The Impact of Financial Deregulation in the Banking Sector of Nigeria

1.1 Introduction

Financial deregulation is a programme of changes in the direction or moving towards a free market economy. This normally includes the reduction of direct controls on both internal and international transactions and a shift towards relying on the price mechanism to coordinate economic activities. Deregulation is a matter of degree, and does not imply a shift to total laissez-faire. Regulations which have been relaxed include controls on interest rates at which banks can lend or borrow, controls on operations by banks outside their country of registration and restrictions on the types of business particular financial institutions can transact, direct credit abolition and exchange rate deregulation (Timothy, et al, 2012).

As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Research questions, Limitation of the study and Definition of technical terms.

1.2 Background of Study

Nigeria economy had a lot of structural distortion in 1980's, the economic policies prior to 1985, made the Nation's economy vulnerable to external stocks. Consequently, the 1986 budget sought to de-emphasized controls and adopted policy measures arrived at expanding the economy resource. To attain this goal, the 1986 budget at a tone, introduced the Structural Adjustment Programme (SAP) which was launched in July 1986, in Nigeria. Structural Adjustment Programme (SAP) is a programme imposed on developing countries, especially on economic policy regions, by the Bretton Woods Institutions (i.e. the World Bank and International Monetary Fund). This is to improve a country's foreign investment by removing trade and investment regulations (i.e. deregulations). The deregulation policy is also an encouragement to efficient operation of the money market.

Subsequently, structural adjustment programme (SAP) was introduced, mainly due to the persistent and destabilizing economic crises that followed. Some macroeconomic indicators explain the pressure the country was passing through then- balance of payment problem, debt service burden, rising unemployment and foreign exchange crises etc. It will be recalled that the financial sector applied diverse monetary control instrument to manage the economy.

The banking institutions are crucial to any government, and play key role in the development of the economy (Todaro and Smith, 2011). The effectiveness and efficiency of performing these roles depends largely on its development and management, thus the need for reforms. Almost two decades after independence in 1960, Nigeria enjoyed fairly a stable economic growth to the extent that it was an era referred to as oil-boom.

At the end, it appears that the Central Bank of Nigeria (CBN) and others banks were not coordinating their activities in the overall interest of the economy. The existing structures were ineffective making the demand for reform (deregulation) imperative.

The deregulation policy was designed to:

1. Restructure and diversify the productive base of the economy in order to reduce dependency on the petroleum viability.
2. To achieve focal and balance of payment viability.
3. To lay the basis for sustainable, non-inflationary/minimal inflationary growth rate.
4. To lessen the dominance of unproductive investment in the economy, improve the sector's efficiency and intensify the growth potential of the private sector.

The banking industry which is a major instrument which government execute their policies need to appropriately reposition itself to take full advantages of the gains that might arise from deregulation, as well as face the challenges. Deregulation of the economy will definitely pose some challenges to the banking industry: Competitive lending rates, effectiveness of management of credit/credit risk, etc.

Therefore, in Nigeria where the research was carried out, the activities that was conducted is to know the Impact of Financial Deregulation in the Banking Sector.

1.3 Statement of Problems

Investigation revealed that due to the undeveloped nature of Nigeria banking system, it is sometimes said that banks have not met the standard expected from them, especially in the introduction of deregulatory policy. There are many problems which the banking industry is no exception. They are as follows:

1. The reluctant competition between banks as a result of deregulatory policy and the possibility of bank failure which prompted the Federal Government to establish the Nigeria Deposit Insurance Corporation (NDIC).
2. The level of expertise in investment banking and corporate finance.
3. Ability to effectively manage credit risk, etc.

These problems threaten the financial performance of the banks in Nigeria due to the information of deregulation in the economy.

1.4 Aim and Objectives of Study

The aim of the study is to examine the Impact of Financial Deregulation in the Banking Sector of Nigeria. In achieving this aim, the following specific objectives were laid out as follows:

1. To identify the various achievements made with the inception of the policy as well as to examine how effective banks have been since the inception of the policy;
2. To critically identify and analyze the impact of government deregulation of the economy on banking sector, with the aim of making useful recommendations on how to improve commercial banks performance and other banks in Nigeria;
3. To compare the activities of commercial banks under the system of regulation and deregulation in order to know the main objective of the policy is being achieved;
4. To examine the performance of banks, under a deregulated economy with a view of assessing the effects, challenges and benefits, as well as achievements which deregulation will likely pose on the banking industry; and
5. To recommend solution that will enhance the efficiency of banks operations will be equally made.

1.5 Research Questions

The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:

• Has deregulation of the economy resulted to an increase in profitability of commercial banks?
• Has deregulation led to an increase in banks' bad debts and doubtful debts?
• Will deregulation lead to an upsurge in the number of commercial banks?

1.6 Significance of Study

The findings of this research will be of immense benefit to other researchers who intend to know more on this study and can also be used by non-researchers to build more on their research work. Also, the entire public will hopefully benefit from this study since it will form the basis for other research work.

1.7 Scope of Study

The scope of the research is focused on the Impact of Financial Deregulation in the Banking Sector of Nigeria.

1.8 Limitations of the Study

During the course of this study, many things militated against its completion, some of which are:

1. Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
2. Research material: availability of research material is a major setback to the scope of the study.
3. Frequent power failure: This made the researcher append more money on fuel to ensure sustainable power.
4. Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

1.9 Research Methodology

The methodology applied in this research project includes Oral interviews with top-bank official (using random sampling). Questionnaire will also be administered to staff, mostly operational departments and few members of the management board.

1.10 Definition of Technical Terms

Banking: Banking is an industry that handles cash, credit, and other financial transactions.

Impact: Impact is the action of one coming forcibly into contact with another.

Sector: A sector is an area of land, sea, or organization that has been divided from other areas. It is also an area or portion that is district from others.