THE EFFECT OF THE GLOBAL FINANCIAL MELTDOWN ON THE NIGERIAN BANKING SECTOR

Abstract

This study seeks to examine the effects of the global financial meltdown on the Nigerian banking sector. The shock waves that emanated from the global financial melt-down that started in 2007 are yet to fully move away. Beginning from the mortgage to stock market in the United States of America it quickly spread to other sectors and other European economies and then a global phenomenon. The effect of the financial crisis left the collapse of many industries in its trail, while the banking sector was the worst hit. To mitigate further collapse of the Nigerian banking sector, the Central bank of Nigeria (CBN) took several steps during and after the global financial crisis. These measures have repositioned the Nigerian banking sector and restored greater degree of public confidence. It was recommended among others that Nigerian banks should depend less on public sector deposits and diversify their products to become more robust in their operations. Key words: Bank Consolidation, Financial melt-down, recapitalization

 

 

 

CHAPTER ONE

INTRODUCTION

• Background of the study

The Nigerian banking sector had witnessed lots of distress, uncertainty and anxiety prior the banking sector consolidation exercise that began in 2005. Investor’s and depositor’s funds were not guaranteed, eroding public confidence, with many of the banks becoming distressed due to capital inadequacy. These problems greatly impaired the quality of the bank’s assets as non-performing assets became unbearable and became huge burdens on many of the banks. The financial intermediation role of the banks became heavily impaired while the macroeconomic activities seriously slowed down. It was against this backdrop, that the Central Bank of Nigeria (CBN) announced a major reform in the entire banking industry. The recapitalization of the capital base of banks constituted the first phase of the bank consolidation process in Nigeria in 2005. The primary objective of the reform initiative was to have an efficient and effective banking industry that could guarantee rapid economic growth and sustainable development. But the global financial meltdown, which started as financial crisis in America and Europe and later spread to other parts of the world, has under minded the banks’ ability to play it developmental roles in the Nigerian economy. The global financial crisis has presented significant challenges for African Countries. It has also exposed weaknesses in the functioning of the global economy. The effects of the crisis become evident in Africa because it happened when the region is making progress in economic performance and management. In Nigeria, the financial systems as well as, the stock market have been affected by the global meltdown, particularly banks with off-shore credit lines. The impact of financial sector on real sector activity has become increasingly evident, propagating beyond the wide spread belief that Nigeria would not be affected by the crisis. The situation if not cubed could generate into worse scenario economy. Under this climate, the growth prospects for Nigeria and many other economies declined considerably, the World Bank global economic growth expectations also declined from 2.5 to 0.9 percent. The resultant effect was that the world economy was marred by the severest financial crisis since the great depression of the 1930s and the Nigerian was not spared. The major challenges posed by the global financial melt-down to Nigeria according Atuche (2007) include the Falling oil prices and dwindling revenue for government. The fall in oil price also affected Nigeria external reserves. Consequently, the naira has been under pressure and has lost more than 25 percent of its value since 2008 to date. Declining capital inflows into the economy. This has the effect of worsening the problem of relatively high operating costs occasioned by decaying infrastructure like power, transportation, healthcare, etc, because of the dearth of funds for investment in infrastructural development. The impact on banks was higher operational costs as well as loss of income that could have been earned from facilitating the inflow of capital into the economy.  Loss of income strategic business units in banks due to restrictive foreign exchange policies to defend the Naira which have been struggling in the inter-bank foreign exchange market. Reduction and re-pricing of credit lines from foreign banks and in some cases outright freeing of such lines. This has led to loss of significant income usually earned from trade finance businesses, Capital market downturn and divestment by foreign investors led to loss of investors’ confidence and increase in non-performing loans from facilities granted to investors in the stock market, Likely loss of business income for key financial institutions directly dependent on the stock market, like the stock broking firms, rating agencies, investment and asset management firms, etc and the implications for banks that are exposed to such institutions, Increased borrowing by national and sub-national governments to cover shortfalls in revenue and the resultant crowding out of the private sector.

