Effects of Financial Sector Reforms on Economic Growth. The Case of Nigeria

Studienarbeit , 2019 , 68 Seiten , Note: 4.60

BWL - Bank, Börse, Versicherung

The objectives of this study includes to examine the effects of banking sector reforms on bank performance, savings, investments, developments of the Nigerian Banking System and Economic Growth.

The banking sector is without no doubt a very essential part of the economy of a nation and any reforms carried out in it extend to other parts of the economy representing a transformational moment for the economy and its people. So it remains a nationwide challenge that the Nigerian banking sector and it’s reforms haven’t been able to significantly support the long-term financial needs of the real sector or facilitate the growth of the Nigerian economy The Augmented Dickey-Fuller (ADF) Test and The Phillip-Perron Test were used to test for stationarity of the variables, while the Johansen co-integration test was employed to indicate the existence of a long-run relationship among Gross Domestic Product—which acted as the Economic Growth proxy, Commercial Bank’s Capital, Commercial Bank’s Credit, and Number of Commercial Bank Branches which acted as the other variables. Secondary data was sourced from Commercial Bank Statistics, Central Bank Of Nigeria Bulletins, Nigeria Bureau Of Statistics, Statistical Bulletins for the period of 1998-2017. Conclusively, there was a positive and significant relationship betweenEconomic Growth and Banking Sector Reforms in the long run, but a negative relationship between Economic Growth and Financial Sector Reforms in the short-run. It was recommended that the government should ensure political and macroeconomic stability as the activities in all other sectors are affected by them, and that people are enlightened on the benefits of banking sector reforms so that they don’t take opposing actions against the goal of reforms.

Contents

CHAPTER ONE: NTRODUCTION
1.1 Background to the Study
1.2 Statement of the Problem
1.3 Research Questions
1.4 Objectives Of The Study
1.5 Research Hypotheses
1.6 Significance Of The Study
1.7 Scope Of Study
1.8 Plan Of The Study
1.9 Definition Of Terms

CHAPTER TWO: LITERATURE REVIEW
2.1 Conceptual Clarifications
2.1.1 Nigerian Banking Systems
2.1.2 Banking Sector Reforms in Nigeria
2.1.3 Banking Sector Reforms and Development in Nigeria
2.1.4 Banking sector reforms and economic growth
2.1.5 Banking sector reforms and Banks’ Performance in Emerging Market
2.1.6 Banking Sector Reforms and Recent Developments in The Nigerian Banking System
2.2 Theoretical Review
2.2.1 Theories of Economic Growth
2.2.2 Camels Analysis
2.3 Empirical Review

CHAPTER THREE: THEORETICAL FRAMEWORK AND RESEARCH METHODOLOGY
3.1 Theoretical Framework
3.1.1 Endogenous Growth Theory
3.2 Model Specification
3.3 A Priori Expectation
3.4 Estimation Techniques
3.4.1 Augmented Dickey-Fuller Test
3.4.2 Phillips Perron Unit Root Test
3.5 Description Of Variables
3.6 Sources Of Data

CHAPTER FOURDATA ANALYSIS AND INTERPRETATION OF RESULTS
4.1 Trend Relationship between GDP Growth Rate and Commercial Bank Capital
4.2 Testing for the Unit Root Status of the Variables
4.2.1 Visual Inspection of the Variables
4.2.2 Augmented Dickey-Fuller Unit Root test
4.2.3 Philip-Peron Unit Root Test
4.3 Testing for Long Run Relationship among the Variables
4.4 Vector Error Correction Model
4.4.1 Long Run Impacts of Banking Sector Reform on Economic Growth
4.4.2 Short Run Impacts of Banking Sector Reform on Economic Growth

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary
5.2 Conclusion
5.3 Recommendations
5.4 Contribution To Knowledge
5.5 Area Of Further Study

