EFFECTS OF BANK MERGERS AND ACQUISITIONS ON LENDING TO SMALL BUSINESS BORROWERS IN NIGERIA

CHAPTER ONE: INTRODUCTION

1.1 Background of the Study

Mergers and acquisitions (MandA) in the banking industry have been a prominent feature of the Nigerian financial landscape, particularly following the 2005 banking consolidation exercise and the 2009-2010 banking crisis interventions. The Central Bank of Nigeria (CBN) mandated a minimum capital base of N25 billion for all deposit money banks in 2005, leading to a wave of mergers and acquisitions as banks scrambled to meet the new requirement. The number of banks reduced from 89 in 2005 to 25 by 2006. Subsequent banking crises in 2009-2010 led to further consolidation, including the acquisition of distressed banks by stronger banks and the creation of bridge banks (e.g., Mainstreet Bank, Enterprise Bank, Keystone Bank). More recently, there have been voluntary mergers (e.g., Access Bank acquiring Diamond Bank, UBA acquiring Standard Trust Bank, Sterling Bank’s evolution) (CBN, 2010; Adebayo and Oyedokun, 2019).

The rationale for bank mergers and acquisitions in Nigeria includes: (a) achieving economies of scale (reducing average costs through larger operations), (b) increasing market share and competitive position, (c) diversifying risk (geographic, sectoral, product), (d) improving operational efficiency (eliminating duplicate branches, consolidating back-office functions), (e) enhancing capital adequacy (meeting regulatory requirements), (f) acquiring new technology and expertise, (g) entering new markets (geographic or product), and (h) resolving distressed banks (preventing systemic risk) (CBN, 2010; Okafor and Udeh, 2020).

Small businesses (small and medium enterprises – SMEs) are a critical segment of the Nigerian economy, constituting over 90% of all businesses, contributing approximately 50% to GDP, and employing about 60% of the workforce. Small businesses operate in various sectors: manufacturing, trading, services, agriculture, construction, and information technology. Access to bank credit (lending) is essential for the survival and growth of small businesses, enabling them to finance working capital (inventory, accounts receivable, operating expenses), purchase equipment and machinery, expand facilities, and invest in technology. However, small businesses have historically faced significant challenges in accessing bank credit in Nigeria, including: (a) high interest rates, (b) stringent collateral requirements, (c) complex documentation, (d) information asymmetry (banks lack information about small business creditworthiness), (e) perceived high risk, (f) short loan tenors, and (g) limited outreach to rural and peri-urban areas (SMEDAN, 2020; NBS, 2019; Okafor and Udeh, 2021).

The effect of bank mergers and acquisitions on lending to small business borrowers is theoretically ambiguous and empirically contested. There are two opposing theoretical perspectives:

Market Power Theory (Collusion Hypothesis) : Mergers and acquisitions increase bank concentration (fewer, larger banks), which may increase market power. Banks with increased market power may charge higher interest rates, reduce lending, and impose stricter terms on borrowers, including small businesses. Larger banks may also focus on lending to large corporate clients (where loan sizes are larger, transaction costs per Naira are lower) rather than small businesses (where loan sizes are smaller, transaction costs per Naira are higher). Under this perspective, bank mergers and acquisitions are expected to reduce lending to small business borrowers (Berger, Demsetz, and Strahan, 1999; Berger, Rosen, and Udell, 2007).

Efficiency Theory (Synergy Hypothesis) : Mergers and acquisitions create efficiencies (economies of scale, elimination of duplicate branches, consolidation of back-office functions, improved technology). More efficient banks may lower their costs, which may be passed on to borrowers through lower interest rates. Larger banks may also have greater capacity to diversify risk across a larger loan portfolio, enabling them to lend to riskier segments (including small businesses). Larger banks may also invest in technology (credit scoring, automated underwriting) that reduces the cost of originating and monitoring small business loans. Under this perspective, bank mergers and acquisitions are expected to increase or have no negative effect on lending to small business borrowers (Berger et al., 1999; Berger et al., 2007).

