THE IMPACT OF GLOBALISATION ON THE NIGERIAN BAKING INDUSTRY

ABSTRACT

This study examined the impact of globalisation on the Nigeria banking industry. The major objectives  was to  determine  the impact  economic  globalization  on the  efficiency  of the Nigeria banks, to determine the affects of globalisation on the profits of Nigeria banks and to examine how globalization have influenced the contribution of the banking sector to the growth of the Nigeria economy. Research  hypothesis were raised and tested through the use of Simple Linear Regression model. After the test of the hypothesis, it was discovered that Economic globalization does not have a positive significant impact on the efficiency of Nigerian banks, Economic globalization does not have a positive significant impact on the profitability of Nigerian banks and Economic globalization has not positively influenced the contribution  of the banking sector to  the  growth of the Nigerian economy. Based on the findings and recommendations,  it  was recommended  that the Central Bank Nigeria apart from  the responsibility  for  broader  monetary  policies,  its key role is to ensure  that the banking system operates in a prudent and efficient manner so as to avoid financial crises. It does this through laying down the rules for the establishment of new banks and stipulating monitoring  procedures  to  ensure  proper  accounting  and  auditing.  Government  should restrict  cross country capital  flows. Government  can mitigate  the cost of volatile capital flows, reducing excessive risk taking and making market less vulnerable to external shocks, and still pursue integration with international financial market.  Profitability of Nigerian the effects of globalisation.

CHAPTER ONE

INTRODUCTION

1.1         BACKGROUND OF THE STUDY

The modern banking industry varies in precise operational methods according to  different their jurisdictions; but their operative principles have always been the same across borders. They have become more so as globalization knits various markets closer  towards oneness,

throwing up common  challenges,  threats and opportunities  (Umoren,  2006). At the  same time, the scope and the complexity of contemporary banking is beyond any given countries regulatory capability. Besides, banking is ever more global than before due to technology and ease of transfer of money. Banks have been heavily regulated by the monetary authorities. Globalisation is a contemporary global debate with its roots dated back to Adam Smith and David Ricardo’s arguments  for freer trade – domestic  and  international with its resultant benefits on societies and individuals (Diaz – Bonilla and Robinson, 2001). Karl Max viewed globalisation from a different perspective, he argued that it leads to expansion tendency by the capitalist which to him is a negative process, leading inevitably to imperialism and war. In the same vein, (Ravinder, 2003) argues that globalisation has become painful, rather than controversial, to the developing world, leading to corruption, environmental degradation and internal dissent. The concept of globalisation is multidimensional, that is, it could be viewed from economic, social and political dimensions.  For the purpose of this paper, globalisation is understood as increasing interrelationships between countries; that is, what is happening within countries is increasingly related to what is happening elsewhere.

Schmukler  (2003) defines globalization  as the integration  of a country’s     local  financial system  with  the  international  financial  market.  This  integration  typically  requires  that government liberalize the domestic financial sector and the capital account.  Integration takes place when liberalized economies experience an increase in cross country capital movement. At first only few countries and sectors participated  in financial globalization, capital flows tended  to  follow  migration  and  were  generally  directed  towards  supporting  trade  flows (Taylor, 1996). It was not until the 1970s, witnessed the beginning of a new wave of financial integration (Awopegba and  Orubu, 2004)  further states that, the decreasing capital  control and increasing capital  mobility with a growing  participation  of a wide  range  of developing countries   in the  global  financial   system;  characterised  the post Brettonwoods.  Thereby leading to a more integrated world economy towards the 1990s. As (Mundell, 2000) argues, the 1970s witnessed the beginning of a new era in the international financial system. As a result  of  the  oil  shock  and  the  breakup  of the  Bretton  Woods  system,  a  new  wave  of globalization began. The oil shock provided international banks with fresh funds to invest in developing  countries.  These  funds  were  used  mainly  to  finance  public  debt  inform  of syndicated loans.

The globalization of the financial market affects development because finance plays such an important  role  in  economic  and  industrialization  (Tolulope,  2000).  Demirguc-Kunt  and

Maksimovic (1998) strongly indicate that financial development spurs economic growth. In theory,  there  are  different  channels  through  which  financial  globalization  can  lead  to improvements in the financial sector infrastructure. Namely: financial globalization can lead to  a greater  competition  in the provision  of funds,  which can  generate  efficiency  gains. Further, the adoption of international accounting standards can increase transparency. Third, the  introduction  of international  financial  intermediaries  would  push  the  financial  sector towards the international frontier.  Stulz (1999) argues that financial globalization improves corporate governance; new shareholders and potential bidders can lead to a closer monitoring of  management.    Crockett  (2000)  claims  that  the  increase  in  technical  capabilities  for engaging  in  precision  financing  results  in  a  growing  completeness  of  local  and  global markets.