REFERENCES

CHAPTER ONE: INTRODUCTION

1.1 Background to the Study

The grave importance of the banking sector in any economy stems from its roles in the provision of an efficient payment system and facilitating the implementation of monetary policies, but most importantly, the banking sector is geared towards financial intermediation and development in all ramifications, which would inevitably result in a boost in economic performance. Usually, Banking sector reforms are viewed as government intervention in the banking industry to provide a panacea for existing anomalies in the banking sector and to establish a reliable and efficient banking sector so that it could guarantee the safety of the depositors’ money, According to Ajayi (2005), 'banking reforms involve several elements that are unique to each country based on historical, economic and institutional imperatives. Therefore, various countries reform their banking sectors for a number of reasons, including structural, capitalization and ownership issues. (Ogbunuka, 2005). The reforms ensure that banks are well positioned to greatly mobilize savings and optimally allocate these mobilized savings in form of credit to profitable investments. These investments are of cognizance to the development process of a nation as provided in the framework of the dual-gap analysis.

The first attempt at banking reforms in Nigeria which also doubled as the premier attempt to regulate the industry in the country was the enactment of the Banking Ordinance of 1952. According to Akpan in Mbat (2011), the high rate of (banking) failure and the need to maintain bank customers’ confidence brought about the appointment of Mr. P. Paton by the colonial administration to inquire into the conduct and performance of the banking business in Nigeria. An attempt to actualize Mr. Paton’s report led to the enactment of the 1952 Banking Ordinance. The Ordinance stipulated the conditions for the establishment and operation `of banks in Nigeria as against the hitherto unregulated scenario which precipitated the incessant banking failures.

The subsequent attempts at banking reforms in Nigeria were introduced through four phases since the commencement of SAP (Structural Adjustment Programme). The first is the financial system reforms of 1986 to 1993 which led to the deregulation of the banking industry that hitherto was dominated by indigenized banks that had over less percent federal and state government stakes, in addition, 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 that necessitated another round of reforms designed to manage this distress. The third phase began with the advent of civilian democracy in 1999 which saw the return to liberalization of the financial distress which necessitated another round of reforms, designed to manage. This era also saw the introduction of Universal banking which empowered the banks to operate in all aspect of retail banking' and non-banking financial markets. The fourth phase began in 2004 to date, precisely on Tuesday July 6, 2004, Professor Charles Soludo, the Governor of Central Bank of Nigeria at a special session of the bankers committee in Abuja unveiled a 13-point reform agenda to bank executives which included an upward review of banks capital base from N2billion to N25 billion which is the first phase of the banking reforms. The decision according to him was to raise the capital base of banks with the aim of strengthening and consolidating the banking system. Besides, strengthening the Nigerian banks with the new capital, Soludo also explained that it is intended to curb the banks distress that has been a problem to the banking sector. According to him, in his paper presented at the special session of the bankers committee in Abuja, He stated that the inability of Nigerian Banking System to voluntarily embark on consolidation in time with the global trend has necessitated the need to consider the adoption of appropriate legal and supervisory frameworks as well as comprehensive incentive package to facilitate mergers and acquisition in the country as well as crisis resolution option, and to promote the soundness, stability and enhanced efficiency of the system. Soludo (2004:4). The Nigerian banking sector reforms remains a reference point for the positive development in the Nigerian economy, African region and the world in entirety, and this can be proven because the last two decades have witnessed several significant reforms and developments in the Nigerian financial services sector, which has caused, the nation's banking system to undergo remarkable changes in terms of the number of institutions, ownership structure, as well as depth and breadth of the market. Presently, the new banking environment created by the reforms has made possible the delisting of Nigeria from the Financial Action Tax Forces (FATF) register of countries that are in breach of the global anti-money laundering and anti-corruption code.

The current Banking sector reform in Nigeria includes four pillars:

- To enhance the quality of banks in Nigeria;
- To enhance financial stability, and by implication, economic stability;
- To bring about healthy financial sector evolution that will result in the much-desired financial sector inclusiveness; and,
- To ensure that the financial sector contributes to the real sector of the economy.

By the time these four cardinal reform objectives are attained, the Nigerian banking system would have been positioned to deliver superior results and compete favorably with its peers globally since the primary objective of the reforms is to guarantee an efficient and sound financial system.

