The Impact Of Global Financial Crisis On The Nigerian Banking Sector

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The Impact Of Global Financial Crisis On The Nigerian Banking Sector


Abstract


This study The aim of this study was to investigate the Impact of Global Financial Crisis on the Nigerian Banking Sector – A Case study of UBA PLC, UBN PLC and OCEANIC Bank PLC, respectively. The global financial crisis is occasioned by banks imprudence, too high/excessive compensation packages to banks executives, reckless bank lending, lose regulatory regimes and several unregulated financial markets and products. The global financial crisis affects depositors funds and confidence in the Nigerian banking sector. The effect negatively impacts on the credit quality of commercial banks. The work is divided into five chapters. Chapter one is the introduction which treats the background of the study, statement of problem, objectives of the study, research questions and hypothesis and significance of the study. Chapter two is the literature review of related works done on the area of Global Financial Crisis. Chapter three is the research methodology which explains the research design, the methodology for collecting and analyzing data. Chapter four centers on data presentation and analysis while the last, but not the least, which is chapter five is on summary of findings, conclusion and recommendations. The sample size was determined using the Taro Yemeni‘s formula and data from the field analysed in percentages using tabular format. The work recommends that the governments of various countries should put up stringent monitoring policies to avert the occurrence of the global financial crisis.


Chapter One


Introduction

1.1 Background of the Study

The world Technological advancement has ushered in drastic changes in The global financial crisis began in the United States of America and the United Kingdom when the global credit market came to a standstill in July 2007 (Avgouleas, 2008:24). The crisis brewing for a while, really started to show its effects in the middle of 2008. Around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems. The crisis later spread to Europe and now has become a global phenomenon. The financial crisis at the early stage manifested strongly in the sub-prime mortgages because households faced difficulties in making higher payments on adjusted mortgages (Olowe, 2008:11). This development led to the use of credit contraction by financial institutions in the US to tighten their standards in the light of their deteriorating balance sheets. In addition, financial institutions stopped lending and recalled their credit lines to ensure capital adequacy (Aluko, 2009:32). According to Baker (2008:31), the original root of the current financial mess is in the US- the world‘s largest Industrial-Military complex. With an estimated GDP of $14 trillion, the US contributes about 25% of world output. If, as is being forecast, the US economy contracts by just 1%, this will imply a direct output loss of approximately $140 billion- equivalent to the GDP of Pakistan, the 47th largest economy in the world! And the crises are not restricted to the US. Cyprian (2008:44) notes that financial markets have tumbled and slumped the world over: from London to Tokyo, Seoul to Sydney, Sao Paulo to Moscow, Bombay to Frankfurt etc. Avey (1998;12) asserts that no economy – whether developed, emerging or developing is, so far, insulated from what Greenspan refers to as „once-in-a-century credit tsunami‟. The initial response of the policy makers in Nigeria was meek. Either they did not understand the crises or underestimated its magnitude. In general, they thought of the crisis as only a ‗storm in a tea cup‘, an aberration, a ‗hiccup‘. They insisted that the ‗fundamentals of the financial system look impressively strong‘ even when the capital market has been bleeding uncontrollably. The Minister of Planning stated, rather insensitively, ‗there is no problem in the Nation‘s capital market. What we have presently is just corrections and adjustments …. Shareholders are getting dividends and bonuses and they are happy…‘ This was at a time when market capitalization had dropped from N12 trillion to less than N9 trillion. When they finally accepted there was a crisis, they promised to take some unspecified ‗drastic and unusual action‘ to stem the global financial crises from causing havoc in the Nigerian financial system.

The current century has undergoing the most worst global financial crisis, it classify as the second worst one after the economic crisis of the Great Depression (1929), when the mortgage, banking, and insurance companies affecting the economy and cast a shadow over the various economic sectors, and this financial crisis spread from America to Europe and other developed and developing countries (Alnajjar et al., 2010). Global economic crisis started in 2007 as a financial crisis in the United State of America, the crisis root in credit contraction in the banking sector due to certain laxities in the US financial system and later the global economic crisis spread to Europe and has become a global phenomenon (Ojeaga, 2009). Many studies shows that practice effects were found to be less clear-cut.in the case of financial globalization, which should enhance international risk sharing, reduce consumption volatility, and foster economic growth (Claessens and Horen, 2014). The collapse of the economic ideology of free market forces is the most important reasons of global financial crisis; the global financial crisis has the potential to escalate into unmanageable proportions for the financial system dominated by banking sector, which reflect many facts such as global aggregate demand has fallen while commodity prices collapsed (Ashamu and Abiola, 2012; Shabbir et al., 2012). The global financial crisis which started in 2007 has many causes, which to a large extent interact into each other when the value of financial assets sudden wide-scale drop or in the financial institutions managing those assets, and often in both, its noted that financial crisis may be has a variety of causes and factors such as negative investment sentiment, fear or panic and this led to that some financial institutions or assets suddenly lose a large part of their value for example (Maiwada, 2013, Batrancea et al., 2014). Before the consolidation exercise started in 2005, the Nigerian banking industry witnessed a lot of stress, uncertainty and anxiety. This eroded the confidence of the general public which used to be a great asset of the banking sector in the past. In addition, investor’s and depositor’s funds were not guaranteed, thereby making many of the banks to come under stress due to capital inadequacy. These problems greatly impaired the quality of the bank’s assets as non-performing assets became unbearable and became huge burdens on many of the banks. The financial intermediation role of the banks became heavily impaired while the macroeconomic activities seriously slowed down. It was against this background, that the Central Bank of Nigeria (CBN) announced a major reform in the entire Nigerian banking industry. The recapitalization of the capital base of banks constituted the first phase of the reform policy in the entire banking sector of the Nigerian economy. The major issues in the consolidation exercise, according to Adeyemi (2005) include:

