Feb 23, 2019 | 04:27 pm | 15
1.1 Background of the study
Bank reforms are veritable means for fostering banking growth and developing the economy as a whole. In a developing economy, such as Nigeria, financial sector development has been accompanied by structural and institutional changes and the sector generally have long been recognized to play a crucial role in economic development of the nation (Kanayo, 2011). Banking reforms have been an on going phenomenon around the world right from the1980s, but it is more intensified in recent time because of the impact of globalization which is precipitated by continuous integration of the world market and economies. (Adegbaju and Olokoyo, 2008).
Banking reforms involve several elements that are unique to each country based on historical, economic and institutional imperatives. 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.
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 other (Adegbaju and Olokoyo, 2008). Bank crises in Nigeria were also due to the failure of the CBN and other government bodies with oversight functions for the financial sector. Lack of co-ordination among regulators prevented the CBN from having a comprehensive consolidated bank view of its activities. In addition, regulations concerning the major causes of the crisis were often incomplete. Likewise, Nigeria, just like any other highly open economy, with weak financial infrastructure, can be vulnerable to banking crises emanating from other countries through infectivity. Banking crisis usually starts with inability of the bank to meet its financial obligations to its stakeholders. Some banking reform programmes occur, some of the time, independent of any banking crisis. Irrespective of the cause, however, bank reforms are implemented to strengthen the banking system, embrace globalization, improve healthy competition, exploit economies of scale, adopt advanced technologies, raise efficiency and improve profitability.
Ultimately, the goal is to strengthen the intermediation role of banks and to ensure that they are able to perform their developmental role of enhancing economic growth, which subsequently leads to improved overall economic performance and societal welfare. The reforms are designed to enable the banking system develop the required flexibility to support the economic development of the nation by efficiently performing its functions as the pivot of financial intermediation (Lemo, 2005). Thus, the reforms were to ensure a diversified, strong and reliable banking industry where there is safety of depositors’ money and position banks to play active developmental roles in the Nigerian economy. This paper therefore analyzes the effects of banking reforms on the performance of banks and assess if they have been able to achieve predetermined goals and set objectives in Nigeria.
Banking Sector Reforms have been a regular feature in the Nigerian financial system, conducted mainly to improve the performance of commercial banks on the one hand and to improve the effectiveness and efficiency of the banking system and the economy in general. In fact, if we follow Nzotta and Okereke (2009), reforms in the banking system date back to 1952 when the Banking Ordinance was enacted. At some instances, much of the reforms centered on capital requirement for start-up. For instance, since the inception of banking regulation in Nigeria, there has always been a directive issued from time to time by the regulatory authorities on the minimum paid-up capital required before a bank can be licensed to operate. The stipulated minimum paid-up capital requirements over the years have witnessed a steady growth since the first Nigeria banking law was passed in 1952.
The 1952 banking ordinance stipulated a minimum capital of N25,000 for indigenous and N200,000 for expatriate commercial banks. This rose to N600,000 and N1.05 million for indigenous and expatriate banks respectively by the 1962 act. During the period 1959-1985, several important legislations were enacted aimed at promoting and integrating the Nigerian financial system. The era began with the enactment of the central bank of Nigeria Act of 1959. In 1969 the banking Act was Enacted. The period also witnessed several regulating measures taken by the government.
Between 1970 and 1977 government took two important measures. These were the indigenization promotion decree of 1972, amended in 1977 that gave the government the acquisition of controlling interest in the then existing foreign banks (40%), and the establishment of a financial system review committee in 1976 to review the whole financial system in other to strengthen the efficiency of the financial system (the Okigbo Committee of 1976). As a means of strengthening the banking sector and accelerating economic development, government established the Nigerian Agricultural and Cooperative Banks, the Nigeria Bank for Commerce and Industry and reconstituted the Nigeria Building Society as the Federal Mortgage Bank of Nigeria. This was followed by establishing state Commercial Banks and Development of finance companies. The reforms have evolved in response to the challenges posed by development in the system such as systemic crisis, globalization, technological innovations and financial crisis. Ofanson, Aigbokhaevbolo & Enabulu (2010), described the period as the period guided by the passion for self reliance.
