The Effect of Deregulation Policies Essay Example for Free

The Effect of Deregulation Policies Essay 1.1 Background of the study Organization, corporations or establishment, just like the governments are governed by rules and regulations, in the same way every economy set out goals, which it achieves, through various means. Vibratory and fiscal policies are the stimulant to any nation economic development, especially with regards to Nigeria. However, in this study, the attention of this is mainly on the influence of deregulation on banks profitability in Nigeria. The discussion on the deregulation can be effectively carried out without understanding what monetary policy is all about. In this content, monetary policy could be defined as a policy which deals with discretionary control of money supply by the monetary authorities in order to achieve stated economic goal of society. The performance of the Nigeria economy has on the decline for a long time now. However the central bank has been issuing series of policies through which she tries to stabilize price in the country. The central bank which came into operation since 1959, has introduced monetary measures for the achievement of the national economic objectives, which range from the maintenance of a health balance of payment control or moderation of inflation through the acceleration of the peace of the economic development to the stabilization of the exchange rate of naira with foreign currencies. Deregulation could be defined as the removal of the unnecessary control which tends to inhabit or prevent the effective and efficient programme of economic and business activities. The regulators and deregulation in the banking sector/ industry have favored some banks while some other banks could not stand the weir of constant changes in the monetary and banking policies. However, deregulation goes with its merit which includes; the removal of inhibiting controls on economic activities, encouragement on investment and assurance of efficient allocation of resources. Over the years, Nigeria economic has witnessed changes in its economic policies. These changes have been carried out by the government and the monetary, growth and development these changes in policies have taken different sectors of the economy, directly including the banking industry. The financial sector and the banking industry in particular, due to its critical position and functions in the economy, have been the major focus of economic reforms. Reforms in the banking industry have taken the form of regulation and presently deregulation prior to 1952: banking industry was devoid of government interference this period regarded by financial operation and analysis as the era of free banking. It was characterized by free entry and exit with minimum of regulated of activities of operations. However, the laissez fair attitude contribution to early bank failure experienced in the industry between the activation of banks given its role as financial intermediaries (claiming saving to investments) in order to build a second and viable financial system. Also, regulation is used to correct distortions in the pricing mechanism of market forces. The country of the activity of the Nigerian banking industry stated with the enactment of the banking ordinance of 1952, which was followed by the central bank act of 1958, the exchange control act of 1962 and the banking act of 1969, the aims of regulation and economic efficiency and effective allocation of resources sometimes, the aims are not fully realized and experience has shown, especially in developing countries, that exclusive control by the stagnation. This is what happened in Nigeria in the early 2008 when the country was facing economic crisis of general rise in price of goods and services, unemployment, external debt problem , fall in total output and dividing revenue caused by fall in oil price. In other to overcome these economic crisis the country in 2007 to 2009, adopted a form of structural adjustment program (sap) with the objective of sustaining economic growth and development, price stability, exchange rate stability, prevention of unemployment and appreciable if not level of employment. These objectives were to be achieved through a determined price system and deregulation of economy. Deregulation is regarded as a major policy or strategy for revitalizing the economy. This is based on the fact that determination which embraces the removal of inhabiting controls on business and economic activities, will encourage competition, increase the level of investment and efficient allocation of resources. The financial sector and the banking industry in particular regarded as the oil that keeps the wheels of economy moving, has continued to experiences the force of deregulation in different areas of it operations. The deregulation of the industry started in 1987, with the liberalization of interest rate. The reform exercise has affected other areas of banking activities, against this background. The study will focus on the deregulation on the banking industry, process of deregulation, dimensions of deregulation, evaluation of reforms and effects on the banking industry. In the process of analysis, reference will be on the zenith Bank plc and Diamond Bank plc. 1.2 Statement of the problem: The banking industry, due to its intricate nature has been encountering problems, such as capital inadequacies, excessive liquidity, bank distress and subsequent legibility in order to minimize and eradicate most of these shortcomings there have been constant manipulations of strategies with the aim of strengthening the base of the banking industry. To overcome the above mentioned problems, then these questions will be considered:- i. How has regulation and subsequent deregulation affected the performance of the banking industry? ii. Have the banks performed better in term of profitability maximization of customer’s welfare and shareholders wealth as well as affected the economy positively under deregulation. iii. Should deregulation be supplemented with regulation in order monetary authorities to be able to achieve their aim and objective? In other to achieve the government objectives, monetary policies and other banking regulations must be implemented. The banking industry which is a major participant in the implementation of government regulation and deregulation faces some problems in its performance which for their study is measured in terms of profitability. This research therefore is to evaluate the impact of deregulation policies on profitability of banks in Nigeria. 