Foreign  bank  entry  is  another  way  through  which  financial  globalization  improves  the financial infrastructure of developing countries. (Mishkin, 2003) argues that foreign banks enhance financial development.

Although financial globalization  has several potential benefits,  financial globalization  can also carry some risks. The recent stream of financial crises and contagion after  countries liberalized their financial systems and became integrated with world financial markets, might lead some to suggest that globalization generates financial volatility and crises.

First, when a country liberalizes its financial system it becomes subject to market discipline exercised by both foreign and domestic investors. When an economy is closed, only domestic investors monitor the economy and react to unsound fundamentals. In open economies, the joint force of domestic and foreign investors might prompt countries to try to achieve sound fundamentals, though this might take a long time.

Second,  globalization  can  also  lead  to  crises  if  there  are  imperfections  in  international financial markets.  The imperfections  in financial markets can generate  bubbles,  irrational behaviour,   herding   behaviour,   speculative   attacks,   and   crashes   among   other   things. Imperfections in international capital markets can lead to crises even in countries with sound fundamentals  (Obstfeld,  1986). Imperfections  can  as  well  deteriorate  fundamentals.  For example,  moral  hazard  can  lead  to  over   borrowing  syndromes  when  economies  are liberalized and there are implicit government guarantees, increasing the likelihood of crises (McKinnon and Pill, 1997). Third, globalization can lead to crises due to the importance of external factors, even in countries with sound fundamentals and the absence of imperfections

in international capital markets. (Calvo, Leiderman, and Reinhart, 1996) argue that external factors are important determinants of capital flows to developing countries.

Fourth, financial globalization can also lead to financial crises through contagion, by shocks that  are  transmitted  across  countries.  Given  the  financial  characterization  of  developing economies, economic globalisation is expected to generate positive gains to the economies if implemented properly. (Seck and El Nil, 1993) concluded that African countries stand to gain from economic globalisation because real deposit rates were found to have a positive impact on financial savings, which in turn affects the level of investment positively. However, the design of financial  sector reforms  is also  important.  (El Nil, 1993)  asserts  that  financial liberalization may not help reduce  interest spreads in African countries if the reduction in reserve requirements and deregulation of the banking sector are not coupled with the increase in competition in the sector.

Studies in Africa have shown that liberalization of the financial sector has proceeded  with limited  success.  (Seck  and  El Nil,  1993)  concluded  that  financial  repression  in  African countries is likely to persist because governments have the incentive to perpetuate it given the incidence of high inflation, large budget deficits and limited access to foreign capital. Thus, African countries are likely to face problems in getting their economies out of the financial repression  web  because  of  high  inflation  rates  that  justify  banks’  high  intermediation margins,  implicit  tax  that  the  government   extracts  from  the  banking  system  through enforcement  of below market rates, and  high liquidity reserve requirements  to help them finance often large deficits. (Aryeetey et al., 1997) concluded that fragmentation of financial markets in Ghana, Malawi,  Nigeria  and Tanzania persisted several years after initiation of financial sector reforms. The reasons attributed to this limited success include the fact that reform  measures   have  mostly  been  incomplete   and  have  not  been  accompanied   by complementary  measures  to  address  underlying  institutional  and  structural  constraints. Though, there have been studies in this area of Nigerian Banks and globalisation. However, most have clustered around the pre and post consolidation of Nigerian banks (Bokhari and Fabrizio, 2008), form and manner of integration (Ajayi, 2003) and macroeconomic reform to rehabilitate  troubled  banks  (Arua,  2006;  Seck  and  El  Nil,  1993).  To  the  best  of  the researcher’s  knowledge,  no study has been carried out the impact of  globalisation on the financial development and economic growth. This is a gap which this study attempts to fill. The essence  is to determine  how Nigerian’s  financial  development  and economic  growth relate to the extent of its participation in the global economy?