Although the reforms have been largely influenced by challenges posed by deregulation, globalization, technological innovations, and adoption of supervisory and prudential requirement that conforms to international standard.(Azeez and Ojo, 2012), The reforms are designed to enable the banking system develop the required renitence to support the economic development of the nation by efficiently performing its functions as the fulcrum of financial intermediation (Lemo, 2005). Thus, the reforms ensure the safety of depositor's money position in banks, play active developmental roles in the Nigerian economy and become major players in the sub-regional and global financial markets.

Although these reforms have been acclaimed to be necessary, it is however debatable if they yielded the anticipated resulted. The thrust of this study therefore, is to assess the effect of banking sector reforms on Economic growth in Nigeria between the years 1998 to 2017.

1.2 Statement of the Problem

Over the years, the banking sector in Nigeria has been unable to significantly support the long-term financial needs of the real sector in Nigeria. This is 'in spite of the fact that the growth of the national economy hinges on the extent to which the real sector of the economy is effectively supported by the banking and finance sector, which continues to play a catalytic role in the growth process. Most investments in the other sectors of the economy are of medium to long- term nature.

To mitigate the financial weakness of any economy, the best practice is to imbibe financial sector reforms or banking sector reforms into the depressed economy as has been experienced in Nigeria over the decades. (Soludo, 2005).

Banking sector reforms and its sub-component, banking consolidation, has resulted from deliberate policy responses to correct perceived "or impending banking sector crises and subsequent failures. A banking crisis can be triggered by the preponderance of weak banks characterized by persistent illiquidity, insolvency, under capitalization, high level of non-performing loans and weak corporate governance among others, as observed in the Nigeria case (Uchendu, 2005). Added to this, highly open economies, especially, those with weak financial infrastructure can be very vulnerable to banking crises emanating from other jurisdiction through the contagion effect. A combination of many of these weak elements could jeopardize the health of the' financial system. Similarly, Abdullahi (2012) and Okoroji (2013) perceive that the cause of distress in the banking sector has often been attributed awkward supervision and weak framework for policy design and implementation. At the heart of economic' reforms therefore, is the need to address a two-fold problem: restructure or get policy incentives right, as well as, restructure key implementation institutions such as Banking Sector.

1.3 Research Questions

In order to examine the effect of Banking sector reforms and their performance on the economy of Nigeria, the following questions are relevant to this study.

I. What are the effects of banking sector reforms on GDP in Nigeria?
II. What is the long-run and short-run relationship between banking sector reforms and GDP in Nigeria?

1.4 Objectives Of The Study

The broad objective of the study is to examine the impact of Bank sector reforms on Economic Growth in Nigeria. The specific objectives are to:

I. Examine the effects of banking sector reforms on GDP in Nigeria.
II. Determine the long-run and short-run relationship between banking sector reforms and GDP in Nigeria.

1.5 Research Hypotheses

The following hypotheses are formulated for the study.

Hypothesis One

H0: There is no significant impact of banking sector reforms on GDP in Nigeria.

H1: There is a significant impact of banking sector reforms on GDP in Nigeria.

Hypothesis Two

H0: There is no significant long-run relationship between Banking sector reforms and the Nigerian Economy.

H1: There is no significant long-run relationship between Banking sector reforms and the Nigerian Economy.

1.6 Significance Of The Study

For several decades after independence, the Nigerian financial system was repressed, as evidenced by the ceiling on interest arid credits expansion; selective credits policies, high reserve requirements, and restriction on entry into the banking industry. This situation inhibited the functioning of the financial system and especially constrained its ability to mobilize savings and facilitates productive investment.

The research study will be significant to several groups of people on Nigerian economy, these include the policy makers, by showing that banking sector reforms could reinvigorate the economy from the shackles of depression; thus, investors will also be highlighted about the positive effects of banking sector reform in Nigeria, with this, individual savers in the society will be rest assured about their investment and savings in various banks.

Finally, it will contribute knowledge to current articles and help upcoming researchers in benefiting from making references from the research pieces.

