CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
All over the world, different regions have experienced serious financial crises. For instance, regional financial crises such as the Asian financial crisis, APANS’ banking crisis, or the Latin American debt crisis have occurred without seriously infecting the rest of the global financial system. However, the global financial crisis of 2008 was a major one due to its devastating and contagious effects and implications on all economies of the world. It has brought home an important point that the United States is still a major center of the financial world.’ This is discernible in the way the crumble in U.S. financial system has brought major parts of the rest of the world down with it (George and Zeihan, 2008).
The reason is that the United States is the main guarantor of the international financial system, the provider of dollars widely used as currency reserves and as an international medium of exchange, and a contributor to much of the financial capital that sloshes around the world seeking higher yields (George and Zeihan, 2008).
The crisis started with failures of large financial institutions in the United States, it rapidly evolved into a global crisis resulting in a number of European bank failures and declines III various stock indexes, and large reductions in the market value of equities (stock) (Pan, 2009) and commodities worldwide (Ambrose, 2007).
The crisis has led to a liquidity problem and the deleveraging of financial institutions especially in the United States and Europe, which further accelerated the liquidity crisis. Thus, it became worst of its kind since the great depression (Torbat, 2008).
Prior to consolidation of Deposit money banks (DMBs) in Nigeria on July, 6, 2004, the Nigerian banking industry witnessed higher level of uncertainty in its operation. This eroded the confidence of the general public which is the main asset of the industry in the past. In addition, investors and depositors funds were not guaranteed, thereby making many of the banks to come under stress due to capital inadequacy. These problems greatly impaired the quality of the bank’s assets as non-performing assets became unbearable and became huge burdens on many of the banks (Peter, 2009).
It was against this background that the Central Bank of Nigeria (CBN) initiated the bank consolidation in 2004 and was concluded on the set deadline date of December 3l, 2005, to provide a strong and reliable banking sector that would guarantee the safety of depositor’s money (Adeyemi, 2005). There is no. doubt that the consolidation exercise was remarkable and had some positive impacts on the banking sector. The banking system was transformed from 89 banks to 25 through regulatory merger and acquisition and latter to 24 through market-induced merger and acquisition, also, the recapitalization requirement of N25 billion by banks (Sanusi, 2010).
Unfortunately, the global financial crisis, which has its roots in the United States of America and Europe in 2007, and later spread to other part of the world including Nigeria, affects this effort. This also eroded the confidence of depositors and investors despite the consolidation exercise.
Even the Nigerian stock Market, which is supposed to function as fund buffer, was not left out of the crisis. This research study therefore examines the impact of the global financial crisis’ on the performance of deposit Money Banks (DMBs) in Nigerian.
1.2 Problem Statement
The global economic crisis started as a financial crisis in the United State of America in 2007. It has it root in credit contraction in the banking sector due to certain laxities in the United State financial system. The crisis later spread to Europe and now has become a global phenomenon. The financial crisis started with sub-prime mortgages as households faced difficulties in making higher payments on adjustable mortgages. By the first quarter of 2008, there was widespread credit contraction, as financial institutions in the united.
State tightened their credit standards in” the high of their deteriorating balance sheets. Since the use of credit contraction by foreign banks began, the deposit Money banks and the banking system of Nigeria has seriously been entangled in a financial crisis. This makes the banks unable to carry out their statutory function in the Nigerian economy. In addition, the crisis eroded the confidence of the general public in the entire Nigerian banking industry.
Therefore, problem of this work’ is to examine the impact of the global financial crisis on the performance of some selected deposit money banks in the banking industry.
1.3 Research Question
In the course of this study, the following research questions were raised with the aim of finding answers to them.
Does global financial crisis affect performance of Deposit Money Banks in Nigeria?
What made the Global Financial Crisis spread to Nigerian Banking Industry?
HI. How can Nigerian banks be protected from impact of future occurrence of the global financial crisis?
