ABSTRACT
This
study focused on examining the effect of Relationship banking on the
performance of manufacturing sectors in Nigeria within the period of 2010 to
2014. This study was carried out to investigate the implication of banking
relationship on firm’s performance in the manufacturing sector in Nigeria,
using the number of banks as proxy for Relationship banking and leverage as
proxy for effects of increase in banking relationships.
Secondary
data were collected from the publicly available audited financial statements of
the companies selected. Ordinary least Squares Regression was implemented using
panel data in testing the correlation between Relationship banking and
performance of twelve manufacturing companies respectively while descriptive
analysis was done with the use of graph in analyzing alterations in the
variables over time.
The
result from the ordinary least squares (OLS) regression analysis showed that
Relationship banking does not have any significant relationship on the
performance of the twelve Nigerian manufacturing companies used in this study.
The study concluded that the number of
banking relationships the manufacturing companies have does not determine or
have any form of effect on the performance of these firms. This
is possible, in that whether there is a decrease or increase in these banking
relationships to the manufacturing sector, it neither discourages, nor
encourages these manufacturing sectors to expand their businesses and scope of
operation, which has ultimately contributed to the massive decline in Nigerian
manufacturing sectors.
CHAPTER
ONE
INTRODUCTION
1.1 Background to the Study
Banking is an Economic activity of intense interest to public policy.
Banks are subject to extensive prudential and conduct of business regulation.
The public sector can also exercise direct and indirect influence over banks’
business decisions through outright ownership. The objective is basically to
achieve public goals such as the channeling of funds to vulnerable economic
sectors to borrowers with limited access to credit. Public sector involvement
can be expressed through financial support, in cases where banks run into
trouble, this support can be explicit or implicit in the markets’ expectation
that some banks will not be allowed to fail.
Commercial banks have increasingly played a major role in financing
public and private entities. Lending which may be on short,
medium or long-term basis is one of the services that deposit money banks do
render to their customers. In other words, banks do grant loans and advances to
individuals, business organizations as well as government in order to enable
them embark on investment and development activities as a means of aiding their
growth in particular or contributing toward the economic development of a
country in general (Bologna, 2011). Deposit money banks are the most important
savings, mobilization and financial resource allocation institutions.
Consequently, these roles make them an important phenomenon in economic growth
and development. Therefore, no matter the sources of the generation of income
or the economic policies of the country, deposit money banks would be
interested in giving out loans and advances to their numerous customers bearing
in mind, the three principles guiding their operations which are,
profitability, liquidity and solvency (Adolphus, 2011). However, deposit money
banks decisions to lend out loans are influenced by a lot of factors such as
the prevailing interest rate, the volume of deposits, the level of their
domestic and foreign investment, banks liquidity ratio, prestige and public
recognition. The CBN require that their total value of a loan credit facility
or any other liability in respect of a borrower, at any time, should not exceed
20% of the shareholders’ funds unimpaired by losses in the case of commercial
banks (Bologna, 2011).
Manufacturing
sector plays catalytic role in a modern economy and has many dynamic benefits crucial for economic transformation.
In a typical advanced country, the manufacturing sector is a leading sector in
many respects. It is an avenue for increasing productivity related to import
replacement and export expansion, creating foreign exchange earning capacity;
and raising employment and per capita income which causes unique consumption
patterns. Furthermore, it creates investment capital at a faster rate than any
other sector of the economy while promoting wider and more effective linkages
among different sectors. In terms of contribution to the Gross Domestic Product
(GDP), the manufacturing sector is dominant and it has been overtaken to the
services sector in a number of organizations for Economic Co-operation and
Development (OECD) countries (Anyanwu, 2003).
Obamuyi
(2013)affirms that banks with high deposits and loans perform better in terms
of profitability than banks with low deposits and loans. The author suggested
that, since high deposits and loans enhance profitability, policy makers must
make savings attractive in order to positively influence the liquidity position
of the banks and their lending behaviour. The author further argues that,
Nigerian commercial banks observed an era of remarkable profitability,
characterized by high competition, huge deposits and varied investment
opportunities. This development in the banking industry suggests that banks
with well efficient deposits mobilization drive with high-quality lending
behaviour will be the most profitable. Since the profitability and survival of
businesses depend largely on availability of funds, and deposits constitute the
major source of bank financing, it is apparent that there exist a relationship
among efficient deposit mobilization, bank lending behavior, and profitability
(Bologna, 2011). This explains why most banking firms have put in place
aggressive deposit mobilization strategies with focus on customer need
identification and offering of sophisticated banking products.