Empirical evidence from developed countries (primarily the United States and Europe) has shown that bank mergers and acquisitions tend to reduce lending to small businesses, particularly in the short to medium term. Larger banks (post-merger) tend to have lower ratios of small business loans to total assets than smaller banks. Small business borrowers often experience higher interest rates, reduced credit availability, and increased collateral requirements after their bank is acquired by a larger bank. However, some studies have found that mergers between small banks that create medium-sized banks may increase small business lending, and that the effects vary by the type of merger (in-market vs. out-of-market, horizontal vs. vertical) (Peek and Rosengren, 1998; Berger et al., 1998; Sapienza, 2002).

Empirical evidence from developing countries (including Nigeria) is limited. In Nigeria, the 2005 banking consolidation led to a reduction in the number of banks from 89 to 25, with many small banks being acquired by larger banks. Studies on the effect of this consolidation on small business lending have produced mixed results. Some studies found that small business lending declined after consolidation, as larger banks focused on corporate clients and reduced their exposure to perceived high-risk small business loans. Other studies found that small business lending increased after consolidation, as larger, more capitalised banks were better able to lend to small businesses (due to improved technology, credit scoring, and risk management) (Adebayo and Oyedokun, 2019; Okafor and Udeh, 2020).

The effect of bank mergers and acquisitions on lending to small business borrowers can be analyzed through several mechanisms:

Loan Size (Transaction Cost) Theory: The cost of originating and monitoring a loan has a fixed component that is independent of loan size (e.g., credit analysis, documentation, legal fees). Larger loans have lower transaction costs per Naira than smaller loans. Therefore, larger banks (post-merger) may prefer to lend to large corporate clients (where loan sizes are larger) rather than small businesses (where loan sizes are smaller). This is the “fixed cost” or “scale economies” explanation for reduced small business lending after mergers (Berger et al., 1999).

Relationship Lending Theory: Small businesses often rely on “relationship lending” where the bank loan officer develops soft information about the borrower (character, business acumen, local market knowledge) through long-term relationships. Relationship lending is more common in smaller, decentralized banks. Larger banks (post-merger) may rely more on “transactional lending” (hard information: credit scores, financial ratios, collateral) and may reduce relationship lending. This can disadvantage small businesses that lack hard information (formal financial statements, audited accounts, credit history) but have valuable soft information (Berger and Udell, 2002; Petersen and Rajan, 1994).

Organizational Structure Theory: Larger, more hierarchical banks may have decision-making processes that are slower and more rigid, making it difficult to approve small business loans quickly. Decision-making authority may be centralized at headquarters, away from local loan officers who have soft information. This can reduce small business lending. Conversely, banks that maintain decentralized structures (e.g., local lending authority) may continue to lend to small businesses even after merger (Berger et al., 2007).

Capital Adequacy Theory: Merged banks may have higher capital adequacy ratios (CAR), enabling them to absorb more risk. Higher capital may enable banks to lend to riskier segments (including small businesses). However, higher capital may also reduce the pressure to lend to risky borrowers (since the bank is already well-capitalised). The net effect is ambiguous (Berger et al., 1999).

Market Structure Theory: In more concentrated banking markets (fewer, larger banks), small businesses may have fewer alternatives if their bank is acquired. Banks may exploit this reduced competition by increasing interest rates, reducing credit availability, or imposing stricter terms. This is the “market power” explanation for reduced small business lending after mergers (Sapienza, 2002).

Technology Theory: Larger banks may invest in technology (credit scoring, automated underwriting, online loan applications) that reduces the cost of originating and monitoring small business loans. This could increase small business lending. However, technology may also standardize lending decisions, reducing the role of soft information (relationship lending) (Frame, Srinivasan, and Woosley, 2001).

The unique characteristics of the Nigerian banking market affect the analysis. Nigeria has a large informal sector, with many small businesses lacking formal financial statements, audited accounts, or credit history. These businesses rely on relationship lending. Bank mergers that centralize decision-making and reduce relationship lending may disproportionately disadvantage these businesses. Conversely, banks that invest in alternative credit scoring (using mobile phone data, utility payments, etc.) may be able to lend to small businesses without traditional financial statements (CBN, 2020; Okafor and Udeh, 2021).

The Central Bank of Nigeria has implemented policies to support small business lending, including: (a) the Small and Medium Enterprises Credit Guarantee Scheme (SMECGS), (b) the Micro, Small and Medium Enterprises Development Fund (MSMEDF), (c) the Anchor Borrowers’ Programme (ABP), (d) the National Collateral Registry (allowing movable assets as collateral), and (e) credit bureaus to reduce information asymmetry. These policies may mitigate the negative effects of bank mergers and acquisitions on small business lending (CBN, 2020).