The study is thus unique; in that, it will not only x-ray the reasons for financial sector reform. It will also highlight the outcomes of financial sector reforms in Nigeria with a view to validating its impact on economic growth and development indices in the last years of current banking sector reform. This study will therefore contribute to knowledge and also provide a basis for further research development.

1.7 Scope Of Study

This research work will cover the pre-reform and the post-reform periods of the Central Bank of Nigeria and the consolidation of the commercial banks in Nigeria and how this affects economic growth in Nigeria from the years 1998 to 2017.

1.8 Plan Of The Study

The study will be organized into five main chapters.

Chapter One provides the introductory part of the study and includes the statement of the problem, objectives of study, research questions, significance of study, research hypotheses, methodology of study, scope and limitation of study and organization of study.

Chapter Two provides the literature review and theoretical framework to this study.

Chapter Three focuses on research methodology and the techniques of data collection.

Chapter Four provides the presentation and analysis of data. It also includes the test of hypotheses.

Chapter Five which is the concluding part of the research work includes; summary of findings, conclusion and recommendations of the study. However, contribution to knowledge and area of further study may be added in this part.

1.9 Definition Of Terms

Reforms: These are changes made, especially in an institution or a practice, in order to improve it.

Bank: These are financial institutions that accept deposits from the public and create credit.

Banking Sector: The banking sector is the section of the economy devoted to the holding of financial assets for others, investing those financial assets as leverage to create more wealth and the regulation of those activities by government agencies.

Real Sector: The real sector is the part of the economy that is concerned with actually producing goods and services, as opposed to the part that is concerned with buying and selling on the financial market. The real sector comprises of agriculture, industry, construction, and services. Agriculture can be further broken into crop production, livestock, forestry and fishing, while industry comprises crude petroleum & mineral gas, solid minerals and manufacturing. Services are made up of transportation, communication, utilities, real estate & business service, education and health.

Economy: The state of a country or region in terms of the production and consumption of goods and services and the supply of money.

Economic Growth: This is the increase in inflation-adjusted market value of the goods and services produced by an economy over time.

Banking industry: The modern banking industry is a network of financial institutions licensed by the state to supply banking services. The principal services offered relate to storing, transferring, extending credit against, or managing the risks associated with holding various forms of wealth.

CHAPTER TWO: LITERATURE REVIEW

2.1 Conceptual Clarifications

2.1.1 Nigerian Banking Systems

STRUCTURE OF THE NIGERIAN BANKING SYSTEM

As a complex whole, the Nigerian banking system comprises several components and each component performs functions which distinguish it from the other components. For instance, the Central Bank of Nigeria (CBN) performs regulatory functions as the central monetary authority while commercial banks are known for a broad range of functions including – but not limited to –acceptance of deposits and provision of credit facilities .

2.1.1.1 Central Bank Of Nigeria (CBN)

The CBN is the central monetary authority in Nigeria as well as the sole issuer of legal tender in the country. It was created in 1958 as a result of the need to make up for the banking deficiency of WACB (West African Currency Board) and foster the development of the capital market as well as the money market at large. It is worthy of note that WACB had been operating prior to the establishment of the Central Bank of Nigeria. Established in 1912, WACB (West African Currency Board) served as the issuer of legal tender in Nigeria before the CBN was set up few years to Nigeria’s independence. WACB had an automatic connection with the British system and was not involved in monetary management. Considering this and the certainty that Nigerians lacked the ethics of monetary management, there arose the significant need to set up the CBN.

Ultimately, the CBN came into existence in 1958. However, the commencement of its operations was delayed until July 1, 1959.

At the start of business, the CBN had the initial capital expenditure of #3 million approved by and completely paid for by the Federal Government. By virtue of its authority as Nigeria’s central monetary system, the CBN plays a key role in the management of the economic system and in serving as an overseer. The CBN maintains the right to implement monetary policies intended to stimulate the growth of Nigeria’s economy. These monetary policies affect the activities of commercial banks in a way intended to regulate the economy. Moreover, the CBN carries out vital foreign and domestic operations required to enhance economic management. Annually, the CBN issues a “monetary circular” to the merchant and commercial banks in order to facilitate their roles in achieving the economic goals of the Nigerian banking system.