1.4 OBJECTIVES OF THE STUDY
The consolidation of deposit money banks was initiated by central Bank of Nigeria (CBN) to provide a strong and reliable banking sector that would guarantee the safety of depositors’ money. Within the short period of consolidation there were positive changes in the entire banking system, as interest and lending rates became stabilized. In addition, the banks went into project financing in the real sector of the Nigerian economy. Therefore, they were able to support the process of economic growth and development of Nigeria. But with the global financial crisis, which affected the Nigerian banking industry, the public has lost confidence on the deposit money banks in the Nigerian banking industry.
Thus, the main objective of this research project therefore is to examine the impact of the global financial crisis on the performance of deposit money banks in Nigeria other objectives are:
To identify relationship, if any that exist between global financial crisis on lending rate of Deposit Money Banks.
To assess relationship, if any between market structure of Deposit Money Banks and Global Financial Crisis.
To determine relationship, if any between Corporate Governance of
Deposit Money Banks and Global Financial Crisis.
IV. To identify the major causes of the financial crisis in Nigeria as it related to Banking Industry.
v. To determine various options that could cushion the impact of the financial crisis as well as avoid future occurrence by banks.
1.5 STATEMENT OF HYPOTHESES
This study will taste the validity or otherwise of the following three (3) hypotheses which are formulated to guide the study.
Hol: There is no significant relationship between lending rate of deposit money banks and the global financial crisis.
H02: There is significant relationship between lending rate of deposit money banks and the global financial crisis.
H11: There is no significant relationship between market structure of deposit money banks and the global financial crisis.
H12: there is significant relationship between market structure of deposit money banks and the global financial crisis.
H21: There is no significant relationship between poor corporate governance of deposit money banks and the global financial crisis.
H22: There is significant relationship between poor corporate governance of deposit money banks and the global financial crisis.
1.6 Significance of the study
The outcome of this research study is expected to assist Nigerian policy makers, banks management teams and banks regulatory bodies in Nigeria to know the extent of the impact of the’ global financial crisis on the performance of deposit money banks in Nigeria.
1. 7 Scope of the Study
The Nigerian banking system consists of twenty one banks as at December 2011 (NSE, 2011). For the purpose of this study, five deposit money banks were selected as sample for the study. These banks include: First Bank of Nigeria Plc, Zenith Bank Plc, Guaranty Trust Bank Plc, Union Bank Plc and United Bank for Africa Plc. The choice of these banks is because of the strategic position the banks hold in the banking industry, and banks were also listed and quoted on the Nigeria Stock Exchange. The study covers the periods of 2006-20 11.
1.8 PLAN OF THE STUDY
The research work is organized into five chapters and the highlight of each chapter is as follows.
Chapter one of the project consists of background to the study of the impact of global financial crisis on the performance of deposit money banks in Nigeria. It highlights the problem state, research questions and hypotheses, objectives and significance of the study, definition of key terms used in the study, scope and plan of how the study will be conducted.
Chapter two consists of conceptualization. It also gives comprehensive review of related literature, determinants of bank performance as well as causes of financial crisis, theoretical review and summary of the chapter.
Chapter three of the study gives adequate in-depth knowledge on the sources of data used, techniques or data analysis. population. sample and sample size of the study, research design and justification of the techniques used for the analysis in the research work.
Chapter four of the study deals with the presentation and analysis of data collected. It gives the result of the analysis and reveals the findings of the research work by testing the validity of the hypotheses formulated in chapter one. It also gi yes the performance appraisal of the selected banks, and finally the policy implications of the results.
Finally, chapter five of this research work contains the summary of the entire project work, the conclusions reached by the researcher, limitations of the study and the researcher’s recommendations.
1.9 Definition of Key Terms
Consolidation: This is defined as a fusion of assets and liabilities, in whole or in part, of two or more business establishments to form an entirely new establishment.
Credit Crunch:- This is a situation in which the amount of available credit in an economy is restricted and so slows down economic activity.
Crisis.- Eichengreen and Porters, (1987) defined crisis “as a sharp change in asset prices that leads to distress among financial markets participants.”
Financial Crisis: Financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value.
Globalization: – Globalization is defined as the integration of independent countries, with respect to economy, culture and knowledge through modern technology (Allen and Thomas, 2000).
THE IMPACT OF GLOBAL FINANCIAL CRISIS ON THE PERFORMANCE OF DEPOSIT MONEY BANKS IN NIGERIA
