CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Economic growth has long been considered an important goal of economic policy with a substantial body of research dedicated to explaining how this goal can be achieved. Most of the empirical studies have focused on explanatory variables selected on the basis of their relevance to policymakers or because of other theoretical predictions. See for instance, Barro 1991; Levine and Renelt 1992.

However, while most prior empirical studies have focused on economic and non-economic determinants of growth in developed and developing economies, there has been very little study focusing on the relationship between the banking sector and economic growth in developing economies. The handful of studies undertaken has focused on transition economies of central and eastern European and the Baltics. Tuuli (2002) explained that although there has been numerous empirical studies on the determinants of growth in transition economies “the relationship between financial markets and economic growth, however, has largely been ignored. To our knowledge, the only study that empirically tests the relation between financial markets and economic growth in transition countries is Drakos’s (2002) paper on the effects of banking sector’s structure on economic performance.” Tuuli’s (2002) study however has some shortfalls: it equates financial sector reforms with banking sector reforms; it uses unbalanced panel data from 25 transition countries as variables which were either not always available or were unavailable for identical periods for each country, and it ignores structural differences amongst the countries.

In Nigeria, the only empirical study 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 specification. For example, given multiple channels of accessing banking services such as internet banking; telephone banking; mobile banking; and use of automated teller machines; the relevance of the number of bank branches as a determinant of economic growth is uncertain. Secondly, the paper makes use of lending rates, savings rates and exchange rates as explanatory variables. Tuuli (2002), however assert that rather than use lending and/or savings rates, interest rate margins (i.e. the difference between savings and lending rates), are “a good estimator for efficiency in the banking

sector as it describes transactions costs within the sector”. Also, Elbadawi (1992) found that high exchange rate premiums (i.e. the difference between the parallel and official market exchange rates), lead to lower revenue generation from official exports, increased difficulties in controlling inflation and an acceleration of capital flight.

As a result, there remains a gap in understanding the causal relationship between banking reforms and economic growth in developing economies. Focusing on the Nigerian economy, a country whose banking industry has witnessed a large number of reforms in a relatively short time, the aim of this paper is to attempt to rectify this gap in economic literature by investigating whether recent banking sectors have had any effect in stimulating economic growth in Nigeria.

Based on theoretical considerations, annual time series data from 1999 – 2009 will be used to develop econometric models that capture the interrelationship between the country’s economic growth over this period, and relevant parameters. Policy directions aimed at stimulating sustainable economic growth and an agenda intended to implement the outcome of this study will thereafter be recommended.

We conduct section 1 with a brief overview of developments within the Nigerian banking sector. A short review of relevant literature and discussion of the theoretical framework is undertaken in section 2. Data sources and econometric models are specified in section 3. Section 4 presents the outcome of the data analyses while section 5 suggests policy recommendations on the basis of the outcome of our analyses and suggests possible extension to the study.

1.2  STATEMENT OF THE PROBLEMS

Absence of policies and regulations in any human endeavour culminates in chaos and eventual failure. In similar vein, when there are policies and regulations and they fail to achieve the objectives for which they are formulated, the signification is malfunction.

       Reforms are introduced when the aforementioned scenarios prevail. The first scenario held sway prior to 1958 when the central Bank of Nigeria was established by virtue of the central Bank Act of 1958.

       The problem seemed to persist and, consequently in recent times, the CBN subjected the banking sector to a spate of reforms in quick succession which blured the proper evaluation of their effect, and there arose, as a result, the problem and the need to properly determine the impact of the reforms on the Nigeria banking sector with particular reference to union Bank of Nigeria Plc in Enugu Metropolis.

       Other problematic issues that need to be addressed are:

1.  The relevance of CBN current reforms in the economic growth of Nigeria.

2.  The extent to which the reforms have been implemented in the banking sector.

3.  The determination of the influence of CBN current reforms on the financial performance of union bank plc.

Existing literature revealed that before the establishment of the Central Bank of Nigeria in 1958, there were about 185 banks and majority of them failed. After the establishment of the Central Bank, the apex bank came up in quick succession with a lot of regulations and counter-regulations which made it uneasy for the analysts to [properly determine their impacts. Hence, the question; what are the impacts of CBN current reforms on the Nigeria banking sector? There exist other problems that relate to the one above which the researcher has the burning desire to address.     

1.3 OBJECTIVE OF THE STUDY

The purpose of this study is to evaluate the impact of CBN current reforms on the Nigerian banking industry with

particular reference to Union bank Plc in Enugu metropolis. Some other objectives of this study are:

1.  To determine the relevance of CBN current reforms in economic growth of Nigeria.

2.  To assess the impact of the current reforms in Nigerian banking sector.

3.  To determine how the reforms have is been implemented in the banking sector.

4.  To determine the influence of CBN current reforms on the financial strength of Union bank plc.

1.4 RESEARCH QUESTION

The following research questions were formulated in this research work:

1.  What are the relevance of CBN current reforms in the economic growth of Nigeria?

2.  What are the impact of CBN current reforms on Nigerian banking sector?

3.  How have the current reforms been implemented in the banking sector?

4.  What are the influences of CBN current reforms on the profitability of Union bank plc?

1.5 RESEARCH HYPOTHESIS

For the purpose of the study, the following hypotheses were formulated:

Ho: CBN current reforms do not have any impact in Nigerian banking sector.

H1: CBN current reforms have significant impact in Nigerian banking sector.