2.1.1.2 Commercial Banks

In Nigeria, commercial banks have been in existence before the inception of merchant banks as well as the evolution of the CBN. Basically, commercial banks function as institutions to which people entrust money and other valuables for the purpose of safekeeping. Meanwhile, the emergence of commercial banks instigated the need for an institutionalized savings of money and other valuables. The importance of commercial banks can never be undermined in any discussion about the Nigerian banking system.

Primarily, commercial banks in Nigeria perform two elaborate functions which are described as the “banking function” and the “savings function”. By virtue of the “banking function”, commercial banks create and issue commercial deposits and credits. In the second place, the “savings function” implies the diversion of funds from surplus units to the non-functioning units of the economy. This is aimed at the establishment of capital projects as well as the promotion of consumer terms.

Roles Performed By Commercial Banks

The roles performed by commercial banks include: helping customers to receive proceeds of banking instruments, helping customers open and keep several types of accounts, provision of credit facilities to customers, fundraising through the provision of debentures to members of the public or other interested persons, guiding customers on the effective use of credit facilities, provision of additional banking services including secure deposit facilities, fund remittance(etc), receiving of deposits –such as target and time deposits –from organizations, firms, and individuals.

2.1.1.3 Merchant Banks

1960 marked the beginning of merchant banks in Nigeria. At a later time, the first merchant bank united with the Nigeria Acceptance Limited –existing as of then –to form NAL Merchant Bank Limited. Significantly, the introduction of merchant banks was aimed at bridging the gap in the composition of credit facilities provided by commercial banks. In 1995, Nigeria had a total of 149 merchant bank branches.

Merchant banks are concerned with the provision of long-term loans as well as the acceptance of large deposits usually from #50,000 upwards. Moreover, they help customers with the management of equipment and provide loan syndication for carrying out capital-intensive projects. Amongst other functions, merchant banks provide people with professional advice on: transfer of public enterprises to private ownership, mergers and acquisitions, capital reconstruction

2.1.1.4 Indigenous Banks

From 1929 to 1952, Nigeria experienced massive establishment of indigenous banks, excluding the National Bank of Nigeria Limited –which was established in 1933 –all the indigenous banks collapsed. Established in 1938, the Agbonmagbe Bank Limited metamorphosed into what is presently known as Wema Bank Limited. Being another indigenous bank, the Africa Continental Bank was founded in 1948. Notably, it once underwent bankruptcy as a result of ineffective management. But as of now, the bank has commenced operations afresh.

2.1.2 Banking Sector Reforms in Nigeria

Reforms are substantial changes in banking sector regulations aimed at improving the conditions of individual banks and/or the entire industry. The Nigerian financial system policies at the pre reform period were characterized by intensive public sector intervention by way of direct credit, selective credit controls, sustained increase in paid-up capital of new banks, strict control of interest rates, preferential treatment towards some sectors in terms of allocation of credit. Such was the scenario when in 1983, the World Bank urged Nigeria to deregulate its financial system drawing on the financial repression hypothesis. The World Bank chided the government over the allocation of credit, public subsidies to financial institutions thereby fostering negative real interest rates, the inadequate number of banks and the complexity and rigidity of government regulation. The first in the series of reforms of the Nigerian banking sector was the liberalisation of credit allocation policy in 1986. In 1987, the number of priority sectors for the purpose of allocation of bank credit was reduced to two, namely priority and other sectors.

Another notable banking sector reform policy measure of this period was deregulation of banking licensing. There was also deregulation of interest rate which was embarked on in January 1987. Banks were allowed to fix their interest rate on both deposits and loans with a desired spread of 3% between the deposit and lending rates. The process of complete deregulation was achieved in August of the same year. Market determined interest rate ruled until 1991 when interest rate was capped. Market forces were once more permitted to prevail in 1992 and 1993 in interest rate determination.

