ABSTRACT
The paper assesses the recent bank reforms and banking sector performance in Nigeria from 1986 to 2012.The essence of the study is to see if the reforms have had any meaningful impact on the performance of the banking industry. To have a well defined study, economic models was developed; the dependent variable to proxy bank performance is commercial bank credit to private sector (cps) while other reforms variables are number of banks, bank asset, non-performing loan to total loan and liquidity ratio.
Using the co integration analysis, it is discovered that number of banks (branches) shows positive relationship with CPS the other independent variables show negative impact on CPS. As the NPLTTL rises, it causes decline in the availability of credit to private sector, likewise the liquidity ratio (LR) and BA. The research does provide recommendation to achieving effective better performance.
CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Banking reforms have been an ongoing phenomenon around the world for a very long time, but it is more intensified in recent time because of the impact of globalization which is precipated by continuous integration of the world market economies.
Banking reforms involved several elements that are unique to the country based on historical, economical and institution al imperatives, reforms result from a need for re-orientation, repositioning and revitalizing an existing status also bedecked with bottlenecks that inhibits institutional smooth running and growth. The dynamic nature and uncertainties in human endeavors’ calls for innovations.
In Nigeria, the ability of the financial sub sectors to play its role has been periodically punctuated by its vulnerability to systematic distress and macroeconomic vitality and policy fine tuning inevitability (kama 2006)
Banking reforms are aimed at addressing weak corporate governance risks management, operational efficiency, under capitalization and to meet with issuing requirement of the economy and the standard of the global world (Uchenta 2005)
The recent reforms in the banking industry in the last three years have s a numbers of measures and initiates taken by the central bank of Nigeria to promote the safety, stability and soundness of the sectors .although these measures have impacted negatively on some stakeholders and banks workers, industry watchers strong believes that the benefit of the measures outweigh the negative effects.
The Nigeria banking sectors since its inception in august 1891 has evolved in several stages. The first was a free banking era characterized by unregulated and laizzez faire banking practices and hence massive bank failure (onyeakagbel 1997).
The next stage was an era of supervision, examination and control of banks in Nigeria which started with the banking ordinance of 1952.thus this stage bordered on definition of banking business, prescription of minimum requirement for the expatriate and indigenous banks, maintenance of a reserved funds, adequate liquidity and inculcation of examination and control habit into the banking sectors. The period lasted till 1959.
The second stage under the reforms started from 1959-1986.it was during the period that the CBN commercial operation. The central bank of Nigeria took off on July 29, 1958 with Mr. R.p fenton of the bank of England as the first governor .it was also an era of control and indigenization (Godwin chigozie 2010).
The third stage commence from 1956-1993,the reform era was a component of the structural adjustment programme (SAP) which kicked off during the Babangida regime .the major reforms policy in this era were deregulation of interest rate, exchange rate and free entry or exit into the banking sectors.
Other reforms include the guided deregulation (1994-1998), universal banking era (1994-2003); consolidated era (2004-2008) and past consolidated era 2009-2012.
The mother of all the reforms came up on July 2004, when 89 banks were forced to merge culminating in 25 universal banks. There was a further reduced to 24 banks through merging and acquisition carried out in the period.
The primary objective of the reform is to guarantee an efficient and sound financial system. The reforms are designed to enable the banking system develop the required resilience to support the economic development of the nation by efficiently performing its function as the fulcrum of financial intermediation (lemo2005).
As at the end of 2007, the number of banks stood at 24 due to the merger of both the Stanbic bank plc and the IBTC banks to form Stanbic IBTC plc. Charles Soludo was the initiators of the recent bank reforms that changed the outlook of the banking sectors .It was recent reforms in bank that changed the general outlook of the Nigeria banking sectors.
As Sanusi emerged the governor of CBN in 2009, the other reforms were initiated. This era experienced the raise of capital base of banks from #5 billion to #25 billion, banks which could not meet up had to be acquired or merge so as t survive; other failed banks were rescued. This era marked the establishment of Asset Management Corporation of Nigeria (AMCON). AMCON had to purchase the non performing loans from deposit money banks and to recapitalize the affected banks. AMCON started operation as soon as the bill was signed into law in July 19, 2010. One key indicator of the relevance of AMCON was the buying over of in-efficient and non-performing loans/credit.
