THE IMPACT OF FINANCIAL SECTOR REFORMS ON THE AGGREGATE OUTPUT IN NIGERIA (1970-2010)

CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

        In recent times, more attention has continued to focus on the reform of the structure of the financial sector which can affect macro-economic performance. Gertter (1988) provides an excellent survey on the connection between the efficiency of financial markets and macro economic performance. For instance, the behaviour of monetary aggregates has great implications for the level of prices and the balance of payments.

Second, it is becoming increasingly clear that the ability to sustain stabilization policies as exchange rate reforms may hinge critically on structural change in the financial sector. Specifically, such structure change in the financial sector may be crucial for the efficient conducts of monetary policy. Without such structural changes, it would be difficult to make any substantial progress with macro-economic stability (Khan and Sundargjan, 1992).

Third, some recent literature has started to focus on the issue of sequence and timing both the overall stabilization programme and the liberation of the financial sector. The speed, sequence and timing of specific components of financial sector reform may hinder the attainment of the objectives of the goals of  stabilization policy.

Therefore, the objective of financial sector reform defined in a broad manner is to increase the size improve the efficiency and increase the diversity of the financial through financial reforming economy. The objective is attained through financial liberation which is viewed as the process of moving toward market –determined interest rates as well as market determined prices on all classes of financial products, banking system characterized by symmetric entry and exist condition to all participants, increasing internationalization or the opening up of domestic to the introduction of new financial products (source).

The successful implication for the monetary policy framework.In particular, indirect monetary management will only succeed when substantial reforms have been implemented in the financial sector. Such as the restructuring of the portfolio of the domestic banking system and the reduction in the size of the deficit of the government are initial condition for transiting to a more market based system monetary control. Thus relatively well developed financial systems are necessary to ensure that indirect method of monetary management work  well.

In Nigeria, the only empirical stud of the relationship between the banking sector and economic growth is Balogun’s (2007) paper on banking sector reforms and the Nigerian economy. There are however question marks around the paper’s use of certain parameters in its model. Most of the empirical studies have focused on explanatory variables selected on the basis of theoretical predication.

In broad term, a well reform financial sector leads a nation on the path to development. This means improving the whole financial sector – everything from banks, stock exchanges, and issuance to credit unions microfinance institutions and money lender.

All this resultantly improves financial sectors performance and since the financial sectors in the heart of a nations’ economy the economy also experiences rapid change and improvement unit’s aggregate performance.

Historically, financial sector reform (FRS) became a major component of the structural adjustment programme in Nigeria with the deregulation of interest rates in August 1987. However, in terms of attention, research efforts in this regard have been minimal, when compared to the effort into the other components of the programme such as trade liberation and exchange rate reforms. Even where research is available, emphasis has tended to be place on the institutional aspects of the programme and here too the focus has been on the banking sub-sector (Ikhide 1994). The reason is that stabilization issues tend to have more far reaching implications, given the structures of most sub-saharan African countries and given the nature of imbalances that necessitated the implementation of economic reforms is these countries in the seventies and early eighties.

The recent times however, more attention has been paid to research work on financial sector especially during these periods of reforms and restructuring of that sector.

 

STATEMENT OF THE RESEARCH PROBLEMS

Economic growth has long been considered an important goal of economic policy with substantial body of research dedicated to explaining how his goal can be achieved. Prior to 1952, banking in Nigeria was completely unregulated. The lack of regulation had resulted in several bank failures and attendant losses to depositions. Indeed, there are differing records of how many banks were in existence or failed during that era. The central Bank of Nigeria (CBN) for instance, identified a total of 22 banks being registered between1947 and 1952. According to Uzoaga, (year) between 1947 and 1952,  Nigeria experienced a rapid expansion of indigenous banking companies. This was quickly followed by a high rate of bank failures which by 1954  had claimed 21 of the 25 established banks with 16 of them collapsing in 1954 alone.

Also Nwankwo (1980) stated “ a figure as high as 185 banks were confirmed by the financial secretary as the number that actually registered as banking companies between 1947 and 1952 of which 145 were registered in 1957 and 40 in 1952. The 1952 Banking ordinance was however ineffective as there was no central Bank in place to act as a lender of last resort or to effectively supervise the existing Banks. The central Bank of Nigeria was subsequently. The CBN was established by virtue of the CBN Act of 1958. Due to the perception of foreign monopoly of the banking sector, the Banking decree enacted.

According to Nnadi and Akpomi (2003), “The 1969 banking decree required all banks to be locally incorporated and to publish their balance sheets or their Nigerian banking business only. There are also other regulation, which are aimed at stabilizing the indigenous banks for their long-term existence and committing the foreign banks into the country economic improvements”.

Furthermore, Jerome and Ogunrola (2004) found that “Between 1963 and 1972, and average of 65% of total capital was in foreign hands” Beck, Cull and Jerome (2005) added that “ in the 19705, the Nigerian authorities introduced an array of direct controls in the banking sector, through ownership, of as well as through interest rate and credit controls. As part of an “indigenization wave” that had the goal on securing domestic majority ownership of strategically many foreign owned banks were nationalized, since no Nigeria purchaser could be found”.