In 1990, an auction system was created to make the treasury bill more attractive, align the rate with other money market rates which had earlier been deregulated, reduce the inflationary effect of governments cheap borrowing and strengthen the use of treasury bill rates as an effective tool of monetary control was introduced. New financial institutions (quasi banks and non-banks) were licensed. This gave rise to the establishment of community banks, peoples banks and finance houses. The essence was to make credit easily accessible to the members of the community and to serve the low income earners operating small scale businesses. Two decrees, CBN decree No. 24 of 1991 and the Banks and other Financial Institutions Decree No. 29 of 1991 gave CBN the impetus to a higher degree of autonomy in the conduct of monetary policy, regulatory and supervisory powers over the deposit money banks and such other financial intermediaries like finance companies. Then came the re-introduction of the pre-reform policy, The return of regulation started with an embargo placed on bank licensing. By the second quarter of 1996, there was a liberalizing of savings deposit rates, a prescription of maximum spread of 7.5% and thus a ceiling on lending rates. In August 1996, the government liberalized interest rates yet again but maintained MRR at 13.5%. The banks maintained the maximum lending rate equally but reduced the interest rate on savings deposit. The reason for deregulating interest rates was part of the process of freeing the banking system and allowing the market forces to prevail, guaranteeing efficient allocation of scarce resources and enabling mobilization of idle funds by the banks.

This policy however witnessed reversals when lending rates became intractable. Soludo (2004) asserted that the banking system was inefficient, characterized by structural and operational weaknesses and thus unable to play the catalytic role of promoting private sector led growth, which then led to a 13-point agenda of banking sector reforms focused on further liberalization of banking businesses that will ensure competition, safety of the system and proactively position the industry to perform the role of intermediation and catalyze economic development, to be put in place. Unfortunately, what would have been the gains from this exercise was short lived following the negative impact of the global financial crisis which affected a section of the banking industry that by 2007 some banks were already having liquidity problems.

Reforms are regarded as essential in the banking sector due to the dynamics of the business of banking and importance of the industry as an engine of growth in an economy. Through reforms, the monetary authority, usually central banks, remove faults or abuses, repair, restore or correct certain anomalies that may lead to systemic failure and erode public confidence in the system. Banking reforms are often pursued in response to either shocks or conscious government policy. Banking sector reforms that are associated with conscious government policy are often in response to industry changes such as deregulation. Shocks could emanate from internal sources such as pressure by stakeholders for performance improvements or from external sources such as globalization and requirements of multilateral financial institutions. In most cases, consolidation exercises rejuvenate banks to remain competitive and innovative in financial service delivery. As a result, banks tend to witness significant post-reform growth. The reform exercises in Nigeria of 1952 and 1994 were linked to domestic banking crisis while those of 1969, 2001 and 2004 were stirred by government economic policy to mobilize financial resources for economic growth and to entrench banking culture in the economy. The exercises of 1986 and 2009 were attributed to external shocks emanating from conditions imposed by the International Monetary Fund (IMF) through the Structural Adjustment Programme (SAP), which focused on market liberalization and extensive divestment of state owned shares in banks, and the 2007 global financial crisis, respectively.

In order to ensure the achievement of broad macroeconomic goals of price stability, full employment, high economic growth and internal and external balance, economic reforms are undertaken to ensure that the economy functions efficiently. Consequently, banking reforms in Nigeria is a vital part of the country-wide reform programme undertaken to reposition the Nigerian economy in order to achieve the objective of becoming one of the 20 largest economies by the year 2020. As part of the vision, the banking sector is expected to efficiently play its critical role of intermediation in order to make Nigerian banks among global players in the international markets. The various reforms in Nigeria were targeted at making the banking system more effective by strengthening its growth potentials. Also, in view of the fact that banks take deposits from the public, there is a need for periodic reforms in order to foster financial stability and engender confidence in the financial sector.