Finally, this study focuses on the effects of bank mergers and acquisitions on lending to small business borrowers in Nigeria. The study will analyze pre- and post-merger lending patterns, compare merged banks to non-merged banks, and examine the mechanisms (loan size, relationship lending, organizational structure, capital adequacy, market structure, technology) through which mergers affect small business lending.

1.2 Statement of the Problem

Bank mergers and acquisitions in Nigeria have significantly altered the structure of the banking industry, reducing the number of banks and increasing the size of surviving banks. While these mergers and acquisitions have been justified on grounds of increased stability, efficiency, and capital adequacy, there are concerns about their effects on lending to small business borrowers. Specific problems include:

1. Reduced lending to small businesses: Evidence from developed countries suggests that bank mergers and acquisitions reduce lending to small businesses, particularly in the short to medium term. It is unclear whether similar effects have occurred in Nigeria.
2. Shift from relationship lending to transactional lending: Larger banks may rely more on transactional lending (hard information) and reduce relationship lending (soft information). This may disadvantage small businesses that lack formal financial statements but have valuable relationships with loan officers.
3. Increased loan sizes and reduced small loan origination: Larger banks may prefer to lend to large corporate clients (where loan sizes are larger and transaction costs per Naira are lower) rather than small businesses. This may reduce the availability of small loans.
4. Centralization of decision-making: Merged banks may centralize lending decisions at headquarters, away from local loan officers who have soft information about small businesses. This may slow down loan approvals and increase rejection rates.
5. Increased market concentration: In more concentrated banking markets (fewer banks), small businesses may have fewer alternatives if their bank is acquired. Banks may exploit reduced competition by charging higher interest rates or imposing stricter terms.
6. Heterogeneous effects across merger types: The effects of mergers may differ depending on the characteristics of the merging banks (size, market share, geographic focus, lending specialization) and the type of merger (in-market vs. out-of-market, horizontal vs. vertical). The Nigerian literature lacks such granular analysis.
7. Limited empirical evidence in Nigeria: While there is extensive research on bank mergers and small business lending in developed countries, there is limited empirical evidence in Nigeria. Most Nigerian studies have focused on the overall performance of merged banks (profitability, efficiency) rather than lending to specific borrower segments.
8. Policy implications: The Central Bank of Nigeria needs evidence on the effects of bank mergers on small business lending to inform future merger approval decisions, prudential guidelines, and small business lending policies.

This study addresses these problems by providing empirical evidence on the effects of bank mergers and acquisitions on lending to small business borrowers in Nigeria.

1.3 Objectives of the Study

The specific objectives of this study are:

1. To identify the major bank mergers and acquisitions that have occurred in Nigeria over the study period (e.g., 2000-2023), including the characteristics of merging banks (size, market share, geographic focus, lending specialization).
2. To analyze trends in small business lending (loan volume, number of loans, interest rates, loan sizes, collateral requirements) in Nigeria before and after bank mergers.
3. To compare the small business lending behavior of merged banks with that of non-merged banks (control group) over the same period.
4. To determine the effect of bank mergers on the volume of lending to small business borrowers (total loan amount, number of loans) in Nigeria.
5. To determine the effect of bank mergers on the terms of lending to small business borrowers (interest rates, collateral requirements, loan tenors) in Nigeria.
6. To examine the mechanisms (loan size, relationship lending, organizational structure, capital adequacy, market structure, technology) through which bank mergers affect small business lending.
7. To assess whether the effects of bank mergers vary by merger type (in-market vs. out-of-market, horizontal vs. vertical, large vs. small acquirers).
8. To provide policy recommendations for the Central Bank of Nigeria and other stakeholders on mitigating any negative effects of bank mergers on small business lending.

