Published on International Journal of Economics & Business
ISSN: 2717-3151, Volume 3, Issue 1, page 49 – 55
Publication Date: March 7, 2019
Umar Lawal Aliyu
Faculty of Management, Department of Business Administration
LIGS University Hawaii, USA
Journal Full Text PDF: Banking Reforms in Nigeria and Its Impact on the Economy.
A bank is a financial institution that is licensed to deal with money and its substitutes by accepting time and demand deposits, making loans, and investing in securities. A bank is a licensed and regulated financial institution that lends money, accepts deposits and carries out other financial transactions for its clients. A good and efficient banking structure promotes great amount of investment and this leads to faster economic growth and development. The Financial Services (Banking Reform) aims at attaining higher standards of conduct on all Nigerian banks. Banking Reform also looks to make sure that customers sum of money deposited is protected by outlining plans for the “ring-fencing” of retail and wholesale banking activities. The Nigerian banking sector has witnessed significant reforms and several reforms in order to tackle the lingering effects of the global financial crisis, which culminated in the contraction of some banks’ balance sheets with the attendant economic problems. In Nigeria, most banks had a low capital base, weak corporate governance, insolvency etc. and this necessitated the introduction of the Banking sector reform in Nigeria by 2004. The government aimed to establish a reliable and efficient banking sector so that it could guarantee the safety of the depositors’ money. Thus according to the findings of this research work it can be said that , through banking sector reform the government of Nigeria was able to move their economy forward by achieving sustainable economic growth and development. The Nigerian banking sector reforms remained a reference point for the positive development in the Nigeria economy, African region and the world. 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.
Keywords: Bank, Banking sector, Banking reform, Customer, Deposit, Financial institution, Money, Economic development & Economic growth.
The economic well‐being of a country will largely, be dependent on the strength, sophistication and complexity of its banking industry. The regulatory authority on banking in Nigeria, the Central Bank of Nigeria, introduced reforms that will bring sanity to the Banking sector and bring into existence stronger, more viable and more versatile banking institutions in Nigeria. Banking Sector Reform in Nigeria was introduced in 2004. The Government aimed to establish a reliable and efficient banking sector so that it could guarantee the safety of the depositors’ money. The main objectives of the Nigerian banking sector reforms include; enhancing 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.
In 2004 ending, the Central Bank of Nigeria introduced a programme of reforms, which created a new minimum paid‐up capital for all banks, from two billion Naira to 25 billion Naira; with a compliance deadline of 31 December 2005. The research design adopted in this study falls within the paradigm of a quasi-experimental study. Data were collected mainly from secondary records and this data where analysed according to performance achieved in the Nigerian banking industry before and after the reform. However, the study revealed that, prior to the 2004 banking sector reforms, many Nigerian banks were undercapitalized and this accounted for their poor performance in terms of low profitability, low liquidity, low returns on investments and lack of sustainability.
The reforms, amongst other programmes, were designed to diversify the banking industry, strengthen the banks to play leading roles in the Nigerian economy, become active players and compete effectively in the African and global financial system and ensure the safety of depositors’ money.
2. LITERATURE REVIEW
2.1 Theoretical Framework
The theoretical underpinning of this research is anchored on the nexus that subsist between banking reforms in Nigeria and its impact on the economy. A bank is a financial institution, which is involved, in borrowing and lending money. Banks take customer deposits in return for paying customers an annual interest payment. The bank then uses the majority of these deposits to lend to other customers for a variety of loans and making of profits. Banks play an important role in the financial system and the economy and being a key component of the financial system, banks allocate funds from savers to borrowers in an efficient manner and these financial services help to make the overall economy more efficient.
The financial system is central nervous system of a market economy of which is essential to its effective and efficient functioning. Banks mobilize savings for investment purposes and this brings about growth and development. Most productive sectors of the economy rely heavily on the banking sector for credit and the banking sector finances most developmental programmes and strategic objectives employed in almost all productive and developmental aspects of the private and public sectors of the economy. It is in view of these strategic roles of the banking system to national economic development that the issue of a sound banking system, through proactive reforms becomes imperative. According to Ajayi (2005), ‘banking reforms involve several elements that are unique to each country based on historical, economic and institutional imperatives.
Banking reform has been an on-going phenomenon in Nigerian financial sector. In recent times, the regulatory authority on banking in Nigeria, the Central Bank of Nigeria, has introduced reforms that have fundamentally altered the outlook, operation and nature of the banking system in the country. It will be good to note that Banking reforms have resulted from deliberate policy response to correct perceived or impending banking sector crisis and subsequent failure. Banking reform in Nigeria is an integral part of the countrywide reform program undertaken to reposition the Nigerian economy to achieve the objective of achieving economic growth and development.
In recent times, the regulatory authority on banking in Nigeria, the Central Bank of Nigeria, has introduced reforms that have fundamentally altered the outlook, operation and nature of the banking system in the country. The government aimed to establish a reliable and efficient banking sector so that it could guarantee the safety of the depositors’ money and so that need of a reform became inevitable. The focus of this thesis is to investigate the Banking reforms in Nigeria and its impact on the economy. The research work will also examine the various roles played by banking reforms in the development of the Nigerian financial system in providing a healthy competitive environment among banks.
The Nigeria banking reforms in recent times has not only brought sanity to the industry but has equally brought into existence stronger, more viable and more versatile banking institutions in Nigeria.
2.2 The Nigeria Banking Reform
The banking industry in Nigeria started during the colonial era with the establishment of Colonial Banks, with the primary aim of meeting the commercial needs of the Colonial Government. The banking system in Nigeria is regulated through the Central Bank of Nigeria. This apex bank started operation on July 1, 1959. Banking reform is the reform of the banking sector under the objectives of solving the chronic non-profit earning problems and strengthening of the overall health of the public sector banks to face international competitions. All reforms also aim at strengthening the growth potentials of the Nigerian banks as well as develop its absorptive capacity in case of any eventuality, as in the recent global financial crisis.
According to Professor Charles Soludo to raise the capital base of banks was basically meant to strengthen and consolidate the banking system. Mainly, banking reforms usually set to achieve macroeconomic goals of price stability, full employment, high economic growth and internal and external balances. 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 banks chiefs, which included an upward review of banks capital base from N2billion to N25 billion which is the first phase of the banking reforms. The reforms in Nigeria have been directed towards financial intermediation, financial stability and confidence in the system (Central Bank of Nigeria, 2012).
According to Professor Charles Soludo in his paper presented at the special session of the bankers committee in Abuja 2004, he was of the opinion that besides strengthening the Nigerian banks with the new capital base, the reform is intended to exalt full pledge discipline and self-restraint in banks distress that has been a problem to the Nigerian-banking sector. Thus, in Nigeria, banking sector reforms ideally is an integral part of the overall economic reforms programme undertaken to reposition the banking industry to be able to play its critical intermediation and developmental roles, and by so doing reposition the Nigerian economy to achieve its objectives of financial intermediation, financial stability and confidence in the system.
However, it is good to note that the inability to have a sound financial system has necessitated the need to consider the adoption of a reform in the Nigerian banking sector. According to Professor Charles Soludo, 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).