One key indicator of bank performance is the net margin on loans and advances. Since interest on loans and advances constitute the major turnover of bank, the net margin on loans and advances has direct impact on bank profit performance. Other performance indicators are Return on Equity (ROE), which is a relevant profit indicator performance; other indicator includes the Return on Asset (ROA), return on investment (ROI) and even credit to the economy. A bank ranking on the camel rating system is another distinct measure of bank performance. The CAMEL rating system, which is adopted by the bank for international settlement is an acronym for capital adequacy, asset quality, and management efficiency, earning strength, profitability and liquidity.
The performance of the banking sector has been greatly influenced by the reforms initiated. The profitability, liquidity ratio, reserve ratio, return on asset , return on equity, total credit to the private and public economy has been influenced by the reforms initiated. The reforms has been put in place so as to check the extent to which the structure and conduct of the banking sector affects the performance.
These are some of the basic issue into which indebt enquiries must be made in this research work.
1.2 STATEMENT OF THE PROBLEM
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, overt and undue exposure to the capital market, oil and gas sector, poor risk management practices and 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 24banks. One of the approaches was a special audit jointly carried 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%capotal 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 unregulatory, 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 $10 million or #1.4 billion 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 as 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. 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.
Weak corporate governance also is another problem facing the banking sector and this has led to mismanagement and corruption in the sector. The reforms is thus put in place so as to revive and resuscitate the general performance of the sector and to improve the health and soundness s of the banking sector through various forum, as to assess the vulnerabilities and strength of the sector and to develop analytical and procedural tools needed to perform this task (Emenuga 1996.)
1.3 OBJECTIVES OF THE STUDY
The broad objectives of the study are to assess the effect of bank reforms on performance of the banking sector in Nigeria.
As a follow-up to the broad objectives, the specific objectives are to the broad objectives, the specific objectives are to be determined as follows:
I.The trend of bank reforms in Nigeria
II.Identify the various recent reforms in Nigeria
III.Investigate the relationship between banking sector performance and recent reforms in Nigeria.
1.4 STATEMENT OF HYPOTHESIS
In order to ensure the research is of high level of validity and accuracy, for this research, the following hypotheses are stipulated.
HO: The recent banks reforms have no significant effect on the performance of the Nigeria banking sector.
HI: The recent bank reforms have significant effect on the performance of the Nigeria banking sector.
1.5 SIGNIFICANCE OF THE STUDY
The study identifies the various reforms initiated by the central bank of Nigeria and the effect it has on the general banking sector performance moreover the study look into the health status of the banking sector, origin of the banking industry, major conceptual issue pertaining to the various reforms, performance measure, the need for the reforms and concept of performance.
The study s carried out to understand what the banking sector is all about, to understand the major element of the reforms and the corresponding impact on the financial deepening.
The study is essential and of vital benefit to student and could be used as a guide to related project and it is of usefulness to policy initiator and the government.
1.6 SCOPE OF THE STUDY
Emphasis in this study is placed on the effect of the recent bank reforms on the performance sector in Nigeria.
The study is limited to the Nigeria banking industry which focuses narrowly on commercial banks. The commercial banks through monetary industry (CBN), they therefore play a general role in the general banking performance of the banking sector, the study covers a time range of 1986-2012, and the year 1986 is the year which initiated the structural adjustment programme (SAP) which also influenced the banking sector.
A blue print to initiate the development of a well structured economy was forged as at this period. The period has been purposely chosen to allow a meaningful discussion of the most and recent banking reforms and the trend and pattern of the performance of the banking sector.
1.7 ORGANISATION OF THE STUDY
The research work is divided into five (5) parts. The chapter one which comprise of the introduction which present the background to the study, the statement of the problem, the objectives of the study, the statement of hypothesis, the scope of the study and the significance of the study.
Chapter two (2) covers the empirical and literature review followed by conceptual issues relating to the banking industry and the theoretical literature.
Chapter three (3) is the methodology and it specifies the method of analysis to be used, the explanation of the variables and the specification of the model.
Chapter four (4) which is the penultimate chapter represents the data and analysis is embarked upon so as to identify and interpret the data.
Chapter five (5) is the last part comprises of recommendation and conclusion of the research work.
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