The Nigerian Enterprises promotion Decree was also promulgated in 1972 to restrict foreign ownership of Nigerians’ businesses to a maximum of 60%. In 1976, an amendment to the decree was promulgated to further restrict foreign ownership of Nigeria business to 406.

With the enactment of the Nigerian Enterprise promotion decrees, the Federal Government was able to acquire 60% equity ownership of all foreign banks.

Up until the early part of the 1980s, the Nigerian economy had been almost entirely predicated on foreign exchange receipt from oil export as a catalysts for economic growth. According to Ross (2003) “it will be difficult to exaggerate the role of oil in the Nigerian economy. Since the first oil price shock in oil has annually produced over 90% of Nigerian’s export income. The oil has price crash of the mid 80’s and dramatic fall in oil export revenue led to a sharp exchange shortages, balance of payments and debt crisis, high rate of unemployment and negative economic growth. Indeed, beginning from 1982 and through 1984, the country had been saddled with negative trends in economic growth as indicated by the decline in its gross domestic product i.e. 0.35% in 1982, -5.37% in 1983 and -5.18% in 1984. In order to improve this situation, the country allowed the establishment of foreign banks in 1990. This results in an increase in the number of banks from 106 to 155 by the end of 1997. In 1997, A CBN directive lifted the restriction on equity ownership of industrial and corporate investors in Nigerian banks. Under the new directive, it was possible for an individual or corporation to own 100% of the share capital of a bank. Prior to this directive, the maximum share-holding possible for an individual was 10% while for companies the limit was 30%.

However, due to the distress that plagued many of these banks, the number of banks declined to 89 at the end of 1998 as the federal government liquidated 27 Ailing Banks, to strengthen the banking industry, and improve availability of credit to the private sector, further reforms were implemented in  2004. Banks were required to raise their capital in order to meet this requirement, banks merged, with those who could not raise the capital or agree mergers, loosing their licenses. This exercise effectively reduced the number of deposit banks in Nigeria from 89 to 25.

In the process of meeting the equivalent of the domestic capital markets and attracted about $652 million FDI into the Nigerian banking sector. The pace of banking reform in the Nigerian Banking industry following the deregulation of the banking sector by the central bank placed significant challenges on corporate governance in deposit taking financial institution. These reforms have however safeguarded.

The banking sector from systematic collapse and to ensure the stability and soundness of Nigerian banking sector, but still Nigeria does not have a stable macro-economic environment.

As a result, there remains a gap in understanding the causal relationship between banking reforms and economic growth in developing economics. Therefore as a nation whose banking sector has witnessed a large number of reform in a relatively short time, this research is aimed at investigating whatever recent banking / financial reforms have had any effect in stimulating productivity improvement in Nigeria.

 

OBJECTIVES OF THE STUDY

The broad objective of this study is to examine the impact of financial sector reforms on the aggregate output in Nigeria. However the specific objectives are to;

  1. examine the trend of financial reforms in Nigeria
  2. evaluate the relationship between the exchange rate and economic growth
  3. examine the effect of the interest rate variation on nation’s economic performance
  4. examine the relationship between the inflation rate and economic growth.

 

STATEMENT OF THE RESEARCH HYPOTHESIS

The research hypothesis is stated as follows; interest rate, saving rate, inflation rate have no significant impact on the aggregate productivity growth in Nigeria.

 

SIGNIFICANCE OF THE STUDY

Despite views, there is evidence that a developed financial system positively influences real economic activity. Nigeria finance system especially the capital market and banking component like those of other developing countries has overtime remained week and a cause for concern. The comprehensive financial sector reforms of the mid 1980s brought about fundamental changes as the capital market, along with the banking sector, is growing very fast and now positioned play its traditional roles of providing sources for ling –term investment and growth of the economy.

The major concern of this research work is to bridge the gap that has been created through non – concentration of research activities on the financial sector of the economy. Which goes a long way in effecting the effectiveness of the various reforms that have been introduced into the Nigeria financial system. This outcome has importantly affected market realities resulting into market inefficiencies, policy conflicts, information asymmetry and government interference in the interaction of market force and he and he produced results is direct contradiction to theoretical expectation.

 

 

 

 

This Project is is available for the below list of Nigerian State capitals.
Abia Umuahia, Adamawa Yola, Akwa Ibom Uyo, Anambra Awka, Bauchi Bauchi, Bayelsa Yenagoa, Benue Makurdi, Borno Maiduguri, Cross River Calabar, Delta Asaba, Ebonyi Abakaliki, Edo Benin. Ekiti Ado Ekiti, Enugu Enugu, Gombe Gombe, Imo Owerri, Jigawa Dutse, Kaduna Kaduna, Kano Kano, Katsina Katsina, Kebbi Birnin Kebbi, Kogi Lokoja, Kwara Ilorin, Lagos Ikeja, Nasarawa Lafia, Niger Minna, Ogun Abeokuta, Ondo Akure, Osun Oshogbo, Oyo Ibadan, Plateau Jos, Rivers Port Harcourt, Sokoto Sokoto, Taraba Jalingo, Yobe Damaturu, Zamfara Gusau, FCT Abuja.

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