Abstract

Mergers
and acquisitions are the major instruments of the recent banking reforms in
Nigeria. The effects and the implications of the reforms on the lending
practices of merged banks to small businesses were considered in this study.
These effects were divided into static and dynamic effects (restructuring,
direct and external). Data were collected by cross-sectional research design
and were subsequently analyzed by the ordinary least square (OLS) method. The
analyses show that bank size, financial characteristics and deposit of
non-merged banks are positively related to small business lending. While for
the merged banks, the reverse is the case. From the above result, it is evident
that merger and acquisition have not only static effect on small business lending
but also dynamic effect, therefore, given the central position of small
businesses in the current government policy on industrialization in Nigeria,
policy makers in Nigeria, should consider both the static and dynamic effects
of merger and acquisition on small business lending in their policy thrust.

Introduction

The current reforms in
the Nigerian banking system may have come as a surprise to some people.
However, to those who have been monitoring the health of the banks, the reforms
could not have come as a surprise. The incidence of distressed and technically
insolvency of the banking industry has been with us for quite some times. The
unprecedented liquidation of twenty-six Nigerian banks in 1998, in addition to the
earlier closure of five banks in 1994/95, did not put an end to the distress
Syndrome (Iganiga, 2000, pp. 137-198 and Imah, 2005). Indeed, it could be
admitted that to have cleansed the banking system of distressed and insolvent
institutions in 1998, more institutions ought to have closed, but that was not
the case due to some obvious reasons.

Special current reforms
include the increase in the minimum paid up capital of banks from N500
million before 2001 to N1 billion in 2001 and N2 billion in 2002.
the introduction of the universal banking in 2001 the adoption of the
contingency planning for systematic crisis framework; the promotion of the code
for good corporate governance, introduction of settlement bank system and so
on. These regulatory measures and many others were largely influence by the
recent desire of the CBN to proactively position the banking sub-sector as a
catalyst agent for development and avoid a repeat of the financial sector
distress of the 1990s with its attendant consequences. The measures adopted by
the CBN were expected to have remarkably transformed the banking system in
terms of size, depth of operation and ownership structures. The reality
however, was that the banking system was characterized by illiquidity poor
corporate governance and prone to distress, while the Nigerian economy was
characterized by stunted growth inflation and high interest rate and stagnated
real sector (Zombo, 2005, pp. 46-52; Hanahan and Kenggehial,2001).

It was clear that some
drastic measures were urgently needed to make the banking sector respond to the
needs of the economy and as a result some reforms were inevitable. It was
against this background that the CBN introduced the banking sector reforms that
were designed to ensure a diversified, strong and reliable banking sector which
will enable the

safety of depositor’s money play active dev
competitive players in the global financial system.

The effects of mergers
and acquisitions on bank lending behaviour is quite complex, with one static
effect and at least three type of dynamic effects. Entangling these four
effects allows us to identify more precisely than the extant literature how
mergers and acquisitions affect small business lending. The static effect is
simply the result from the banking

institutions combining their pre-merger
and acquisition assets into a larger institution with a combined balance sheet
and competitive position. The static effect might be expected to result in a
decreased supply of small business loans, since larger banking institutions
tend to make fewer small business loans per naira of assets (Benston,William
and Larry,1995).

The restructuring
effect is a dynamic effect of the Mergers and acquisitions due to a change in
focus in which the institution changes its size, financial condition, or
competitive position from their proforma values after consummating a merger and
acquisition.

Hence, this study on
mergers and acquisition; a viable option for increased profitability of
Nigerian banks and availability of funds for lending to small and medium scale
enterprise was undertaken to examine the strength and place of mergers and
acquisitions in providing fund for lending to small business.

The following research
questions guided the study in its guest to provide solution to the problem that
prompted the study:

(i)                            
What is the static effect relationship
of banks merger and acquisition on small business lending in Nigeria?

(ii)                          
What is the direct effect relationship
of banks merger and acquisition on small business lending in Nigeria?

(iii)                        
What is the restructuring effect
relationship on small business lending in Nigeria?

(iv)                        
What is the external effect relationship
of banks merger and acquisition on small business lending in Nigeria?

Conceptual framework:

Bank capital
model

This model considers the lending behaviours of bank
to small and medium businesses to be affected by a capital adequacy
requirement. According to Obamuyi (2007, pp. 6-7),

“the bank capital channel views a change in capital,
particularly when banks’ lending is co

The lifecycle
approach

The lifecycle approach, as, described by Weston and
Brigham (1981), was conceived on the premise of rapid growth and lack of access
to the capital market. Small firms were

seen
as starting out by using only the owne of undercapitalization would soon appear
and they would then be likely to make use of other

sources of funds, such as trade credit
and short-term loans from banks, rapid growth could lead to the problem or
illiquidity.

“The dynamic small firm would therefore growth to
keep pace with its internally generated funds, acquire a costly stock market

quotation, or
seek that most  elusive form of
finance-venture capital”   (Weston   an

1981).

Therefore, indicating a
trend in small and medium business that expanding small firms are likely to
experience rising short-term debt and use little or no long-term debt.

The pecking
order theory

The pecking order
theory as propagated by Myers (1984, pp. 199-233) that firms finance their
needs in a hierarchical order, first by using internally available funds,
followed by debt and external equity. This practice is more common in Small
Firms practice and indicates the negative relationship between profitability
and external borrowing by small

firms. According to the report by South African
reservehishypothesisbank (200 implies that there tends to be a negative
relationship between profitability and external

borrowing by small firms. In other
words, assuming a zero growth firms with high profitability would generate
higher levels of internal liquidity, reducing the need for borrowing. Older
firms, it may then be hypothesized, would make less use of external

finance                    and,   instead,  
would   rely   on  
retained

Agency theory

This theory places
emphasis on transaction costs, contracting analysis following the work, Coase
(1937, pp. 386 –405), Jensen and Meckling (1976) and most important, Stiglitz
and Weiss (1981). The work of these writers all point to the challenges that
surround

ownership, contractual agreements,
management interrelationship and credit rationing between small and medium
scale businesses and external providers of finance, thereby subjecting firms to
the risk of asset substitution which in practice means a change in the

firm’s asset structure-enterprises,. thisForasset
substitutionvery maysmallwell and take place between the enterprise and the
owner’s h South African reserve bank (2004) “The pre explain the greater use of
collateral lending to small firms as a way of dealing with these agency
problems. Lenders’ strategies for d to the cost of dealing with this sector.
For a large enterprise the evaluation of an application