THE IMPACT OF GLOBALIZATION ON THE NIGERIAN FINANCIAL SECTOR

ABSTRACT

The study examines the effect of globalization on the Nigerian financial sector. It is also aimed at ascertaining the impact of globalization on the Nigerian commercial banks and the stock exchange. Assets of the Nigerian financial sector and commercial banks were used as performance indicators of the Nigerian financial sector and the commercial banks. Market capitalization was used as performance indicator of the Nigerian stock exchange. The data used are Nigerian yearly data from 1985 to 2006 converted to rate and interpolated to 88 data points. The data were analyzed using descriptive statistics, Ordinary Least Squares statistical technique, Johansen’s co-integration and error correction mechanism. We used Augmented Dickey-Fuller statistics to test for stationarity and Granger causality test to test for the causal relationship of the variables used. We proxy globalization with degree of openness (measured by total trade divided by gross domestic product), foreign direct investment, portfolio investment flows, external debt flows, nominal exchange rate and gross capital formation. Three null hypotheses were  formulated and  tested.  They were  all  rejected  based  on  the overall significance of the models using F statistics at five percent level of significance. The results of our estimate show that the Nigerian financial sector as a whole has benefited from globalization. The globalization proxy variables conformed to the a priori signs for the overall Nigerian financial sector model. However, the openness variable, foreign direct investment flows and external debt flows negatively affected the performance of the commercial banks. This shows that Nigerian commercial banks have not benefited from trade openness, foreign direct investment and external debt flows. We also observe that gross capital formation  and  external  debt  flows  affected  the  Nigerian  stock  exchange negatively. We therefore recommend that for the Nigerian commercial banks to benefit from globalization, the recent re-capitalization and debt recovery exercise and monitoring of macroeconomic stability be encouraged to gain confidence by investors in the financial sector.

CHAPTER ONE

INTRODUCTION

1.1      Background of the Study

The world is now a global village. Activities of one national economy now affect the others. Although most people continue to live as citizens of a single country, they are influenced culturally, materially, psychologically, politically and economically by people living in other countries. Distance, national borders, etc, are no-longer barriers or limiting factors.  The issue of one global economy is now the topic of discourse among peoples of the world both in developing and developed countries.

The awareness of a global economy especially in the 1980s by individuals, communities, businesses and governments around the world is made possible due to the advancement in technology, communication, transportation, information, integration of  nation-states, international integration of  markets and  increased international trade. Globalization also involves the growth of multinational corporations (businesses that have operations or investments in many countries) and transnational corporations (businesses that see themselves functioning in a global market place).

The concept of globalization appears to be new due to the recent popularization by its advocates. Two reasons are given for the recent popularity of the concept. The first is the scale and speed with which it is occurring and the way technology (especially in communication and transportation) is changing the world. Second, it is now widely accepted that globalization is not just the latest fad but that the international environment is changing in profound ways and that the world is indeed becoming a global village (Ajayi, 2001). Also attributed to its popularity in

recent times is the conscious effort of those with the ideology that it could be a panacea for the world economic disorder. Its supporters believe that with free- market globalization, investment funds can move unimpeded from where they are plentiful (the rich countries) to where they are most needed (the developing countries). Consumers can also benefit from cheaper products because reduced tariff makes goods produced at low cost from far away places cheaper to buy. In the same vein, producers of goods gain by selling to a wider market. However, globalization is not without criticism. Antagonists argue that it is a conscious effort by the Western World to deliberately force some of their economic polices that may not be favourable to the receiving economy with the aim of perpetually contributing to the under-development of the less developed countries. It is seen as another form of colonialism which does not promote self-reliance, self- determination and  indigenization. They  also  argued  that  the  success  of  most developed nations is through protectionism and subsidies and not because of free trade.  It is base on this that some have defined globalization as a world-wide drive toward a global economic system dominated by supranational corporate trade and banking institutions that are not accountable to democratic processes or national governments. The reasons for the changing perception of globalization by many

are given thus;

.… the lack of tangible benefits to most developing countries from opening their economies, despite the well-publicized claims of export and income gains; the economic losses and social dislocation that are being caused to many developing countries by rapid financial and trade liberalization; the growing inequalities of wealth and opportunities arising from globalization; and the perception that environmental, social and cultural problems have been made worse by the workings of the global free-market economy” (Khor, 2000: i).