  1. A minimum capital base of 25 billion naira with a deadline of 31st December 2005.
  2. Consolidation of banking institutions through mergers and acquisitions.
  3. Phase withdrawal of public sector funds from banks, beginning from July, 2004.
  4. Adoption of a risk-focused and rule-based regulatory framework.
  5. Zero tolerance for weak corporate governance, misconduct and lack of transparency.
  6. Accelerated completion of the Electronic Financial Surveillance system (e-FASS).
  7. The establishment of asset management companies’
  8. Promotion of the enforcement of dormant law.
  9. Revision and updating of relevant laws.
  10. Closer collaboration with the Economic and Financial Crime Commission (EFCC) and the establishment of the financial intelligence unit.

The two outstanding issues in the reform initiatives that have attracted a lot of concern and reaction because of its peculiarities are:

  1. The recapitalization requirement of 25billion by Banks before the end of 31st December, 2005.
  2. Consolidation of Banks through mergers and acquisitions.

The primary objective of the reform initiative was to have an efficient and effective banking industry that could guarantee rapid economic growth and development for the entire nation. But the current global economic crisis, which started as financial crisis in America and Europe and later spread to other parts of the world, has eroded the confidence of depositors and investors. Even the Nigerian Stock Market (NSM), which is supposed to function as fund buffer, was not left out of the crisis. This research study therefore will examine the impact of the current global financial crisis on the Nigerian banking industry. Data from both qualitative and quantitative sources will be used to gain an insight understanding and knowledge of the Nigerian banking industry. However, a structured questionnaire and telephone interviews will be used to get relevant information on areas that require further clarification.

According to Aluko (2009:38), the country‘s dependence on the export sector is very significant: 99% of foreign exchange and 85% of local revenues are directly derived from activities related to export of a single commodity, which is at the center of the current financial crises, oil. It is estimated that 58.4% of Nigeria‘s exports are US bound and up to 25% to the Euro zone. 67% of our non-oil exports go to Western Europe, 20% to Asia, while ECOWAS accounted for only 11% in 2007. The stock of our foreign exchange reserves is kept in European capitals where financial markets have tumbled and banks distressed. Indeed the world‘s economies are integrated financially; a little shake-up in one area of the world affects the other (Aluko, 2009:42).


1.2 Statement of the Problem

The global financial and economic crisis has presented significant challenges to African countries, especially Nigeria. The direct effects of this crisis have been felt mostly through the banking sector. There is depression of the capital market and drop in the quality of part of the credit extended by banks for trading in the capital market. The global credit crunch and re-pricing of risks push up interest rates on lines of credit for Nigerian banks. High exchange rate risks on foreign lines slows growth rate of bank‘s balance sheet in response to the crisis leading to lower profitability. Banks tighten up liquidity outflow due to high foreign exchange outflows and lower monetization of oil earnings. It is the existence of these factors that the global financial crisis impacts on the Nigerian Banking sector


1.3 Objective of the Study

This study was conducted with the following objectives:

  1. To identify to assess the impacts of the global financial crisis on the Nigeria Banking industry.
  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.

1.4 Research Hypotheses

Hypotheses One
  • Ho: There is a significant relationship between ownership structure of capitalized banks and the present financial crisis in the Nigerian banking industry
  • Hi: There is a significant relationship between ownership structure of capitalized banks and the present financial crisis in the Nigerian banking industry
Hypotheses Two
  • Ho: There is a significant direct relationship between top level management of consolidated banks and the present financial crisis in Nigerian banking industry
  • Hi: There is a significant direct relationship between top level management of consolidated banks and the present financial crisis in Nigerian banking industry

1.5 Significance of the Study

The study will be of great benefits to establishments. It will help them to know the advantages and disadvantages if any, they are likely to experience with the installation of these machines. It will also be beneficial to the practicing secretaries to know how far these office machines have contributed to their efficiency and also whether or not to encourage the use of these new machines in various offices.

