The Impact Of Financial Sector Reforms On The Performance Of Banks In Nigeria

Project and Seminar Material for Economics

The Impact Of Financial Sector Reforms On The Performance Of Banks In Nigeria

Abstract

This study examined the impact of financial sector reforms on the performance of the Nigerian banking sub-sector. The study aimed to test the impact of financial sector reforms lags on the performance of the banking sub- sector.

Variables were incorporated in the model to capture other variables that can impact on the performance of the banking sector. While money supply was proxy for financial sector reforms, interest rate was proxy for banking sector performance and variables such as inflation, real GDP and money supply lags were introduced. Data collected covered the period between 1980 to 2010. In analyzing the model, the Ordinary Least Square (OLS) methodology was employed. Money supply, inflation rate, real GDP and money supply lags were revealed to have had significant impacts on the performance of the Nigerian banking sub-sector.

However, this study further suggested that financial sector reforms must be consistently and continually conceived and implemented. The frequently encountered financial reform reversal and discontinuity must be mitigated if financial deepening, stability and efficiency must be achieved in the banking sector in Nigeria.

Chapter One

Introduction

1.1 Background of the Study

In Nigeria, the ability of the financial sub sector has been periodically punctuated by its vulnerability to systematic distress and macroeconomic volatility and policy fine-tuning inevitability which has worsen its contributions to the nations’ growth and development.

Siyan and Obi(2003) stressed that the “ability of the banking sector to play its fundamental roles in the growth and development of an economy through its financial intermediation function which is perhaps the most important function of the banks especially in developing countries like Nigeria has been frustrated periodically by its vulnerability to systemic financial crisis macro-economic instability. Other roles of the banks include serving as clearing and settlement institution and the medium through which the effect of monetary policy are transmitted to the rest of the economy. In a mission to finding a lasting solution to this lingering ugly incidence of bank distresses, worsening economic financial condition of their corporate borrowers and increasing incidence of fraud and embezzlement of funds. Thus, the need for a reform or overhauling of the entire sector by the regulatory authority “Central bank of Nigeria(CBN)” such that depositors can go to sleep while their monies or deposit are in safe hands. In the light of the above, Nnanna (2005) posited that the policy makers have endeavored to deepen their financial system in order to enable banks play their roles most efficiently. The thrust of this research is on the impact of the financial reform on the banking industry. Financial reform according to Olekan (1993) is policy measures designed to deregulate the financial sector with a view to achieving a liberalized market oriented system within an appropriate regulatory framework.

In other words, Siyan and Obi (2003)depicted that “Financial sector reforms are meant to establish a solid foundation for the effective implementation of market based monetary policy since many aspects of these reforms have implications for the Central Bank’s achievement of the financial system stability. Anecdotal literature indicates that banking sector reforms are propelled by the need to deepen the financial sector and reposition it for growth; to become integrated into the global financial architecture and evolve a banking sector that is consistent with integration requirements and international best practices(Ajayi M.2005) In most reforms, emphasis has always been on the capital adequacy in determining banks ability to operate and record appreciable performance by way of good returns to the shareholders and positive contribution to real growth in the economy. One of the latest reforms whose deadline was 31st December, 2005 is on the increase in capital base of banks from the former two billion naira to twenty-five billion naira within a space of less than five years. The big question therefore is whether it is large capital base or high quality operation or both that will improve banks performance and reduce the probable incidence of systemic distress and bank failures experienced in the past Although the former Central Bank Governor, Soludo (2006)noted in one of his statements that “The Nigerian banking industry today is fragile and marginal, whereas the national goal should be a banking system that is part of the global change and which is reliable, competitive, strong and innovative.

1.2 Statement of Problem

In spite of the numerous financial sector reforms, little impact of it has been experienced by the banking sub sector. The banking sub sector which is supposed to be affected directly by financial sector so as to achieve the much needed objectives of financial deepening, financial development, financial stability amongst other monetary policy objectives has remained unaffected. In the face of recent financial reforms, the financial system is becoming stable while the banking sub-sector is experiencing instability as it is being ably affected by both national and trans-national financial shocks. Obviously, the number of banks in Nigeria has constantly and continuously taken the path of shrinkage. This has led to the retrenchment of workers, which is contributing to the unemployment rate in Nigeria. Furthermore, embezzlement of people’s savings by top bank officials for personal enrichment and the insider trading in banks are obstacles that have over the years plagued the banking sector even in the face of increasing financial sector reforms in Nigeria.

