Global Economic Recession; It’s Impact On The Banking Industry In Nigeria

Project and Seminar Material for Economics

Global Economic Recession; It’s Impact On The Banking Industry In Nigeria


Abstract


The crisis that has rocked the Global economy in the past few year has been nothing but of great interest to governments, experts and scholars in different fields of study worldwide. Several phrases have been used to describe the situation. Indeed names like; Economic Depression, Global Meltdown, Economic Downturn, Economic Recession, and Economic Crunch and so on are no strangers in both the local and international prints and electronic media and they all tend to describe the same phenomenon – a slowdown in economic activities globally.

Although, it all started in the United State of America with the sub prime mortgage crisis, it has continued to spread across Europe and other parts of the world with its adverse consequences. This crisis has led to the collapse of many banks and other international financial institutions and even rendered an entire nation bankrupt.

In Nigeria, the banking sector appears to have weathered the storm due to a number of factors amongst which include the fact that our financial system is not fully integrated into the world’s financial system. This however does not mean that the Nigerian economy is completely immune from the crises.

It is on this premise that the research was conducted, in order to find out the relationship between the present Global Economic Crisis and the performance of Nigerian Banks.

Structured questionnaires containing scale rated options were employed to get facts from a carefully selected audience. The following interested findings emanated from the analyses carried out.

Despite the crises, Nigerian banks still remain the best option to customers for maintaining cash deposits. Services such as: money transfer, customer service, facilitating of contracts through the provision of indemnities and guarantees, and promotion of exchange, through clearing and third party claims settlement are still being performed by the banks effectively and efficiently.

However, banks have become more careful in granting credit facilities which may have made bank credit more difficult to access. These have potent adverse effects on both the yearly results of banks and to SMEs who rely heavily on bank credits.

Some banks may have started showing signs of illiquidity amongst which are the five (5) banks that were recently affected.

In order to rescue the situation, the researcher has made the following recommendations; recapitalization, merger, take-over, acquisition and provision of guarantees for the interbank market by the CBN in order to restore the confidence of banks and the banking public.

Finally, it has been discovered that the overall effect of the current Global Economic Recession on the banking sector is potently adverse. The Chi-Square (X2) test was applied in testing the three hypotheses that were put forward and all three alternative hypotheses were accepted.


Chapter One


Introduction

1.1 Background of Study

Recession is a general slowdown in economic activities over a sustained period of time or a business cycle contraction. An increasing commodity and energy prices and a disruption in the financial and capital market characterize a recessionary economy. As the topic imply “global economics recession in banking industry the researcher intend to contribute his own knowledge on recession. The word “recession” is a general slowdown of an economic activity over a sustainable period of time or business cycle contraction. Historically, The first recession can be traced back to 1930 when the great economic down turn ever experienced in global economy took place. This lasted from 1929 to 1931.Little wonder why it is referred to as “the great depression of the 1930s

The current economic crisis have been tagged numerous name like; Economic Meltdown, Economic Depression and so on. Whatever name it is called, it simply means a gradual slowdown in economic activities globally. The most recent one, which has spread to other part of the world, started in 2007 in United State of America due to unrestricted lending to sub/prime mortgage. The reasons for this crisis are varied and complex, but largely it can be attributed to a number of factors in both the housing and credit markets, which developed over an extended period. Some of these include: the inability of homeowner to make their mortgage payments, poor judgment by the borrower or lender, speculation and overbuilding during the boom period, risky mortgage products, high personal and corporate debt levels, financial innovation that distributed and concealed default risks, During recession many macro economic indicators vary in similar ways, production as measured by Gross Domestic Product (GDP), employment level, investment spending, capacity utilization, household income and business profit all fall.

