Nigeria majorly began in 2005 although the mandate was made in June 2004. Second, scholars of banking consolidation have identified that the minimum post-consolidation gestation period for manifestation of dynamic effects is three years as can be seen in the work of Focarelli and Panetta, (2003), since there is always a delay in efficiency adjustment. The 3-year minimum gestation period is consistent with the results of the interview conducted by the Federal Reserve Board of staff with officials of banks involved in US mergers (Berger et al 1998). Hence, 2004 bank data relating to changes in equities, deposits and gross asset would in no way be able to capture the restructuring effects as far as banking consolidation is concerned in Nigeria. Based on this criterion therefore, the above domestic work has created a research gap. This study intends to fill this gap by using a 6-year post-consolidation gestation period a period long and good enough for the consolidated banks’ to have restructured fully and saved all costs associated with the consolidations. Moreover, while those two major works used 2-bank case studies therefore falling victims of poor representation problems, the present study makes a difference by studying the reactions of the entire recapitalized banks in relation to small business lending. In addressing these issues, the researcher shall therefore, be focusing on driving a concise tool in the form of an econometric model that would serve as a guide in predicting the potential effects of bank consolidation metrics on small business lending as a way of remedying and preventing consolidation and lending information asymmetries that could destroy Nigerian economy.

1.3 Objectives of the Study

The main objective of this study is to determine the extent and the direction of bank mergers and acquisitions effect on consolidated banks’ ability to lend to Nigerian small credit users as a strategy for effecting sound economic policies. In view of the above, the specific objectives of this thesis are therefore to:

  1. Determine the extent of the impact of changes in consolidated banks’ deposits on small business lending.
  2. Determine the extent of the impact of changes in consolidated banks’ market share on small business lending.
  3. Ascertain the extent changes in bank equity affect banks’ decision to lend to small business borrowers after bank consolidations.
  4. Ascertain the extent changes in bank size affect banks’ decision to lend to small business borrowers after bank consolidations.

1.4 Research Questions

The researcher was guided towards answering the following questions, which are:

  1. To what extent do changes in consolidated banks’ deposits impact on small business lending?
  2. To what extent do changes in consolidated banks’ market share impact on small business lending?
  3. To what extent do changes in bank equity affect banks’ decision to lend to small business borrowers after bank consolidations?
  4. To what extent do changes in bank size affect banks’ decision to lend to small business borrowers after bank consolidations?

1.5 Statement of Hypotheses

The null hypotheses postulated for the purpose of this thesis are that:

  1. Changes in consolidated banks’ deposits do not significantly impact on small business lending.
  2. Changes in consolidated banks’ market share do not significantly impact on small business lending.
  3. Changes in bank equity do not significantly affect banks’ decision to lend to small business borrowers after bank consolidations.
  4. Changes in bank size do not significantly affect banks’ decision to lend to small business borrowers after bank consolidations.

1.6 The Significance of the Study

The significance of this study cannot be overemphasized. The study in summary has a tripartite significance; namely theoretical, methodological, and practical significance. First, let us consider its theoretical importance. Evidently, literary work in the phenomenon of bank consolidation in Nigeria is still scanty and sketchy. However, this work adopts an expository, descriptive and hypothesis testing approach towards unearthing the theoretical framework underlying bank mergers and acquisitions in a contemporary economy. Methodically, the work used important statistical tools to analyze the data obtained and authenticate results based on internal and external validity tests of the underlying risk and techniques. This is an indication that a combination of different research methods and tools can lead to more credible conclusion on important studies of this kind and by demonstrating how these methods are applied in an empirical research, good foundation for further study in this area was being laid. For those who are lacking in research methodologies, this study has reduced their problems to a minimal level if not to a zero degree.

In relation to its practical significance, we are very sure that among other things, the findings of this work will help CBN to be properly guided and directed in bank recapitalization policies. Of course, we are all aware that Nigerian-banking industry has been marked with policy inconsistency and incompetency. However, we believe the situation in the banking industry engineering will positively change if the basic findings and recommendations offered in this study would be humbly implemented and applied. Through this study, the apex bank would be able to monitor the effect of bank mergers and acquisitions on bank lending and be able to create alternative market for small business borrowers when the danger light indicates. It will also guide scholars and researchers in the area of bank consolidations, which relate directly to small business lending.

Moreover, small business borrowers would be able to explore the strength, weaknesses, opportunities, and threats revolving around commercial banks in lending to them. They would be able to key in to the existing opportunities and tap the resources available to them in the events of mergers and acquisitions.

1.7 Scope of the Study

The study was carried out within the geographical location of Nigeria. The study focused on the dynamic effects of bank mergers and acquisition on small business borrowers in Nigeria. The likely static and external effects are not covered in this research. Therefore, the lending to small businesses by other non-commercial banks such as Micro-finance banks is not considered among the loans to small businesses. The period covered is between 2001 and 2010. The study did not consider the trend and changes in the variables that occurred before 2001 and after 2010. The study concentrated on secondary data. Primary data are not used in this study. Small businesses are defined by Small and Medium Industries Equity Investment Scheme as enterprises with total capital employed between N1.5million and N200 million with staff capacity between 10 and 300. The researcher adopts this boundary in this work. The entire 24 banks were studied.

1.8 Limitation of the Study

One major limitation this study suffered from is the selection of all the 24 commercial banks that emerged successfully after the N25billion recapitalization mandate as though they were all involved in mergers and acquisition. Actually, 3 of them for instance GTB and Zenith bank although recapitalized were not involved in the 2004/2005 banking consolidation. The researcher faced the difficulty of separating small business loans of the non-involved from those of the involved as aggregate of the small business loans reported in Central Bank of Nigerian Statistical Bulletins were the data readily available. Our confidence in using the data despite the limitation is that all the emerged banks witnessed significant changes in sizes and market power that had the potential to drive their lending behaviour during the periods under review. So, indirectly, all banks were involved in banking consolidations in Nigeria within the period under survey. Therefore, our results are unbiased and would not be significantly different had only the data relating only to the involved were used in the analysis. This limitation if anyone considers it significant and can dismantle it can even be a good ground for further and deeper study in this area.




In this section, we shall first consider the theoretical and conceptual framework and then the review of the empirical studies related to the impacts of bank mergers and acquisitions on lending behaviour particularly as it affects small credit supply. The empirical literatures we reviewed were those relevant to the objectives of this thesis, which is to analyze the extent bank mergers and acquisitions can have some influence on small credit supply abilities of merged banks. In addition, the literature reviewed also provided us with sufficient knowledge of the way in which bank decide their lending and how bank consolidations would likely affect the lending decisions of merged banks as it majorly affect bank credit availability, loan pricing, and risk taking.

2.1 Theoretical and Conceptual Framework

2.1.1 The Concept of Mergers and Acquisitions

Mergers and acquisitions in most literatures represent aspect of organizational recomposition geared toward effecting strategic management, corporate finance and value maximization for investing stakeholders or shareholders in particular. According to extant literatures, both, that is, mergers and acquisitions deal with the buying, selling, dividing and combining of different companies and similar entities. Fundamentally, the combination helps the players grow rapidly in their sector or location of origin, or a new field or new location. The unique thing about consolidations is that the activities impact on the market structures of banks, which in turn affects banks’ behaviour. Based on the Structure-Conduct Performance Paradigm, and Efficient-Structure Performance Hypothesis of banking consolidation, bank mergers and acquisitions affect the way banks behave, and on the other hand, bank concentration causes banks to be more efficient through market collusion that would help the players extract rents from their borrowing customers.

From this scenario, mergers and acquisitions activities can be defined as type of restructuring events. This is because the activities occur in some corporate organization and result in reorganization that provides growth or positive value to investing shareholders. Mergers and acquisitions are closely related. In fact, the distinction between the two has become increasingly unclear and variously misconceived in various respects particularly in terms of the main economic outcome according to scholars. Therefore, although both differ, scholars use the terms loosely to mean the same thing. From a legal point of view, according to Wikipedia (2014), a merger is a legal consolidation of two companies into one entity, whereas an acquisitions occurs when one company takes over another and completely establishes itself as the new owner in which case the target company still exist as an independent legal entity controlled by the acquirer. As a concept that is quite complex, a merger according to Oye (2011) is the situation where two or more companies combine to form a larger business organization. On the other hand, according to the scholar, an acquisition involves the purchase of controlling shares in another company. In her book, ‘Advanced Financial Accounting’ Ofoegbu, (2003), sees merger as an event that takes place where shareholders or business enterprises combine their operations in order to achieve mutual sharing of risks and rewards attached to the combined enterprises. Hence, considering merger from her own point of view, the ultimate aim of merging in the corporate is to diversify for risk removal, reduction or even transfer, which eventually would result in value maximization. Control is an essential element in acquisitions. No wonder then Nwude (2005) defines acquisition as the purchase of controlling interest in one company by another company such that the acquired company becomes a subsidiary or a division of the acquirer. Where acquisitions occur between entities according to David, Britton and Ann (2009), the acquiring entity obtains control over the action of the entity taken over. This control, according to them, gives the acquirer the power to govern the financial and operating policies of the acquired, which enables them to obtain benefits from its activities.

Wikipedia (2014) maintains that either structure can result in the economic and financial consolidation of two entities. In practice according to literatures, a deal that is an acquisition for legal purposes may be euphemistically called a merger of equal. This is true if both Chief Executive Officers (CEOs) agree that merging or combining would do both firm good. However, when the deal is unfriendly, that is when the target company does not want to be bought over and considers the acquirers as threats or black knights; it is usually regarded as acquisitions or takeover. An acquisition or takeover therefore is the purchase of one business or company by another company or other business entity. In this scenario, the purchaser would be willing to pay a price otherwise called purchase consideration for controlling interest or shares of at least 51%. Otherwise, the purchase is to be regarded as a mere significant influence, investment or joint venture in which case control is not obtained. In some cases, 100% controlling interest can be obtained making the target entity become a fully owned subsidiary without any minority or non-controlling interest in existence. Minority interest or non-controlling is the aspect the target company’s share that do not belong to the acquiring company. This interest always ranges between 1% and 49%. Consolidation occurs when two or more companies combine to form a new enterprise altogether, and neither of the previous companies remain independently. Acquisitions are divided into private and public acquisitions, depending on whether the acquirer or merging company (also termed target) is or is not listed on a public stock market. An additional dimension or categorization consists of whether an acquisition is friendly or hostile. An acquisition usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a similar firm according to Rumyantseva, Grzegorz and Ellen (2002), will acquire management control of a larger and/or longer-established company and retain the name of the latter for the post-acquisition combined entity. This is known as a reverse takeover. Another type of acquisition is the reverse merger, a form of transaction that enables private company to be publicly listed in a relatively short period. A reverse merger occurs when a privately held company often one that has strong prospects and is eager to raise financing buys a publicly listed shell company, usually one with no business and limited assets.

From the extant literatures, achieving acquisition success has proven to be tough. Various studies have revealed that 50% of acquisitions were unsuccessful especially in its post-consolidation existence. The acquisition process is very complex, with many dimensions influencing its outcome. According to Douma and Shreuder (2013), serial acquirers appear to be more successful with M&A than companies who only make an acquisition occasionally. The new forms of buyout created since the crises are based on serial type acquisitions, which is a co-community ownership buy out and the new generation buy outs of the MIBO (Management Involved or Management Institution Buy Out) and MEIBO (Management & Employee Involved Buy Out). It is normal for M&A deal communications to take place in a so-called confidentiality bubble wherein the flow of information is restricted pursuant to confidentiality agreements. In the case of a friendly transaction, the companies cooperate in negotiations; in the case of a hostile deal, the board and /or management of the target is unwilling to be bought or the target’s board has no prior knowledge of the offer. Hostile acquisitions can and often do ultimately become friendly as the acquirer secures endorsement of the transaction from the board of the acquire company. This usually requires an improvement in terms of the offerand/or through negotiation. According to Douma and Schreuder (2013) in wikipedia, the combined evidence suggests that the shareholders of Acquired firms realize significant abnormal returns while shareholders of the acquiring company are most likely to experience a negative wealth effect. The overall net effect of M&A transactions appears to be positive; almost all studies report positive returns for the investors in the combined buyer and target firms. This implies that M&A creates economic value, presumably by transferring assets to management teams that operate them more efficiently.

Scholars also indicate that there are a variety of structures used in securing control over the assets of a company, which have different tax and regulatory implications. First, the buyer buys the shares, and therefore control of the target company acquired or purchased. Ownership control of the company in turn conveys effective control over the assets of the company, but since the company is acquired intact as a going concern this form of transaction according to scholars carries with it all of the liabilities accrued by the business over its past and all of the risks that company faces in its commercial environment. Second, the buyer buys the assets of the target company. The cash the target receives from the selloff is paid back to its shareholders by dividend or through liquidation. This type of transaction leaves the target company as an empty shell if the buyer buys out the entire assets. A buyer often structures the transaction as an asset purchase to cherry-pick the assets that it wants and leave out the assets and liabilities that it does not. This can be particularly important where foreseeable liabilities may include future unquantifiable damage awards such as those that could arise from litigation over defective products, employee benefits or terminations, or environmental damage.

2.1.2 Forms of Mergers and Acquisitions

Based on functional roles in the market, scholars have classified mergers in the following ways. However, it very important to understand that mergers and acquisitions process itself is a multifaceted and complex phenomenon, which according to extant literatures depends upon the type of merging companies.