But the concept is an age long phenomenon. Some believe that globalization has no origin in the sense of an exact starting point. However some have traced it to the first circumnavigation of the earth from 1519 to 1521 when the first great expansion of European Capitalism took place. The term ‘global’ began in the

1860s to mean the ‘whole world’ though; the word globalization first appeared in a dictionary (of American English) in 1961. Diaye (2001), also asserts that globalization started gaining momentum in the 1960s when businesses in search of larger markets expanded their reach and interest beyond national borders.

Globalization is multi-dimensional, affecting all aspects of life – economic, cultural, environmental, and social as well as relations between governments and nations on the seven continents. Globalization is characterized, in particular, by an intensification of cross-border trade and increased financial and foreign direct investment flows promoted by rapid liberalization and advances in information technology (Mohamed, 2001). This consciousness has led to the formation of international  associations  and  unions.  For  instance,  we  have  the  General Agreement on Tariffs and Trade (GATT) which is now the World Trade Organization (WTO), the North American Free Trade Agreement (NAFTA) in North America, the  Latin  American  Integration Association (LAIA) in  South America, the European Union (EU) in Europe, the African Union (AU) in Africa, and also in West Africa, we have the Economic Community of West African States (ECOWAS). To make international trade successful, the European Union even introduced a common currency, the euro. In the same vein, there is also a consensus for a common currency in West Africa.

In Nigeria, the term ‘globalization’ became pronounced through the adoption of the Structural Adjustment Programme (SAP) in 1986. The primary aim of SAP was to restructure and diversify the productive base of the economy. In addition, the SAP was designed to establish a realistic and sustainable exchange rate for the

naira through trade and payment liberalization, tariff reforms and commercialization and privatization of public enterprises. An appraisal of this programme shows that it was a failure since it could not yield the expected results. According to Abutiate (1987), as cited in Ikpeze (1994: 154),

‘‘one assessment of this liberalization effort is that it has turned out to be a policy failure because: Neither domestic savings  nor  inflow of  new  foreign  capital appears  to  have  increased  appreciably.  Depositors who became hawkish in their demand for deposit rates on their placement are being rebuffed by banks      who have little investment outlet to utilize such funds’.

Since  the  concept  of  globalization  is  multi-faceted (political,  social,  cultural, economic, etc), it is defined and explained based on the area of interest. This study concentrates on  the economic aspect of  globalization. Economic globalization according to Onah (2007) is “the increasing openness of national economy to international trade investment, migration, borrowing and lending, aid, economic policies, communications and other forms of cooperation by firms”. We shall lay more emphasis on the financial sector. The financial sector is all wholesale, retail, formal and  informal institutions in  an  economy offering financial services to customers,  businesses  and  other  financial  institutions.  The  financial  sector includes; banks, stock exchanges, and insurers, to credit unions, microfinance institutions and money lenders. Thus, financial globalization is referred to as the increasing global linkages created through cross-border financial flows. We shall look at the impact of globalization on commercial banks and the Nigerian Stock Exchange (NSE).

