The research focus on EFFECT OF FINANCIAL SECTOR REFORM ON THE PERFORMANCE OF BANKS (A SURVEY OF SELECTED BANKS IN DELTA STATE)
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This study examined the effect of financial sector reform on the performance of banks (A survey of selected banks in Delta state). It specifically determined the effects of policies of interest rates deregulation, exchange rate reforms and bank recapitalization on banks performance, and analyzed how banks internal characteristics and industry structure affect the performance of Nigerian banks. The study utilized panel data econometrics in a pooled regression, where time-series and cross-sectional observations were combined and estimated. The result of econometric panel regression analysis confirmed that the effects of government policy reforms, bank specific characteristics and industry structure has mixed effects on banks profitability level and net interest margin of Nigerian banks. Bank specific characteristics appear to have significant positive influence on bank’s profitability and efficiency level, while industry stricture variables appeared not to have contributed meaningfully to the profitability and efficiency performance of banks in Nigeria.
TABLE OF CONTENTS
- Background of the study
- Statement of the problem
- Objectives of the study
- Research question
- Research hypothesis
- Significance of the study
- The scope of the study
- Limitation of the study
- Definition of terms
2.1 Background of Financial Reform in Nigeria
2.2 Financial Reforms and Economic Development
2.3 Measurement of Economic Development and Financial Sector Reforms
2.4 Impact of Bank Reform on the Performance of Bank in Nigeria and Prospect
2.5 Problems and Challenges of the Reforms
- Study Area
- Study population
- Sampling frame
- Sampling method and sample size
- Sources of data
- Primary source of data
- Secondary source of data
- Data collection instruments
- Method of administration
- Method of data analysis
- Tools of analysis
DATA PRESENTATION AND ANALYSIS
Presentation and discussion of the of findings
DISCUSSION AND CONCLUSION OF RESULTS
- Summary of the study
1.1 BACKGROUND OF THE STUDY
One of the most important tasks before developing countries is to achieve higher rate of economic growth. Due to the influence of the activities in the financial sector on the economy at large, every nation strives to have a proper and up to date financial sector.
The Financial sector is in no doubt a very essential part of the economy of a nation and any reforms carried out in the financial sector extends to other parts of the economy representing a transformational moment for the economy and its people. Financial sector reforms however have been a regular feature of the financial system. The reforms have evolved in response to the challenges posed by developments in the system such as systemic crisis, globalization, technological innovation, and financial crisis. Financial reforms in Nigeria dates back to 1952 when the banking Ordinance was enacted. The deregulation of banking in 1986 provided the impetus for the Structural Adjustment Programme. The 1986 reform of the financial system saw a policy shift from direct control to a market based financial system, especially as regards monetary management, risk management and asset holding capabilities of the institutions. A number of other reforms followed including the consolidation policy in banking in the year 2005 and insurance in 2007.
For clarity, the financial sector does not only mean the banking sector, the banking sector only holds a major stake in the financial sector of the economy making it more pronounced than other sectors of the economy. We also have the Non-Bank Financial institutions (NBFI) which includes Insurance companies, Discount Houses, Unit trust, the capital market institution through which bond, stocks and other securities are traded, interest rates are determined and financial services are produced and delivered around the world. The money and capital markets, along with the financial system that support them, are an exciting area for study. The capital market has also experienced a lot of reforms over the years and is still in place, especially as regards the capital requirements of the operators, the operational and ethical standards of the institutions and the modalities of the market mechanism. The reforms in the system impacted positively on the growth of the financial system and the economy in general. What goes on daily in these markets and within the financial system, as a whole, has a powerful impact on the economy. Broad changes are forever remaking the financial market as new institutions, new methods, new problems and new services continually appear. The reforms often seek to act proactively to strengthen the system, prevent systemic crisis, strengthen the market mechanism, and ethical standards. Likewise recent reforms have also been evident in the banking sector with the abolishment of universal banking, reduction in the tenure of MD/CEO of banks, introduction of Asset Management Company with its sole responsibility of buying back toxic assets from banks currently in need and return capital to the banks, improve liquidity and prepare grounds for the Central Bank of Nigeria to exit from the affected banks
Roles of bank in the economic process are strategic. It represents the heart of the national economic life and the nucleus of the economic survival around which other sectors are tangential. The centrality of the banking sector also makes the sector to attract much attention in any reform process. Therefore, the adoption of the Structural Adjustment Programme (SAP) in Nigeria in 1986 made the banks the centre of the gamut of the reform in the financial sector.