A Horizontal Merger

This is merger between two companies in the same business sector. On the other way, it is a kind of merger between firms operating at the same level and in the same industry. Mergers between banks are a good example of a horizontal merger. Another good example of horizontal merger would be if a health care system as illustrated in Wikipedia, buys another health care system. This means that synergy can be obtained through many forms including such as; increased market share, cost savings and exploring new market opportunities. This form of mergers and acquisitions brings about monopoly and therefore can stipple competitions.

A Vertical Merger

As the name suggests, it is a kind of forward-backward integration among firms in the same industry although at different levels or stages of productions. Here, for instance, the source of raw material merges with the distributors or users of the material. In this case, although, both firms operate in the same industry, they are not at the same level; hence the vertical relationship. This according to scholars represents the buying of suppliers of a business. For instance, Coca Cola firm merging with an entertainment firm or a hotel for mere distribution of its soft drinks is a kind of vertical merger. Another illustration is a case where a health care system buys the ambulance services from their service suppliers. The vertical buying is aimed at reducing overhead cost of operations and economy of sale.

Conglomerate Mergers and Acquisitions

When two unrelated firms merge, it is termed conglomerate merger. Some see it as a form of acquisition dealings between two or more irrelevant companies. When a bank acquires an agricultural firm, you might wonder what the connection between the firms is. This is a form of merger is called conglomerate acquisitions. The aim possibly could be for hedging, diversification or empire building.

Arm’s Length Mergers

This is a form of merger that is either Approved by disinterested directors or Approved by disinterested stockholders. The two elements are complementary and not substitutes. The first element is important because the directors have the capability to act as effective and active bargaining agents, which disaggregated stockholders do not. However, because bargaining agents are not always effective or faithful, the second element according to scholars is critical, because it gives the minority stockholders the opportunity to reject their agents’ work. Therefore, when a merger with a controlling stockholder was negotiated and approved by a special committee of independent directors and conditioned on an affirmative vote of a majority of the minority stockholders, the business judgment standard of review should presumptively apply. Any plaintiff ought to have to plead particularized facts that, if true, support an interference that despite the facially fair process, the merger was tainted because of fiduciary wrongdoing (In re Cox Communications, 2005).

Strategic Merger

Strategic merger usually refers to long-term strategic holding of target (acquired) firm. This type of mergers and acquisitions process aims at creating synergies in the end by increased market share, broad customer base, and corporate strength of business. Strategic acquirers may also be willing to pay a premium offer to target firm in the outlook of the synergy value created after mergers and acquisitions processes.


The term ‘acqui-hire’ is used to refer to acquisitions where the acquiring company seeks to obtain the target company’s talent, rather than their products, which are often discontinued as part of the acquisition so the team can on projects for their new employer. In recent years, these types of acquisitions have become common in the technology industry, where major web companies such as facebook, twitter, and yahoo have frequently used talents acquisitions to add expertise in particular areas to their workforces (Hof, 2014).

2.1.3 Brand Considerations and Implications on Consolidation

Mergers and Acquisitions often create brand problems, beginning with what to call the company after the transaction and going down into details about overlapping and competing product brand. Consolidation used in this sense to mean mergers and acquisition has several implications for the banking industry. Available literatures show that the implication can be categorized into two namely: branch and structure implications. After mergers and acquisition, new branch entities that emerge out of this exercise will begin to change their names especially where two or more banks decide to adopt a single name. Changes in logos and branch messages will begin to occur. These changes are regarded as branch implication of mergers and acquisitions. Apart from the changes noted above, changes in staff, customers and entire banking sector will definitely surface after consolidation. There would be a decrease in the number of banks in the country, closure of many small banks especially in the rural areas, increased competition and acquisition digestion issues. These changes occurring after mergers and acquisition are the structural implication of bank consolidation. Decisions about what brand equity to write off are consequential. Given the ability for the right brand choices to drive preference and earn a price premium, the future success of a merger or acquisition depends on making wise brand choices. Brand decisions-makers essentially can choose from four different approaches to dealing with naming issues, each with specific pros and cons (Merriam, 2012).

Keep one name and discontinue the other

The strongest legacy brand with the best prospects for the future lives on. In the metrger of United Airlines and Continental Airlines, the united brand will continue while Continental is retired.

Keep one name and demote the other

The strongest name becomes the company name and the weaker one is demoted to a divisional brand or product brand. An example is Caterpillar Inc. keeping the Bucyrus International name.

Keep both names and use them together

Some companies try to please everyone and keep the value of both brands by using them together. This can create an unwieldy name as in the case of PriceWaterhouseCoopers, which has since changed its name to PWC.

Discard both legacy names and adopt a totally new one.

The classic example is the merger of Bell Atlantic with GTE, which became Verizon Communication. Not every merger with a new name is successful. The factors influencing brand decisions in a merger or acquisitions transaction can range from political to tactical. Ego can drive choice just as well as rational factors such as brand value and cost involved with changing brands.

2.1.4 The Theory of Drivers and Motives of Mergers and Acquisition

There are specific factors that drive bank mergers and acquisitions. These factors motivate and encourage banks to get involved in the activities. First among these factors is the desire for value maximization by the consolidating institutions. This is the shareholders’ theory of banking consolidation. Banks get involved in mergers and acquisitions because they want to maximize the value of their investors. They pursue this goal by investing to increase market power, which can easily be achieved through consolidations. In the process of merging, the shareholders always make sure that the mergers would result in a positive present value.

Through bank consolidation, the involved can also achieve wealth maximization by replacing inefficient management after the acquisitions. Mergers and acquisitions promote economies of scale and scope, which also advance the interest of investors. As institutions merge, their scale of operations widens for instance geographically. Increase in Scale of operation such as productions reduces fixed cost, which in turn bring about increasing returns to scale. In order to benefit from the increasing returns associated with larger scale of operations, shareholders always take advantage of mergers and acquisitions to meet their target value. Therefore, an economy of scale is an opportunity for the consolidating institutions to spread fixed costs across a larger volume of output. This opportunity can be achieved through the elimination of duplicating and competing resources, bulk purchases of materials at reduced prices due to discounts. It may be obtained through improved negotiating strength in dealing with suppliers, intensive utilization of production facilities, standardization of materials and products to enable value analysis to be applied, and acquisition of improved technology and know- how from the acquired company. Moreover, banking consolidation also decreases risk through geographic and product diversification.

This no doubt increases shareholders values thereby motivating them to consolidate. Apart from value maximization theory, mergers can also occur between institutions for non-value maximization purposes. Mergers can take place because of desire for managerial acquisitions and hubris hypothesis. When an organization needs expertise in management, they can come by it by acquisition of other entities, which would encourage intermanagerial breed. If the subsidiary has specialist knowledge in specific areas of the parent company’s production area, they can demand the release of the specialist from the subsidiary company for the task in the acquiring company since they are both under one entity. This need for managerial expertise, therefore, can drive institutional integrations such as mergers and acquisitions.

Organizations such as banks can go for acquisitions because of desire to claim mere superiority over their competitors such that even when the acquisitions may not result in positive net present value to the parent shareholders’ wealth, the acquirers may go on to purchase the firm. This is the pride theory in mergers and acquisitions- in this hubris hypothesis, the predatory company just want to show off by even paying higher it should have cost it to acquire similar company under normal circumstances. In addition to these firm level motives, banks decision for mergers and acquisition might be influenced by external factor such as industry level differences in the economic environment, laws and regulations (Berger et al 1999). Taking for instance, the laws and regulations, institutions can engage in consolidation because a new law that positively reviewed the minimum capital base was passed. The case of the Nigerian consolidation experience was as a result of N25 billion minimum capital mandate by the Central Bank of Nigeria. This law influenced greatly the banks desire to merge in Nigeria.

In 2005, 74 banks out of 89 banks in existence merged into 24. Indeed, the causes of mergers and acquisitions have long been debated in the literature (Folios et al 2011). However, following the neoclassical theory argument, all firm decisions including acquisitions are made with the sole objective of maximizing shareholders wealth. Mergers and acquisitions according to them in this context serve as a means to increase market power, replaces inefficient management, achieve economies of scale and scope among others. Nwude (2003) also states that the reasons behind corporate acquisitions and mergers are operating economies of scale; sources of supplies, finance/leverage, management expertise, increased market share, desire for growth and technological drive are largely the factors that firms seek to achieve while pursuing policies for merger and acquisitions.

The reasons for mergers and acquisitions would be appreciated when one considers the fact that the acquiring company may be seeking to safeguard the source of supply for materials so that it will not be thrown out of business suddenly. Leverage as the scholar noted improves earning per share, over all liquidity, access to capital markets, access to cash resources, acquisition of asset backing which may assist in obtaining loans. These benefits can be enjoyed through business combinations. Banks going for combinations may have such benefits at the back of their minds. Liquidity is an essential bank specific characteristic and no bank can be managed efficiently without adequate liquid assets.

Companies fishing for management expertise can also achieve such by opting for acquisition. The motive here is to acquire management team that is highly experienced, aggressive, competent and respected, cross pollination of managerial tactics and expertise or displacement of existing management to ensure continued growth (Nwude:2003).

In summary the following factors bellow are the motivators of mergers and acquisitions:

Improving Financial Performance

The dominant rationale used to explain M&A activity is that acquiring firms seek improved financial performance. The following motives are considered to improve financial performance.

Economy of Scale

This refers to the fact that the combined company can often reduce its fixed costs by removing duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit margins.

Economy of Scope

This refers to the efficiencies primarily associated with demand-side changes, such as increasing or decreasing the scope of marketing and distribution of different types of products.

Increased revenue or market share

This assumes that the buyer will be absorbing a major competitor and thus increase its market power (by capturing increased market share) to set prices.


For example a bank buying a stock broker could then sell it banking products to the stock brokers’s customers while the broker can sign up the bank’s customers for brokerage accounts. Or a manufacturer can acquire and sell complementary products.


For example, managerial economies such as the increased opportunity of managerial specialization. Another example is purchasing economies due to increased order size and associated bulk-buying discounts.


A profitable company can buy a loss maker to use the target’s loss as their advantage by reducing their tax liability

Geographical or other diversification

This is designed to smooth the earnings results of a company, which over the long term smoothens the stock price of a company, giving conservative investors more confidence in investing in the company. However, this does not always deliver value to shareholders.

Resource transfer

Resources are unevenly distributed across firms (Barney, 1999) and the interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combing scarce resources as maintained by King: Slotegraaf, and Kesner (2008).

Vertical Integration

Vertical integration occurs when an upstream and downstream firm merge (or one acquires the other). There are several reasons for this to occur. One reason is to internalize an externality problem. A common example of such an externality is double marginalization. Double marginalization occurs when both the upstream and downstream firms have monopoly power and each firm reduces output from the competitive level to the monopoly level. Following a merger, the vertically integrated firm can collect one deadweight loss by setting the downstream firm output to the competitive level. This increases profits and consumer surplus. A merger that creates a vertically integrated firm can be profitable (Madigan and Zaima (1985).


Some companies use acquisitions as an alternative to the normal hiring process. This is especially common when the target is a small private company, thereby acquiring company simply hires (acquires) the staff of the target private company, thereby acquiring its talent (if that is its main assets and appeal). The target private company simply dissolves and little legal issues are involved.

Absorption of similar businesses under single management

Similar portfolio invested by two different mutual funds namely united money market fund and united growth and income fund, caused the management to absorb united money market fund into united growth and income fund.


While this may hedge a company against a downturn in an individual industry it fail to deliver value, since it is possible for individual shareholders to achieve the same hedge by diversification of their portfolios at a much lower cost than those associated with a merger.

Manager’s Hubris

Manager’s overconfidence about expected synergies from M&A which result in overpayment for the target company.


Managers have large companies to manage and hence more power.

Manager’s Compensation

In the past, certain executive management teams had their payout based on the total amount of profit of the company, instead of the profit per share, which would give the team a perverse incentive to buy companies to increase the total profit while decreasing the profit per share (which hurts the owners of the company, the shareholders)

2.1.5. Potential benefits and Cost of Mergers and Acquisitions

However, there are many potential benefits associated with the waves of mergers and acquisitions. Among the benefits as reported by Berger et al (1995) are increased investment diversifications, improved competition and deletion of the entrenched inefficient and self-serving bank managers. Apart from the above benefits there are other dividends of consolidations as discovered by the scholars such as Cole et al (1996). For them reduction of excess capacity, and the additional discipline brought to bear on bank managers at institutions that might be candidates for acquisition constitute potential benefits of mergers and acquisitions. The researchers discover that consolidation enables costs to be minimized if economies of scale or scope can be made. It is also observed that larger institutions may be more efficient if redundant facilities and personnel are eliminated after the merger. Moreover, according to Prompitak (2009) costs may go down if the same bank can offer several products at a lower cost than was possible for separate banks each providing individual products. Increasing the number of services and products can also diversify risk for consolidated banks. Besides the value incentive, bank managers may also pursue mergers for their own advantage, since to do so reduce their largely undiversified employment risk, provides extra benefits and increases the size or the power of their organization.