Indexes from various Governmental and non-governmental bodies like: the International Monetary Fund (IMF), World Bank (WB), and the Central Bank of Nigeria (CBN) and so on, all tend to be predicting and forecasting an impending and gradual slowdown in other developed nations like Britain. The developing countries of Africa are not left out either. For instance, the Central Bank of Nigeria had recently released a report, forecasting an anticipated slowdown in economic growth in 2010. It is therefore pertinent to carry out an empirical assessment of the effect of the current global economic recession on the various sectors of the Nigerian Economy especially the banking sector. This will help to establish a roadmap to be adopted in rescuing the economy from total collapse. Of major interest to the researcher is the Nigerian-banking sector, hence the topic: The Global Economic Recession: Its impact on the banking industry in Nigeria.


1.2 Statement of the Problem

The role of the banking industry in the Nigerian Economy cannot be over emphasized. Banks are part of the infrastructure of the country within which development takes place. They certainly help in the shift from a subsistence economy to a cash crop economy by encouraging both the use of money and confidence in it. They provide a convenient means of making payments between people easy by the use of cheques and also provide safe places for depositing money.

Furthermore, they aid development by their ability to make loans. Undoubtedly, banks and other financial institutions especially commercial banks play the all important role of intermediating funds between the surplus and deficit sectors of the economy which in turn aid development of the latter.

However, the banking sector is an intricate part of the economy and this means it does not operate in isolation. Therefore, it is likely to be plagued by crisis in the larger economy. Consequently, the desire to empirically study the impacts of the current Global Economic Crunch on the banking sector is borne out of the realization of the importance of the sector to the Nigerian economy


1.3 Objective of the Study

The research work will be conducted deliberately to establish the impact, adverse or otherwise of the Global Economic Depression on the banking industry in Nigeria. The aim of this research study therefore is to examine the impact of the current global financial crisis on the Nigerian banking industry. The outcome of this research study is expected to assist Nigerian policy makers, banks management teams and banks regulatory bodies in Nigeria in the following ways.

  1. To know the major causes of the financial crisis in Nigeria.
  2. To determine the extent of the impact of the global financial crisis on the Nigerian banking industry and the entire economy.
  3. To determine various options that could cushion the impact as well as avoid future occurrence.
  4. To elucidate the origin of the current Global Economic Crisis.
  5. To determine the effect of the economic crisis on investors’ confidence both locally and internationally.
  6. To find out what to do in order to rescue the economy from the present meltdown.
  7. To suggest ways of dealing with the complexities arising from the current economic crunch.

1.4 Significance of the Study

This research work will be useful to all stakeholders and players in the banking industry. The banks regulatory authorities will particularly find the result of this research very relevant in formulating and regulating policies for the financial sector.

This research work will contribute to the already existing body of knowledge. It will try to push back the frontiers of findings already existed on the topic and also add to the solutions earlier proffered by previous researchers in tackling the complexity brought about by the global economic meltdown.


1.5 Research Question

The researcher attempted to find answers to the following questions:

  1. What is the impact of the ongoing Global Economic Recession on the Nigerian banking industry?
  2. How does the ongoing Economic Recession affect the role of the banking industry?
  3. What is the correlation between the ongoing Global Economic Crisis and the performance of the banking sector?
  4. What was the position of banks before the global financial crisis?
  5. What were the impacts of the global financial crisis on the Nigerian banking industry?
  6. What made the crisis spread to the Nigerian banking industry?
  7. Is the banking sector immune to the present Global Economic Crisis?
  8. Can the banking sector help in rescuing the Nigerian economy from the current Global Economic Recession?
  9. How does the CBN Banking polices & regulation increase or reduce depression in the banking industries.

1.6 Research Hypotheses

  1. Ho: The ongoing Global Economic Recession has no effect on the Nigerian banking sector
    Hi: The ongoing Global Economic Recession has effect on the Nigerian banking sector.
  2. Ho: The ongoing Global Economic Recession does not affect the roles of the Nigerian banking sector.
    Hi: The ongoing Global Economic Recession affects the roles of the Nigerian banking sector.
  3. Ho: There is no correlation between the ongoing economic recession and the performances of the Nigerian banking sector.
    Ho: There is a correlation between the ongoing economic recession and the performances of the Nigerian banking sector.