Among the objectives of financial reforms is to build more efficient, robust and deeper financial systems, which can support the growth of private sector enterprises (Ajilore 2003). The proponents of financial reforms argued that such reform would bring about significant economic benefits through improved bank operational efficiency and effectiveness in order to guarantee a more effective mobilization and efficient allocation of resources among various economic units. Whether or not bank actually achieves these expected performance gains, remain critically an empirical question. If reforms do in fact, lead to efficiency gains, then shareholder wealth could be increased. On the other hand, if reforms do not lead to the promised positive effects, then reforms may lead to a less profitable and valuable banking industry.
A reading of the literature suggests that the efficiency gains that alleged to accrue to the large and growing wave of banking reforms have not been verified. More importantly, signals from the apex bank (CBN) indicated that three out of the remaining 25 banks after the recent reform are technically distressed. Thus, leading the research community in quandary on whether the industry has followed a path of massive restructuring on a misguided belief of efficiency gains or whether the financial regulators and operators are lying to the public and shareholders about the effects of their activity on banking performance. It is important to address this issue by reconciling data with empirical reality of continued reform activity in the Nigerian banking sector.
Moreover, while there are myriads of studies on the effects of reform policy on other sectors of the Nigerian economies, there is paucity of studies on the effects of bank reforms on banking performance itself in Nigeria. The neglect of this issue is particularly surprising for this sector of Nigerian economy, where the short run real effects of financial reforms have long remained controversial.
In addition, the adoption of financial reforms has often been postponed, reversed shortly after being implemented or partially implemented for fear of recessionary consequences. Indeed, ascertaining the empirical relevance of the implications of bank reform on banking operating efficiency for developing economies is an important step in assessing the short run costs of overall economic reforms in these economies. More so, reforms in the banking sector affect not only the bankers and their customers, it has pervasive impact on overall economic activity given the centrality of financial system in the growth process. It is of great importance to know if bank reforms actually delivered its benefits to the economy.
More importantly, there is evidence in the literature that financial reforms in Nigeria have affected negatively on the overall performance of Nigerian banking system (Ajilore, 2003, CBN 2004, 2006). The implication of this evidence on banking system for a fragile and weak financial system in Nigeria is far reaching. First, unguided financial liberalization exposes the banks and indeed the economy to excessive financial shocks. The recent financial crises in the Asian countries are a case in point. Second, continuous reforming the financial system makes the system unstable, planning difficult and indeed creates unfriendly operational environment that may affect the efficient operational performance of the banks. For instance, the ripples of universal banking introduced in 2001 have not settled before the recapitalization exercise was introduced in 2004. Similar reversal and rewriting of rules were noticed in the past reforms. Given the under developed nature of financial base of the economy and the dominant role the bank is expected to play in the transition stage of development, the issue deserves attention; specific bank empirical evidence is crucial if any policy inference is to be made based on policy reform bank performance hypothesis.
Establishing or refuting the validity of positive effects of reforms on banks performance without taking cognizance of the ‘aggregate versus specific bank level’ controversy impedes seriously the policy relevance of the inferences from such studies. However, some studies had attempted to examine the effects of financialreforms on banks in other developed country like Japan. Not much work has been done in this area to investigate individual bank effect of financial sector reforms in a developing economy like Nigeria. Investigating micro effects of bank reforms in Nigeria is a worthwhile challenge, which will distinguish this study from any other studies carried out on policy reform- bank performance nexus in any developing countries like Nigeria.
Filling these empirical gaps is an invaluable addition to existing empirical evidence on the financial management and economics using Nigerian-banking industry as the case study. This is therefore an exigent scholarship effort at contributing to, and complementing other scholarly efforts at providing empirical foundation for designing appropriate policy strategy to promote and sustain financial development growth in a developing economy like Nigeria. To this extent, this study investigated the empirical linkage between financial reforms and banks’ operational performance in Nigeria. Specifically, it investigated whether financial reforms have any effect on the operational performance of banks in Nigeria.
1.2 STATEMENT OF THE PROBLEM
Critically examining the nature of Nigeria’s financial sector challenges, arguments have been raised on the way and manner in which reforms are being carried out by Lamido Sanusi, the Central Bank of Nigeria (CBN) Governor, whose actions have been regarded as playing a one man show in a disintegrated gathering.(Ayo ,2010).
However, the major problem posed in this study is on the question of both the long and short run possible effects of the recent financial sector reforms being carried out especially the one by the CBN under the leadership of Prof. Charles Soludo and continued by his predecessor Lamido Sanusi, due to unsatisfactory results of past reforms. By so doing, comparisons are done on reforms carried out before now and those done currently to actually determine the true state of Nigeria’s financial sector and how far it has helped in the economic development of the nation. Of the major problems are lacks of proper attention to the needs of the real sector of the economy, inadequate policy framework for financial development, weak regulatory supervision in a highly liberalized financial environment allowing banks become over confident, audacious, less transparent and less accountable in the handling of their diverse portfolios of services.