1.2      Statement of Problem

Prasad et al (2003), argued that economic globalization could in principle help to raise the growth rate in developing countries through a number of channels. Some of these directly affect the determinants of economic growth (augmentation of domestic savings, reduction of the cost of capital, transfer of technology from advanced to developing countries and development of domestic financial sectors). Indirect channels, which in some cases could be even more important than the direct ones, include increased production capitalization owing to better risk management, and improvements in both macroeconomic policies and institutions induced by the competitive pressures or the “discipline effect” of globalization. They also said that the volume of cross-border capital flows has risen substantially in the last decade. There has been not only a much greater volume of flows among industrial countries but also a surge in flows from industrial to developing countries. This  movement is  the  outcome  of  “pull  factors” which  arise  from changes in policies and other aspects of opening up by developing countries. These include liberalization of capital accounts and domestic stock markets and large-scale privatization programmes. How much of the advertised benefits for economic growth has actually materialized in the Nigerian financial sector? This is because Nigeria, as one of the developing countries in Africa, has experienced a lot of reforms since independence in 1960. More significant was the adoption of the IMF’s Structural Adjustment Programme in 1986 by the Federal Government. The financial sector was not an exception. The financial sector was liberalized and deregulated which gave room for more banks and other non-bank financial institutions to be established (commercial banks, merchant banks, discount houses, finance houses, development banks, etc). The financial sector reform also allowed banks to set interest rates, substantially reduce central bank liquidity credit, and abolish administratively determined credit ceilings. The objectives of the financial sector deregulation were to move away from administrative control to market allocation of credit flows, provide higher returns to depositors and lower costs to

borrowers by raising the degree of competition in the financial markets. It was also aimed  at  increasing savings  mobilization,  allocating financial  resources  more efficiently through increased reliance on the market mechanism and increasing the use of capital market instruments to raise equity capital and enhance the liquidity of shares.

We noted that during this period of liberalization and deregulation there had also been a high incidence of distress in the financial services industry. The financial institutions can no longer perform their primary role of lending and the naira has depreciated more than 5000 percent (Gbosi,1995). What is the cause? Why is the sector still backward despite the liberalization and deregulation exercise which began in 1986? The Indonesian banking reforms of 1983 worked. Other African countries  like  Benin,  Botswana,  Burkina-Faso,  Cameroon,  Mauritius, Mozambique,  Senegal,  Tanzania,  and  Uganda  all  achieved  growth  and  also brought inflation to a single digit during 1999 and 2000 (Gondwe, 2001). Has globalization strengthened the Nigerian financial sector? Has globalization impacted significantly to the Nigerian commercial banks and the Nigerian stock exchange? What sector has it impacted most and what is the nature of the impact?

1.3      Objectives of the Study

The broad objective of this study is to ascertain whether globalization has strengthened the Nigerian financial sector.

Specific objectives of this study are;

1.    to assess the relevance of globalization (trade openness) to the Nigerian commercial banking sub-sector.

2.   to ascertain the effect of globalization on the Nigerian stock exchange.

3.    to  assess  the  nature  of  impact  globalization  has  on  the  sub-sectors mentioned above.

1.4      Hypotheses

The hypotheses in this study are stated thus;

(i)       Globalization has not strengthened the Nigerian financial sector.

(ii)       Globalization is not relevant for the good performance of the Nigerian commercial banks.

(iii)     Globalization has not impacted positively to the performance of the

Nigerian stock exchange.

1.5      Significance of the Study

This study is essential and significant since it is meant to provide an overview of globalization and its effects on the financial sector of the Nigerian economy. A study of this kind therefore provides useful information for government and policy makers especially those involved in the country’s external economic relations. It also provides a database for further studies and lectures on world economy and international financial relations.

1.6      Scope of the Study

The concept of  globalization is  multi-faceted. This study as indicated earlier, concentrates on the financial sector with special interest on the commercial banks and the Nigerian stock exchange. The period under study is between 1985 and

2006. This period was selected because of some reasons: firstly, it covers the SAP period (1986-1989) under which the Nigerian economy was really liberalized and opened. Second, the recent years (2000-2006) have witnessed aggressive efforts by the Obasanjo administration at integrating Nigeria with the outside world. The policies are aimed at liberalization, deregulation, increase in foreign trade and increase in foreign direct investment.

1.8      Organization of the Study

The  study  is  divided  into  seven  main  chapters.  Chapter  one  looks  at  the background of the study, statement of the problem, objectives of the study, hypotheses, significance of the study and scope of the study.  Chapter two, deals with  literature  review.  Chapter  three  presents  the  overview  of  the  Nigerian financial sector. Chapter four presents the methodology. Data presentation and analysis are found in chapter five. Chapter six takes care of interpretation of results while chapter seven focused on the summary, recommendations, contribution to knowledge, limitations of the study and conclusion.

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