THE IMPACT OF GLOBAL FINANCIAL CRISIS ON THE NIGERIAN BANKING SECTOR
ABSTRACT
The aim of this study was to investigate the Impact of Global Financial Crisis on the Nigerian Banking Sector – A Case study of UBA PLC, UBN PLC and OCEANIC Bank PLC, respectively. The global financial crisis is occasioned by banks imprudence, too high/excessive compensation packages to banks executives, reckless bank lending, lose regulatory regimes and several unregulated financial markets and products. The global financial crisis affects depositors funds and confidence in the Nigerian banking sector. The effect negatively impacts on the credit quality of commercial banks. The work is divided into five chapters. Chapter one is the introduction which treats the background of the study, statement of problem, objectives of the study, research questions and hypothesis and significance of the study. Chapter two is the literature review of related works done on the area of Global Financial Crisis. Chapter three is the research methodology which explains the research design, the methodology for collecting and analyzing data. Chapter four centers on data presentation and analysis while the last, but not the least, which is chapter five is on summary of findings, conclusion and recommendations. The sample size was determined using the Taro Yemeni‘s formula and data from the field analysed in percentages using tabular format. The work recommends that the governments of various countries should put up stringent monitoring policies to avert the occurrence of the global financial crisis.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
The global financial crisis began in the United States of America and the United Kingdom when the global credit market came to a standstill in July 2007 (Avgouleas, 2014). The crisis brewing for a while, really started to show its effects in the middle of 2008. Around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems.
The crisis later spread to Europe and now has become a global phenomenon. The financial crisis at the early stage manifested strongly in the sub-prime mortgages because households faced difficulties in making higher payments on adjusted mortgages (Olowe, 2014). This development led to the use of credit contraction by financial institutions in the US to tighten their standards in the light of their deteriorating balance sheets. In addition, financial institutions stopped lending and recalled their credit lines to ensure capital adequacy (Aluko, 2015).
According to Baker (2014), the original root of the current financial mess is in the US- the world‘s largest Industrial-Military complex. With an estimated GDP of $14 trillion, the US contributes about 25% of world output. If, as is being forecast, the US economy contracts by just 1%, this will imply a direct output loss of approximately $140 billion- equivalent to the GDP of Pakistan, the 47th largest economy in the world! And the crises are not restricted to the US. Cyprian (2014) notes that financial markets have tumbled and slumped the world over: from London to Tokyo, Seoul to Sydney, Sao Paulo to Moscow, Bombay to Frankfurt etc. Avey (2014) asserts that no economy – whether developed, emerging or developing is, so far, insulated from what Greenspan refers to as „once-in-a-century credit tsunami‟.
The initial response of the policy makers in Nigeria was meek. Either they did not understand the crises or underestimated its magnitude. In general, they thought of the crisis as only a storm in a tea cup‘, an aberration, a ‘hiccup‘. They insisted that the fundamentals of the financial system look impressively strong‘ even when the capital market has been bleeding uncontrollably. The Minister of Planning stated, rather insensitively, there is no problem in the Nation‘s capital market. What we have presently is just corrections and adjustments …. Shareholders are getting dividends and bonuses and they are happy…‘ This was at a time when market capitalization had dropped from N12 trillion to less than N9 trillion. When they finally accepted there was a crisis, they promised to take some unspecified drastic and unusual action‘ to stem the global financial crises from causing havoc in the Nigerian financial system.
According to Aluko (2015), the country‘s dependence on the export sector is very significant: 99% of foreign exchange and 85% of local revenues are directly derived from activities related to export of a single commodity, which is at the center of the current financial crises, oil. It is estimated that 58.4% of Nigeria‘s exports are US bound and up to 25% to the Euro zone. 67% of our non-oil exports go to Western Europe, 20% to Asia, while ECOWAS accounted for only 11% in 2007. The stock of our foreign exchange reserves is kept in European capitals where financial markets have tumbled and banks distressed. Indeed the world‘s economies are integrated financially; a little shake-up in one area of the world affects the other (Aluko, 2015).
1.2 STATEMENT OF PROBLEM
The global financial and economic crisis have presented significant challenges to African countries, especially Nigeria. The direct effect of this crisis have been felt mostly through the banking sector. There is depression of the capital market and drop in the quality of part of the credit extended by banks for trading in the capital market. The global credit crunch and re-pricing of risks push up interest rates on lines of credit for Nigerian banks. High exchange rate risks on foreign lines slows growth rate of bank‘s balance sheet in response to the crisis leading to lower profitability. Banks tighten up liquidity outflow due to high foreign exchange outflows and lower monetization of oil earnings. It is the existence of these factors that the global financial crisis impacts on the Nigerian Banking sector.
1.3 OBJECTIVES OF THE STUDY
The primary objective of this study is to identify the impacts of the global financial crisis on the Nigeria Banking industry. The following specific objectives were also deduced.
1. To assess the impact of global financial crisis on Commercial Banks in
Nigeria.
2. To examine the causes of global financial crisis.
3. To determine the solutions to global financial crisis.
4. To identify how Nigerian banks can avoid/withstand the adverse impact of Global financial crisis in the future.