There is undue preference by banks for financing general merchandise rather than manufacturing agriculture, power, and the importation of finished goods rather than raw materials, plants and equipment. The real sector is a vibrant part of the economy that needs special attention but due to lack of funds, it has since been in a poor state.
The government has adopted policies aimed at achieving specified objectives, such as; interest rate ceilings and selective sectorial policies .Those policies were introduced with the intention of directing credit to priority sectors and securing “inexpensive “ funding for their own activities (Fry ,1998). The ceiling oninterest rate and quantity restriction on loanable funds for certain sectors ensures that a larger share of funds is made available for favored sectors hindering financial intermediation since the financial markets will only be accommodating the credit demand of the government plan and ignoring risks.
Regulatory agencies empowered with the task of monitoring the affairs of financial institutions have relaxed resulting to less transparency in financial records, inefficient operations and ultimately fraud and other unethical practices.
1.3 OBJECTIVE OF THE STUDY
The broad objective of this study is to evaluate the effect of financial sector reform on the performance of banks.
The specific objectives however are:
- To examine the relevance of financial sector reforms on economic development of Nigeria;
- To examine the trend of the financial reforms;
- To ascertain the long and short run effects of the ongoing reforms, and
- To examine the contributions of the financial sector to the real economy.
1.4 RESEARCH QUESTIONS
The research work will be guided by the following hypothesis.
- To what extend does financial sector reform examine the relevance of financial sector reforms on economic development of Nigeria?
- Does financial sector reform examine the trend of the financial system in the selected banks?
- Does current reform on financial sector ascertain the long and short run effects of the ongoing reforms?
- To what extent does financial sector reform contribute to the real economy?
1.5 RESEARCH HYPOTHESIS(SES)
The research work will be guided by the following hypothesis.
(a)H0: There is a positive relationship between banking reforms, real sector financing & economic development in Nigeria.
H1: There is no positive relationship between banking reforms, real sector financing & economic development.
(b)H0: Financial sector reforms have brought about changes to the economy.
H1: Financial sector reforms have not brought any change in the economy.
(c)H0: The financial sector has contributed to the real sector of the economy.
H1: The financial sector hasn’t made any contribution to the real sector of the economy.
1.6 SIGNIFICANCE OF THE STUDY
The study will benefit the staff and customers of the selected banks as well as other existing banks on ways to apply the financial sector reform on their daily banking activities. This will be achieved when the company adopts the measures that will be suggested/recommended by the researcher having examines the company’s related problems on the issue of banking sector reform.
Moreso, the study will benefit the incoming researchers especially those who may seek to carry out a close related topic with this particular topic (effect of financial sector reform on the performance of banks), based on the findings, and report of the researcher, it can serve as material guide to such incoming researchers.
In addition to the above, the researcher will likewise benefit from the study having carried out a researchable topic on her discipline. Indeed, no knowledge is a waste. Thus, more knowledge will be acquired by the researcher in the course of the research work.
1.7 SCOPE OF THE STUDY
The scope of the study on the effect of financial sector reform on the performance of banks will be narrow down to the selected banks in Delta state for evaluation and decision in the course of the research work procedures.
1.8 LIMITATION OF THE STUDY
There is no research work that is free from problems but not withstanding all the problems encountered during the research work, all does not hinders the continuation of the research work. Some of the problems include:
Financial Constraints: Due to the researchers inadequate to finance, few literatures were reviewed coupled with the deductive nature on the topic of investigation.
Time Constraints: Time is another serious problem that contradict researcher due to different responsibility alongside with the research findings.
Respondent Bias: The unreliability of the respondent affects the 100% confidence of the report (research work).
1.9 DEFINITION OF TERMS
Bank: is a business that keeps and lend money and provides other financial services (Longman Dictionary of contemporary English 1995). This means that banks not only accept deposit from customers, they also lend money and offer other service related to finance Lawal et al (1999) used bank as public limited liability company, which undertake all kinds of banking activities.
Reforms: Oxford English Dictionary (1991) referred to reform as amendment of what is defective, victous, corruptor depraved. Which a program that is geared toward turning around a bad situation. project topic titled: EFFECT OF FINANCIAL SECTOR REFORM ON THE PERFORMANCE OF BANKS, A SURVEY OF SELECTED BANKS IN DELTA STATE writen by Okeke chidi