IMPACT OF BANKING REFORMS ON BANK PERFORMANCE IN NIGERIA

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ABSTRACT

Banking sector is becoming competitive and market forces are creating an atmosphere where many banks simply cannot afford to have weak balance sheets and inadequate corporate governance. There is no doubt that the banking sector is very crucial to any nations development, and a reform in that sector plays a major role   in monetary policy formulation for effective changes to compete, attract international investment and increase capital market growth. However, Weak corporate governance evidenced by Poor risk management, frequent cases of liquidation and non compliance with regulatory requirements were some of the factors that led to the Banking reforms in Nigeria. One objective of these reforms is to create a sound and more secured banking system that depositors can trust. These banking reforms were expected to address the problem faced by the banks and other technically insolvent institutions without an initial resort to liquidation, with all its adverse consequences for deposits. However, the correlation between these sets of reforms and bank performance has not been clearly ascertained. The study examined the impact of banking reforms in bank performance in Nigeria. The study as a methodology adopted the ex-post facto statistical design. We sampled all the Seventeen commercial banks that survived the consolidation process in Nigeria using secondary sources of data. The Secondary sources of data used were retrieved from the CBN statistical bulletin and audited financial reports of the selected banks for Nine (9) years period spanning from 2000-2008. We tested our hypothesis using the Karl Pearson coefficient of correlation and the T test technique in examining the impacts and relationships amongst dependent and independent variables. Findings from the test statistics indicated that, bank reforms do not have significant impact on bank performance in Nigeria (most Sig values >0.05). There is no significant impact of interest rate on bank performance in Nigeria (R2 = 0.0366; AR2=0.275; t-value=-2.008; f-value=4.033; p=0.105; DW= 0.877). And finally, Bank recapitalization/consolidation does not significantly impact on bank performance in Nigeria (t-value = -1.621; critical t-value= -3.18; Sig-value= 0.204 >0.05). 

TABLE OF CONTENTS

Title Page

CHAPTER ONE
1.0       Introduction
1.1       Background to the Study
1.2       Statement to the Problem
1.3       Objectives of the Study
1.4       Research Questions
1.5       Research Hypothesis
1.6       Scope of the Study
1.7 Significance of the Study
1.8 Operational Definition of Terms
References

CHAPTER TWO
2.0 Review of Related Literature
2.1 Conceptual Framework
2.1.1 Evolution of Banking in Nigeria
2.1.2 Background to the Recent Reform Measures
2.1.2.1 2004/2005 Soludo Banking Sector Reforms in Nigeria (The 13 -Point Agenda)
2.1.2.2 Sanusi Reforms (2009)
2.1.3 Bank Reforms and Measures of Performance
2.1.3.1 Liquidity
2.1.3.2 Capital Adequacy Ratio (CAR)
2.1.3.3 Asset Quality (AQ) And Non-Performing Loans(NPL)
2.1.3.4 Government Deposits
2.1.3.5 Quality Service Delivery
2.1.4 Bank Consolidation (Merger and Acquisition)
2.1.5 The Vision of the Consolidation
2.1.6 Bank Recapitalization
2.1.7 The Principles of Capital Restructuring
2.1.8 Interest Rate Restructuring
2.1.9 The Reasons behind the Reforms
2.1.10 The Key Elements Of The Reform
2.1.11 The Goals and Objectives of The Reform
2.1.12 Macroeconomic Consideration of The Banking Reforms
2.1.13 The Impact Of The Banking Reforms On The Economy
2.1.14 The Outcome of The Banking Sector Reforms
2.1.15 The Benefits of The Bank Reform
2.1.16. The Challenges of the Bank Reform
2.1.17 Regulatory Reforms and Bank Performance
2.2 Theoretical Framework
2.3 Empirical Framework
2.4 Summary of review of Related Literature
       References

CHAPTER THREE
3.0 Methodology
3.1 Research Design
3.2 Nature and Sources of Data
3.3 Population and Sample Size
3.4 Technique for Analysis
3.5 Linear Regression Model Specification
References

CHAPTER FOUR
4.0 Data Presentation and Analysis
4.1 Data Presentation
4.2 Test of hypotheses

CHAPTER FIVE
5.0 SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Introduction
5.2 Summary of Findings
5.2       Conclusion
5.3       Recommendations
5.4       Suggestions for Further Study
Bibliography
Appendices

CHAPTER ONE
1.0  INTRODUCTION
1.1  BACKGROUND TO THE STUDY
Reforms are predicated upon the need for reorientation and repositioning of an existing status quo in order to attain an effective and efficient state. There could be fundamental bottle-neck that may inhibit the functioning of the institutions for growth and the achievement of core objectives in the drive towards enhancing and sustaining the economic and social imperatives of human endeavor. Carried out through either government institutions or private enterprises, reform becomes inevitable in the light of the global dynamic exigencies and emerging landscape (Somoye, 2006).