Banking relationships can influence syndicated
loans terms. However, the role of lending relationships in syndicated loans
remains virtually unexplored. When banks develop a long-term relationship
(called a banking relationship, or a lending relationship) with their customers
in a syndicated-loan market with repeated transactions, they gather information
about the firms. The
relevance of financial markets and financial institutions occurs, when they
arise to help solve some of the frictions that could be found in real markets.
Banks serves multiple purposes such as transforming short term liquid
investments such as deposits into long term illiquid assets such as loans,
(Diamond &Rajan, 2008). They also economize on collecting and processing
the information necessary to make investment and lending decisions. According
to these authors, the idea that banks can provide a
service in the form of a lending relationship arises out of the value, that
firms place on these relationships. This relationship critically depends on the
competitiveness of the capital markets. Lending relationships should be most
valuable where the information about a firm and its potential investment
opportunities are most uncertain.
The development of long-term bank-firm relationships provided benefits,
such as reducing information asymmetries, particularly when the borrowers are
smaller.
Syndicated loans are thus referred to as a hybrid of transactional and
relationship banking, (Lee &Mullineaux, 2004). A
small business lending can enhance bank value through relationship lending,
unlike the transactional lending, the bank can also benefit from its
opportunities to cross-sell additional products and services. The firm has an
incentive to remain with the relationship bank rather than to defect and begin
new relationship with another lender. In any case, because it is costly and
time consuming to establish new lending relationships, firms are subject to a
lock-in effect with their current relationship lender, which in turn enhances
the banks’ profits. When the credit market is competitive and creditors cannot
hold equity claims, the lender cannot expect to share in the future surplus of
the firm. Since uncertainty about a firm’s prospects is high when the firm is
young or distressed, creditors may be forced to charge a high interest rate
until the uncertainty is resolved.Banking power at firm and market level is
detrimental to the firm, as it increases the probability of credit constraints.
Multiple banking choices, larger, riskier, less profitable and more
opaque firms prefer more lending ties, and the number of relationships is also
positively correlated with credit market concentration. However, firms that
engages in multiple relationships, benefits from competition among lending
banks in terms of a lower probability of tightening, though such competition
does not fully outweigh the marginal effect of local banking market power. In
addition, the impact of competition on access to finance, depends on the
quality and scope of credit information sharing mechanisms and better credit
information, mitigates the damaging impact of low competition.
Harjoto (2006)
and Bosch (2007) try to confirm if banking relationships matter by asking
whether commercial and investment banks adopt the same tariff policies. They however,
confirmed that in the syndicated loan market, commercial banks are more likely
to develop a banking relationship. In contrast, investment banks are more
likely to adopt arm’s length transactions, called the transaction banking, so
commercial banks could gather information about firms and charge a reduced
spread. Harjoto (2006) find that the investment banks charge higher spreads,
and they thus provide the first evidence that banking relationships matter.
Bosch (2007) also investigates the role of banking relationships in the
determination of the spread. He shows that, whereas information asymmetries
between the debtor and the lender increase the spread, a preexisting banking
relationship reduces it. His result confirms the reasoning of Harjoto (2006)
that banking relationships provide information to the banks, decrease the
information asymmetries, and therefore allow a reduction of the spread.Banking
relationships could have negative consequences for firms, via the so-called
hold-up effect. Indeed, banking relationships in loan market, offer banks a
competitive advantage because of the private information that banks have about
firms. Thus, lending relationships can create switching costs for firms, and
banks can charge an information rent.
Mattes(2012)
show that if firms suffer from important switching costs, banks exploit their
advantage and charge a higher spread. Therefore, banking relationships can
offer an information rent to the banks, and can present drawbacks to the firms.
Credit extension is essential function of banks and bank management because it
strives to satisfy the legitimate credit needs of the community it tends to
serve. The Central Bank of Nigeria established a credit act in 1990, which
empowered banks to render returns to the credit management system in respect to
its entire customers with aggregate outstanding balance of one million naira
and above, (Ijaija & Abdulraheem, 2000).This made Nigerian Banks to
universally embark on upgrading their control system and risk management, in order
to avoid industry financial risk.
1.2 Statement of the Problem
In the history of development of the Nigerian Banking Industry, most
of the failures experienced in the industry prior to the consolidation era were
results of imprudent lending that finally led to bad loans and some other
unethical factors, (Ogundepo & Olanirul, 2008).