Moreover, both shareholders and managers may use consolidations to increase a bank’s access to government safety nets (Prompitak, 2009). Take for instance; consolidations open a bank an access to deposit insurance and a discount window. In addition, according to the scholar, a government can also use bank mergers and acquisitions in order to pursue its own objectives, using the merger mechanism in particular as an option for economic policy reforms in its national banks. In this context the most common purpose of bank mergers is to assist troubled banks, notably those with insufficient capacity, by letting them be safer and sounder once their operation becomes more efficient from economies of scale and scope of mergers and acquisitions.

Although there are many dividends of consolidations, yet mergers and acquisitions have potential drastic effect that can throw the economy into chaos. According to Cole and Wolken (1995), and Cole et al. (1996), major potential costs of consolidation constitute reduced competition, especially in smaller markets, and the disruption of established commercial banking relationships between borrowers and the banks that are the targets of takeovers. This disruption according to the scholars is likely to be especially severe and heavy for small businesses because such firms rely primarily upon banks for their credit needs. Another potential problem associated with consolidation as they maintain is the shortfall in small business lending that might arise if, as some scholars of banking consolidation observe and claim, large banks acquire smaller banks and use the newly acquired deposits as a source of funding for middle-market and larger loans originated by the main office of the merged entity. These factors have been associated with the cost of bank consolidation. However, despite these costs, bank managers have been making acquisition proposal advances to their potential targets with reckless abandon while the policy makers continue to demand new evidence of the impact. According to Cole et al. (1998) not addressed by the claims of potential lending disruptions is the possibility that small business borrowers turned away by large acquirers can transfer their business to small banks or other lenders operating in the same market. That means there is need for further investigations.

2.1.6 The Monti-Klein Theory (Model) of the Banking Firm

According to Prompitak (2009) a variety of industrial organizational approaches can be used in examining how banks behave in respect of loan creation and pricing. According to the scholar, these models or theories can be divided into two groups according to their assumptions made in respect of banking market structure. The assumptions of these models are either that the market structure is a perfect competitive or is imperfectly competitive structure. Out of these models, the most popular model in respect of a perfectly competitive banking market is the Marginal Cost Pricing (MCP) theory.

According to De Bondt (2002) quoted in Prompitak, in this model, the optimal conditions are obtained when prices for instance loans equal marginal costs and the derivative of prices with respect to marginal costs equals one. However, the European banking system and generally banking market elsewhere as he maintained can be characterized as an imperfectly competitive market, in which case each national market is led by only three to five large banks. This fact of oligopolistic composition of banking market structures can be verified in the following works; Heffernan (1996) and Berg and Kim (1998) as cited in Prompitak (2009). Taking Nigeria, as an example, bank structures since 2005 has been oligopolistic with few banks dominating the market. Likewise, the studies of De Bandt and Davis (2000) and Corvoisier and Gropp (2001) as shown in Prompitak’s show that in the principal European countries competition in the 1990s was monopolistic. Because of the present market composition where perfectly competitive bank market is no longer obtainable, the marginal cost-pricing model is not appropriate for analyzing present behaviour of bank. This means that the costpricing theory of banking behaviour would not constitute our theoretical frame of work.

The second approach, which would likely form our theoretical frame of reference, is the model that assumes an imperfectly competitive banking market. This theory considering the characteristic nature of our present banking market is indeed considered suitable for the purpose of this work. According to prompitak up cit, Edgeworth (1888), first originated this imperfectly competitive approach. He identified the unique features of banks of holding not up to 100% of deposits as reserve.

In this way, banks make profits from the positive margin obtained from the difference between risk asset (loan) and deposit interest rates. In addition, because the optimal level of reserves grows less than proportionately to deposits, larger banks will be more profitable than smaller banks. This imperfectly competitive market structure means according to prompitak that banks can exert monopoly power. The theory of bank monopoly was formalised by at least two studies. Klein (1971) and Monti (1972) developed the most popular model. Today, this theory is popularly known as the Monti-Klein model of the banking firm. The unique thing about this theory is that it views the banking firm in a static setting. What this view implies is that demands for deposits and supply of loans simultaneously clear both markets. This means at a point in time, banks can be without reserve from deposit. Therefore, out of the depositors’ fund, banks can maximize profit by lending everything out to their customers-something unlikely to be realistic in the present days banking operations. Therefore, the problem with this formulation is that it fails to determine how to separate decisions about loans and about deposits in the bank optimization problem of the basic Monti-Klein model. This has generated controversy ever since. However, according to scholars, the shortcoming can be overcome by including additional assumptions. The very thing the theorists would least accept as they would make us believe that such additional variables are exogenous factors. However, scholars believe that without such additional supposition being introduced, the theory would not represent the reality it purports to. Ever since, the model has been modified. One such approach is to introduce risks into the function. Studies that have incorporated risk in the model include; Prisman, Slovin and Sushka (1986), Dermine (1986), Fuentes and Santre (1998) and Corvoisier and Gropp (2001) as quoted in Prompitak. The studies show that loan and deposit decisions are interdependent if the bank faces the positive probability of risk. In addition, according to Prompitak by extending the Monti-Klein model into the context of two-stage game theory, Dvorak (2005) finds that the second stage optimal lending prices of both incumbent and entrant will depend on the first stage optimal prices, which are the function of the associated bank’s deposit supply.

The alternative model is the location model of Salop (1979). This model is based on the concept of monopolistic competition, in which product differentiation is generated by transportation costs. The bank optimal pricing behaviour depends on the security price, the transportation cost for loans and the optimal number of banks in the market (Freixas and Rochet, 1998). However, due to the lack of data, which allows the econometrician to identify the effect on loan prices of the borrower-lender distance, or, in other words, the effect of loan transportation cost, very few empirical studies have investigated price lending behaviour within this framework (Cerqueiro, 2007). In addition, as stated by Dvorak (2005), the Salop model has less possible range of applicability compared with the Monti-Klein model which can be applied to the study of a great number of diverse problems (Dvorak, 2005). In the context of bank pricing behaviour, the Monti-Klein model is applied in a number of studies; for example, Corvoisier and Gropp (2001) examine bank pricing behaviour in the EU banking market by assuming that banks behave like Cournot competitors, as suggested by the Monti-Klein oligopolistic version. In order to examine interest rate setting by universal banks in the euro area, De Bondt, Mojon and Valla (2002) apply an equilibrium relationship between the retail and market rates obtained in a simple static Monti-Klein bank where banks hold money market instruments and longer term assets. Fernandez de Guevara, Maudos and Perez (2005) analyse the evolution of price setting in the banking sectors of the European Union based on estimating Lerner indices, obtained from the Monti-Klein model. Nys (2003) analyses the determinants of bank interest margins for 12 selected European countries by using a firm-theoretical approach which uses the framework of the Monti-Klein model. Uchida and Tsutsui (2004) use the Cournot oligopoly based on the Monti-Klein model to derive a setting function for the loan interest rate for the Japanese banking sector. Betancourt, Vargas and Rodriguez (2008) apply the Monti-Klein model to explain the changes in the bank’s interest rate policy in the Colombian banking market. Therefore, if the appropriate assumption of an imperfectly competitive banking market is made, its power in modeling the bank pricing behaviour, as well as the shortcomings of alternative approaches, makes the Monti-Klein model of the banking firm a suitable model for examining the impacts of bank mergers and acquisitions on loan pricing behaviour or credit creation. The theory therefore forms our theoretical framework.

In the Monti-Klein theory or model according to Prompitak, a monopolistic bank is assumed a financial intermediary, which collects savings from households and finances investment needs to firms by lending to them. The bank holds two types of asset – securities and loans – and one liability, namely deposits. In the securities market, the volume and price of securities are given by government. However, in the deposit and loan markets banks are assumed to set the price that would help them maximize profit. The bank determines whatever interest rate for deposits and loans that would maximize its profit. The decision variables are the amount of loans and the amount of deposits with the amount of equity and asset as given. In addition, in granting loans and collecting deposits, the bank has to pay intermediary costs, which are assumed to be linear functions of the amounts of loans and of deposits. Besides the above assumptions, the bank is assumed to issue two types of deposit: demand deposits and time deposits. The supplies of both deposits are supposed to have increasing functions of the returns, which the bank offers on these accounts. For demand deposits, the bank has to pay some implicit return in the form of preferential treatment to customers. Although demand deposits have implicit returns, they are assumed to have a significant role in the bank’s profit function. This is because the bank has to pay some costs arising from the payment mechanism. With regard to time deposits, the bank is assumed to invest these funds in earning assets. These assets are government securities and loans. Government securities have perfect elasticity of supply because the bank’s actions have no impact on the expected return or on the risk characteristics of the securities. Loans are imperfectly elastic in supply to the individual bank because the return on loans depends on the amount of loans issued by the bank. From the above assumptions, the profit function of the bank as shown in Prompitak in the traditional Monti-Klein model can be expressed as the following equation:

The inverse demand function for loans is given by; rL ( L) , with derivative rL’(L)<0.

The inverse supply function of deposits is rD ( D) , with derivative rD’( D)>0.

The return on security demonstrates the market risk, which is the risk of loss caused by changes in the level or volatility of market prices.

S, L, and D are the amounts of security, loan and deposit, respectively.

C is the total intermediate costs of managing an amount L of loans and an amount D of deposits. This is the convex managing-cost function.

To maximize the profit, the proportion of total funds allocated to the loan is chosen at the point where the marginal return on loan is equal to the average expected return on investment or equity or government security. The optimal pricing rule is taken in the following form;

The equation above suggests that the loan interest rate and propensity to create risk assets tends to increase with market rate and marginal cost, while it decreases with loan demand elasticity. In addition, when costs are separable by activity, the optimal loan interest rate is independent of the deposit market. In other words, loan-pricing decision-making according Prompitak (2009) is not influenced by the bank’s deposit characteristics. Loan price tends to increase with the market interest rate and marginal cost of managing loans, while it decreases with loan demand elasticity.

2.1.7 The Monti-Klein Bank Theoretical Model and Market Competition or Share

The original Monti-Klein model is primarily based on the case of a unique, monopolistic bank, which might apply in countries with only one bank. However, a situation in which there are several banks is more interesting and closer to experience as in Nigeria. As suggested by Molyneux, Lloyd-Williams and Thornton (1994) and De Bandt and Davis (1999), who studied the competition in the European banking market, the banking industry can be characterised by monopolistic competition. This suggests that oligopoly models would be more relevant for the study than a monopolistic model.

In the oligopolistic version, according to Freixas and Rochet (1998), the Monti-Klein model can be reinterpreted as a model of imperfect (Cournot) competition between a finite number N of banks, n=1,..,N. By having the same assumptions as the monopolistic model has, with the additional assumption that every bank has the same linear cost function (which is the function of aggregate loan volume, L, and aggregate amount of deposit, D), the optimal condition for every bank is:

loan interest rate or loans. That is, as the number of banks in the market increases, or when the market is more competitive, a bank tends to reduce its loan price and propensity to lend. In contrast, as the number of banks decreases, or when the market is less competitive, the price of loans tends to rise with consequential desire to sell more of the loan product. Moreover, the Monti-Klein oligopolisitic version model also indicates that the sensitivity of loan interest rates to changes in market interest rate has a negative relationship with the number of banks in the market. That is, the higher the number of banks in the market, the less sensitive the loan interest rate to changes in the market rate. In contrast, loan prices tend to be more sensitive to market interest rates when the number of banks goes down. Fuentes and Sastre (1998) also examine the effect of the reactions of a bank’s rivals. They assume that banks in the market have different products and prices to offer to lenders and depositors. That means there are products and price differentiations in loan and deposit markets. Therefore, the strategies of competitor banks in reaction to a particular bank’s actions may also have an impact on the behaviour of the bank’s products and prices. The effects of product differentiation and price differentiation are measured by the substitution elasticity of products between banks and their cross-price elasticity respectively. In addition to the factors suggested by the Monti-Klein model, Fuentes and Sastre (1998) from Prompitak indicate that the sensitivity of bank interest rate also depends on the strategic interactions among participants in the same market and the degree to which their products can be substituted for one another. In other words, the more sensitive competitors in products and prices are, the lower the interest rates for the bank to collect from its lenders. Literature indicated that Dvorak (2005) extends the oligopoly version of the Monti-Klein model by analyzing bank lending behaviour within the context of game theory. He adopts the standard incumbent/entrant game under the Bain-Sylos-Labini-Modigliani framework (BSM framework). In addition to the Monti-Klein assumptions, the model was set up as a two-stage game in which there are two banks in the market: the incumbent and the entrant. Moreover, any banks, which plan to enter the industry have to pay certain fixed setup costs according to scholars. In the first stage, the incumbent can pre-commit itself to a loan price, which it will set in the second stage and this action can be observed by the entrant who uses this information in order to decide whether or not to enter into the market. In the second stage, the incumbent is assumed to set a loan price, which maximizes its profit, as it has committed itself to do in the first stage. The entrant reacts optimally to the choice of the incumbent. Unlike the traditional Monti-Klein model, Dvorak (2005) claims that loan pricing decisions depend on the deposit market. In other words, the decisions about loans and deposits are interdependent, in contrast to the separability of these two decisions, which is suggested by the Monti-Klein model.

