The Impact Of Financial Deregulation In The Banking Sector Of Nigeria

Project and Seminar Material for Accountancy / Accounting

The Impact Of Financial Deregulation In The Banking Sector Of Nigeria


For years gone by, it has been obvious that the banking sectors by its nature of activities is the most heavily regulated sector in most economies of the world; this is being evidence by various policies which are postulated to protect its operations- both external and internal, this policies include fiscal and monetary policies (which are to be explained in details later in this project).

To a great extent, the responsibility of economic development rests on the financial sector of the nation, and as such, when regulations are on high side or rigid in nature, this may adversely affect the overall development of Nigeria.

This course of study has been approved on evaluation in order to find out the outcomes and impact of ‘leniency’ and flexibility of regulations on the banking sector, which invariably determines the economic growth and development at large.

The research based on observation methodology, shows that deregulation policy cuts short the hindrance of funding to the public, both the rich and poor, so as borrowing does not cost excessively.

In conclusion, financial deregulation plays a vital role in the banking sector of the economy and in the national growth.

Table Of Contents

Preliminary Page(s)

  • Title Page
  • Approval Page
  • Dedication
  • Acknowledgement
  • Abstract
  • Table of Content

Chapter One

1.0 Introduction

  • 1.1 Statement of Problems
  • 1.2 Purpose of the Study
  • 1.3 Significance and Relevance of the Study
  • 1.4 Scope of the Study
  • 1.5 Limitations of the Study
  • 1.6 Research Methodology
  • 1.7 Research Questions
  • 1.8 Definition of Operational Terms

Chapter Two

2.0 Literature Review

  • 2.1 The History of Banking in Nigeria
  • 2.2 Functions of Commercial Banks in the Development of Nigerian Economy
  • 2.3 The Concept of Structural Adjustment Programme
  • 2.4 The Concept and Areas of Deregulation in the Economy…
  • 2.5 The Role of CBN in the Deregulation of the Economy
  • 2.6 Effects of the Deregulation of the Economy on the Banking Sector
  • 2.7 Challenges and achievements of Commercial Bank under a Deregulated Economy
  • 2.8 A Comparative Analysis of Commercial Banking under Deregulation and Regulation

Chapter Three

3.0 Research Methodology and Design

  • 3.1 Research Design
  • 3.2 Sample Size
  • 3.3 Sources of Data
  • 34 Method of Data Collection
  • 3.5 Technique of Data Analysis

Chapter Four

4.0 Data Presentation and Analysis

  • 4.1 Presentation of Data
  • 4.2 Analysis of Data

Chapter Five

5.0 Summary, Conclusion and Recommendation

  • 5.1 Summary of Findings
  • 5.2 Conclusion
  • 5.3 Recommendation

Chapter One

1.0 Introduction

Nigeria economy had a lot of structural distortion in 1980’s, the economic policies prior to 1985, made the Nation’s economy vulnerable to external stocks. Consequently, the 1986 budget sought to de-emphasized controls and adopted policy measures arrived at expanding the economy resource. To attain this goal, the 1986 budget at a tone, introduced the Structural Adjustment Programme (SAP) which was launched in July 1986, in Nigeria.

Structural Adjustment Programme (SAP) is a programme imposed on developing countries, especially on economic policy regions, by the Bretton Woods Institutions (i.e. the World Bank and International Monetary Fund). This is to improve a country’s foreign investment by removing trade and investment regulations (i.e. deregulations). The deregulation policy is also an encouragement to efficient operation of the money market.

The deregulation policy was designed to:

  1. Restructure and diversify the productive base of the economy in order to reduce dependency on the petroleum viability.
  2. To achieve focal and balance of payment viability.
  3. To lay the basis for sustainable, non-inflationary/minimal inflationary growth rate.
  4. To lessen the dominance of unproductive investment in the economy, improve the sector’s efficiency and intensify the growth potential of the private sector and so on.

The banking industry which is a major instrument which government execute their policies, need to appropriately reposition itself to take full advantages of the gains that might arise from deregulation, as well as face the challenges. Deregulation of the economy will definitely pose some challenges to the banking industry: Competitive lending rates, effectiveness of management of credit/credit risk, etc.

