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.....
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