According to Prompitak, there are two prominent theoretical approaches, which can be used to explain the role of market concentration on loan pricing behaviour. One is the Structure-Conduct- Performance (SCP) hypothesis. This approach was derived from the neoclassical analysis of markets in order to identify the relationship between industry structure and performance (Shaik et al., 2009). The SCP paradigm states that a change in the market structure affects the way in which banks behave and perform. The degree of market concentration is inversely related to the degree of competition, because market concentration encourages firms to collude. This hypothesis will be supported if there is a positive relationship between market concentration and performance, regardless of the efficiency of the firm. Therefore, firms in more concentrated industries will earn higher profits than firms operating in less concentrated industries irrespective of their efficiency. That is, as concentration increases, banks with market power can exert this power to earn more profits by setting relatively high loan prices but low deposit rates. Thus, loan interest rates or loans and market concentration are expected to have a positive relationship. The other approach rivaling the SCP is the Efficient-Structure-Performance (ESP) hypothesis. This paradigm suggests that the performance of a firm is positively related to its efficiency. When the number of banks is small as a result of consolidation, the more efficient banks will dominate the market. Market concentration emerges from competition where firms with a low cost structure increase profits by reducing prices and expanding their market share. That is, some banks earn super normal profits because they are more efficient than others are and not because of collusive activities, as the traditional SCP paradigm would suggest. In the ESP approach, consistent with the SCP paradigm, concentration and profits have a positive relationship. However, the ESP predicts an inverse relationship between prices or loans and concentration. That is, as concentration increases, by taking the ESP approach, more efficient banks earn higher profits by setting lower lending prices, which reduces their propensity to lend, and offering high deposit interest rates. Thus, loans or loan interest rates and market concentration are expected to have a negative relationship.

2.1.8 The Monti-Klein Theoretical Model and Risks

Risk is an essential factor in bank lending. However, one of the weaknesses of the Monti-Klein model is that it did not control for both default risk and liquidity risk. These two factors were ignored. The model assumes that these two risks are exogenous because both deposit and loan repayments are random without notice. In the model, the bank is assumed to ignore the liquidity risk, which arises from a cash deficiency. This is because the bank is required to hold some cash, which has implicit returns and is able to adjust its asset portfolio by changing the level of its government securities in order to secure its liquidity position. These assumptions are inconsistent with the characteristics of the banking market, which may make the results of the traditional Monti-Klein model inappropriate for explaining bank lending behaviours. Therefore, to make the model more rational, these two risks should be considered. Prisman, Slovin and Sushka (1986) introduce liquidity risk into the traditional Monti- Klein model. In this mode, deposits are assumed to be the only source of funds and to be sufficient to finance loans. The bank is required to keep some reserves, which earn a return at the same rate as the market interest rate. Moreover, the bank can suffer from liquidity risk, which occurs when the bank has to make unexpected cash payments or when there is an unexpected massive withdrawal of deposits. This risk is defined in the model by the random amount in the volume of deposit withdrawals. If the deposit withdrawals are larger than the bank reserve, a liquidity shortage results and the bank has to pay some penalty cost for this shortage. That is, the bank has to pay two kinds of cost: the deposit interest rate and the penalty cost of a liquidity shortage. However, this model ignores the marginal costs of granting loans and collecting deposits.

The optimal conditions of the model indicate that the maximized profit behaviours are similar to the conclusion of the Monti-Klein monopolistic bank model. In addition, for the role of liquidity risk, loan interest rates tend to increase with the liquidity shortage penalty rate, the amount of deposit withdrawal and the uncertainty over the amount of withdrawn deposits. However, in contrast to the Monti-Klein model, this model shows that the bank’s decisions on loans depend on deposits. That is, loan interest rate decision making depends on the deposit characteristics. This is because the optimal loan interest rate is the function of the expected cost of the liquidity shortage. This cost depends on the bank reserve, which in turn is the difference between the amounts of deposits and of loans. Thus, loans are also the functions of the deposit volumes. Besides the liquidity risk, the role of the default risk on bank behaviours is one of the important aspects in the analysis of bank lending behaviour. Default risk is the risk that an asset or a loan will become irrecoverable in the case of complete default, or the risk of an unexpected delay in the debt repayment. Default risk is a common risk for a commercial bank, since every commercial bank, by definition, has a loan portfolio. In order to investigate this effect, Fuentes and Sastre (1998) and Corvoisier and Gropp (2001) introduce default risk into the Monti-Klein oligopolistic version. The models assume that there is a possibility that borrowers may be unable to pay their debts and this risk is measured by the probability of non-performing loans. In addition, an oligopolistic bank is assumed to hold some reserves on which the return equals the market interest rate. Consistent with the Monti-Klein model, the loan interest rate tends to increase with the market interest rate, marginal cost of managing loans and the aggregate demand for loans. However, it decreases with the degree of competition in the banking market and the elasticity of demand for loans, both that of individual bank loan demands and that of the whole banking market. However, unlike the traditional model, Corvoisier and Gropp (2001) find that the optimal loan rate also depends on the deposit interest rate, which is assumed to be exogenously given and on the reserve requirement, which is the difference between the volume of deposits and of loans. This violates the conclusion about the independence in the Monti-Klein model of decision-making about loans from that about deposits. Thus, it can be concluded that when risks are considered, bank decision-making on setting a loan price will also depend on the characteristics of its deposits. In addition, for the role of default risk, both models indicate that loan prices and the expected bank default risk have a positive relationship. That is, banks tend to raise their loan rate as their expected rate of non performing loans increases. From the above theoretical models, we can form some conclusions about the factors, which affect bank loan pricing behaviour. These factors include the market interest rate, the characteristics of demands for loans, which include the elasticity of the loan demand and the aggregate demand for loans, the characteristics of deposits, including deposit rates and reserve requirements and the intensity of competition, marginal costs and risks. In addition, all these writers agree on the relationships between these factors and loan interest rates. They agree that the lending price has a positive relationship with the market rate, total demand for loans, the bank’s deposit position, cost and risks and that it has a negative relationship with the elasticity of demand for loans and the number of competitors, reflecting the intensity of market competition. Moreover, when risks are considered, the decision-making on loan prices depends on a bank’s deposit position, for example, its deposit interest rate and the amount of deposits. This conclusion is inconsistent with the result from the original Monti-Klein model, in which loan and deposit positions are independent of each other. All the loan interest rate determinants based on the Monti-Klein model have been empirically investigated. For the effect of the market interest rate, Slovin and Sushka (1984), Hannan (1991a), Kahn, Pennacchi and Sopranzetti (2001) and Gambacorta (2004) (please see Prompitac 2009) discover that the money market rate has a positive relationship with the loan interest rate. However, in Kahn, Pennacchi and Sopranzetti’s study, the impact of the market rate is significant for the automobile loan rate only, but not for the rate of personal loans. In addition, Slovin and Sushka (1984), Kahn, Pennacchi and Sopranzetti (2001) and Gambacorta (2004) as quoted in Prompitak suggest that the demand for loans, proxied by the investment rate, personal income, inflation rate and GDP, has a positive effect on the loan price and credit creation. But in Corvoisier and Gropp (2001)’s paper the elasticity of demand for loans and loan interest rate have a negative relationship. Moreover, the deposit reserve requirement has a positive impact on loan rate, according to the results of Slovin and Sushka (1984). In addition, Hannan (1991a), Kahn, Pennacchi and opranzetti (2001) and Corvoisier and Gropp (2001) in Prompitack (2009) suggest that the loan rate has a negative relationship with the competition in the banking market. In other words, it has a positive relationship with market concentration measured by the Herfindahl Index, which is calculated from the market share of bank deposits. Moreover, the results of Gambacorta (2004) as in Prompitak show that intermediation costs have a positive effect on loan interest rates. Finally, for the impacts of risks on loan price, Slovin and Sushka (1984) find that the cyclical change and loan rate have a positive relationship. In addition, default risk and liquidity risk also have a positive effect on the loan interest rate, as suggested by Corvoisier and Gropp (2001), Gambacorta (2004) and Hao (2004) in Prompitak (2009).

The theoretical framework of bank consolidation and banking behaviour has a foundation in Mont-Klein Model. However, this model was not formulated with banking consolidation in mind. Banking consolidation is a dynamic event. Moreover, the Monti-Klein model of banking firm is based on general bank lending behaviour. While we appreciate the progress so far especially with the level of modification so far just to make the model relevant to the society in which we live, the theory is yet not complete until begin to consider specifics even within the merger and acquisition environment. We borrowed ideas and words extensively from the work of Prompitak(2009), although we duly acknowledged the erudite scholars. But I must say that the models, both the original and modified, have left behind one essential factor and that is how banks behave in respect of lending to small business borrowers. The challenge now is can the model be modified to accommodate how banks behave with regard to lending to small business borrowers who solely depends on banks for their credit especially in a developing economy like Nigerian in the events of banking consolidation. As long as this question remains, the theory remains incomplete and that constitutes a serious gap in literature.

2.2 Empirical Review

Within the past few decades, the global economy has witnessed significant banking consolidations. Since then the need to examine how banking consolidation impacts on the banks’ propensity to lend to small businesses has dawned on scholars especially among the US and European ones. For countries such as Nigerian, mergers and acquisitions are just recent happenings especially in the banking sectors. The Nigerian banking sector witnessed a significant wave of the activities in 2005 and little of it in 2012. Within these periods, 78 banks were reduced to 21 through the banking consolidations. In terms of scholars who pioneered the studies on the effects of banking consolidation on bank lending to small businesses, first among them was Berger et (1988). They studied how banking consolidation has impacted on US banks in respect of creation of small risk assets. Although, the effects have remained contentious ever since, they identified two class of effect associated with banking consolidation and small business lending. According to them, the effects include the Static Effect, which results from simply combining the balance sheets of the small institutions into a larger pro-forma institution with combined characteristics. Another effect is the Dynamic Effect, which is categorized into two. They include the restructuring effect, which is change in small business lending that follows from decisions to restructure the institution in forms of its sizes and other characteristics after the Merger and acquisition and the direct effect, which is change in lending focus beyond that associated with the changes in sizes and other characteristics from the static and restructuring effects. The final effect has to do with dynamic responses of other lenders to mergers and acquisitions in the same market. This is called the external effect. The restructuring effect is a dynamic effect of mergers and acquisitions because of change in focus in which the organization changes its sizes, financial condition, or competitive position from their pro-forma values after consummating mergers and acquisitions. The dynamic restructuring and direct effects increase small business lending propensities for consulting banks offsetting some of the static effects. That is, managers of consolidating banks tend to restructure and refocus their policies and procedures in ways that increase small business lending relative to size, peers in some markets. The external effects tend to increase small business lending by other banks in the local market. These other banks according to Berger et al. (1988), may pick up profitable loans that are dropped by merging institutions, or otherwise have a dynamic reaction that increases their small business supply. Berger et al. (1988) conclude by maintaining that the effect of bank mergers and acquisitions are complex with several offsetting static and dynamic effects. For them, the effects of mergers and acquisition on small business lending depend on the type of mergers and acquisitions, size of institutions involved, intrastate versus interstate nature, and many other factors. The external effect which is the reactions of the other banks in the local markets seems to be quite strong and positive, offsetting much if not all of the reductions in supply of small business lending by the consolidating institutions. However, this effects as they say is most difficult to pin down precisely. Generally, we shall do the empirical review in terms of the following heading.

2.2.1 Banking Consolidation and Credit Availability

Most of the studies exploring the potential effect of bank mergers and acquisitions on credit availability focus on their impact on specific group of borrowers, in particular, the small business borrowers (Prompitak, 2009). In the context of US banking market, the results are mixed. Featherstone (1996) suggests, from examining the effects of bank mergers on agricultural loans from 1987 to 1993, in general, that the agricultural loans offered by merged banks did not decrease during the three years after any consolidation. However, small banks tend to increase their agricultural credits after mergers. This positive change in credit provided by small banks is consistent with the findings of other researchers such as Strahan and Weston (1996). The scholars took interest in investigating the relationship between small business lending and bank mergers. This they did by comparing the variations in merged banks’ pre- and post- merger small lending with those of nonacquisition players. Their results show that mergers and acquisitions between small banks tend to promote the credit available to small business borrowers. However, it is discovered from Prompitak (2009) that other types of merger have little impact. For Avery and Samolyk (2004) who use bank mergers and acquisitions data in the US banking market between 1993 and 1997 to analyze the impact of bank mergers, bank mergers between small banks have a tendency to offer more small business lending in local banking markets. This finding is in contrast to the finding of Gilbert and Belongia (1988) that investigated the impact of bank mergers on agricultural loans and reported negative relationship. The inverse relationship between consolidation and credit supply is consistent with the results of Keeton (1996). Keeton investigated the impact of bank mergers and acquisitions on farm and business lending in the Federal Reserve System’s Tenth District states for the period 1986 to 1995 and discovered that out- of- state acquisitions of banks owned by urban organizations tend to reduce the loans, which they offer to small businesses and farmers. However, other banks competing in the same local market have a tendency to increase their small business lending according to him. Peek and Rosengren (1997) use data from 1993 to 1996 to examine the effects of bank consolidations on the willingness of a banking organization to lend to small customers. Their results show that consolidated banks tend to lower their small business loan portfolio share following a merger.

