BANKING REFORMS AND THE NIGERIAN ECONOMY (1986 – 2017)
ABSTRACT: This research work is focused on examining the effect of the 1986 and 2004 Banking sector reforms on Nigerian Economy growth. Banking sector performance and the unemployment rate in Nigeria from 1986 to 2017. The data for the study was gotten from the Central Bank of Nigeria, World Bank International Labour Organization and other journals and publications related to the study. The research employed the regression method as its statistical tool for testing the hypothesis. In the model specified, gross domestic product (GDP) Bank Credit to GDP ratio (BCGDPR) and unemployment rate (UNEMP) are the dependent variables while Bank capital and the Banking reform during variables (for both 1986 and 2004) are the independent variables. The study adopted a pre-estimated test, an estimation technique, and a post estimated test. For the pre-estimation test, the ADF unit root test and the Julius Johansen test of cointegration were employed. For the estimation technique, The parsimonious Error correction model was used for the post estimation test, the Breusch-Godfrey serial correlation LM test and the Ramsey RESET test were employed, it was observed from the study that all the time series were ‘not stationary’ at levels but was stationary at first difference, a long-run relationship was dictated among the time series data in the estimated models. Bank capital and the Banking reform indicator dummy variable combined significantly to explain economic growth for both 1986 and 2004 reform periods. Banking capital and the Banking reform indicator during variable combined significant to explain Banking sector performance for the 1986 reform period while it did not combine significantly for the 2004 reform period. Bank capital and the Banking reform indicator dummy variable did not combine significantly to explain the unemployment rate for both 1986 and 2004 reform periods.
CHAPTER ONE
Background of the Study
In terms of Economic Development Strategy, Nigeria’s economy has undergone fundamental structural changes over the past years since independence. Many economists have argued that the major factor responsible for the downturn in the economy was the inconsistency in the financial system of the economy.
In the Nigerian Economy, the financial Sector comprises of the Financial Instrument, Financial market, and the financial institution. This shows that the financial system is a catalyst in the whole process of economic growth and development.
The Nigerian Financial system is made up of regulatory and supervisory authorities, as well as banks and non-bank institutions, among these regulatory and supervising authorities is the Central Bank of Nigeria (CBN) and it is the principal regulator and supervisor in the money market.
The Banking system is an economy that plays an important role in promoting Economic growth and development through the process of financial intermediation.
Consequently, the Banking Sector as an important landscape needs to be reformed to enhance its competitiveness and capacity to play a fundamental role in financing investments.
Reforms according to Mr. Ajayi are predicated upon the need for re-orientation and repositioning of an existing status gives to attain an effective and efficient state. Banking Sector reforms are propelled by the need to deepen the financial sectors and reposition it for growth, to become integrated into the global financial architecture, and evolve a banking sector that is consistent with regional integration requirements and international best practices.
Nigeria’s banking sector has witnessed a lot of structural reforms between 1970-1980 when attempts were made to indigenize the Nigerian Economy.
The period under review witnessed two important developments; one was the compulsory acquisition of 60% ownership in the existing foreign banks, under the indigenization decree and the setting up of a financial system review committee under the renowned Nigerian Economist Dr. Pius Okigbo.
Again between 1980-1999, Significant numbers of banks were closed down, their management taken over by the Central Bank, while some Banks were converted into public liability companies. On the 6th of July 2014, The CNB Governor addressed the Bankers Committee at the CBN Headquarters in Abuja on the new Nigerian Banking reform. The board of the CBN approval guidelines and incentives to facilitate consolidation in the industry, to assist banks in meeting8 the approved capital base of twenty -five billion naira (#25b) by December 31st, 2005, major important developments were recorded from these actions.
Firstly, the banking system is recognizing the benefits of Economies of scale through cost-saving and efficient allocation of resources.
Secondly, the reforms succeeded in renewing the confident investors and the general public has on the banking sector unlike when investors were scared of investing based on the gross uncertainty associated with it.
Thirdly, the recapitalization of the banking system sufficiently repositioned it such that it contributed to the social-economic development of the country as the twenty-five billion-naira (#25b) recapitalization dragged most of the banks to the capital market (Nigerian Stock Exchange) to raise fresh capital long selling shares.
Finally, it aids fiscal adjustment, trade globalization, financial deregulation as well as privatization which readdresses the problems of slow growth, debt overhang as well as ameliorate the external and internal stocks.
The relevance of banking reforms on an Economy cannot be under looked; therefore the project is aimed at examining the positive effect of the banking sector reforms on the Nigerian Economy.
1.2 Statement of Problem
The fact that the banking sector has contributed in no small measure to the development of the national economy through its financial intermediation and other developmental roles is undisputed.
Before the recapitalization exercise in Nigeria, the banking sector has many small banks with poor equity capital base and was easily experiencing a financial crisis. This is evident as branches of deposit-taking banks rose from 3,247 to 5,837 and 6,605 in 2003, 2010 and 2011 respectively. Also, employment in the sector rose from 50,836 in 2005 to 71,876 in 2010 (Sanusi2011-Sanusi 2012).