1.4 Research Questions

The following research questions guide this study:

1. What are the major bank mergers and acquisitions that have occurred in Nigeria, and what are the characteristics of the merging banks (size, market share, geographic focus, lending specialization)?
2. What are the trends in small business lending (loan volume, number of loans, interest rates, loan sizes, collateral requirements) in Nigeria over the study period?
3. Is there a significant difference in small business lending (loan volume, number of loans) between merged banks and non-merged banks in Nigeria?
4. What is the effect of bank mergers on the volume of lending to small business borrowers (total loan amount, number of loans) in Nigeria?
5. What is the effect of bank mergers on the terms of lending to small business borrowers (interest rates, collateral requirements, loan tenors) in Nigeria?
6. What mechanisms (loan size, relationship lending, organizational structure, capital adequacy, market structure, technology) explain the effect of bank mergers on small business lending in Nigeria?
7. Do the effects of bank mergers on small business lending vary by merger type (in-market vs. out-of-market, horizontal vs. vertical, large vs. small acquirers)?
8. What policy recommendations can be made to mitigate any negative effects of bank mergers on small business lending in Nigeria?

1.5 Statement of Hypotheses

The following hypotheses are formulated in null (H₀) and alternative (H₁) forms:

Hypothesis One (Loan Volume)

• H₀: Bank mergers and acquisitions have no significant effect on the total volume of loans (amount) to small business borrowers in Nigeria.
• H₁: Bank mergers and acquisitions have a significant effect on the total volume of loans (amount) to small business borrowers in Nigeria.

Hypothesis Two (Number of Loans)

• H₀: Bank mergers and acquisitions have no significant effect on the number of loans made to small business borrowers in Nigeria.
• H₁: Bank mergers and acquisitions have a significant effect on the number of loans made to small business borrowers in Nigeria.

Hypothesis Three (Interest Rates)

• H₀: Bank mergers and acquisitions have no significant effect on the interest rates charged on loans to small business borrowers in Nigeria.
• H₁: Bank mergers and acquisitions have a significant effect on the interest rates charged on loans to small business borrowers in Nigeria.

Hypothesis Four (Loan Size)

• H₀: Bank mergers and acquisitions have no significant effect on the average loan size (loan amount per borrower) to small business borrowers in Nigeria.
• H₁: Bank mergers and acquisitions have a significant effect on the average loan size (loan amount per borrower) to small business borrowers in Nigeria.

Hypothesis Five (Small vs. Large Banks)

• H₀: There is no significant difference in small business lending between merged banks and non-merged banks in Nigeria.
• H₁: There is a significant difference in small business lending between merged banks and non-merged banks in Nigeria.

1.6 Significance of the Study

This study is significant for several stakeholders:

Central Bank of Nigeria (CBN) : The findings will inform the CBN’s merger approval decisions, prudential guidelines, and small business lending policies. If mergers reduce small business lending, the CBN may impose conditions on mergers (e.g., requiring merged banks to maintain or increase small business lending portfolios).

Small Business Borrowers: Small business owners will gain insights into how bank mergers affect their access to credit (availability, terms, conditions), enabling them to anticipate changes and seek alternative financing sources if necessary.

Banks (Management and Boards) : Bank management will gain insights into the effects of mergers on small business lending, enabling them to design post-merger integration strategies that preserve relationship lending, maintain local decision-making authority, and continue serving small business customers.

Investors and Shareholders: Investors will gain insights into the potential impact of mergers on bank profitability (if small business lending is profitable) and risk (if small business lending is risky). This may affect investment decisions.

Government (Federal Ministry of Industry, Trade and Investment) : The findings will inform government policies on small business development, access to finance, and the role of banks in supporting SMEs.

Small Business Associations (e.g., NASSI, MAN, NACCIMA) : The findings will provide evidence for advocacy on behalf of small business members, supporting calls for policies that protect small business access to credit.

Academics and Researchers: The study contributes to the literature on bank mergers and small business lending in developing countries, particularly in the African context.

Development Partners (World Bank, AFDB, DFID/UKAID) : The findings will inform technical assistance programs on small business finance and banking sector reform.

The Nigerian Economy: Improved understanding of the effects of bank mergers on small business lending will support policies that promote small business growth, job creation, and economic diversification.

1.7 Scope of the Study

This study focuses on the effects of bank mergers and acquisitions on lending to small business borrowers in Nigeria. The scope is limited to:

Geographical Scope: Nigeria, with a focus on deposit money banks (DMBs) operating in Nigeria.