• STATEMENT OF THE PROBLEM

The global economic crisis started as a financial crisis in the United State of America in 2007. It has it root in credit contraction in the banking sector due to certain laxities in the US financial system. The crisis later spread to Europe and now has become a global phenomenon. The financial crisis at the early stage manifested strongly in the sub-prime mortgages because households faced difficulties in making higher payments on adjusted mortgages (Soludo, 2009). This development led to the use of credit contraction by financial institutions in the US to tighten their standards in the light of their deteriorating balance sheets. Since the use of credit contraction by foreign banks began, the Nigerian banking system has seriously been entangled in a financial crisis. At the moment, the banks are unable to carry out their statutory function in the Nigerian economy. In addition, the crisis has eroded the confidence of the general public in the entire Nigerian banking industry. In view of this development, this research study is undertaken to examine the impacts of the global financial meltdown on the Nigerian banking sector.

 

• OBJECTIVE OF THE STUDY

The main objective of this study is to assess the effect of the global financial meltdown on the Nigerian banking sector. However, for the successful completion of the study, the researcher set the following sub-objectives:

1. To ascertain the effect of global financial meltdown on Nigerian banks
2. To ascertain the relationship between global financial meltdown and the performance of Nigerian banking sector

• To evaluate the effect of the financial crises on banks’ capital

1. To evaluate the effect of the global financial meltdown on the profitability of the banks
   • RESEARCH HYPOTHESES

For the successful completion of the study, the following hypotheses were formulated:

H₀: The global financial meltdown does not have any significant effect on Nigerian banking sector

H₁: The global financial meltdown has a significant effect on the Nigerian banking sector

H₀: There is no significant relationship between global financial crises and the performance of the Nigerian banking sector

H₁: There is a significant relationship between global financial meltdown and the performance of the Nigerian banking sector.

• SIGNIFICANCE OF THE STUDY

It is conceived that at the completion of the study, the findings will be of great important to the global financial market in formulating policy to prevent further occurrence of the crises, the findings will also be of importance to the Nigeria banking sector in and other financial houses. The study will also be of great importance to the central bank of Nigeria which is a regulatory body to regulate the activities of the banks in other to ensure efficiency in service delivery. And finally, the findings will also be of benefit to researchers, academia lecturers students and the general public as it will add to the pool of knowledge.

• SCOPE AND LIMITATION OF THE STUDY

The scope of the study covers the effect of the global financial meltdown on the Nigerian banking sector. However, there are some constrain to the scope of the study. Below are some of these limitations.

(a) Availability of research materials: The research material available to the researcher is insufficient, thereby limiting the study

(b)Time factor: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

(c)Finance: The finance available for the research work does not allow for wider coverage as resources are very limited as the researcher has other academic bills to cover.

1.7 DEFINITION OF TERMS

Financial crises

The term financial crisis is applied broadly to a variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these panics. Other situations that are often called financial crises include stock market crashes and the bursting of other financial bubbles, currency crises, and sovereign defaults. Financial crises directly result in a loss of paper wealth but do not necessarily result in significant changes in the real economy (e.g. the crisis resulting from the famous tulip mania bubble in the 17th century)

Banks

A bank is a financial institution that accepts deposits from the public and creates credit. Lending activities can be performed either directly or indirectly through capital markets. Due to their importance in the financial stability of a country, banks are highly regulated in most countries. Most nations have institutionalized a system known as fractional reserve banking under which banks hold liquid assets equal to only a portion of their current liabilities.

Finance

Finance is a field that deals with the study of investments. It includes the dynamics of assets and liabilities over time under conditions of different degrees of uncertainty and risk. Finance can also be defined as the science of money management. Finance aims to price assets based on their risk level and their expected rate of return. Finance can be broken into three different sub-categories: public finance, corporate finance and personal finance.

 

1.8 ORGANIZATION OF THE STUDY

This research work is organized in five chapters, for easy understanding, as follows

Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, research methodology, definition of terms and historical background of the study. Chapter two highlight the theoretical framework on which the study its based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding.  Chapter five gives summary, conclusion, and recommendations made of the study.

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