1.2      STATEMENT OF THE PROBLEM

Commercial banks are particularly relied on, for the promotion of financial integration of the various parts of the country. The role of an efficient banking system in economic growth and development   lies   in   Savings   mobilization   and   intermediation.   Banks,   as   financial intermediaries, channel funds from surplus economic units to deficit units to facilitate trade and capital formation (Soyibo and Adekanye, 1992a). As (Ncube and Senbet, 1994) argued, an efficient financial system is critical not only for domestic capital mobilization but also as a vehicle for gaining competitive advantage in the global markets for capital. For the financial system to be efficient, it must pay depositors favourable rates of interest and should charge borrowers  favourable  rates  of  interest  on  loans.  The  financial  intermediation  activity  in banking  involves  screening  borrowers  and  monitoring  their  activities,  and  these  enhance efficiency  of  resource  use  (Mckinnon  and  Shaw,  2003)  is  of  the  view  that  financial intermediation through the banking   system  induces economic growth, assuming  there are no government  policies and  legislation   working   towards distorting   its growth oriented effect.

Salimono (1999)  argues that globalization  offers  economies with potentials of eradicating

poverty .The  reason for this belief may not  be  unconnected  with the dramatic  increase  in prosperity that globalization has brought  in its wake  especially in South Korea, India  and south Africa. A reasonable way to measure economic performance is through growth in real per capita incomes. Although such a measure ignores the impact of the distribution of income on welfare, it nevertheless provides a convenient summary of economic conditions in a given country (Sylla and Rousseau, 2001).

However the situation is different in Nigeria, where income is decreasing. (Association  of African Central Banks, 2001) holds that the growing importance of globalization has helped economic growth in many parts of the world; African countries have been  rather slow to embrace  these changes and are poorly integrated  into  the global  system.   Back  home  in Nigeria, it has become a scarce word in quarters because of our unpreparedness for the global economy and market, (Nigeria deposit Insurance Corporation, 1997). Akadiri (1998) asserts that Nigeria would be cast into a ruthless, wild frontier where the battle is to the strong and race is to the swift. (Tolulope,  2000)  opines that Nigeria  economy is not very sound  to support full globalization.

Here are some of the problems the Nigerian bank has to resolve before they can fully join the global   financial   market   and   not   to   be   a   spectator   (Nigeria   Deposit    Insurance Corporation1997).

1        Inefficiency in the Nigerian banks

2        Poor profits of the Nigerian banks

3         Poor contribution of the banking sector to the growth of the Nigerian economy

The most basic functions  of a financial system  are: firstly, to provide efficient  payments mechanism  for  the  whole  economy  and  secondly  intermediating  between  lenders  and borrowers. These basic functions are the domain of the banking institutions. For most banks, including Nigerian banks, margin is the main source of their profits (Memmel, 2008). In a liberalized environment, competition should reduce spreads and enhance bank performance and  efficiency.  With  reference  to  the  intermediation  function,  this  means  narrowing  the margin between what they pay for financial resources (the deposit rate) and what they earn on them (the loan rate). The difference between the deposit rate and the loan rate is referred to as the interest spread  (or interest  margin).  Due to competition  banks engage  in non-interest earning asset which may reduce the Net Interest Income. Similarly variation in overhead and other operating cost is reflected in banks interest margin, as banks pass on their operating cost on their  depositors  and lenders. Thus, Nigeria is   likely to face problems  in getting their economies  out of the financial repression  web because  of high inflation rates that  justify banks’  high  intermediation  margins,  implicit  tax  that  the  government  extracts  from  the banking  system  through  enforcement  of  below  market  rates,  and  high  liquidity  reserve requirements to help them finance often large deficits.

The primary duty facing the management of any bank is to make profit, which is often the basis  of  assessing  their  performance.  The  more  open  an  economy  is  the   higher  the competitive pressure on domestic producers and retailers. That is why globalisation may have reduced the cyclical sensitivity of profit margins since companies cannot raise their prices in cases of excess domestic demand that could be satisfied by imports. International competition also  forces  banks  to  increase  the  services  rendered  in  order  to  reduce  costs.  As  a consequence,   globalisation  reinforces  the   efforts  to  increase  service  productivity  and technological progress. Growing productivity and declines in relative costs will only lead to a decline in prices if firms  pass the lower costs on their customers in form of lower prices (Galati,  2006).   Imperfect competition  among firms or even a monopoly situation causes

output  to  fall below  the optimal  level,  which might  enhance  the incentive  for  monetary authorities to increase money supply which will result to inflation.

