Research Journal of Finance and Accounting www.iiste.org ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol.5, No.16, 2014 113 The Impact of Banking Consolidation on the Economic Development of Nigeria Enya Emori 1 Stephen Nkamare 2 Ikenna Nneji 3* 1.Lecturer, Department of Banking and Finance, University of Calabar, Cross River, Nigeria 2.MSc Scholar, Department of Banking and Finance, University of Calabar, Cross River, Nigeria 3.PhD Scholar, Department of Banking and Finance, University of Calabar, Cross River, Nigeria *dikenna@yahoo.com Abstract Consolidation was used as a key strategy by a number of banks to meet the capitalization requirements issued by the Central Bank of Nigeria (CBN) in 2005. In view of the need to understand the effect of this strategy as used by the banks, this study sought to establish the impact of bank capital, aggregate investment, loans and advances, bank profitability on the performance of the Nigerian economy. Time series was used from 1986-2011 and multiple regression was used to analyze data. It was found that bank capital was a determinant of banks performance and banks’ investment had a positive impact on the economy. The study also showed that loans and advances were a determinant of banks profitability. Accordingly, it was recommended that the Central Bank of Nigeria should constantly monitor the activities and the performance of the emerging mega- banks in order to prevent bank distress and failure .It was also recommended that adequate capital should be provided to make Banks more liquid. Keywords: Consolidation, economic development 1. Introduction The banking industry is the most vibrant sector in the Nigeria economy. It serves as catalyst for growth and development. It is the pivot upon which a nation’s economy rotates. Commercial banks are unique among financial institution. Commercial banks have the extra capacity to create new credit money (Nzotta, 2004). The money is invested in low and high risk assets to ensure that depositors funds are not impaired by cumulative losses and banks are by law and regulation expected to hold adequate capital cover to cushion out any loss, so that depositors funds may continue to be intact (Onoh, 2002). The strength of a bank depends on the capital funds available to the bank. According Soludo (2004), banks have not played their expected role in the development of the economy because of their weak capital base and as such, the decision to raise capital base of banks was with the aim of strengthening and consolidating banking system. The strengthening and consolidation of the banking system was the first phase of reforms designed to ensure a diversified, strong and reliable banking sector which will ensure the safety of depositors’ money, play active development roles in the Nigeria economy and also become competent and competitive in the financial system. Consolidation of banking firms involves either a combination of existing bank growth among the leading banks. The capital of bank is to serve as a symbol of confidence in banking institutions. Therefore, the strong capital base prescribed under the recapitalization programme is consistent with corporate mandate of promoting public confidence in the banking system. The increase in the minimum capitalization requirement for banks will, to a large extent, engender public confidence in the banking system as it will enhance banks capacities to absorb operating losses and minimize recourse to depositors’ funds protection agency. 1.1 Statement of the problem Capital is required to support business but the importance of adequate capital in banking cannot be over- emphasized. It is an essential element which enhances confidence and permits a bank to engage in banking. A very important function of capital in a bank is to serve as a means of absorbing losses. It serves as a buffer between operating losses and insolvency. Bank capital does not only serve as a cushion against deposition run-off, but forms the basis for future asset growth. The rate at which retained earnings grow is determined to a large extent by the growth of bank capital and invariably the growth of bank asset. If the rate of growth of retained earnings is low, it could be an indication of poor profitability which may affect the performance Nigeria economy. Bank consolidation stems from the need to resolve problem of financial distress in order to avoid systematic crises as well as to restrict inefficient banks because of inadequate capital cover to wipe out or at least reduce losses sustained from failed investments. The presence of weak, unhealthy and undercapitalized banks increased the need for a high level of consolidated banks through mergers and acquisitions. This has necessitated the work to see how bank consolidated in Nigeria in the past years have led to economic development