1.1 Statement Of The Problem

Due to the undeveloped nature of Nigeria banking system, it is sometimes said that banks have not met the standard expected from them, especially in the introduction of deregulatory policy. There are many problems which the banking industry is no exception. They are as follows:

  1. The reluctant competition between banks as a result of deregulatory policy and the possibility of bank failure which prompted the Federal Government to establish the Nigeria Deposit Insurance Corporation (NDIC).
  2. The level of expertise in investment banking and corporate finance.
  3. Ability to effectively manage credit risk, etc.

These problems threaten the financial performance of the banks in Nigeria due to the information of deregulation in the economy.

1.2 Purpose Of The Study

The purpose of this study is to examine the performance of banks, under a deregulated economy with a view of assessing the effects, challenges and benefits, as well as achievements which deregulation will likely pose on the banking industry. This study attempts to critically identify and analyze the impact of government deregulation of the economy on banking sector, with the aim of making useful recommendations on how to improve commercial banks performance and other banks in Nigeria.

Emphasis will also be made on the current banking practices and habits as means of battling with the challenges and the threats deregulation has brought with it. Also, to identify the various achievements made with the inception of the policy as well as to examine how effective banks have been since the inception of the policy.
Furthermore, this text will try to compare the activities of commercial banks under the system of regulation and deregulation in order to know the main objective of the policy is being achieved; Recommendations that will enhance the efficiency of banks operations will be equally made.

1.3 Significance And Relevance Of The Study

The findings of this work will contribute to knowledge in the subject matter, other researchers and the entire public will hopefully benefit from this study since it will form the basis for other research work.

1.4 Scope Of The Study

The scope of the study in terms of time available was within a space/length of two of three months, i.e. August through October, 2013; the scope, in terms of location was banks, which were selected at random in the capital city of Owerri. This selection was made to measure the performances of commercial banks under a deregulated economy, where there is other non-banking financial institution situated.

1.5 Limitations Of The Study

The limitations encountered during the researcher project were:

  1. Inadequate time length, which would have suitable to carry out a more explicit research; posed a constraint.
  2. Inadequate resources, i.e. Cost of transportation to and fro, the sampled environment, which were as a result of bad road network.
  3. Inadequate access to information, due to inability of bank official to disclosure full information, which were part of the banking ethics.

1.6 Research Methodology

The methodology applied in this research project includes Oral interviews with top-bank official (using random sampling). Questionnaire will also be administered to staff, mostly operational departments and few members of the management board.

1.7 Research Questions

They are as follows:

  • Will deregulation lead to an upsurge in the number of commercial banks?
  • Has deregulation of the economy resulted to an increase in profitability of commercial banks?
  • Has deregulation led to an increase in banks’ bad debts and doubtful debts?

1.8 Definition Of Operational Terms

(SAPs) Structural Adjustment Programmes:

These are economic policies for developing countries who have been promoted by the World Bank and International Monetary Fund (IMF) to encourage to an extent, private participation and removal of excessive government controls in the money market of the Nation (- World Health Organization).


An item of value demanded by banks as a security for loans granted to customers.


Money created by commercial banks through the means of loans and discount granted to customers.

Economic Liberalization:

The ‘loosening’ of government regulations in a country to allow for private sector companies to operate business transactions with fewer restrictions. This is synonymous to financial deregulation.


procedures and techniques used, in tackling problems encountered in the course of the research.


List of questions in a printed form administered to respondents.

Sample/Sampled Population:

Fraction, or part of the population taken in a specified manner.


People selected from a population (i.e. sample) who are expected to answer questions asked to them during interviews or via questionnaires.


This is an economic system where private individuals are given freedom (in an extreme case) to rule the economic aspect of a country.

Invisible Hands:

Coined by Adam Smith, it refers to individual attempts in maximizing their own good/to become healthy, and as a result, leads to the overall development of an economy.

Commercial Bank:

In this context, it is used interchangeably with bank. Commercial bank refers to financial institution(s) established with the aim of providing loans and accepting deposit and making profit at the end of the financial year.


