THE IMPACT OF BANKING REFORMS ON BANK PERFORMANCE IN NIGERIA
Reforms
are predicated upon the need for reorientation and repositioning of an existing
status quo in order to attain an effective and efficient state. There could be
fundamental bottle-neck that may inhibit the functioning of the institutions
for growth and the achievement of core objectives in the drive towards
enhancing and sustaining the economic and social imperatives of human endeavor.
Carried out through either government institutions or private enterprises,
reform becomes inevitable in the light of the global dynamic exigencies and
emerging landscape (Somoye, 2006).
In terms of policy thrust therefore the banking
sector reforms are expected to build and foster a competitive and healthy
financial system to support development and avoid systemic distress (Soludo,
2007). Thus Balogun (2007) averred that banking sector reforms is interpreted
to mean embarking on comprehensive process aimed at
Substantially improving the financial infrastructure,
strengthening the regulatory and supervisory framework to address the issue of
low capitalization and a structured financing for cheap credit to the real
sector and financial accommodation for small and rural credit schemes. In most
cases, bank reforms are embarked upon to forestall banking crises or cushion
the effects of a recent crisis. Banking sector reforms have come into play due
to banks inability to meet up to required obligations or satisfy their
stakeholders which overtime have led to subsequent failures and crises. A
banking crisis can be triggered by weakness in banking system characterized by
persistent illiquidity, insolvency, undercapitalization, high level of
non-performing loans and weak corporate governance, among others. (Adegbaju and
Olokoyo, 2008).
The reforms carried out in Nigerian banking
industry which started from July 6 2004
was done primarily to meet the developmental challenges of the 21st
century. In his words, Professor Charles Soludo, the governor of Central Bank
of Nigeria from June 2004 to June 2009 said that the reforms were to engender
exchange rate and price stability, managing interest rate for stability and
development of macroeconomic coordination, vigorous pursuit of the
developmental roles of the CBN, improvement of the payment system, financial
sector diversification and regulatory reforms and strategies for integrating
the Nigeria’s financial system into the African regional and global financial
system. He further emphasized his desire to concentrate on the theme of banking
sector consolidation. Strengthening and consolidating the banking system was to
constitute the first phase of the reforms designed to ensure a diversified,
strong and reliable banking sector which will ensure the safety of the
depositor’s money, play active developmental roles in the Nigerian economy and
be competent and competitive players in the African regional and global
financial system. The reform was to support the banks to become strong players
for good health, long live and positive contributors to the economy. Depositors
were expected to have sweet dreams in aftermath of this reform. With the
universal Banking system which was introduced in 2000, banks became one stop
shops offering a range of financial services, insurance, mortgage, stock
broking, investment, banking etc. Unfortunately after the observation that the
banks were putting shareholders’ funds at risk and not concentrating on their
areas of core competence, the central Bank of Nigeria on 15 March 2010
announced the phasing out of universal banking within the 18 months. All these
reforms had taken place but the benefits especially as it relates to bank
performance is still a doubt to many people.
1.0 STATEMENT TO THE PROBLEM
Oloyode (1994) observed that the
banking sector over the years has been faced with so many crises and some
fraudulent practices. These crises led to the recent reforms in the banking
system one of which was merger and acquisition of banks. Oke (2006) observed that the inconsistency in
monetary reforms and regulatory policies as a major setback to banks stability
as the surveillance and regulatory measures of the Central Bank of Nigeria
(CBN) have unfortunately been unable to keep the pace with the rapidity of the
changes in the financial system.
One objective of the reform is to create a
sound and more secured banking system that depositors can trust. These banking
reforms were expected to address the problem faced by the banks and other
technically insolvent institutions without an initial resort to liquidation,
with all its adverse consequences for deposits. These problems encountered by
the banks before the reformation according to Lemo (2005) were as follows:
a.
Weak corporate governance, evidenced by
high turnover in the board and management staff, inaccurate reports and non
compliance with regulatory requirements.
b.
Late or non publication of annual
accounts that obviates the impact of market discipline in ensuring banking
soundness.
c.
Poor risk management practice.
d.
Operation at level lower than that which
could deliver competitive return on equity.
e.
Poor asset quality.
f.
Poor quality services and diversified
delivery channels.
g.
Thin spread of qualified and experienced
man power.
h.
Heavy reliance by banks on government patronage.
i.
Gross insider abuses, resulting in huge
non performing insider related credits.
j.
Weak capital base, the minimum capital
base before the reforms was N2 billion
which is approximately $15 million. But after the reform the minimum capital
requirement stood at N25 billion,
approximately $250 million.
According
to Soludo (2007), the Nigerian banking system has undergone remarkable changes
over the years. Regimes in Central Bank of Nigeria have always geared up
towards the avoidance of banking distresses and its attendant consequences as
witnessed in Nigeria in the past. These changes have been influenced largely by
challenges posed by the reforms in an attempt to consolidate and strengthen the
banking system and solve the problem of illiquidity and distress, and to
restore public confidence in the sector. However, the correlation
between these sets of reforms and banks performance has not been clearly
ascertained.
1.1 OBJECTIVES OF THE STUDY
The main objective of the study is to ascertain
the impact of banking reforms on Bank performance in Nigeria. The specific
objectives are:
1. To determine the effect (s) of banking
reforms on bank performance in Nigeria.
2
To assess the impact of interest
rate restructuring on bank’s performance in Nigeria.
3
To determine the impact of Bank
Recapitalization /consolidation on bank’s performance in Nigeria.
1.4 RESEARCH QUESTIONS
The
research questions were formulated to address the research problem and the
research objectives as discussed above. Three principal research questions were
answered in this study. They are:
1.
Do bank reforms have any effect on
bank’s performance in Nigeria?
2.
How does interest Rate restructuring
impact on bank’s performance in Nigeria?
3.
Has bank recapitalization /consolidation
had any impact on bank’s performance Nigeria?
1.5 RESEARCH HYPOTHESIS
Based on the research questions above the
following hypotheses were designed to guide the course of study
1.
Bank reforms do not have any effect on
bank’s performance in Nigeria.
2.
There is no significant impact on bank’s
performance by interest Rate in Nigeria.
3.
Bank Recapitalization/consolidation does
not significantly impact on bank’s performance in Nigeria.
1.6 SCOPE OF THE STUDY
The research covers all the reforms that have
taken place in the Nigerian Banking system within the period 2000 – 2008.
1.7
SIGNIFICANCE OF THE STUDY
One of the major
significance of the work includes the evaluation of the banking reforms in
terms of its impact on efficiency in the Nigerian banking sector. At the en of
this study, the following shall benefit.
v Government
of Nigeria at respective levels: Federal, State and Local Government in seeing
the way to propound laws to care for the problems of the monetary policies of
the bank.
v The
bankers in seeing how to execute their works in order to bring about a fair and
sound financial system.
v General
public in understanding how the reforms have helped the banking sector.
1.8 OPERATIONAL DEFINITION OF TERMS
Consolidation:
This
occurs when two companies combines into one for either a
business or other purposes.
Mergers:
A merger
occurs when two or more companies transfer their businesses and asset to a new
company and in consideration; their members receive shares in the transferee
company
Acquisition:
An
acquisition occurs when one company acquires sufficient shares in another
company so as to control that other company. This may be inform of take over
bids or by purchasing shares in the market
EDITOR SOURCE: The Impact Of Banking Reforms On Bank Performance In
Nigeria