The recent experience from the global financial crisis further underscored the importance of regular reforms in the banking system in order to dampen the effects of shocks that emanate from crises. The global economy was hit by an unprecedented financial and economic crisis between 2007 and 2009 that resulted in a global recession. This crisis led to the collapse of many world renowned financial institutions cutting across different industries. The Nigerian economy was hit by the second round effect of the crisis as the stock market collapsed by about 70 per cent between 2008 and 2009. Many Nigerian banks sustained huge losses, particularly as a result of their extensive exposure to margin lending in the capital market and credit to downstream oil and gas firms. Thus, the Central Bank of Nigeria had to rescue 8 of the banks through capital and liquidity injections, in order to restore confidence and sanity in the banking system. A holistic investigation into the banking crisis of 2008 in Nigeria found eight interrelated factors responsible. These were macroeconomic instability caused by large and sudden capital inflows – referred to in the literature as hot money, corporate governance failures in banks, lack of investor and consumer sophistication, inadequate disclosure and transparency about the financial position of banks, critical gaps in the regulatory framework and regulations, uneven supervision and enforcement, unstructured governance & management processes at the Central Bank of Nigeria and weaknesses in the business environment. Acting together, these factors brought the entire Nigerian financial system to the brink of failure. A well-functioning financial system is imperative to individual economic units and to the economy at large.

The Nigerian economy’s potential for growth is huge and to realize this potential, measures to establish financial stability, facilitate a healthy evolution of the financial sector and ensure that the banking sector contributes to the development of the real economy were introduced. When Professor Charles Chukwuma Soludo became Governor of the Central Bank of Nigeria, CBN, the general perception was that another Mohammed Ali of Egypt and Emperor Menelik of Ethiopia or Henrique Cardoso of Brazil had come to reform the ailing economy. In his maiden address in 2004, Soludo announced a 13 point reforms program for the Nigerian Banks.

The primary objective of the reforms was to guarantee an efficient and sound financial system. There was need to reposition the banking system with a view to developing the requisite flexibility to support the economic development of the nation. The reforms sought to ensure a diversified, strong and reliable banking industry where there would be safety of depositors’ money; so that banks can play active developmental roles in the Nigerian economy.

The key elements of the 13-point reform programme of Central Bank include:

- Minimum capital base of N25billion with a deadline of 31st December, 2005
- Consolidation of banking institution through mergers and acquisition;
- Phased withdrawal of public sectors 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 of the enforcement of dormant laws.
- Revision and updating of relevant laws.
- Closer collaboration with the EFCC and the establishment of the Financial Intelligence Unit.

Of all reforms agenda the issue of increasing stakeholders fund to N25 billion generated so much controversy especially among the stakeholders and the need to comply before 31st December 2005. Most people have expressed concern that the recapitalization has not resulted in a significant improvement in banking service delivery. While poverty eradication is one of the Millennium Development Goals (MDGs), the poverty index has worsened since the recapitalization exercise. More so, those who were laid off were not absorbed in the consolidated banks and this increased the unemployment index.

Revelations from the CBN banking sector reforms point to the fact that some commercial banks engage in unwholesome financial practices such as granting of loans without collateral security, over-budgeting, and other sharp practices such as money laundering for big businesses and politicians. Some of these ills are perpetrated with the profit motive in mind and these unethical practices negate the rules and regulations of the banking.

In spite of these unwholesome practices, notwithstanding, commercial bank rating and claims of excellence by Nigerian banks has been commonplace. How could they have done these without the connivance of the CBN Governor? Professor Chukwuma Soludo deregulated bank rating by using strange, discrete parameters and liberalized money laundering. Ideally, bank rating is to provide an opinion on the relative inherent quality of the Equity Instrument contemplated to be issued at public offer. The rating opinion is reflected by the earnings prospects, risk and financial strength, associated with the specific bank.

He assumed office as the CBN Chief and rolled out seemingly innovation action programmes, the most prominent being the banking sector reforms, privatization of government enterprises and other IMF – inspired policies ostensibly designed to reposition the tottering economy. First, he hurriedly closed down most banks by raising the liquidity ratio and in one fell swoop, 64 banks sub-marined. Secondly, he advised ex-president Obasanjo to privatize most of the government owned enterprises and a huge chunk of them were sold to their fronts and cronies. Thirdly, he convinced Aso Rock of the wretched re-denominating policy and minted new currencies making Nigerian believe that the devil holding back the economy was the color and denomination of the Naira.