Finally, the study will serve as a reference point to intending researchers and could form basis for future researches


1.6 Scope and Limitation of the Study

The The researcher has narrowed the scope of this study to some selected establishments in Enugu State. They are as follows: Central Bank of Nigeria, Enugu, Governor’s office, Enugu, Institute of Management and Technology, Enugu. The researcher encountered some constraints, which limited the scope of the study. These constraints include but are not limited to the following.

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.


1.7 Definition of Terms

Secretary:

A secretary is an assistant who possesses the mastering of files, skills on how to manipulate these new office machines in her place of work.

Records:

Writing information down for reference purposes or in other ways like on a disc, magnetic tape, etc.

Technology:

Technology in this case means the modern way or technique for making and doing things. It is those activities directed to satisfy human needs which produce alternative as in the material world.

Etiquette:

A polite social behaviour among people in a class of society or a profession.

Metamorphosis:

Changes in form or character that occur in a person.

Skill:

Ability to do something expertly and well.


1.8 Organization of the Study

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

  • Chapter one is concerned 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 the impact of global financial crisis on the Nigerian Banking sector. In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations are made, which in the opinion of the researcher will be of benefit in addressing the challenges of global financial crisis on the Nigerian Banking sector.


5.2 Summary

The statistical analysis pointed out implying that the present global financial crisis is significantly related to top management of consolidated banks and the ownership structure of banks in Nigeria. These two contentions are determined by the state of the entire economy. Onyekakeyah (2008) describes the Nigerian economy as a crude oil oriented economy and therefore refers to it as a commodity based economy. He pointed out in the paper that the price of crude oil at the international market determines the amount of revenue that flows into the economy. Further, he mentioned that the recent global economic crisis has reduced the price of crude oil from $140 per to $60 per barrel. This has seriously affected the inflow of revenue and resulted in macroeconomic instability in the Nigerian economy. The CBN annual report (2008) also buttresses this argument, by pointing out that the proceeds from the sale of crude oil accounted for 80% of Nigerias GDP. Somoye & Ilo (2008) also argued that the general performance of the economy is reflected by the macroeconomic aggregates which include, gross domestic product, employment level, industrial capacity utilization, inflation, money supply and exchange rate. They argued further that banks’ performance depends on these factors and that banks at different points in time during their operations adjust their lending tendencies to suit the prevailing macroeconomic environment. Macroeconomic instability in the Nigerian economy has been a consistent trend because the survival of the economy depends on revenue from the sale of crude oil. This is because the annual budget of the entire Nigerian economy is based on the expected proceeds from the sale of crude oil. Onyekakeyah (2008) again stated that the Nigerian government operates a bubble economy that cannot withstand the problem of illiquidity. If the government experiences a shortfall, the various tiers of government seek a bail out from banks to finance their budget deficits. Data obtained for this study, pointed out that the present global financial crisis is related to the internal management attitudes of the banks and also that the state of the economy is strongly connect to the global financial crisis. Therefore banks became grossly affected when the economy run short of revenue due to shortfall in the price of crude oil at the international market. What could be observed as responsible for the present global financial crisis of the Nigerian banks is the characteristic feature exhibited by the Nigerian economy. To avoid this undue pressure from government agency on banks, Obamuyi (2008) suggested a financial liberalization. He pointed out that a financial liberalization in the economy would facilitate the flow of funds for private sector development and generates increased savings, investment and efficient allocation of capital for economic growth. He argued that a financial liberalization policy would encourage interest rate administration, saving behavior and bank credit to the economy.


5.3 Conclusions and Recommendation

Based on the findings of the study, it is concluded that The purpose of this research study is to discuss the impacts of the global economic crisis on the Nigerian banking industry. This has become necessary because the present financial crisis in the Nigerian banking industry has been attributed to a lot of factors. The characteristic features of the Nigerian banks show that the banking sector before the global financial crisis was sound and vibrant enough to support the nation’s economic growth and development. This is evident from the questionnaire that was distributed to stakeholders in the banking industry. But the management teams attempt to boost the standards of their banks and also to have high returns on investments, and therefore have exposed some the banks to the financial crisis. The impacts of the crisis could have been avoided if there were precautionary measures. This study, will suggest the following.

  1. The Nigerian banks do not have access to long term deposits that would enable them to grant long term loans to their customers. This made the banks to over rely on foreign financial institution and banks for credit lines. In order to avoid this, the Nigerian government through the CBN should organize and strengthen the growth of institutions like the pension fund, Housing fund, Health insurance fund etc. This could be achieved through a financial liberalization policy.
  2. The Nigerian government should find alternative ways to fund their budget deficit so as to reduce the pressure of financing projects in the real sector of the Nigerian economy by banks.
  3. Nigeria Deposits Insurance Corporation should strengthen its legal frame on insuring of deposit fund. This will create confidence in the mind of the public.
  4. Banks should stop giving out loans to invest in the stocks of banks that are quoted in the Nigerian stock market.

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