Complexity
experienced in banking industry today makes bank managers to be desperate, and
therefore see each other as competitors. Bank services are increasing in
Nigeria, yet the level of failure in their services indicate that ineffective
relationship with customers seems to be pronounced. This level of competition
has made bank managers to focus on how to be in a close contact with their
customers in order not to lose their active customer to their presumed
competitors.
Furthermore,
competition in banking has implications for other sectors of the economy. Thus,
higher competition in the banking sector is found to be associated with a
faster growth of other sectors of the economy that rely on external financing.
This is because banks advance credit or loans to both firms and consumers and
an uncompetitive banking sector will lead to under-provision of such credit,
(Adebiyi&Obasa, 2004).Competition in the banking sector will promote the
efficiency required to create a fully functional credit system, and according
to the competition-stability theory, will help improve the stability of the
system, (Degryse& Mitchell, 2004).
High
concentration in banking is negatively related to industrial growth in
low-income countries but not in high-income ones, suggesting that emerging
economies need a relatively more competitive banking sector in order to promote
growth. Hence, company relationship with more than
one bank, means there will be competition among the participating banks, if
there is; it is expected of the company to do better, in the presence of a lead
bank(Chodechai,
2004). In the existence of other market
imperfections, it’s not always true that competition among participating banks
lead to greater output and lower prices of the company. Therefore, in Nigeria,
it is somewhat possible for performances to be effective using one bank, this
research is to see if the performance can be used in one or more banks.
1.3
Objective of the Study
The main
objective of this study is to provide an analysis of Relationship banking and
its implications on the performance of Nigerian Manufacturing Industries. The specific objectives are to:
1. examinetrends in number of banking relationships overtime within
Nigerian Manufacturing Industries and
2. examinethe effect of number of banking relationships on firm
performance withinNigerian Manufacturing Industries.
1.4 Research Question
The
following is the research question that addresses the research objectives;
1.
What
effect does number of banking relationships have on the performance of Nigerian
Manufacturing Companies?
1.5 Hypothesis
The following is the research hypothesis for the study:
HO1:Number of banking relationships does not have effect
on the performance of Nigerian Manufacturing Companies
1.6 Scope of the Study
The study covers a period of 5years, which is from 2010-2014, for
twelve manufacturing companies in Nigeria, and the data to be used for this
research were obtained from the audited financial statement of the firms listed
on the Nigerian Stock Exchange. The variables of interest for this study are
profit margin, optimal number of banks and leverage, these variables were
chosen because previous literatures made emphases on performance only, and
hence this study used other proxies to show the effect of an increase or
decrease in the number of banking relationship.
1.7 Significance of the Study
The goal of
every organization is to remain in business through profit making. It is also
worth mentioning that granting of loan contributes to the profit of banks
through the charging of interest. Loans given to borrowers, shareholders’ and
depositors’ money and hence should be critically evaluated before they are
being granted and they should be continuously checked to for proper management.
The effect of lending in the Nigerian economy today is that, it has tightened
up the global credit on the primary market and the secondary market, thereby
reducing the volume of the investors in the secondary syndicated loan market in
Nigeria and bringing down the value of shares in the stock market. There is a possibility that there’s implicit
syndication between the banks and their customer borrowers. This benefit allows
the relationship banks to provide loans for them during crisis, Due to the
services they provide; operating costs of relationship-banks are higher than
those of transaction banks. One of the advantages of these relationships is
that, they may allow the lender to collect information about a borrower, which
is not easily reproduced by financial institutions, this in turn, can give the
lender a competitive advantage. The explicit syndication is not really
observable.
1.8 Justification for the Study
The relevance of
this study is to examine financial
institutions and loan syndication in Nigerian manufacturing sector. If a
manufacturing industry does not have more than more relationship, the bank
can try to hold the company hostage in
terms of acting like a monopolist by charging the company higher interest rate
on their loans.
1.9
Operational Definition of Terms
1. Transactional
Lending: A loan extended
by a bank for a specific purpose.
2. Lock-in
Effect: is a term, which
is typically used to explain a practice, where a company makes it extremely hard
for their customers to leave them, even if the customer wants to.
3. Informational
rent: is the rent an agent derives from having
information not provided to the principal.
4. Relationship
Banking: A long, intimate
and relatively opened relationship established between a corporation and its
bank, on the basis of long or short term investment.
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