The government, through her agency- the Central Bank fixed prices of financial products, directed where and how the resources of the sector should go and be used. This sometimes, saw the resources of the sector being channelled to ventures that might not be socially optimal, and the system performing poorly. However from 1986 to date, the banking sector has witnessed reforms aimed at freeing the sector’s resources to where returns will be maximum. According to Balogun, (2007), we recognize four phases of banking sector reforms since the commencement of SAP. The first is the financial systems reforms of 1986 to 1993 which led to deregulation of the banking industry that hitherto was dominated by indigenized banks that had over 60 per cent Federal and State governments’ stakes, in addition to credit, interest rate and foreign exchange policy reforms. The second phase began in the late 1993-1998, with the re-introduction of regulations. During this period, the banking sector suffered deep financial distress which necessitated another round of reforms, designed to manage the distress. The third phase began with the advent of civilian democracy in 1999 which saw the return to liberalization of the financial sectors, accompanied with the adoption of distress resolution programmes. This era also saw the introduction of universal banking which empowered the banks to operate in all aspect of retail banking and non-bank financial markets. The fourth phase began in 2004 to date and it is informed by the Nigerian monetary authorities who asserted that the financial system was characterized by structural and operational weaknesses and that their catalytic role in promoting private sector led growth could be further enhanced through a more pragmatic reform.
In a developing economy, such as Nigeria, financial sector development has been accompanied by structural and institutional changes and the sector generally has long been recognized to play a crucial role in economic development of the nation (Kanayo, 2011). Banking reforms have been an on-going phenomenon around the world, but it is more intensified in recent time because of the impact of globalization which is precipitated by continuous integration of the world market and economies (Adegbaju and Olokoyo, 2008).The role of the banking system in any economy cannot be overemphasized as the banking sector serves as a means through which the apex bank regulates the entire financial system by administering its monetary policies and also serves as a medium for mobilizing and circulating financial resources in an economy. The reforms are designed to enable the banking sector develop the required capacity to support the economic development of the nation by efficiently performing its functions as the head of financial intermediation (Lemo, 2005). This crucial role makes it pertinent for it to be regulated regularly to ensure efficiency and confidence in the system. A banking crisis can be caused 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).
In a bid to ensuring prudence and an efficient banking system the Nigerian banking system has undergone remarkable changes in recent years, in terms of the number of institutions, ownership structure, as well as depth and breadth of operations (Olokoyo, 2013). These recent major reforms were carried out by the administrations of Soludo as governor of the Central Bank of Nigeria between 2004 to 2009. The key elements of the 13-point reform programme in Nigeria include: Minimum capital base of N25 billion with a deadline of 31st December, 2005; Consolidation of banking institutions through mergers and acquisitions; Phased withdrawal of public sector funds from banks, beginning from July, 2004; Adoption of a risk-focused and rule based regulatory framework; Zero tolerance for weak corporate governance, misconduct and lack of transparency; Accelerated completion of the Electronic Financial Analysis Surveillance System (e-FASS); The establishment of an Asset Management Company; Promotion and enforcement of dormant laws; Revision and updating of relevant laws; Closer collaboration with the EFCC and the establishment of the Financial Intelligence Unit.
To a large extent, banking sector reforms are based on a belief that their gains will be accrued through expenses reduction, increased market power, reduce earnings volatility, economies of scale and to create a vibrant banking system (Olokoyo, 2013). However, a critical look at the twenty four (24) banks that emerged after the recent banking sector reforms shows that most banks that were regarded as distressed and unsound reorganized under new names or merged into existing perceived strong banks not necessarily to correct the inefficiency in their operating system but to meet the mandatory requirements, to remain afloat and to continue business as usual (Okpara 2012). While these reforms no doubt have benefits, what is less clear is the effect of these reforms on the operating efficiency of the banks (Lemo, 2005).
Also Afolabi (2004) and Lemo (2005) assert that these reforms that change the structure and size of the Banking Sector in Nigeria had a primary objective of guaranteeing a platform to support banks efficiency, safety of depositors fund and become a major player in the global financial market.