Is a bond, acknowledging a loan to a company usually the company’s seal, which bears a fixed rate of interest. It is simply known as LOAN CAPITAL.

Interest Rate:

Rental payment for the use of credit borrowed, it also refers to returns received for parting with liquidity by lenders.

Chapter Five

5.0 Summary, Conclusion And Recommendation

This chapter is aimed at summarizing the findings from the research work as well as providing recommendations.

5.1 Summary Of Findings

This study shows that the adoption of the deregulation policy in Nigeria was in response to the deteriorating economic and social conditions inherent in Nigerian economy among the considered trend were slow output growth, decline exports, rising inflation, inefficient allocation of economic resources, balance of payment problems and rising debt burden. In order to provide solution to the unconducive environment, the deregulation policy was introduced to combat with the distortions in Nigeria economy. The deregulation policy encourages the efficient operation of the market which will lead to higher productivity, greater effective and efficient allocation of economic resources

This study has shown that the macro-economic policy environment is an sample evidence that the deregulation has brought doubt a substantial change in the structure of commercial banks operation through the dismantling of most of the complex regulatory framework, particularly of the deregulation of interest rate, institutional deregulation, price and trade deregulation. The deregulation policy provided a competitive environment for commercial banks with the proliferation in the number of banks came the end of the era of the armchair banking. Banks became more committed to efficiency and customer’s satisfaction faced with the competitive environments, banks driven by instinct for survival research daily by the customer.

This period also saw the introduction of new products and information technology in the banking industry. This was in accordance to the changing demands of the economy with the introduction of new products and information technology there was need for manpower base development. Banks in response to such need, engaged in staff skill development in order to increase the efficiency with which their services is being carried out. Inherent among the effect of deregulatory policy were the introduction of specialized banking such as merchant banking, agricultural banking. With the introduction of the serialized banking, the profitability level of commercial banks equally increased, it was also discovered through the study that deregulation poses some challenges to commercial banks in the form of ability to meet up shareholders’ requirement in respect of their investment, high demand for bank loans with competitive lending rate, ability of the bank to effectively manage credit risk as well as to get the fair share of the banking public with a competitive interest.

The government in collaboration with Central Bank of Nigeria has derived the economy towards achieving certain macro-economic objective through deregulation of interest rates, institutional deregulation as well as trade and exchange deregulation. All their aims were at efficient allocation of economic resources.

5.2 Conclusion

From the research carried out in the study of infact of deregulation on the banking sector’s activities, the following conclusions can be made.

  1. The deregulation of the economy resulted in an upsurge in the number of banks resulting in a competitive environment.
  2. The deregulation of the economy resulted in increase in manpower of staff skill development in the banking sector.
  3. With the deregulation of the economy, came high-technology information technology thereby reducing the incidence of fraud.
  4. The competitive environment created by deregulatory policy led to an increase in product development.
  5. Through deregulation policy, the efficiency with which banks and other institutions carry out their business has been on the increase.
  6. Deregulation of interest rates policies did not contribute to the efficient allocation of economic resources as funds were being directed to non-productive sector of the economy.
  7. The financial performance of commercial banks improved tremendously following the deregulation policy.
  8. The policy of deregulation did not actualize the objective for which it was implemented.

5.3 Recommendation

Based on the findings of this project, the following recommendation is been made:

  1. There should be some consistency in interest rate policy which is to be favourable enough to ensure greater utilization of banking service towards efficient allocation of economy resources. This is to say that the interest rate should not be too low to discourage savings or too high to stiff new investment.
  2. The economy should not be totally deregulated. It should be a form of “sitting on the fence” between absolute deregulated and regulated economies.
  3. Commercial banks should ensure that adequate collateral are collected before extending loans to customers, irrespective of the competitive environment in order to reduce the incidence of bad and doubtful debt.
  4. Since the deregulation measures taken by CBN have not achieved their designed objectives, there should be drastic revaluation of the implementation strategies. The Central Bank of Nigeria should make sure that interest rate charged by commercial banks should be a function of rate payable by Central Bank of Nigeria on their commercial papers, like treasury bills, treasury certificates, bonds and guarantees.

The Impact Of Financial Deregulation In The Banking Sector Of Nigeria

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