Joe and Eric (1997) discover that large institutions invest a relatively smaller share of assets in small business loan. The scholars maintained that mergers and acquisitions are not just about the bank size. Some other issues matter. Large banks according to them look away from the small business loan application. The reason for this behaviour was that small institutions are generally limited to small loans and cannot make large business because of legal lending limits and diversification problem. Large institutions may be disinclined to extend relationship driven small business loans because of organization diseconomies associated with producing such loan along with the transactions driven large loans and capital market services in which large banks specialize. Moreover, the policies and procedures associated with dealing with small informational opaque borrowers may be very different according to them from those associated with providing credit to large informational transparent borrowers and it may be costly to employ both types of policies and procedures in the same organization. From their findings, large banks that usually emerge out of mergers and acquisitions are not always disposed to maintain their former loan service relationship with the small business. Level has changed and their reallocated assets are now sufficient for higher dealings. This of course may not be in the interest of the small business unless some other non-banking loaning units find such a departure as a new market for lending to small businesses.

Some extant literatures maintain that the number of small banks has declined and the effect of this on small business lending is not of small concern. Literatures maintain that there is strong inverse link between banking institutions size and the proportion of bank assets lent to small business. On the surface according to literatures, these facts that banking consolidation has significantly reduced the number of small banks and that large institutions make business loans would seem to suggest that the total supply of the bank credit to small business may fall substantially. However, the report from the US Office of Economic Research rejects the simplistic analysis that small business lending propensities are static and are determined solely by the size of the institution. Their reason is that mergers and acquisitions are fundamentally dynamic events that may involve significant changes in the business focus of the consolidating institutions. According to the report, bank get involved in mergers and acquisitions because they want to do something different and the something different may be more aggressive or less aggressive in lending to the small business. Moreover, they reason that local banks or non-bank lenders such as finance companies, in the same local markets may pick up any profitable loans that are no longer supplied by the consolidated banks. These other banks could also react to mergers and acquisitions with their own dynamic change in focus that could either increase or decrease their supplies of small business loans.

2.2.2 Market Structure and Bank Lending Behaviour

One of the determinants of the bank loan interest rate is the structure of the banking market (Prompitak, 2009). The impact of the market structure on the bank loan interest rate is generally summarized by two opposing hypotheses. One is the Structure-Conduct-Performance (SCP) hypothesis, which suggests that banks will collude and use their market power to extract rents. The other is the Efficient-Structure-Performance (ESP) hypothesis, which suggests that concentration would increase the overall efficiency of the banking sector. In this framework, concentration is given to the faster growth of more efficient banks than of less efficient banks, or the take-over of the latter by the former. In this case, more banks that are efficient are expected to price their services more competitively or, in other words, to offer prices that are more favorable to their customers. Studies examining the impacts of market structure on bank loan price yield mixed results. Aspinwall (1970) investigated the relationship between market structure and bank mortgage interest rates in the US banking market in 1965. Estimating a cross-section regression analysis, the results indicated a statistically significant association between lending rates and two market structure measures: the number of lending instructions in the market and the concentration ratio. That is, the lending rate tends to be lower when the number of institutions increases, while it tends to be higher as the market concentration increases. Besides market structure, he also showed that other factors influence lending rates. These factors include the demand for credit, a nation’s per capita income, credit risk and bank size. Using the data of 300 US banks during the period 1984 to 1986 to test the SCP hypothesis based on the Monti-Klein model of the banking firm, the Hannan (1991) confirmed the relationship between commercial loan rates and market concentration, as predicted by the SCP paradigm. The result specifically showed that loan interest rates rise higher in markets that are more concentrated. In addition, he also concluded that, if loan rates are more rigid in concentrated markets and if rates in equilibrium tend to be higher in such markets, then it followed that periods involving sharp rises in interest rates would exhibit a more distant relationship between loan rates and concentration. This is because banks in more concentrated markets adjust their rates upward more slowly than banks in less concentrated markets. In contrast, Petersen and Rajan (1995) investigate the effects of competition between banks on the loan rate and availability of credit. They found that banks with uncertain future cash flows in more concentrated banking markets charge substantially lower loan rates and provide more financing. However, they do not provide any explanation to support the ESP hypothesis. Instead, they surmise that this reduction in loan price results from the fact that banks seemingly smooth loan rates in concentrated markets and as a result provide more credit availability. These results support the SCP hypothesis, which suggests that higher market concentration will result in collusion. Extant literatures also suggested that in 1993 high bank concentration in the US had, on average, a positive relationship with loan rates. In addition, focusing on the risk effect, Boyd and De Nicolo (2005) found that greater competition reduces loan rates. They show that, in equilibrium, the risk in bank loan portfolios increases with the level of concentration. This risk-shifting mechanism is based on the idea that banks, as concentration increases, charge higher loan rates to their customers. In turn, the higher loan rates worsen the agency problems in the credit market, since they induce firms to take more risk. Changes in the market interest rate could have a significant impact on bank lending rates.

2.2.3 Loan Pricing Behaviour of Merging Banks

Studies examining the price effect of bank mergers and acquisitions can be classified into three main groups: the effects of bank mergers on deposits rates, on lending prices and on bank loan spreads. In the case of deposit interest rates, most of the studies which focus on Us bank mergers find that bank mergers and acquisitions have a negative influence on the deposit interest rates of the merged banks. This can be seen from the study of Prager and Hannan(1998), who analyzed the price effects of bank mergers which have substantially increased the concentration of a local market. They examine the dynamic changes in deposit interest rates and find that mergers occurring in concentrated banking market leads to adverse changes in the short-term deposit interest rate. That is, merged banks do not pass on efficiency gains to their customers, but instead earn increased monopoly rent and therefore offer lower deposit interest rates. In addition, the deposit rates of banks, which did not operate in the markets where such mergers took place, change in the same direction. However, the deposit rates of the merged banks tend to be decreased by a greater percentage. The evidence of the reduction in deposit rates is consistent with the findings of Park and Pennacchi (2007), who formulate a theoretical model to investigate the setting of interest rates by large multimarket banks, which have been created by cross-border mergers. Their model suggests that large banks engaging in mergers and acquisitions tend to reduce their retail deposit rates. In addition, their empirical analysis of data on large US multimarket banks from 1994-2005 also supports the predictions of this model. One of the explanations for this finding is that of finding advantages. That is, as banks grow larger, they tend to have greater access to alternative and cheaper sources of funding, implying optimally lower retail deposit interest rates. However, Rosen (2003) argues that this explanation is not specific to banks in the US over the period 1988-2000, his results show that merged banks tend to offer higher deposit interest rates on both cheque accounts and money market deposit accounts. Moreover, a market with more and larger multimarket banks generally has higher deposit interest rates. Hannan and Prager (2004) provide empirical evidence regarding the determinants of deposit interest rates offered by those US banks, which engaged in mergers and acquisitions between 2000 and 2002. Their results also indicate that large banks offer lower deposit interest rates than their smaller counterparts. In addition, when the size of the organization is controlled, banks operating in many local banking markets tend to set lower deposit interest rates than those operating in fewer markets.

Evidence of the effects of bank mergers on deposit interest rates in European banking markets is rather scarce. Focarelli and Panetta (2003) use Italian data at bank level between 1990 and 1998 to analyze empirically both the short-term and long-term pricing effects of bank mergers and acquisitions. They find that merged banks obtain increased monopoly rent and exert market power by lowering their deposit rates. The largest rate reductions are made in the first years after the mergers. However, in the end, post-merger deposit interest rates can also be positive. This is explained by the fact that cost efficiency gains through mergers can often take years to achieve. Ashton and Pham(2007) study the influence of bank mergers by focusing on the level of interest payable on retail deposits. Using data from the UK retail bank mergers between 1988 and 2004; their results indicate that merged banks tend to be more cost efficient, which leads to improved deposit interest rates for their customers.

Studies, which examine the effects of bank mergers on loan interest rates, tend to yield mixed results. As noted by Ashton and Pham (2007), different empirical findings may exist for many reasons, including differences in the market structure of the banking market under consolidation. In the context of US bank mergers, Akhavein, Berger and Humphrey (1997) analyze the price effects associated with bank megamergers. Comparing the loan pricing behaviour of the merged banks and non- merging banks, they find that the changes on lending price, which occurs following consolidations, are notably small and hard to predict. That is, although the loan interest rates of merged banks tend to be lower than the loan interest rates of non-merging banks; this difference is small and not significantly different from zero. However, they suggest that the small price difference could reflect the efficiency gains and better diversification of loan portfolios across geographical markets, which come from bank merging.

2.2.4 Risk Taking Attitude of Merging Banks

While the impact of consolidation on prices and credit availability has been widely investigated, evidence on the effects of consolidation on banks’ attitude to risk has been more limited and understanding this will shed useful light on the merged banks’ lending behavior. As suggested by De Nicolo et al. (2003), bank mergers can provide differential incentives for bank’s risk-taking. On the one hand, consolidations may result in diversification gains, which may reduce bank risk. On the other, consolidations may allow banks to increase risk exposure. The studies presenting evidence on consolidations and bank’s attitude to risk mainly focus on mergers between US banks. Some of them claim that bank mergers and acquisitions can reduce bank risk. Craig and Santos (1997) examine the dynamics of risk effects caused by bank consolidations, using the sample of bank acquisition in the US. They find that the post-acquisition risk of newly formed banking organizations is substantially lower than the pre-acquisition risk of acquiring bank holding companies (BHCs). This result indicates that bank mergers and acquisitions could produce less risky organizations and therefore diversification gains can be one of the motives for merging.

2.2.5 Small Business Lending and Changing Structures of Banking Industry.

Philip et al. (2011), have examined small business lending and changing structures of banks. They approached the issue by looking at after effects of the banking company as a unit rather than looking at individual banking units of the consolidating organization. Through their studies, intra-company transfer of funding and lending activities were captured. They investigated two potential opposing influences on small business lending associated with changes in the size distribution of the banking sector- namely the diseconomies of scale associated with small business lending that may increase lending costs as the size of banking company increases and the size-related diversification that may enhance small business lending. By emphasizing banking company size rather than bank unit size, the study concluded that diversification enhances bank lending, by both large and small banks, as size increases rather than reducing small business lending because of increasing costs caused by organizational diseconomies. Specifically, consolidation among small banking companies according to them serves to increase bank lending to small businesses, while other types of mergers and acquisitions have no effect. The study also found that small business lending might increase with bank size and complexity.

Kolari and Asghar (2011) reviewed historical data on the relationship between small business lending and various banking characteristics. The research hypothesis in these studies that small business lending is related to different variables that capture bank structure was tested. Secondly, the studies examined recent mergers and acquisitions for their potential effects on changes on in small business lending. From their work, the main research hypothesis is that changes in small business lending activity before and after acquisitions are related to different variables that reflect bank structure. In this regard, they proposed two competing hypotheses, which constitute (a) the size hypothesis. The size hypothesis, which contends that target bank benefit from joining a larger aggregate organization, which results in increased credit supplies to smaller bank customer; (b) the siphoning hypothesis which argues that the larger aggregate organization will spirit away funds from the smaller target bank or reallocate credit consistent with the objectives of the parent bank. Consistent with other published research on this subject, the authors found that the empirical results are mixed. However, the weight of the evidence points to more negative than positive effects of banking industry consolidation on small business lending. Briefly stated, some of the findings of their study are as follows. Regarding the relationship between small business lending and different variables that capture bank structure, the findings are as stated below. (A) With respect to bank holding companies, holding a number of factors constant in a multivariate context, the authors found that member banks tended to make more small business loans as a proportion of total assets compared with independent banks. Likewise, holding asset size constant, member of large bank holding companies tended to have lower small business loans ratios than members of small bank holding companies. Banks in states previously allowing national entry of merged bank holding companies or allowing statewide merged bank holding companies tended to have lower small business loan ratios; and more liberal bank encourages a greater degree of bank consolidation than in order states. For branch banks, the results were similar to those for bank holding companies in many ways. They also found that branch banks tended to make more small business loans than banks with no branches. According to them, large branch banks organization tented to have lower small business loan ratios than small branch bank organizations while states allowing statewide branching tended to have lower small business loan ratios compared to states with limitations on statewide branching. Regarding the after-merger activities of a sample of bank targets and buyers involved in acquisitions in the second half of 1993 and 1994, the finding is that the total asset size of the target banks had a significant positive relationship with changes in small business loan ratio before and after bank acquisition. This means that the evidence from their work tended to support the size hypothesis in which more loans are associated with greater size, rather than the siphoning hypothesis, in which there are fewer loans because of the siphoning away of only the creditworthy. Moreover, they maintained that the evidence on whether or not banks that were independents or members of one-bank holding companies before acquisition changed their small business loan ratios after being purchased by the larger organization was mixed. The finding was such that, at least in the short run, no clear inferences on how structural change affects small business lending activities could be made. Finally, they found that analysis of aggregate data for buyers and targets in acquisitions and mergers revealed that, when targets of simpler organization forms more complex organizations. This implies that there are greater increases in small business lending compared with targets of complex organizations. This short-run evidence again tends to support the size hypothesis, rather than the siphoning hypothesis. Moreover, according to them, intrastate mergers are more beneficial to small business than interstate mergers, which can be interpreted to mean that mergers across state lines are not motivated by increasing access to small loan market. Such intrastate mergers are more likely motivated by the desire to expand a banking organization’s large business loan market.