Time Period: The study period covers major merger waves: (a) 2004-2006 (consolidation to N25 billion capital base), (b) 2009-2012 (post-crisis interventions and acquisitions), (c) 2018-2020 (voluntary mergers such as Access-Diamond). The study may also include a pre-merger period (e.g., 2000-2003) and post-merger period up to 2023.

Banks: The study includes merged banks (acquirers and targets) and non-merged banks (control group). The sample includes commercial banks (not merchant banks, microfinance banks, development banks).

Small Business Borrowers: The definition of small business follows the National Bureau of Statistics (NBS) and SMEDAN definitions: enterprises with 10-49 employees and assets between N5 million and N50 million (excluding land and buildings). The study may also include micro enterprises if data is available.

Lending Variables: The study examines: (a) loan volume (total amount lent to small businesses), (b) number of loans (count of loans to small businesses), (c) average loan size, (d) interest rates on small business loans, (e) collateral requirements, (f) loan tenors, (g) rejection rates.

Merger Variables: The study examines: (a) merger type (in-market vs. out-of-market, horizontal vs. vertical), (b) acquirer size (large vs. small), (c) target size, (d) pre-merger market share, (e) pre-merger small business lending intensity.

Data Sources: Secondary data from CBN publications (annual reports, statistical bulletins, banking supervision reports), bank annual reports, NDIC reports, SMEDAN surveys, and NBS business surveys.

1.8 Limitation of the Study

This study acknowledges several limitations:

1. Data Availability: Small business lending data may not be consistently or comprehensively reported by banks. Banks may not separately disclose loans to small businesses vs. larger businesses in their financial statements. The study may need to rely on CBN supervisory data or surveys, which may have limitations.
2. Definition of Small Business: The definition of “small business” may vary across banks (different loan size thresholds) and across time (inflation may increase loan sizes). Inconsistent definitions may affect comparability.
3. Endogeneity: Mergers are not random events; banks that choose to merge may differ systematically from banks that do not (e.g., larger banks, more profitable banks, banks with higher small business lending). This self-selection may bias results. The study will use econometric techniques (difference-in-differences, instrumental variables) to address endogeneity.
4. Causality: It may be difficult to isolate the effect of mergers from other factors affecting small business lending (economic growth, interest rates, monetary policy, technological change, regulatory changes). The study will control for these factors.
5. Limited Sample Size: The number of bank mergers in Nigeria is limited (approximately 20-30 significant mergers). The sample size may reduce statistical power, particularly for subgroup analyses (e.g., by merger type).
6. Short Post-Merger Period: Some mergers occurred recently (e.g., Access-Diamond, 2019). The post-merger period may be too short to observe long-term effects. The study will include mergers with sufficient post-merger data (at least 3-5 years).
7. Generalizability: Findings may not be generalizable to other developing countries with different banking structures, regulatory environments, and small business sectors.
8. Informal Sector Lending: Small businesses in the informal sector may rely on non-bank financing (informal lenders, microfinance banks, cooperatives). This study focuses on bank lending and may not capture the full picture of small business financing.

CHAPTER TWO: REVIEW OF RELATED LITERATURES

2.1 Theoretical and Conceptual Framework

This section presents the theoretical and conceptual framework underpinning the study of the effects of bank mergers and acquisitions on lending to small business borrowers. The framework integrates concepts from industrial organization economics, banking theory, and corporate finance.

2.1.1 Concept of Bank Mergers and Acquisitions

A merger is a combination of two or more separate business entities into a single new entity. In a merger, the combining entities typically cease to exist as separate legal entities, and a new entity is formed. In the banking context, a merger involves the consolidation of two or more banks into a single banking entity, often with a new name or one of the existing names. An acquisition (or takeover) occurs when one business entity (the acquirer) purchases a controlling interest in another business entity (the target). The target entity may continue to exist as a subsidiary or may be absorbed into the acquirer. In banking, acquisitions are often friendly (agreed by management and board), but hostile takeovers are rare due to regulatory oversight (Gaughan, 2018; DePamphilis, 2019).

Bank mergers and acquisitions can be classified by the relationship between the merging entities:

Horizontal Mergers: Mergers between banks that operate in the same geographic market and offer similar products/services. Horizontal mergers increase market concentration and may reduce competition. Most bank mergers in Nigeria (e.g., Access Bank acquiring Diamond Bank) are horizontal mergers (CBN, 2010).

