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.
This material content is developed to serve as a GUIDE for students to conduct academic research
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