These numerous banks were merely gasping for breath and in dire need of a life-line due to technical insolvency, illiquidity, inept management, weak capital base, poor cooperate governance, poor asset quality among others. Not surprising, therefore, the hitherto bloated banking sector with 89 members banks before the 2004 banking sector reforms, flattened to the 24 members-bank which emerged from mergers and acquisitions during the 2014 banking sector reforms and consolidation exercise, down to the 24 commercial banks ( 2018 list of commercial banks in Nigeria released on the 8th of June 2018 by CBN and then the current 2019) 20 commercial banks in Nigeria as a result of the merger between Diamond bank and Access bank.
The need for reforms arises as a result of the high level of financial exclusion in the Nigerian financial system and the low ration of the bank branch to the total population. For instance, the ratio of the bank branch to the total population stood at 1:24,224 as of 2011. Equally, Nigeria’s population in 2005 was financially excluded to as high as 65 percent (CBN 2015) and 46 percent in 2010, compared to South-Africa, Kenya, and Botswana with 26.0 percent, 32.7 and 33.0 percent financial exclusion rates respectively (Sanusi, 2012).
The dwindling public confidence in the sector due to incessant banking failures which situation was further accentuated by the global financial crises and the end to reposition and strengthen the banks to play their critical and strategic roles as well as to attain global competitiveness all make continuous banking reforms a ‘Sine qua non’.
The objective of the Study
The general objective of this study is to examine the impact of banking reforms on the Nigerian Economy. The specific objectives are:
- To examine the effect of banking reforms on the Gross Domestic Product (GDP)
- To examine the effect of Banking reforms on bank credit to Gross domestic product (GDP) ratio.
- To examine the effect of banking reforms on the unemployment rate.
Research Questions
- What is the effect of banking reforms on the gross domestic product (GDP)?
- What is the effect of banking reforms on bank credit to gross domestic product (GDP) ratio?
- Does Banking reforms affect the unemployment rate?
Research Hypothesis
HO1: Banking reform has no significant effect on economic growth.
HO2: Banking reform has no significant effect on Bank credit to gross domestic product (GDP) ratio.
HO3: Banking reform has no significant effect on the unemployment rate.
Significance of the Study
The result of this research work will enable us to understand the financial state of the Nigerian banks and to encourage the masses to drop their fears and pick up the habit of savings again.
The study will also help us understand the contributions of banking reforms on Nigerian economic growth.
This research will enable investors to confidently invest in the Nigerian financial system which through various reforms have been made better-off.
Finally, the study will provide the basis for further researches on Banking reforms and their impact or effect on the Nigerian economy.
Scope and Limitations of the Study
The study is restricted to an empirical analysis of available data on bank performance proxy by Bank credit to gross domestic product(GDP) ratio, unemployment rate, economic growth which is proxy by the Gross Domestic Product and Banking reforms proxy by the reform dummy variables between 1986 – 2017. Due to financial and time constraints, this research work will focus on two (2) reforms; which are the 1986 and 2004 reforms.
TABLE OF CONTENT
Title page i
Declaration ii
Certification iii
Dedication iv
Acknowledgment v
Abstract vi
Table of content vii
CHAPTER ONE: INTRODUCTION
1.1 Background of Study 1
1.2 Statement Of Problem 4
1.3 Objective Of Study 5
1.4 Research Questions 6
1.5 Research Hypothesis 6
1.6 Significance of Study 6
1.7 Scope and Limitations of Study 7
CHAPTER TWO: LITERATURE REVIEW
2.1 Conceptual Framework 8
2.1.1 Banking Sector 8
2.1.2 Banking Reforms 8
2.1.3 Economy 8
2.1.4 Banking Sector Reforms In Nigeria (History) 9
2.1.4 The Bank Consolidation Exercise (2004) 13
2.1.5 Role of the Banking Sector In Economic Development 16
2.1.6 Rationale for Banking Reforms In Nigeria 17
2.1.7 Benefits of Banking Reforms In Nigeria 19
2.1.8 Challenges of Banking Reforms 19
2.2 Theoretical Review 20
2.2.1 Financial Repression Theory (Mckinnon And Shaw 1973). 22
2.2.2 The Keynesian Theory 23
2.2.3 Concentration Theory 24
2.2.4 Say’s Law Theory 25
2.3 Empirical Review 26
2.4 Evaluation of Literature Review 30
CHAPTER THREE: RESEARCH METHODOLOGY
3.0 Introduction 32
3.1 Research Design 32
3.2 Method Of Data Analysis 32
3.3 Sources Of Data 33
3.4 Model Estimation/Specification 33
3.5.0 Analytical Framework 34
3.5.1 1986 Banking Reforms And Economic Growth 34
3.5.2 1986 Banking Reforms And Bank Performance 34
3.5.3 1986 Banking Reforms And Unemployment Rate 35
3.5.4 2004 Banking Reforms and Economic Growth 36
3.5.5 2004 Banking Reforms and Bank Performance. 37
3.5.6 2004 Banking Reforms and Unemployment Rate. 38
CHAPTER FOUR: RESULTS AND DISCUSSION
4.1 Trend Analysis 39
4.2 Econometric Analysis 42
4.3 Discussion of findings 47
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Report 57
5.1.1 Summary Of Main Findings 57
5.2 Conclusion 61
5.3 Recommendations 61
References 63
Appendix 65
Reviews
There are no reviews yet.