Through the privatization spree, the CBN technocrats only re-stated the Marxist thesis that the bourgeois class has the tendency of concentrating, centralizing and over-accumulating capital, which is the underlying principle of imperialism. The Nigerian economy has been harassed by double-digit inflation, capacity under-utilization and unstable economic climate. Most companies that operated in Nigeria had wound-up because of the inclement business weather compounded by lack of basic infrastructure such as good roads, an efficient transport system and power supply.

The first phase of the reform agenda was the privatization exercise, which was fraught with incurably acute obstacles. The Ex-Vice-President Atiku Abubakar used the exercise to transfer the ownership of many public corporations into private hands, mostly his cronies. Those who are familiar with the stories surrounding African Petroleum, the PTDF imbroglio, the Pentascope saga and many such outfits will agree that privatization in Nigeria was a monumental failure. Rather than adopt a gradual approach, the wholesale handing over of gigantic public corporations to very few mindless, super-rich capitalists helped to further widen the gap between the rich and the poor. Thus privatization only compounded the problems of the poor and increased their misery-index.

Even the Nigerian Police took advantage of the privatization exercise. The Inspector General then was so uncontrollably irked by this brazen corruption, and since the police have no tangible asset to privatize, they privatized the highways, intimidated media houses, killed opposition politicians for money and corporatized corruption in the establishment (For the avoidance of doubt, ask Uncle Tafa Balogun, and Enhindero and later Mike Okiro. The incumbent may travel the same road.)

Soludo’s tenure was fraught with deception. Soludo told Nigerians that there were excess foreign reserves to shore-up the economy in the event of any crisis. Yet Soludo never formulated any macro-economic policies to diversify the economy hence Foreign Direct Investment (FDI) in the economy was shrinking while the CBN Chief was basking in the euphoria of his reforms.

The unpardonable “sin” Professor Soludo perpetrated against Nigeria is the manufacturing of figures based on guestimates or outright falsehood, that inflating rate was single digit even when the ordinary market woman who buys tomatoes knows that inflation was spiraling. At the wake of the global economic meltdown, Soludo also assured Nigerian that the impact of the tumble- down would not be severe on the nation, but just before he gave that eloquent speech at the hallowed chambers, Peugeot Automobile Nigeria (PAN) had laid off about 600 workers, Cadbury also laid off about 335 staff and since then most parastatals, even the so called consolidated banks” had started to downsize. Sadly amidst these sordid realities, the CBN Governor was still trumpeting that the Nigerians economy was growing at a supersonic speed. When there is economic growth, there are visible indicators such as reduced inflation, the propensity of workers to save because they earn living wages, stability of the exchange rate of the currency, job creation and industrialization to mention just a few. None of these has happened since Soludo introduced the so-called reforms.

On the re-denomination propaganda, Soludo argued that the economic benefits for re-denomination of the Naira to include: making pricing more efficient such that under the new regime one kobo will have relative value; cultivating the habit of using coins and reinforcing the on-going currency reforms and, promoting more efficient payment system such as making ATM part of our payment culture and decongesting banking halls. Others are reducing the risks associated with carrying out physical cash as we eliminate the large denominations with very little value; discouraging currency substitution and addressing the perception that the domestic currency is weak. He also posited that the new Naira will have relatively high value and coins will dominate transactions.

[...]

• Veranstaltung: Banking and Finance
• Note: 4.60
• Autor: Angel Okonkwo (Autor:in)
• Erscheinungsjahr: 2019
• Seiten: 68
• Katalognummer: V1059911
• ISBN (eBook): 9783346516152
• ISBN (Buch): 9783346516169
• Sprache: Englisch
• Schlagworte: Banking Sector Reforms, Economic Growth, Nigeria.