In terms of policy thrust therefore the banking sector reforms are expected to build and foster a competitive and healthy financial system to support development and avoid systemic distress (Soludo, 2007). Thus Balogun (2007) averred that banking sector reforms is interpreted to mean embarking on comprehensive process aimed at
Substantially improving the financial infrastructure, strengthening the regulatory and supervisory framework to address the issue of low capitalization and a structured financing for cheap credit to the real sector and financial accommodation for small and rural credit schemes. 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. A 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 others. (Adegbaju and Olokoyo, 2008).

The reforms carried out in Nigerian banking industry which started from July 6  2004 was done primarily to meet the developmental challenges of the 21st century. In his words, Professor Charles Soludo, the governor of Central Bank of Nigeria from June 2004 to June 2009 said that the reforms were to engender exchange rate and price stability, managing interest rate for stability and development of macroeconomic coordination, vigorous pursuit of the developmental roles of the CBN, improvement of the payment system, financial sector diversification and regulatory reforms and strategies for integrating the Nigeria’s financial system into the African regional and global financial system. He further emphasized his desire to concentrate on the theme of banking sector consolidation. Strengthening and consolidating the banking system was to constitute the first phase of the reforms designed to ensure a diversified, strong and reliable banking sector which will ensure the safety of the depositor’s money, play active developmental roles in the Nigerian economy and be competent and competitive players in the African regional and global financial system. The reform was to support the banks to become strong players for good health, long live and positive contributors to the economy. Depositors were expected to have sweet dreams in aftermath of this reform. With the universal Banking system which was introduced in 2000, banks became one stop shops offering a range of financial services, insurance, mortgage, stock broking, investment, banking etc. Unfortunately after the observation that the banks were putting shareholders’ funds at risk and not concentrating on their areas of core competence, the central Bank of Nigeria on 15 March 2010 announced the phasing out of universal banking within the 18 months. All these reforms had taken place but the benefits especially as it relates to bank performance is still a doubt to many people.

1.2  STATEMENT TO THE PROBLEM
Oloyode (1994) observed that the banking sector over the years has been faced with so many crises and some fraudulent practices. These crises led to the recent reforms in the banking system one of which was merger and acquisition of banks. Oke (2006) observed that the inconsistency in monetary reforms and regulatory policies as a major setback to banks stability as the surveillance and regulatory measures of the Central Bank of Nigeria (CBN) have unfortunately been unable to keep the pace with the rapidity of the changes in the financial system.

One objective of the reform is to create a sound and more secured banking system that depositors can trust. These banking reforms were expected to address the problem faced by the banks and other technically insolvent institutions without an initial resort to liquidation, with all its adverse consequences for deposits. These problems encountered by the banks before the reformation according to Lemo (2005) were as follows:
a.       Weak corporate governance, evidenced by high turnover in the board and management staff, inaccurate reports and non compliance with regulatory requirements.
b.      Late or non publication of annual accounts that obviates the impact of market discipline in ensuring banking soundness.
c.        Poor risk management practice.
d.      Operation at level lower than that which could deliver competitive return on equity.
e.       Poor asset quality.
f.       Poor quality services and diversified delivery channels.
g.      Thin spread of qualified and experienced man power.
h.      Heavy reliance by banks on government patronage.
i.        Gross insider abuses, resulting in huge non performing insider related credits.
j.        Weak capital base, the minimum capital base before the reforms was N2 billion which is approximately $15 million. But after the reform the minimum capital requirement stood at N25 billion, approximately $250 million.
According to Soludo (2007), the Nigerian banking system has undergone remarkable changes over the years. Regimes in Central Bank of Nigeria have always geared up towards the avoidance of banking distresses and its attendant consequences as witnessed in Nigeria in the past. These changes have been influenced largely by challenges posed by the reforms in an attempt to consolidate and strengthen the banking system and solve the problem of illiquidity and distress, and to restore public confidence in the sector. However, the correlation between these sets of reforms and banks performance has not been clearly ascertained.

1.3  OBJECTIVES OF THE STUDY
The main objective of the study is to ascertain the impact of banking reforms on Bank performance in Nigeria. The specific objectives are:
1.   To determine the effect (s) of banking reforms on bank performance in Nigeria.
2        To assess the impact of interest rate restructuring on bank’s performance in Nigeria.
3        To determine the impact of Bank Recapitalization /consolidation on bank’s performance in Nigeria.

1.4       RESEARCH QUESTIONS
The research questions were formulated to address the research problem and the research objectives as discussed above. Three principal research questions were answered in this study........


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