Vertical Mergers: Mergers between banks and entities at different stages of the financial services value chain (e.g., a bank acquiring a mortgage company, insurance company, or asset management firm). Vertical mergers are less common in Nigeria.

Conglomerate Mergers: Mergers between banks and entities in unrelated businesses. Conglomerate mergers are rare in banking due to regulatory restrictions on non-financial activities (Gaughan, 2018).

In-Market vs. Out-of-Market Mergers: In-market mergers involve banks operating in the same geographic market (same city, state, or region). Out-of-market mergers involve banks operating in different geographic markets. In-market mergers have greater potential to reduce competition and affect small business lending (Berger, Demsetz, and Strahan, 1999).

Acquisition of Distressed Banks: In the context of banking crises, stronger banks may acquire distressed banks (often with regulatory encouragement or intervention). These acquisitions may have different effects than voluntary mergers between healthy banks (CBN, 2010).

2.1.2 Forms of Mergers and Acquisitions

There are several legal forms of mergers and acquisitions:

Statutory Merger: The target bank is absorbed into the acquiring bank, and the target ceases to exist as a separate legal entity. The acquiring bank assumes all assets and liabilities of the target. This is the most common form of bank merger in Nigeria.

Subsidiary Merger: The target bank becomes a subsidiary (wholly owned) of the acquiring bank but continues to operate under its own name and charter. The acquiring bank may maintain the target’s brand and local management. This form preserves brand equity and customer relationships.

Consolidation (Amalgamation) : Two or more banks merge to form an entirely new bank, with a new name, new charter, and new management. All pre-existing entities cease to exist. An example is the merger of First Atlantic Bank, Inland Bank, NUB, and others to form FinBank (now part of First Bank) (CBN, 2010).

Share Acquisition (Stock Purchase) : The acquiring bank purchases a controlling interest (usually >50%) of the target bank’s shares. The target continues to exist as a separate legal entity but is now controlled by the acquirer. The target may later be merged into the acquirer.

Asset Acquisition: The acquiring bank purchases specific assets (e.g., loan portfolio, branches) of the target bank, but not the entire entity. This is less common in banking (DePamphilis, 2019).

2.1.3 Brand Considerations and Implications on Consolidation

Brand considerations play a significant role in bank mergers and acquisitions, particularly in retail banking where customer relationships and trust are important. Brand considerations include:

Brand Equity: Established banks have brand recognition, customer loyalty, and trust. Acquiring a bank with strong brand equity may allow the acquirer to retain customers who might otherwise leave. The acquirer must decide whether to retain the target’s brand (subsidiary merger) or rebrand to the acquirer’s name (statutory merger).

Customer Relationships: Small business borrowers often have long-term relationships with local bank managers and loan officers. These relationships (relationship lending) are important for small business lending because loan officers develop soft information (character, business acumen, local knowledge) that is not captured in financial statements. Mergers that disrupt these relationships (by closing branches, replacing loan officers, centralizing decision-making) may reduce lending to small businesses (Berger and Udell, 2002; Petersen and Rajan, 1994).

Branch Network: Merged banks often consolidate branch networks, closing duplicate branches (especially those in close proximity). Branch closures in small business-intensive areas may reduce small business lending because small business borrowers rely on local branches for relationship lending. The decision to retain or close branches has implications for small business access to credit.

Corporate Culture: Merging banks may have different corporate cultures (risk appetite, lending policies, customer focus). Cultural clashes may lead to the departure of loan officers who have relationships with small business borrowers. Successful post-merger integration requires managing cultural differences (Gaughan, 2018).

Brand Dilution: Acquiring a bank with a weak reputation may damage the acquirer’s brand. Conversely, acquiring a bank with a strong brand may enhance the acquirer’s brand. In Nigeria, the acquisition of Diamond Bank (strong retail brand) by Access Bank (strong corporate brand) created a combined entity with both strengths (Access-Diamond merger).