1.7 Scope and Limitation of the Study

This research work was directed more at the banking industry. It will empirically seek to unveil the impacts of the Global Economic Crunch on the performance and sustenance of the industry.

Though emphasis was on the banking sector, however, other parts of both the global and local economy were considered


1.8 Definition of Terms

Recession:

This refers to a general slowdown in economic activities over a sustained period of time.

Depression:

Same as above

Global Economy:

This refers to the totality of the economy of different countries of the world.

Arm:

Adjustable Rate Mortgages

Global Economic Recession:

This refers to a gradual and sustained slowdown in the world’s economy.

MBS:

These are financial products called mortgages backed securities on sales in the US Financial market.

Economic Activities:

These refer to the various activities that take place within the economy e.g. production, investment, consumption and trading.

Macro Economy:

This refers to the economy as a whole.

Macro Economy Variables:

These refer to economic indicators such as production, capacity utilization, employment level, investment spending, household income and business profit.

Financial Market:

It refers to the market where short and medium term funds can be sourced .e.g. banks.

Capital Market:

It refers to the market where long-term funds can be sources e.g. the Nigerian Stock Exchange (NSE).

SME:

Small and Medium Scale Enterprises.

CBN:

Central Bank of Nigeria

IMF:

International Monetary Fund


Chapter Five


Conclusion and Recommendation

5.1 Conclusion

The global economic meltdown and the implications on the Nigerian economy were discussed. A number of possible initiatives for fast tracking the economy and the more daunting task of preparing Nigeria has the resources and management capability of becoming a major player in the global economy. An all-round national re-orientation is all Nigeria needs to start moving to the promise Land. The global economic recession has come with its devasting effect on global economies. Government in developed and developing economies are working assudiously to salvage the remains of devasted economies. The decision of the government to bailout the banking sector, while allowing the banking industry to gyrate on its own to the detriment of banking industry investor might have an adverse effect on the economy. This is more so because savers deficit will be at the mercies of banks. Such development will make the financial system atrophied in nature, encourage banks to misbehave and hurts economic growth in Nigeria on the long-run.

The accepted alternative hypothesis in this study has empirically confirmed that the global economic recession strongly affect the Nigerian economy because of uncertainty in foreign direct investment and Money Supply that could create uncertainty in the level of investment which retards economic growth in. This is evidenced by the bearish trend in the banking industry, the problem in the banking sector, the decline in commodity prices especially crude oil, the reduction in foreign direct investment and the decline in remittance from abroad are all result of the global economic recession. Hence, it can be asserted that economic recession or crisis adversely affects the economic growth and development. It slows down the economy, investors are discouraged, producers do not have access to external fund to produce, consumers lack necessary money due to unemployment and therefore they cannot afford to buy the available goods in the market.


5.2 Recommendation

This study also proffers the following recommendations which are hoped will form panacea for the issue at stake. There is need for the regulatory authority to device new means of early detection of distress signs in the banking industry. The regulatory authority should enhance its remedial programmes to fix the core causes of crisis in the banking industry. The improvement, enhancement and total implementation of risk based supervision of banks to conform to the global best practice. There is an urgent need for the total overhaul of regulations and regulatory framework, in order to enhance both the on –site and off-site examination and supervision of the banks. There is the need for increased and enhanced provisions for consumer protection.

Nigerian economy is a mono-economy; any crash on the price of oil internationally will cripple our economy. So it is a matter of urgency for the Nigerian economy to divest into agriculture, manufacturing, information technology etc. Political stability is an important factor that encourages investment in an economy. So our nascent democracy should be nurtured.

The Central Bank of Nigeria`s propagation of financial inclusion should be embraced, as it will empower the masses through the availability of cheap funds, trigger off investment, employment and an increase in aggregate demand.
The exchange rate is an important instrument in the financial market, and as such should be allowed to be determined by market.


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