Okafor and Emeni (2008), and Asuquo (2012) all revealed that going by the restructuring and direct effect, bank size, bank financial specifics and deposits of non-merged banks are directly related to small business lending in Nigeria. They found that for every one naira increase in bank gross total assets loans to small business investors increases by N0.47k and for every one unit increases in ratio of equity to gross total asset, small business lending also increases by a whooping N300,457.20. According to their finding, after mergers and acquisitions, for every N1 increase in bank deposits the lending to small business increases by N2.13k. Furthermore, they discovered that for the deposits of the merged banks, every one percent increase in bank market share, lending to small business falls by N1.50k. Hence, going by the direct and external effects for merged banks, after mergers and acquisitions the reverse is the case because there is an inverse relationship between size of merged banks and their lending to small business, given according to their finding that for every 1% rise in bank market share, lending to small business will fall by N6,694.76. From their findings, the static effect resulted in a positive relationship between small business lending and bank size given that for every N1 deposit received about N0.3k was given out to small business as loan. For the dynamic effect, they found negative relationship between bank lending and mergers and acquisition as regards small business lending. After mergers and acquisition, the merging banks seem to shy away from lending to small business. They discovered that changes in banking focus otherwise referred to as restructuring effects, resulted in poor lending to small business.

2.3 Summary of Literature Review

In summary, the review of the related literature showed that the effects of banking consolidation on bank lending are not only static but also dynamic. Moreover, the effects largely depend on the type of mergers and acquisitions, size of institutions involved, and among other factors, on how long the mergers have taken place. In many of the above literature reviewed, although substantial effort had been made to explore the effect of banking consolidations on credit availability, only very few relate to mergers and acquisitions in a developing nation such as Nigeria and considered the facts that the effects are largely dependent on whether the consolidated banks have fully restructured or not. Those that applied the appropriate and normal three year gestation period are in respect of US, and European bank consolidations. Unfortunately, knowledge of the extent of the effects of such banking consolidation on credit availability to small business borrowers may not be directly applied in Nigerian banking sector due to differing economic factors and environments. These gaps point to one thing: the need for a substantial research in Nigerian as it affects bank consolidation and credit availabilities to small business borrowers by fully restructured consolidated banks.




In this chapter, the researcher presents the methodological approaches used in the course of conducting this research. Therefore, the population of the study, the sources of data, and the techniques of analyzing the data including the methods of post-regression tests were presented here.

3.1 Research Design

The research is an event and an archival study where we wish to ascertain effects of independent variables on the dependent variable using historical accounting data. Therefore, the design should be such that we should not have control over or manipulate the independent variables. Based on this, we used Ex-Post Factor research design. By using this design, we carried out a ten-year (2001 to 2010) cross-sectional trend study of the Nigerian banking industry. The period under study was divided into two, and is of specific interest to us. They are the period from 2001 to 2004 and the period from 2005 to 2010. The period 2001 to 2004 covers four-year pre-merger time while the period 2005-2010 covers a six –year post- merger era in Nigerian banking history. With a 6-year gestation period chosen, we would be able to capture the dynamic effect since the minimum gestation period needed to capture the dynamic effects is three years according to scholars. To separate the impact of pre merger from post-merger, and in order to capture the time effect or the trend effect on bank lending, we created a dummy variable f, which takes the value 0 for pre-merger period and 1 for post merger period.

This design also enabled us to carry out hypothesis testing, descriptive and exploratory approaches. Therefore, we gathered as much data as possible about banking consolidation and small business lending in Nigeria. For instance, we read a number of journal articles, explored published and unpublished thesis, and other literatures related to banking consolidations thereby vividly describing the existing and proposed rules and theories regarding the banking consolidations. We formulated our own hypotheses, which were empirically tested since we collected enough data for postulation of hypotheses. With these, we were able to establish and confirm facts, and developed new theories about banking consolidations in Nigeria.

3.2 Population/Sample Size

This study was focused on commercial banks in Nigerian banking sector. Therefore, the population of the study was all the 24 commercial banks that emerged successfully through the N25billion minimum recapitalization exercises that took place between 2004/2005. The entire population was selected for study.

3.3 Data Source

We made use of secondary data obtained from the Central Bank of Nigerian Statistical Bulletins and the selected banks’ database. The data were collected at different points in time from 2001 to 2010. We also sourced data from internet downloads, journals, published and unpublished theses.

3.4 Data Analysis Techniques

In an empirical research, various tools can be used in analyzing the data collected. However, the choice of any tool is dependent on the nature of the data and the objectives of the research in general. For the purpose of our thesis, the following techniques were engaged in analyzing our data.

3.4.1 Multiple Regression Analysis

We collected data that have cause-effect characteristics and multiple independent variables. Because of these, we analyzed the data by multiple regression analysis with the aid of E-view software. E-view is powerful statistical software for panel data analysis, which has several extensive tests and correction such as test for normality, linearity and serial correlation of the empirical data. In a multiple regression analysis, there is always one dependent variable and at least two independent variables to be analyzed together. The multiple regression equation takes the form:

y equals the dependent variable where as x1 through xn are the independent variables.  and βs are the intercept and the gradients respectively, which are parameters to be estimated using the multiple regression method. er is the stochastic error. The parameters would be automatically generated when the statistical package is run with the data keyed in.

We employed the regression coefficients (Beta or βs) in determining the degree and direction of the effects of mergers and acquisitions on bank lending. Beta of positive value signifies positive direction while Beta of negative value indicates negative effects. Zero Betas indicate no effects. The higher the beta is the higher the degree or the impact either positively or negatively.

3.4.2 Co-Efficient of Determination (R-Squared)

Regression analysis demands that data should be analyzed in relation to how good the data fit the formulated model. The statistic that indicates this is the Co-efficient of Determination (R2). We therefore engaged this statistic to be able to determine how good our model fits. The statistic would be automatically obtained from the E-View statistical software output when regression command is initiated. The higher this statistics is the better for the model. R2 =1 or 100% indicates a perfect fit and means that the response of the dependent variable is solely explained by the behaviour of the independent variable if serial correlation of the residual is absence.

3.4.3 Wald Coefficient Restrictive Test

As already indicated above, we employed hypothesis testing research approach. Null hypotheses were postulated in which we made assumptions that the relationship between the explanatory and response variables not significant. We therefore, determine the reality of these assumptions. To do this; we employed Wald Coefficient Restrictive Tests and Ftests. The Wald test works by testing the null hypothesis that a parameter is equal to some value. In this thesis, the null hypothesis is that the coefficient associated with an explanatory variable is significantly not different from zero. This means that Wald statistic tests how far the estimated parameter is from zero. We reject or accept the hypothesis depending on the value of the probability associated with Wald statistics, which follows Chi (X2) distribution in comparison with the normal 5% level of significance. The statistics for this test would be generated with the E-view statistical software.

3.4.4 Data Screening and Post-Regression Tests

For regression analysis to be unbiased and genuine, certain assumptions must be satisfied especially as it concerns multiple regressions. Among the assumptions are that the data obtained for the purpose of regression analysis must follow a normal distribution, and the independent variable is expected to have a linear relationship with the dependent variable. In this work, we test for normality and linearity using Jarque- Bera Statistic. Jarque- Bera statistic tests the null hypothesis that the data are normally distributed. In statistics, the Jarque-Bera test is a goodness-of-fit test of whether sample data have the skewness and kurtosis matching a normal distribution. The test statistic is defined as:

correctly specified. If the model is not correctly specified, the basic OLS fitted values may not help explain significantly the response variable (Ramsey, 1969). To be able to examine if our regression analysis met the essential assumptions, we conducted a test for each of the assumptions. First, we test for the distribution implicit using Jarque-Bera statistics, which test the null hypothesis that the residual error is normally distributed. The usual formulation of the JB test statistic when we test for normality of the errors in an OLS regression model is:

3.5 Model Formulation

In formulating the model for bank lending behaviour, we followed the foundation laid by the traditional models that assume an imperfectly competitive banking market structures as described in chapter two. One of these models, which we adapted, is Monti-Klein model of banking firm named after the formal studies of banks’ profit maximization behaviour by Klein (1971) and Monti (1972). In this model, the unique feature of banks as it affects maximizing profit by holding less than 100% of deposits as reserve was indentified. This behaviour makes banks profit from the positive margin obtained from the difference between risk asset (loan) and deposit interest rates. This imperfectly competitive market structure means according to scholars that banks can exert monopoly power as previously described. The unique thing about this model is that it views the banking firm in a static setting. By assuming that banks operate in this kind of environment, it implies that demands for deposits and supply of loans can simultaneously clear both markets at equilibrium, where demand for loans equal supply of loans through efficient profit maximizing portfolio pricing. This assumption has constituted a big problem among scholars and has generated controversy ever since. That is, the traditional Monti-Klein model failed to determine how to separate decisions about loans and about deposits in the profit optimization of banks. However, the solution to this shortcoming has been to introduce additional variables or suppositions into the model, which we did.

One such variable we introduced was concentration ratio. One of the major shortcomings of the traditional Monti-Klein model is the assumption that banks operate in a monopolist environment where competition among banks is nil. This assumption is far from the reality obtainable today. In fact, the original Monti-Klein model is primarily based on the case of a unique, monopolistic bank, which might apply in countries with only one bank. Which means the model did not consider the effect of market concentration on bank lending behaviour. Bank consolidation brings about market concentration in which case market may be dominated or led by few banks. Therefore, a situation in which there are several banks with just few of them dominating or leading the market is more realistic and closer to contemporary global banking experience as in Nigeria. The present banking industry can be characterized by monopolistic competition therefore; oligopoly models would be more relevant for the study of the way bank behave in respect of lending than a monopolistic model as Monti and Klein demonstrated. Therefore, we make the traditional monopolistic model an oligopoly version by introducing concentration ratio factor in the model.

Another weakness of the Monti-Klein model is that it ignores size and equity conditions of banks. The model assumes that these variables are exogenous because both deposits and loans repayments, according to its assumption are random without notice. However, in the study of bank lending behaviour, size and financial characteristics of the banks are very essential in understanding how banks behave. First, big bank allocates their assets in a manner that may be inconsistent with how smaller banks do. Small banks according to scholars are more predisposed to supply small loans because of the limitation imposed on them by their size. Moreover, mergers between banks in an oligopolistic banking market may affects both their size and equity condition which in turn can lead to increase or decrease in their propensity to lend. Interestingly, most of the times, mergers between banks can result in equity divestitures the essence of which may be to remove some excess loads in the market, which in turn may negatively affect the firm’s ability to lend. On the other hand, mergers may trigger diversification that may result in market deepening that would grow the assets of the players. This increment in size or equity after the consolidations has the potential to positively change their abilities to create small risk assets in the long-run.

In the study of bank consolidation and behaviour, time dimension is quite essential. According to scholars, there are two types of effects being associated with mergers and acquisitions. They are static effect and dynamic effect. Static effect is observable within 1 to 2 years of consummating the mergers while dynamic effect is observable after three years of consolidations. For the restructuring effects to surface fully, the minimum post-consolidation gestation periods must be completed and this takes quite substantial period, which according to Focarelli and Panetta, (2003) is because there is always a delay in efficiency adjustment. Extant literatures actually show that it may take time to restructure the consolidated institutions’ portfolio by divesting assets, or to change its lending focus by promulgating revised lending policies and procedures. There may also be temporary disequilibrium due to downsizing, meshing of bank cultures, or turf battles that draw managerial attention away from the refocusing efforts (Berger et al 1998). The result of the interview conducted by the Federal Reserve Board of staff with officials of banks involved in US mergers is consistent with the minimum of 3-year post-consolidation gestation period for the harvest of dynamic effect by the consolidating banks (see Berger et al 1998). To take care of this, we allowed for a 6-year post consolidation lag and introduced time merger dummy f in the model to capture the trend effects. The time dummy f takes value 0 in all pre-merger years, which helped us to switch off pre-merger period effect and 1 to capture net post-merger effect.

From the above theoretical framework, the researcher has explored pertinent variables, which can explain bank lending behaviour. These factors include bank deposits, bank size, bank equity condition, market concentration and merger. This theoretical framework for the effect of bank consolidation on bank lending behaviour has a foundation in a traditional Mont-Klein Model. We therefore adapted this model as it bank lending behaviour in a merging environment. The model is thus;

Small business loan = f (size, equity condition, deposits, market share, merger,m) ….(8)

Specified as:

Other constituents of the model are described in details in table 3.1 below

Table 3.1-Detailed Description of the Variables

Variables Detailed descriptions Source
Sbl This is a dependent variable. It stands for bank loans to small business borrowers. It is a measure of aggregate bank loans to small-scale businesses. We analyze how the variable responds to changes in explanatory variable in the right-hand side of the above equation. In the equation, the researcher measures the banks’ gross total assets (GTA) that are allocated to small business borrowers as domestic loans because of variations in the above merger metrics. Therefore, in this model small business borrowers are represented by the size of loans from the banks as reported in their financial statements and CBN bulletins. The variable is transformed into natural logarithm CBN Statistical Bulletin


bcr4 This is a bank concentration ratio/market share. It is the four top bank concentration ratio in the Nigerian banking industry measured in terms of total assets. This is the main indicator in the banking market structure that can influence the behaviour of banks in terms of lending. Concentration ratio determines the market share of banks in the domestic banking market setting. Hence, it is used in order to feature the bank’s market structure, or in other words, the competitive environment in which the banks operates (Prompitak, 2008). The data for the measurement of this index is obtained from the CBN database and the banks’ financial statements. The four banks selected for the purpose of this calculation are First Bank of Nigeria Plc, Zenith Bank, UBA and GTB that control about 50% of the industry’s asset base as at 2009. As at 2012, the top firms’ assets constitute about 70% of the entire industry’s gross assets. To calculate the concentration ratio, we measure the individual market shares of the selected banks. Thus, we apply the formula:


Author’s Own Calculation; Data used From Audited Financial Statements of four big banks.