2.1.4 The Theory of Drivers and Motives of Mergers and Acquisition

Several theories explain why banks engage in mergers and acquisitions:

Synergy Theory (Efficiency Theory) : Mergers create synergies where the combined entity is more valuable than the sum of the individual entities. Synergies can be: (a) Cost synergies (economies of scale and scope) : reducing duplicate costs (branches, headquarters, back-office functions, IT systems), spreading fixed costs over a larger asset base, and achieving lower average costs, (b) Revenue synergies: cross-selling products to the combined customer base, accessing new markets (geographic or product), and increasing market share, and (c) Financial synergies: improved access to capital markets, lower cost of funds, and better risk diversification (Berger et al., 1999).

Market Power Theory: Mergers increase market concentration, which may increase the merged bank’s market power. A bank with increased market power may: (a) charge higher loan interest rates, (b) pay lower deposit interest rates, (c) reduce loan availability (especially to small businesses), and (d) impose stricter terms and conditions. Market power is more likely in in-market mergers where the merging banks’ market shares overlap (Sapienza, 2002).

Agency Theory: Managers may pursue mergers to increase the size of the firm (empire building) to increase their compensation, power, and prestige, even if the merger does not increase shareholder value. Managerial hubris (overconfidence) may lead managers to overestimate the benefits of mergers and overpay for targets (Jensen, 1986; Roll, 1986).

Diversification Theory: Banks may merge to diversify geographically (enter new regions) or across product lines (enter new businesses). Geographic diversification reduces the bank’s exposure to local economic downturns. However, geographic diversification may also reduce the bank’s commitment to relationship lending in local markets (Berger et al., 1999).

Regulatory Theory: Regulation may drive mergers. The Central Bank of Nigeria mandated a minimum capital base of N25 billion in 2005, forcing undercapitalized banks to merge or be acquired. Regulatory intervention in distressed banks (e.g., 2009-2010 crisis) also led to acquisitions (CBN, 2010).

Tax Theory: Mergers may be motivated by tax considerations, such as utilizing tax loss carryforwards of the target (reducing taxable income of the combined entity). Tax motivations are less significant in banking due to the industry’s generally profitable nature.

Market Timing Theory: Banks may merge when their stock price is high (using stock as currency) or when target valuations are low (opportunistic acquisitions). The 2005 consolidation wave in Nigeria was driven by regulatory pressure, not market timing (CBN, 2010).

2.1.5 Potential Benefits and Costs of Mergers and Acquisitions

Bank mergers and acquisitions have potential benefits and costs for various stakeholders:

Benefits:

• Economies of scale: Reduced average costs through larger scale of operations.
• Economies of scope: Sharing of customer information across product lines, cross-selling.
• Improved efficiency: Elimination of duplicate functions, consolidation of branches.
• Increased capital adequacy: Combined entity has a larger capital base, reducing risk of failure.
• Enhanced risk diversification: Geographic and sectoral diversification reduces portfolio risk.
• Access to new technology: Acquiring a bank with advanced technology (e.g., digital banking, credit scoring) can improve efficiency.
• Market expansion: Entering new geographic markets or customer segments.
• Resolution of distressed banks: Preventing bank failures and systemic risk (Berger et al., 1999).

Costs:

• Reduced competition: In-market mergers reduce the number of competitors, potentially increasing market power.
• Reduced small business lending: Larger banks may reduce lending to small businesses, as discussed in detail below.
• Branch closures: Consolidation of branch networks may reduce access to banking services in rural and low-income areas.
• Job losses: Elimination of duplicate positions (branch managers, loan officers, back-office staff).
• Customer disruption: Customers may experience service disruptions during integration, leading to loss of relationships.
• Integration costs: Merged banks incur significant costs in integrating IT systems, branch networks, and staff.
• Cultural clashes: Merging banks with different cultures may experience employee turnover and reduced morale.
• Increased systemic risk: Larger banks may become “too big to fail,” increasing systemic risk (Gaughan, 2018).

The effect of bank mergers on small business lending is a key cost that this study examines.

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

The Monti-Klein model (Monti, 1972; Klein, 1971) is a microeconomic model of the banking firm that analyzes the profit-maximizing behavior of a bank under imperfect competition. The model is an extension of the traditional theory of the firm to banking, recognizing that banks face imperfect competition in both loan markets (where they have market power) and deposit markets (where they also have market power). The model is widely used to analyze the effects of market structure (e.g., mergers) on bank lending behavior (Freixas and Rochet, 2008).