A bank is a financial intermediary that accepts fund deposits for the primary purpose of channeling those funds into lending activities (Idolor, 2010). The financial intermediary could be a central bank, a commercial bank, or some other form of bank. The central bank is the monetary authority of a country, implementing the monetary policy and circulating money on behalf of the government (Gabor, 2010; Goodfriend, 2011). From the deposits they accept, commercial banks are able to lend to the public either directly or through capital markets, and in some cases, they invest such funds in profitable ventures. The commercial banks thereby serve as intermediaries between customers who have free funds to save in the bank and others who are in need of funds. As business organizations, banks are expected to generate income, incur expenditures, and make a profit for their shareholders. Because they charge their borrowers higher rates of interest than they pay depositors, banks are able to create a net income that is the difference between the rates of interest. They facilitate economic growth in a variety of ways (Rose & Hudgins, 2010). In the course of their operations and development, banks are known to have owned major stakes in industrial companies such as in Germany.
Since the advent of modern banking, the banking industry has been subjected to one form of regulation or another by the governments of their respective countries or their agents (Ezeoha, 2007). Different countries regulate their banks differently (Jackson, 2010). This approach is understandable considering the important roles that depository institutions play in the financial system of every economy. In Nigeria, banking operations are regulated by the Banking and Other Financial Institutions Act (BOFIA) of 1991 (as amended).
Over the past 3 decades, corruption plagued the Nigerian banking industry leading to the collapse of many banks particularly in the 1990s. This situation resulted in huge losses to the customers, investors, and other stakeholders. These failures, largely attributed to frauds perpetrated by the bank management and staff, arose through the granting of unsecured loans that resulted in huge bad debts and, consequently, loss of liquidity; failure to maintain the prescribed capital base; and outright embezzlement of funds (Transparency International, 2009). Idolor (2010) described this fraudulent practice in Nigerian banks as industry-wide. According to Soludo (2004), by 2004, many banks in Nigeria were undercapitalized; one-third of them were unhealthy; operating losses were enormous, leading to negative shareholders' funds and so promoting insolvency; and 28% of the bank loans were nonperforming (CBN, 2005-2006).
These events led to the Nigerian banking industry reform of 2005, which entailed a recapitalization from 2 billion naira to 25 billion naira by December 31, 2005, through mergers and acquisitions (CBN, 2004). The recapitalization effort was aimed at improving the financial capacity of the banks for the execution of big projects; improving public confidence in the banks; creating a level-playing field, hence promoting healthy competition among the banks; enhancing transparency in the banks' operations; and making them global players (CBN, 2004). The reform process resulted in the emergence of 25 banks, each with new minimum share capital and a code of corporate governance (CBN, 2006).
In studies related to bank reforms, based on bank-level data from 2000 – 2005, World Bank (2007) predicted increased efficiency of intermediation among banks in Nigeria, thus giving support for reforms. Similarly, Somoye (2008) found that bank recapitalization would cause a change in total assets, and this change would boost bank performance. Onaolapo (2008) reported a positive relationship between bank capitalization, distress management, and asset quality, all of which increased expectations for improved financial performance of the recapitalized banks. Throughout 2006, 2007, and 2008--that is, after the 2005 reforms--the CBN did not report any bank distress, an indication that the 2005 banking sector reforms were on the right course.
In 2007, Nigerian banks occupied the first 19 positions among the Top_30 West African banks (African Business Report, 2007). However, among the African Top_10 banks, only one Nigerian bank, Intercontinental Bank Plc, made it to the list (in eighth position). No other Nigerian financial institution was rated among the Top_10 in Africa (“Stirred and Shaken,” 2007). The deep-seated 2005 reforms to the Nigerian banking sector appeared to have created a more conducive economic environment that induced the South African Standard Bank (Stanbic) to acquire a majority interest in Nigeria’s IBTC Chartered Bank. The new-look IBTC planned to increase the asset base of the bank, thus empowering it to offer improved services within and beyond Nigeria (“Stirred and Shaken,” 2007).
In 2009, the editors of Global Finance selected Nigeria’s Firstbank Plc as being among the world’s best banks (World’s Best Banks, 2009). In their report, they noted that the bank’s earnings rose by 43% in 9 months ending in December 31, 2008. Furthermore, the report stated that Firstbank, with an asset base of 10 billion U.S. dollars, and a network of 489 branches in the country remained a leader in financing infrastructure investments, in Nigeria (World’s Best Banks, 2009). Yet, Firstbank is ranked fourth among the Nigeria Stock Exchange-listed Top_5 in Nigeria. The overall picture is that Nigerian banks occupy distinctive positions in Africa and more distinctive in the West Africa subregion. They significantly affect the national economy, and in a variety of ways, they impact the global economy. However, the results of two stress tests conducted by the CBN in 2009 on the 24 commercial banks showed that there were significant distress and poor management in the banking system (Cook, 2011). It was further disclosed that eight banks failed the tests, the system required a capital and liquidity injection of 620 billion naira, the distressed banks altogether held 2 trillion naira in "toxic" loans, and the absence of effective internal controls among other factors could have caused the crisis in the banking system (Cook, 2011). Among the reasons adduced by the CBN were "major failures in corporate governance, inadequate disclosure and transparency about the financial position of banks, critical gaps in the regulatory framework and regulations, and uneven supervision and enforcement" (Sanusi, 2010, p. 5).
Based on the recent Nigerian banking sector reforms, which are predicated upon the economic importance of the banking industry, and the adverse consequences of bank failures (Ochejele, 2007; Reynaud, 2010), a study of the relationship between ICE and financial performance in the banking industry might prove beneficial to the sustainability of Nigerian banks. It will also fill a gap in the academic literature. As required by BOFIA of 1991 (as amended), all the 24 commercial banks that operate in the banking industry in Nigeria report their annual balance sheets and profit and loss accounts to the CBN. By implication, therefore, the accounts of all the banks were publicly available for use in this study.