Economic  growth means increase  in the real per capita income. This implies that on  the average each person in the country gets more goods and services and a higher  standard of living than before. For more goods and services to be produced in order to achieve economic growth, more people have to save and invest. Economic growth will only come when the resources of a country are well harnessed. The industrial sector has witnessed increasingly, the  pitfalls  that  a  liberalized  regime  could  bring.  Among  them  are  increased  credit  to purchase assets and finance consumption, asset price volatility and financial fragility. Besides that, in developing countries, economic globalisation often changes significantly the sectoral allocation  of credit;  typically the  shares of services sectors,  consumer  loan and property related credit tend to increase at the expense of industry. Note that the difficulties faced by many  countries  in  liberalizing  their  financial  markets  go  beyond  simply  problems  of macroeconomic stability. Financial markets are characterized by severe market failures that can lead to a case for government intervention which liberalization retard.

1.3      OBJECTIVES OF THE STUDY

In line with the above stated problems,  the following are therefore  the objectives of  this study:

1     To determine the impact of economic globalization on the efficiency of the Nigerian banks.

2     To determine the impact of globalization on the profits of Nigerian banks.

3     To examine how globalisation have influenced the contribution of the banking sector to the growth of the Nigerian economy.

1.4   RESEARCH   QUESTIONS

The aim of this study would be achieved if solutions are offered to the following research questions.

1   To what extent has economic globalization affected the efficiency of Nigerian    banks?

2      To  what  extent  has  economic  globalization  affected  the  profitability  of  Nigerian banks?

3     To what extent has economic globalisation influenced the banking contribution to   the growth of the Nigerian economy?

1.5      RESEARCH HYPOTHESES

To actualise the stated objectives, the following hypotheses have been formulated.

1.    Economic globalization does not have a positive significant effect on the efficiency of

Nigerian banks.

2.    Economic globalization does not a positive significant effect on the profitability of

Nigerian banks.

3.    Economic globalization has not positively influenced the contribution of the banking sector to the growth of the Nigerian economy.

1.6      SCOPE OF THE STUDY

The introduction of democratic rule of government in Nigeria brought the dawn of a  new optimism and new expectations in the country. For the banking sector it also brought a new phase of sanitisation, including organisational, ethical reforms and recapitalisation. Due to the level of competition in the banking and the dynamism of the environment, any strategy that was based  solely on the traditional  function  of granting  loans and advances  as the core business of banking had limited growth opportunities (CBN Banking supervision and Annual Report). In the struggle for survival and many other reasons, the Nigerian banking industry introduced  universal banking  in the year  2000 (Ehikhamenor,  2003). However,  the study covers the profitability,  net interest  margin and financial intermediary development of the Nigerian banking industry between 2000 and 2007.

1.7      THE SIGNIFICANCE OF THE STUDY

Though  this  research  paper  is  principally  to  fulfil  academic  requirement,  it  is  however significant to individuals operating in the banks and the entire government at large.

1   Banks

The knowledge of the study will enable banks to be aware of the dangers surrounding over extending domestic lending boom which often precede a currency crisis. Secondly, that lack of transparency has been to be associated more harden behaviour by international investors which  can destabilize  a country’s  degree  of financial  markets.    It  tries  to  ascertain  the problems, which must be tackled along the way, challenges facing Nigeria in order to benefit maximally from the globalisation process.

2    Researchers

The project when completed will serve as a reference material in the related field and will be useful to students of the Nigeria institutions.

3     Policy makers

Policy makers and other stakeholders  in the Nigerian economy will find and draw  useful lessons in the various issues of globalisation  discussed. This study even though  based on Nigeria, could be extended to analyse economic development in other developing countries. Furthermore,   policy  makers   should   be   conscious   of   how   they  approach   economic globalisation because it is widely believed that it may not be beneficial to the economy if not properly managed.

1.8      GENERAL DEFINITION OF TERMS.

Internationalization  refers to the increasing importance  of international  trade,  international relations, treaties, alliances etc.

Integration  is  derived  from  integer  meaning  one,  complete  combining  into  one  whole. Liberalization refers to the act of freeing something from political, religious, legal or moral restrictions.

1.9      LIMITATION OF THE STUDY.

It is important to point out that this research work is not exhaustive; this is to say that the study is not without certain limitations. The researcher is fund constraint, thus, the study is limited by the availability of fund.

The second limitation was associated with data generation.  Getting statistical data from the CBN Annual Report and Statement of Accounts of various years under study was  a huge problem. In fact, the intention of the researcher was to undertake a 10 year time frame for the study, however, mutilations of data and lack of timely data posed to be a  problem for the researcher. This could be attributed to Nigerians at the moment having poor attitude towards data documentation and preservation and where available  sentiments do not allow those in charge to release such data even for academic purposes.

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