Gta Is an explanatory variable that stands for bank gross assets. It measures bank size effect on credit policy of banks. It is transformed into natural logarithm to enhance normality and linearity. CBN Statistical Bulletin
Equ Is an explanatory variable that stands for bank financial characteristic. It is measured as the ratio of bank equity to total assets. Equity is the aggregate of the shareholders fund. This variable capture the effect on loans to small businesses because of the way the new institutions restructure itself that may alter its equity condition. This change in equity over a period could significantly affect the banks propensity to lend. Author’s calculation; Data used from CBN Statistical Bulletin


Depa This variable stands for the ratio of total deposit to total assets. It is an independent variable that measures industry market size and bank deposit market demand. It is scaled in terms of assets to remove the variations that would result from the size differences. The variable captures bank deposit characteristics and indicates changes in bank financing. The variable has been used in the work of Ayida and Pujas (2000). Author’s Calculation; Data from CBN Statistical Bulletin


F This is a merger dummy variable featured to capture merger effect based on time dimension. f takes value 0 if the period is pre-merger and 1 for post merger period. Author


Source; Author

The summary of the detailed description of the variables is presented in table 3.2 below

Table 3.2: Summary Description of the variables

Variable Symbol Description Source
Dependent Variable      
Small Business Loans Sbl Log of loans to small scale businesses CBN Statistical Bulletins
Independent Variables      
Market Share bcr4 Four Firm concentration Ratio Expressed in percentage Author’s calculation from financial statements of four big banks
Equity Condition equ Ratio of Bank equity to total assets expressed in percentage CBN Bulletins & authors own calculations
Bank Size gta Log of Gross Total Asset Author’s Calculation; Data used from CBN Statistical Bulletin
Market Demand/Deposit Condition depa Ratio of total bank deposit to total assets expressed in percentage. Author’s Calculation. Data used from CBN Statistical Bulletin
Merger Effect F Time dummy that takes value 1 and 0 for post and pre merger periods respectively Author


Source: Author




 4.1 Introduction

We present and give accurate analysis of the data obtained in this chapter. The data was presented in tables and graphs. The raw data were data collected based on the research questions. The operational measures of the variables are the transformed data for normality and regression analysis purposes. These data were analyzed and the analysis enhanced accurate statistical tests and conclusion reached in this study. Through the analysis, the extent and the direction of the effects of bank mergers and acquisitions metrics on small business credit supply in Nigeria were established. The analysis also helped us to test the postulated hypothesis by using Wald-Coefficient restrictive and F-ratio tests at 5% level of significance, where the testing procedure follows the same decision rule and that is, to accept the null hypotheses if the computed p-values for Wald are more than the theoretical critical value otherwise reject.

4.2 Data Presentation

The data obtained based on the research questions are presented in table 4.1 below. First, the data in column 3 (TBDEP) and 5 (SBLOANS) in table 4.1 is in respect of research question 1 where we asked the extent changes in consolidated banks’ deposits affected credit availability to the small business borrowers in Nigeria. Second, the data in column 6 (TBEQUITY) and 5 (SBLOANS) in table 4.1 is in respect of research question 3 where it it was asked the extent changes in bank equity affected banks’ decision to lend to small business borrowers after mergers and acquisitions. Third, the raw data in column 2 (TBAC4) and 5 (SBLOANS) in table 4.1 is in relation to research question. In this question, we asked the extent changes in bank market share because of bank consolidations affected credits banks supply to small business borrowers. Finally, the raw data displayed in column 4 (TBA) and 5 (SBLOANS) in table 4.1 is in relation to research question 4: To what extent do changes in bank size affect banks’ decision to lend to small business borrowers after mergers and acquisitions?

Table 4.1: The Raw Data Obtained

We also present some of the data by graphs as shown below.

TBA= Total Bank Asset; SBLOANS= Small Business Loans

The graph above was plotted with total bank assets and small business loans picked from table 4.1 columns 4 and 5. It shows the relationship between bank size and bank loans to small business borrowers. From the graph, it can be seen that the relationship between small business loans and changes in bank assets is substantially negative. Initially, the relationship appeared positive. However, the sudden nose-diving of the curve must have begun when banks began mergers and acquisitions activities. The gradient of this curve would be determined from regression analysis.

Figure 4.3 above is the graph of changes in total bank assets (TBA) for ten years. Within the years under consideration, banks increased in sizes. It grew exponentially from 2005 and experienced the highest growth in 2009.

Figure 4.4 below shows how banks have been allocating their assets to small business borrowers. The graph indicates falls in credit availability to small businesses as the years pass by starting from 2004 when the consolidation arrangements were being made. The banks lent more to small business borrowers in 2003, which was a pre-merger period.

Starting from 2004, loans to small businesses began to decree, which was when the effects of mergers must have begun. However, in 2007, the credits to small business borrowers increased. However, it fell again from 2008.

Source: Author; Data used are from banks’ financial reports and CBN statistical Bulletins as shown in table 4.1 above.

gta= log10(TBA); This is the operational measure of the Total Bank Assets. It is the natural logarithm values of banks assets for various years. sbl=log10(SBLOAN); This is the operational measure of the Small Business Loans (SBLOANS). It is the natural logarithm values of SBLOANS for various years under considerations. depa = (TBDEP/TBA)*100: This is the ratio of Total Bank Deposits to Total Bank Assets multiplied by 100. equ= (EQUITY/TBA)*100: This is the ratio of EQUITY to Total Bank Asset multiplied by 100%. bcr4 = (BAC4/TBA)*100: This also is the ratio of Bank Asset Concentration of 4 Top Banks to Total Bank Asset multiplied by 100.

The descriptive statistics are presented below in table 4.3. The descriptive statistics are computed from the operational measures of the variables as displayed in table 4.2 above.

From the above table, the dispersions around the mean are very low for each variable. For instance, the mean of Total Bank Asset now transformed into gta is 7.719995 while the standard deviation is 0.633005%. This indicates that the variables are good proxies for bank mergers and acquisitions. The table also presents statistics for the test of data normality and linearity. The test for the data normality and linearity is done using Jarque-Bera statistic. If the data were not normally distributed, the probability associated with the statistic would be less than 0.05. The normality of data signifies also linearity. The statistics indicate that the data are normal and linear in nature. The probability associated with each of the Jarque-bera statistic is greater than 0.05.Therefore, the null hypothesis that the data for the regression are normally distributed is accepted. Skewness also confirms the normality test by yielding values that are less than 1 as shown in the above table.

4.3 Regression Analysis

The direction and the extent of the effects of bank mergers and acquisitions are captured in regression analysis. We display the output of this analysis in the table below.

4.4 Residual Test

Before examining the regression output above, we have to consider first the quality of the output by carrying out the residual test. This test is aimed at determining if the stochastic residual error is normally distributed. For regression analysis to be unbiased, the distribution of the residual must be normal. We have noted that the normality on the distribution of residuals of a model is indispensable in order to obtain a valid result with statistical significance. Therefore, we carry out this test using Jarque-Bera statistic as shown in the table 4.5 below. Decision rule is to accept the null hypothesis that the residual is normal if the p-value associated with JB is greater than 5% level of significance. Otherwise, we reject the hypothesis that the residual is normal.

From the table below, it can be seen that the distribution of the residuals is normal (JB=.0.4342; p-value=0.8048>0.05). We therefore accept the null hypothesis that the error is normally distributed. Therefore, there would be no possibility of committing any type of error.

4.5 Ramsey RESET Test

Although we have obtained the basic ordinary-least squares result as shown above in table 4.3 and can begin the interpretation right away having established that the residual is normal, yet we also have to test for any possible error specification for our basic model coefficients. We shall carry out this test using RegRESET. RegRESET is a regression postprocessor, which performs Ramsey test. As we have noted in chapter three, it is used after running a linear regression to test the specification of that regression. We shall still remind ourselves that Ramsey RESET test is indeed a general specification test for regression model and it generally tests whether non-linear combinations of the fitted values help explain the response variable. The result of this test, which is based on the regression output displayed in table 4.4 is shown in table 4.5 below.

The result as shown in the above table indicates that there was no presence of error in the model specification in our basic ordinary least squares result displayed in table 4.4. The null hypothesis that the basic model was not wrongly specified is therefore accepted (F7 statistic=0.275; p-value=0.635>0.05). Therefore, our model would not be based on Ramsey RESET test since our basic regression model is a correctly specified model. We would be interpreting and fitting our model based on the basic regression output as presented in table 4.4 above.

4.6 Interpretation of the Regression Results

The output of the regression analysis as outlined in the table 4.4 above provides us with the information needed for our interpretations and applications. First, we shall start the analysis by looking at R2, which indicates the proportion of the dependent variable behaviour that is accounted for by the explanatory variables. R2 equals approximately 0.90, which indicates that 90% of variations in bank loans to small businesses are caused by mergers and acquisitions. On the other hand, only 10% of the variances are attributable to an error. From all indications, the statistic indicates that our model fits well and we can predict with high accuracy the likely behaviour of banks in the events of banking consolidations in the longrun. We therefore fit our model thus: Sbl= 10.9 -0.159f+0.02bcr4 +0.0197equ -0.635depa – 0.623gta

Restructuring Effect of Changes in Bank Deposits

Having established that our model fits well, we shall consider the extent and the direction of individual effects of changes in the explanatory variables on banks’ propensities to lend to small business borrowers. First, we shall consider how changes in bank deposits affected consolidated and restructured banks in relation to small risk asset creation. This shall be in relation to objective one. Based on the result, the impact of changes in bank deposits on the lending behaviour of consolidated banks is negative (β= -0.063). This indicates that as bank deposits increase after mergers and acquisitions, bank loans to small business borrowers substantially decrease. As revealed by the impact elasticity or coefficient, 1% increase in bank deposits brought about 0.063% increases in bank loans to small business borrowers. Therefore, in market where banks merge subsequently, the effect on small business borrowers as deposits increase due to the activities would be to affect adversely small business borrowers through insufficient credit availability for their transactions.

Restructuring Effect of Changes in Bank Market Share

In relation to objective two, we try to see how changes in restructured banks’ concentration ratio or market shares impact on banks’ lending to small business borrowers. Based on the result of our analysis, the impact of post merger changes in market share/ concentration ratio on small credit lending is positive (β=0.02). This implies that increases in market share increases bank loan to small business borrowers. For 1% positive change in bank’s market share, loans to small business borrowers increase by 0.02%. Higher bank asset concentrations after consolidation encourage banks’ willingness to offer loans to small business borrowers in Nigeria. The reason for this behaviour could be that the dominating large banks are not willing to abandon small profitable local products for higher ones. Instead, they pursue higher transactions while maintaining their grip of small business credit customers. Moreover, competition between the big four banks may have kept their focus on small business loans market.

Dynamic Effect of Changes in Merged Banks’ Equity Condition on Banks’ Decision to Make Small Business Loans

The extent changes in equity condition of fully restructured banks in Nigeria affect banks’ decision to create small risk assets is the content of objective two. This was also revealed in the basic regression table above. Changes in equity have a positive effect on bank lending to small business borrowers (β=0.019). This implies that as bank equity increases, bank loans to small businesses would also likely increase. Based on the coefficient (β) reported above, for every 1% increase in the consolidated banks’ equity, bank may decide to release 0.019% of their asset as loans to small businesses. Therefore, as bank equity increases in relation to bank assets, banks would likely allocate more of their resources to small credit borrowers. We can infer that increase in shareholders’ fund through banking consolidation positively affected banks’ decision to lend to small business borrowers insignificantly. Therefore, increasing bank equity through mergers and acquisitions in Nigeria could encourage lending to small business borrowers.

Dynamic Effect of Changes in Merged Banks’ Bank Size on Banks’ Becision to Make Small Business Loans

Based on the above result, it is clear that the relationship between the decision to supply credits to small business borrowers and changes in bank size in a post merger period is negative and insignificant (β= -0.062). Therefore, as bank gross asset increases, merged banks would likely decide to reduce their bank loans to small business borrowers by 0.62% for every 1% increase in bank gross assets. As bank gross assets increase, banks would be reluctant to allocate more of their resources to small business borrowers. That means that bigger banks in terms of assets devoted insignificant amount of their resources to small credit borrowers in Nigeria after consolidation. This has a high implication. Take for instance, bank acquisition that might lead to divestment, would increase bank loans to small businesses while mergers between huge banks for asset diversification purposes would affects banks’ decision to lend to small business borrowers negatively. This relationship can also be seen in the graph below. The graph reveals a negative slop. It slows down gradually over the 10 year-period.

The Net Dynamic Effect of Banking Consolidation on Banks’ Lending Abilities

The main essence of dividing the study into pre and post using dummy variable is to capture the net time effect on the welfare of the small business borrowers. Our emphasis here is on the direction of the net effect over the period. Negative direction shows the effect is badly affecting small business borrowers and vice versa. Based on our result, the dummy variable shows that the post-merger effect is negative on bank lending behaviour (δ=-.159). The dummy variable indicated in our regression outputs relates to the post merger period and since the post merger is negative, the pre-merger on the other hand would be positive as the dummy operates based on “On” and “Off” iteration. This implies that prior to bank mergers, banks had strong lending relationship with small business borrowers. However, this relationship has changed in post merger period in Nigeria. Before we proceed, we would like to test our hypotheses in order to draw our specific conclusions.