However on assumption of office, Sanusi recognized continuous weakness in the system despite the recapitalisation of 2005. He identified weak corporate governance, operational indiscipline and global financial crisis as the major causes of the weakness and prescribed further decisive reforms to forestall total collapse of the sector. There is, therefore need to re-assess the state of the banking sector after these major reforms to known their consequent effects on the banking sector and largely the Nigerian economy. Nevertheless, shortly after these reforms were carried out in 2004 under the watchful eyes of Soludo the overall gains of reforms appear not to have been achieved as banks were declared as weak and distressed by the Sanusi administration (Olokoyo 2013). This is an indication that the persistent reforms orchestrated by the apex bank had seemingly little or no effect on bank performance in Nigeria. Also, the gap identified in the literature is that, none of the empirical studies reviewed specifically studied Bank Deposits (BD) and Banks Deposits (BD) as performance indices of the banking sector using aggregate data from CBN bulletin which is also a gap this study seeks to fill. It is in view of the existing gap and the series of banking sector reforms in Nigeria with seemingly little or no meaningful effect on bank performance that constitutes the research problem which the researcher seeks to examine. Specifically the study seeks to resolve the lingering problem of whether or not the banking sector reforms carried out by Soludo have significant effect on the performance of deposit money banks (DMB).
1.2 statement of the problem
As was the case before 1999, factors such as low capitalization, liquidation of banks, poor public perception, bank frauds, inability to attract or retain skilled manpower, poor remuneration and low investment in information technology have remained the major obstacles in the development and growth of banks in Nigeria (Lemo, 2005). In spite of the steady growth of the local market, the Nigerian banking industry has been underperforming when compared to Banking industries of other countries.
Therefore, there was the need for reforms which aimed at strengthening the asset based of Nigerian Banks as well as repositioning these banks in line with global practices and take advantage of size to enhance the value of the banks.
As it were the problem this research tries to solve anchored on the effect of the reforms on the profit potential and asset base of Nigerian banks before and after the consolidation exercise. A critical look at the nation banking sector invariably portend the need for urgent attention as situation that have made for series of reform of the sector over the years. The reform started when it became clear that poor corporate governance practice, over and undue exposure to the capital market, oil and gas sector, poor risk management practices, inadequate disclosure and transparency about the banks financial position characterized the Nigerian banking sector (Wilson 2006).
The CBN in June 2009 took a-three pronged approach to assess the financial conditions of the 24 banks. One of the approaches was a special audit jointly carried out by the CBN and the Nigerian Deposit Insurance Corporation. The exercise highlighted inadequacies in capital asset and liquidity ratios as well as weaknesses in corporate governance and risk management in nine banks. These banks were found to be in distress as they failed to meet the minimum 10% capital adequacy and 25% minimum liquidity ratio. Apart from accumulating high non-performing loans, these banks were seriously exposed to the oil and gas sector as well as the capital market poor risk management practices in the form of absence of necessary control measures were prevalent as the boards and management of the banks had failed to observe established control (Ademola Alawiye 2012).
A holistic investigation into what went wrong in Nigeria leading up to the banking crisis in 2009 found eight (8) highlighted and interrelated factors responsible. These are; macro economic instability caused by large and sudden capital inflows, major failures in corporate governance of banks, lack of investors and consumer sophistication, inadequate disclosure and transparency about the financial position of banks, critical gaps in the regulatory framework and un-regulatory, uneven supervision and reinforcement, unstructured governance and management processes at the CBN and weakness in the business environment (Sanusi Lamido 2012).
Due to the increase in the number of banks which overstretched the existing human resources capacity of banks thereby resulting into many problems such as poor credit appraisal system, financial crime, accumulation of poor asset quality and so on. The banking sector is characterized by general small-sized fringed banks with high overhead cost, low capital base average less than $10million or N1.4billion in 2005, heavy reliance on government patronage (with 20% of industry deposits from government sources) boardroom squabbles, dwindling earning and in some cases loss making.
A review of the banking system in 2004, revealed that marginal and unsound banks accounted for 19.2% of the total assets, 17.2% of total deposit liabilities, while industry non performing asset was 19.5% of the total loans and advances in the same year. The implication of this unsatisfactory statistics as noted by Lemo (2005) is that there existed threat of a systematic distress judging by the trigger points in the CBN contingency planning framework of December 2002. It was therefore apparent that from all these foregoing, a reform of the banking system in Nigeria was inevitable.