For the Nigerian banks to meet up with the modern trend in service rendering and financial intermediation by banking institutions in first world countries, then the root cause of these problems pulsating the banking sub-sector which has impaired response to financial sector reforms must be identified and attended to. In the face of financial sector reforms, the banking sector have remained stagnate, why?

1.2 Objective of the Study

The objectives of the study are;

  1. To examine the impact of financial sector reforms on the banking sector in Nigeria.
  2. To determine the time lag needed for the banking sector to be affected by financial reforms.
  3. To ascertain the relationship between financial sector reform and bank performance in Nigeria

1.3 Research Hypotheses

For the successful completion of the study, the following research hypotheses were formulated by the researcher;

  1. H0: there is no impact of financial sector reforms on the banking sector in Nigeria
    H1: there is impact of financial sector reforms on the banking sector in Nigeria
  2. H02: there is no time lag needed for the banking sector to be affected by financial reforms.
    H2: there is time lag needed for the banking sector to be affected by financial reforms.

1.5 Significance of the Study

The important position occupied by the banking sector is the achievement of financial targets and at large economic objectives cannot be underscoring. In the face of this, this study tends to capture financial sector reforms via financial liberalization which will be proxied by the volume of broad money supply while the performance of the banking sector will be captured using the lending interest rate. This study is significant owing to the fact that it is the most recent research on the issue of financial sector reforms and its impact on the Nigerian banking sector.
In addition, while other studies such as Olajide et al (2011), Fadere (2010), Ajayi (2005), Iganiga (2010), Eregba (2010) amongst others, have given priority to financial deepening as a proxy for financial sector reforms as captured by the ratio of money supply to GDP, this study has deemed it necessary to bring a new dimension by using the money supply as a proxy for financial sector reform as captured by financial liberalization. Hence, a springboard has been founded on which other research works are expected to take off and through this, the problems of the Nigerian banking sector if not totally solved can be ameliorated.

1.6 Scope and Limitation of the Study

The scope of the study covers the impact of financial sector reforms on the performance of banks in Nigeria. The researcher encounters some constrain which limited the scope of the study;

a) Availability of Research Material:

The research material available to the researcher is insufficient, thereby limiting the study

b) Time:

The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

c) Organizational Privacy:

Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities

1.7 Definition of Terms

Financial Sector:

The financial sector is a category of the economy made up of firms that provide financial services to commercial and retail customers. This sector includes banks, investment funds, insurance companies and real estate. Financial services perform best in low-interest-rate environments

Bank Performance:

“Efficiency” refers to the bank’s ability to generate revenue from a given amount of assets and to make profit from a given source of income. … There are a multitude of measures used to assess bank performance, with each group of stakeholders having its own focus of interest.

Reforms:

Make changes in (something, especially an institution or practice) in order to improve it.

1.8 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

  • Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study.
  • Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature.
  • Chapter three deals on the research design and methodology adopted in the study.
  • Chapter four concentrate on the data collection and analysis and presentation of finding.
  • Chapter five gives summary, conclusion, and recommendations made of the study

Chapter Five

Summary, Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was to ascertain the impact of financial sector reforms on the performance of banks in Nigeria

In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of financial sector reforms on the performance of banks in Nigeria

5.2 Summary

This study was on the impact of financial sector reforms on the performance of banks in Nigeria. Three objectives were raised which included: To examine the impact of financial sector reforms on the banking sector in Nigeria, to determine the time lag needed for the banking sector to be affected by financial reforms, To ascertain the relationship between financial sector reform and bank performance in Nigeria. In line with these objectives, two research hypotheses were formulated and two null hypotheses were posited. The total population for the study is 200 staff of CBN in Enugu State. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made up human resource managers, accountants, customer care officers and junior staff was used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies

5.3 Conclusion

However, from the study, the sector has experienced a remarkable growth rate since the introduction of structural adjustment Programme. This growth has not actually led to improvement in the performance of the Nigerian Economy. From the study, it was discovered that despite the recent series of reforms in Nigerian Financial Sector is yet to contribute significantly to the performance of Nigerian Economy. The sector is still faced with several challenges. This implies that a radical policies are required that will increase credit to private sector and ensure efficient allocation of credit to the private sector. Also, the apex bank (CBN) should be more committed to policy implementation

5.4 Recommendation

Reforms should be premeditated, mapped out and even implemented before the crystallization of the negative consequences of reforms, in order to avoid its negative impact. Also, some of the extant reforms can be re-examined and lessons should be drawn from them towards practising speculative reforms in having a maximal control of the policies supporting the reforms such as monetary policy and foreign exchange policy among other

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