4.7 Test of Hypotheses

Four hypotheses were postulated each of which is stated in null. We shall restate each of the hypotheses before testing them. However, we do these simultaneously including comparative analysis with past results on the related work. The information for the test of the hypotheses would be taken from table 4.4

Hypothesis 1: Changes in bank deposits do not significantly affect small business lending. The information used for the test of this hypothesis is taken from table 4.4- the regression output table where data in table 4.1 and 4.2 relating to Total Bank Deposit (Depa) and Small Business Loans (sbl) were used in regression analysis. The data and the statistics from the regression output are presented again in summary in table 4.6 and table 4.7 respectively below for testing the hypothesis. The decision rule is to reject the null hypothesis if the p-values associated with the calculated Wald (Chi- Statistic), or the Fstatistic as displayed in table 4.7 below is less or equal to 0.05 critical values, otherwise, accept.

Table 4.6: Operational Measure of the Variable Data for the Test of Hypothesis 1

Year Sbl Depa
2010 4.098654 56.45506
2009 4.213956 52.21772
2008 4.130726 50.00243
2007 4.613846 45.54371
2006 4.410165 45.24169
2005 4.704773 45.09493
2004 4.740214 44.2675
2003 4.955093 43.87661
2002 4.915761 41.82006
2001 4.719567 42.15245

Source: Author; Data used are from CBN statistical Bulletins displayed in table 4.1

sbl=log10(SBLOAN), which is the natural logarithm values of SBLOANS for various years under considerations. depa = (TBDEP/TBA)*100 which is the ratio of Total Bank Deposits to Total Bank Assets multiplied by 100.

The statistics above indicate that the null hypothesis 1 is accepted. The significant values (0.1703 and 0.0950) yielded by the test are greater than the critical value 0.05. We therefore accept the null hypothesis and conclude that changes in bank bank deposit do not significantly impact on small business lending. The result is not consistent with the finding of Okafor and Emenike (2008) and Asuquo(2012) who found the effect of changes in bank deposit on small business lending to be significant and negative. This difference must have surfaced due to variation in the post-consolidation gestation periods chosen. However, our result shows that changes in bank deposits affect positively the ability of banks to create small risk assets.

Hypothesis 2: Changes in consolidated banks’ market share do not significantly impact on small businesses lending. The information for the test of this hypothesis was from the regression output in table 4.4 where the concentration ratio and small business loans were regressed. The data and the test statistics from the regression output for the test of the hypothesis 2 are displayed respectively in table 4.8 and table 4.9 below. The decision rule is to reject the null hypothesis if the probabilities associated with the calculated Wald (Chi- Statistic) or the F-statistic is less than or equal to 0.05 critical values, otherwise, accept.

Table 4.8: Operational Measure of the Variable Data for the Test of Hypothesis 2

Year Sbl cr4
2010 4.098654 48.25
2009 4.213956 50.38
2008 4.130726 37.39
2007 4.613846 34.7
2006 4.410165 33.83
2005 4.704773 15.9
2004 4.740214 23.91
2003 4.955093 21.02
2002 4.915761 17.36
2001 4.719567 11.63

Source: Author; Data used are from CBN statistical Bulletins displayed in table 4.1

cr4= log10(TBACR4) which is the natural logarithm values of Total Bank Asset Concentration 4 top banks for various years under consideration. sbl=log10(SBLOAN) which is the natural logarithm values of SBLOANS for various years under considerations.

The statistics above indicate that the null hypothesis 2 is accepted. The significant values (0.3158 and 0.2520) yielded by the test are greater than the critical value 0.05. We therefore accept the null hypothesis and conclude that changes in bank market share do not significantly impact on small business lending. This conclusion is not consistent with what Okafor et al discovered. They found negative relationship between changes in bank market share and small business lending while we found positive relationship. The finding of Kolari et al (2011) also supports this present finding. They discover that market share has not been an important factor in determining bank lending behaviour, which is consistent with our result. Our finding does not confirm the Efficient- Structure Performance theory where changes in banking market share or concentration result in overall bank lending efficiency due to rent extraction.

Hypothesis 3: Changes in bank equity do not significantly affect banks’ decision to lend to small business borrowers after bank consolidations. The information for the test of this hypothesis was from the regression output in table 4.4 where the data relating to bank Equity (EQUITY) and small business loans (SBLOANS) were regressed. For the purpose of the test of hypothesis 3, we used the data in table 4.2 and the information from the output of the regression analysis in table 4.4 to test the hypothesis. The data and the information are brought forward and presented in table 4.10 and table 4.11 respectively below. The decision rule is to reject the null hypothesis if the probabilities associated with the calculated Wald (Chi- Statistic) or the F-statistic (t-Statistic) is less than or equal to 0.05 critical values, otherwise, accept. The decision rule is to reject the null hypothesis if the p-value yielded by the calculated Wald (Chi- Statistic) or the F-statistic is less than or equal to 0.05 critical values, otherwise, accept.

Table 4.10: Operational Measure of the Variable Data for the Test of Hypothesis 3

Year Sbl Equ
2010 4.098654 22.09523
2009 4.213956 16.9
2008 4.130726 16.6
2007 4.613846 14.8
2006 4.410165 14.8
2005 4.704773 15.9
2004 4.740214 11
2003 4.955093 17.6
2002 4.915761 18.1
2001 4.719567 16.20001

Source: Author; Data used are from CBN statistical Bulletins displayed in table 4.1

equ= log10(TBEQUITY) which equals the natural logarithm of total bank equity. sbl=log10(SBLOAN) which equals the natural logarithm values of SBLOANS for various years under considerations.

The result of the test speaks in favour of the null Hypothesis 3 that changes in bank equity do not significantly affect banks’ decision to lend to small business borrowers after mergers and acquisitions. Both F-ratio and Chi-square statistics yielded probabilities greater than 0.05. Since their associated probabilities 0.4822 and 0.4390 are greater than 0.05, we accept the null hypothesis and therefore conclude that changes in bank equity do not significantly affect banks’ decision to lend to small business borrowers after mergers and acquisitions. Our finding is not consistent the finding of Okafor et al. While they found significant positive relationship between bank equity and small business lending, ours indicates insignificant positive relationship.

Hypothesis 4: Changes in bank size do not significantly affect banks’ decision to lend to small business borrowers after bank consolidations. The information for the test of this final hypothesis was from the regression output in table 4.4 where the data relating to Total Bank Asset transformed into gta and small business loans (SBLOANS) were used among other variables for regression analysis. For the purpose of the test of this hypothesis, we used the information from the output of this regression analysis to test this hypothesis. In summary, we bring forward the data and the regression output information in tables 4.12 and 4.13 respectively below. The decision rule is to reject the null hypothesis if the p-value associated with the calculated Wald (Chi- Statistic) or the F-statistic is less than or equal to 0.05 critical values, otherwise, accept.

Table 4.12: Operational Measure of Variable Data for the Test of Hypothesis 4

Year Gta Sbl
2010 7.238838 4.098654
2009 7.243605 4.213956
2008 7.201931 4.130726
2007 7.040669 4.613846
2006 6.855697 4.410165
2005 6.654669 4.704773
2004 6.574411 4.740214
2003 6.483994 4.955093
2002 6.44199 4.915761
2001 6.351611 4.719567

Source: Author; Data used from CBN Statistical Bulletin

Gta=Log10(TBA) which equal the natural logarithm of bank gross asset. TBA= Total Bank Assets


Table 4.13: Summary Regression Output Statistics for the Test of Hypothesis 4

Wald Test:    
Equation: gta  
Test Statistic Value df Probability
F-statistic (T-statistic) 1.164989 (1, 4) 0.3412
Chi-square 1.164989 1 0.2804
Null Hypothesis Summary:  
Normalized Restriction (= 0) Value Std. Err.
β4 (gta) -0.622753 0.576972

Source: Author; Data used are from CBN statistical Bulletins displayed in table 4.1 which were regressed and displayed in table 4.4

The test statistics indicate non-significant. Probabilities associated with both F-statistic (0.3412) and X2 (0.2804) are greater than 5% significant level. Based on this we accept the null hypothesis and conclude that Changes in bank size do not significantly affect banks’ decision to lend to small business borrowers after bank consolidations. The conclusion is also not in agreement with with the conclusion reached by Asuquo (2012) where he found significant positive relationship between banking consolidation and changes in bank size. The present study is consistent with Joe and Eric (1997) who found that increase in bank size decreases credits available to borrowers. Based on these findings, we therefore summarily present our work below.




5.1 Summary

The researcher made extensive efforts in analyzing the effect of bank mergers and acquisitions on small business borrowers in Nigeria, which has raised significant concern among the policy makers in Nigeria. We have through this study tried to provide answers to the questions raised. To have done this successfully, we gathered data that enabled us to formulate and test the empirical hypotheses postulated. The hypotheses tested were rejected giving us strong empirical reasons for the conclusions we drew. We did not just apply the panel data obtained in analysis without examination of their nature as regards normality and linearity. Both were satisfactorily met. Having met all that are required to make our thesis a good empirical study, we therefore come to some significant findings and conclusions, which we summarily present.

  1. Changes in consolidated banks’ deposit negatively impacted on banks’ small business lending to the extent that for every 1% rise in bank deposits, banks cut their credits to small businesses by 0.063%.
  2. Changes in bank market share of consolidated banks in Nigeria positively impacted on small business lending. In this case, 1% positive change in banks’ market share resulted in 0.02% rise in bank loans to small business borrowers.
  3. Changes in bank equity of merged banks positively affected banks’ decisions to allocate loans to small business borrowers such that for every 1% increase in shareholders fund, banks decided to increase loans to small businesses by 0.02%.
  4. Changes in bank size negatively affected consolidated banks’ decisions to allocate loans to small business borrowers to the extent that for each 1% increase in bank gross assets, banks decided to reduce loans to small business borrowers by 0.062%.
  5. Therefore, based on the merger dummy time effect, one can confidently announce that the overall effects of bank mergers and acquisitions are negative on the welfare of small business borrowers. This means that banking consolidation do not advance the interest of small business borrowers in Nigeria although statistically, this conclusion is not significant.

5.2 Conclusion

The concern of policy makers as to the extent banking consolidation affects small businesses in Nigeria has been met through this study. Our analysis provided every detail as regard the restructuring effects of bank lending to small businesses. How changes in bank size, equity, deposits, and market share affected small business borrowers is now an established theory in Nigeria. Each of these merger driven small business lending explanatory variables to a reasonable extent affected small businesses lending in Nigeria. Although, statistically, the impacts are not significant, economically, the influences should not be ignored in making lending policies on the part of the government. Based on the evidence before, we therefore, conclude that banking consolidation has not been significantly advancing the interests of small businesses in Nigeria. The model derived in this work if properly applied by the policy makers would go a long way in enhancing decisions that would leverage lending to small business borrowers for economic growth.

5.3 Recommendations

Based on the above findings and conclusion, the researcher therefore makes the following recommendations:

  1. As mergers between mega banks continue to take place, government should promote and lay strong emphasis on even capital adequacy since increase in equity promotes credit availability to small business borrowers.
  2. Micro-finance banks should be sensitized on the possible small credit market created by bank mergers and acquisitions. The market abandoned by the emerging mega banks can be filled up by the micro-finance banks, which are limited to small loans. This means government should encourage the proliferations of these small banks to all nooks and crannies of our nation.
  3. Banking concentration should not be worried about but should be encouraged in relation to small business lending since increase in concentration yields positive effects on bank lending to small businesses.
  4. Moreover, government should continue to promote bank lending to small businesses by educating the mega banks on the need for continual supply of loans to small businesses as they grow in sizes. The bank directors should be made to understand that without loans to small businesses, the economy would not grow and this would eventually affect bank performances.
  5. We also recommend that there should be incentives such as awards to the banks that lend highest to small business borrowers. Moreover, adequate default shock absorptions should also be provided by the Central Bank of Nigeria. They should be willing to come to the aid of any bank that suffers from credit default from small business borrowers. The negative relationship between increase in size and loans to small business borrowers is likely an indication that banks are more risk averse in post consolidation period. Hence, this study recommends possible bail out if it is connected with loan default by small business borrowers.

Contributions to Knowledge

This study has contributed immensely to knowledge as it affects how consolidated and fully restructured banks allocate their risk assets to Nigerian small business borrowers. This study is the first formal study to establish that fully restructured banks in Nigeria allocate relatively little amount of their asset to small credit users. Prior to this study, no study has been carried out which established the dynamic relationship between equity, size, concentration index and loans to small businesses by the emerging merged mega banks in Nigeria. This study, therefore, is a groundbreaking research in the area of banking consolidation and credit availability to small business borrowers in Nigeria.

Recommendation for Further Study

Although commercial banks are the major suppliers of credit to small business borrowers, non-commercial bank institutions also supply loans to small businesses. Therefore, we recommend a further study that would integrate loans to small businesses by other financial institutions such as micro-finance banks.


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Bank mergers and acquisitions in Nigeria between 2004 and 2005




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