Okike (2007) noted that most socio problem and societal ills such as “corruption” bedevils the Nigeria banking system and that at one time or the other, they are deeply traceable and rooted in the country’s socio economic, political and cultural challenges at both the pre and post colonial era.
In the course of carrying out this project, Union Bank as the public liability company is the focus of the study. The reforms adopted by the banks board of trusties or directors goes a long way of playing an active part in the profitability of the bank. Any person as an individual and corporate bodies have sacrificed their limited resources towards the establishment of the bank, the shareholders would therefore with a bearable unit otherwise would prefer alternative investment lane.
1.3 Research Questions
In the course of this project, the following questions shall be considered to serve as a directory of the project work.
What is the contribution of commercial bank to the Nigerian economy?
What is the effect of Bank reforms to the profit margin of the bank?
What are the solutions to the problem of bank reforms in the development of profit margin
1.4 Objective of the Study
This research study is to examine the reforms adopted by commercial banks which leads to its profitability or increase in its profitability. In an effort to really bring out the role of the commercial banks in the development of Nigerian economy, a leading bank, Union Bank of Nigeria plc is the focus and the perspective of this work is critical to:-
Evaluation of contribution of commercial banks to the Nigerian economy.
Evaluation of the effect of Bank reforms to the profit margin of the bank.
Suggesting solutions to the problem of bank reforms in the development of profit margin.
1.5 Hypothesis of the Study
Ho1: there is no significant contribution of commercial banks to the Nigerian economy.
Ho2: there is no significant effect of Bank reforms to the profit margin of the bank.
Ho3: the problem of bank reforms in the development of profit margin has no significant solution.
1.6 Significance of the Study
The research is determined to present the true picture of the roles bank reforms plays in the development of the banks profit margin and the role bank profitability plays in economic development and provide reference point for future project work. Readers of this work might find it useful in all important more of the starting point, and the development of all important financial sectors of the Nigerian Economy.
It is also expected that the findings of the study would provoke further researches into the subject thereby building a strong literature on the subject matter. This study will be of great importance to the students and other researchers since it will serve as a reference point for future studies. This study will also contribute to the existing literature by providing recent empirical evidence concerning the banking sector reform. More so, the result of this study may serve as a paramount terrain in formulation of new agendas for commercial banks in Nigeria.
Operators of banking business will see from the work their shortcomings and the available options to remedy the shortcomings. In the same vein, those that are not aware of the various economic service rendered by the commercial banks might start to reap the benefits of this job, after reading this work.
1.7 Scope and Limitation of the Study
This study assessed the impact of bank reforms on bank profitability in Nigeria. The study was restricted to the period between 2005 and 2017 using relevant indicators such as Bank Share Capital (BSC), Total Net Assets (TNA), Profit After Tax (PTA), Loan and Advances which the data was sourced from Union Bank Financial Report (2017). The following are the limitations:
Time Constraint: Time poised a serious constraint especially that the study accounted co-researchers and painstakingly required to agree in terms before decision and action would be taken. More so, the time given to complete the project is little (within three months), in which we need to read for our exams. So, this lead to improper collections of sufficient data.
Secrecy: The security and oath of secrecy of the transport fare, Bank made the task of getting essential materials and permission to use the bank premises and records in administratively questionnaire on workers and customers.
Inadequate fund: Fund was not adequate owing to the general economic hardship in the country. Especially the case of the transport fare, become higher because of the subsidy removal reform carried out by the present administration in Nigeria.
Poor Response to Questionnaire: Due to the course of carrying out this project work, the response from some persons concerning the subject matter was poor due to lack of knowledge or accurate understanding of the subject matter. This and many more limitations were faced to mention a few in the project work.
1.8 Organization of the Study
This study is organized into five chapters:
Chapter one: The introductory aspect gives an insight into the background of the study, statement of the problem, research question and hypothesis, significance of the study, scope of the study and definition of terms.
Chapter two: covers the review of literature which is logically structured to include the conceptual literature, theoretical literature and empirical literature, theoretical framework, Gaps in literature.
Chapter three: will provide information on the source of data, model specification and method of data analysis.
Chapter four will contain data presentation, the estimation of the data and interpretation of result for model. Chapter five being the concluding chapter will attempt to highlight the summary of findings, conclusion, policy recommendation and suggestion for further research.