Pro-Concentration Theory

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enhanced capital base, all things being equal, is expected to confer competitive edge on a bank. It would enable the bank acquire relevant technology, engage high-quality personnel and absorb shock. It would also position the bank to offer better and value added services while increasing its earning capacity. Furthermore, consolidation increases the potential of banks to compete effectively at the national, regional and global levels. Pro-concentration theory Proponents of banking sector concentration argue that economies of scale drive bank mergers and acquisitions (increasing concentration), so that increased concentration goes hand-in-hand with efficiency improvements. Demirguc-kunt and Levine (2000), suggest that greater bank…show more content…
The greater subsidy for larger banks may, in turn, intensify risk-taking incentives beyond any diversification advantages enjoyed by them, thereby increasing the fragility of concentrated banking systems (Boyd and Runkle, 1993). Proponents of the concentration-fragility view disagree with the proposition that a few large banks are easier to monitor than many small banks. They believe that increased banking concentration will reduce the availability of credit supply to the economy, as concentration of banks will reduce small and medium scale enterprises’ access to credit facilities. The policy implication of the pro-deconcentration theory is that higher market concentration is associated with lower socio-economic welfare thus, higher concentration is undesirable. The theory, therefore, advocates for a less concentrated banking sector with many small banks. 2.6.2 Agency Theory Mergers and acquisitions can end up destroying value rather than creating synergies even though managers act fully rationally. The literature of agency theory throws light on how managers’ interest in maximizing their own utility can lead to decisions that are not in the interest of the shareholders. However, the decisions are fully conscious and are a result of opportunism rather than irrational behaviour (Bjarke and Peter,…show more content…
The studies of Szapary (2001) provided the foundation for a research on the linkage between banks mergers and acquisition and profitability. Evidence as provided by De-Nicolo (2003) and Caprion (1999) suggested that mergers and acquisitions in the financial system could impact positively on the efficiency of most banks. Overall, some of these studies provide mixed evidence and many fail to show a clear relationship between mergers and acquisitions and performance. Samuel (2010) in a study of recent banking sector reforms and economic growth in Nigeria using ordinary least square regression techniques, established that interest rate margins, parallel market premiums, total banking sector credit to the private sector, inflation rate, size of banking sector capital and cash reserve ratios account for a very high proportion of the variation in economic growth in Nigeria. This shows that there is a strong and positive relationship between economic growth and banking sector reforms in Nigeria. Okpanachi (2011) concluded that his result showed an enhanced financial performance leading to improved financial efficiency of the banks that engaged in

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