1.3 Purpose of the study. The writers want to ascertain the effect of deregulation on the performance of banks, particularly on their profitability. The study will deal at length with the various Operational component of the banking activities which deregulation has affected. The study is aimed at i. Investigating the need for changes in banking deregulation policies. ii. Investigating the range of policies, that has been implemented within the period of study (1999-2009). iii. Determine the instruments of banking deregulations that should be used to ensure profitability and growth in the banking industry. To enhance the study, zenith bank plc and diamond bank plc will be used as reference banks. 1.4 Statement of hypothesis Ho: Deregulation has no direct effect on banks profitability H1: Deregulation has direct effect on banks profitability. 1.5 The scope of the study. The study covers the period of deregulation in the country but with in- depth study of what happen in the banking industry between 1999-2009. The activities of the supervisory and regulating authorities, during their period will also be examined, As well as how deregulation of the industry has affected profitability of the banks. The commercial banks selected for study are zenith bank plc and diamond bank plc. The choice of this bank is necessary since they have passed through all the area of banking policies in the country. 1.6 The significance of the study. Banks, be they commercial, deregulation or mortgage in every economy, ensure that profit is made through their credit facilities, as a result of the prevailing regulations, instituted by the regulatory authorities. This work will go a long way by helping the banks know the appropriate time to give loans. Also, it is the belief of the research to the already existing literature on the impact of deregulation policy on the profitability of the banks in Nigeria. Moreover, this work will have positive influence on educational studies and will aid other researches 1.7 Definition of terms i. Deregulation: is the removal or simplification of government rules and regulations that constrain the operation of market forces. In other word is the reduction or elimination of government power in a particular industry usually enacted to create more competition within the industry? ii. Policy: a policy is typically described as a deliberate plan of action to guide the decision and achieve rational outcome. iii. Profitability: profit generally is the making of gain in business activity for the benefit of the owners of the business. iv. Banks: a bank is a financial intermediary that accepts deposit and channels. Banks are a fundamental component of a financial system and are also active player in an economic. v. Economy: Economies consist of the economic system of a country or other area, the labour capital and land resources, and the economic agent. vi. Rationale: the term rationale may refer to as the explanations on the basis or fundamental reasons for something. A justification or rationalization. vii. Interest rate: an interest rate is the price a borrower paid for the use of money they borrow from the lender, for instance a small company might borrow capital from bank. viii. Structural adjustment program: is an economic policy which countries must follow in other to qualify for new World Bank and international monetary fund CHAPTER TWO Literature Review 2.1 Introduction Over the years many outstanding scholars have conducted extensive studies on deregulation policies and financial system. In this chapter the researcher discusses briefly some of existing literature on deregulation policies and financial system. This chapter covers the overview of the Nigeria financial system, the Nigeria Banking system, an overview of commercial banking in Nigeria, problem of deregulation policies and lot more. 2.2Overview of the Nigeria financial system. The Nigeria financial system could be seen or defined as a set of rules, regulations, financial arrangements, institutions, agent and other mechanism whereby they relate to each other within the financial sector and the rest of other sectors of the economy†. Furthermore, financial system could be defined as a conglomerate of various institutions, market, instruments and operations interact within any economy to provide financial services (CBN 98/06 pi). These services provided may include resource mobilization and allocation, financial intermediate trade among others. In Nigeria, the financial system has undergone remarkable changes in terms of ownership structure, the instruments employed, the number of institution established, the economic environment and the regulatory framework within which the system operates the Nigerian financial system is made up of regulatory/supervisory authorities as well as banks and non-bank financial institutions. The federal ministry of finance(FMF), central bank of Nigeria (CBN), Nigeria deposit insurance co-operation (SEC), national insurance commission (NIC), federal mortgage bank of Nigeria (FMB.N) and the national board for community banks (NBCB) are the regulatory and supervisory authorities, in Nigeria through the CBN report to the presidency through the federal ministry of finance in all monetary matter it has effectively assumed the leadership of all banking institutions in the financial system. To this effect, the CBN has the responsibility for the control and supervision of all commercial, merchant and co mmunity banks, people banks finance house, development banks and all discount house and other (ibid ppi-2) In recent times, the Nigeria financial system has witnessed some changes. Among these changes were financial malpractices in banks decree no.8 of 1994. The decree was promulgated to facilitate the prosecution of those who contribute to the failure of banks and to recover the debits used to the failed banks. Also, the inauguration of the financial services regulatory coordinating committee (FSRCC) by the central bank of Nigeria in 1994 to coordinate and standardize the regulatory policies of all financial institutions in the system. This committee is to ensure some level of co-operation among the regulatory agencies. However, in 1995 above, three (3) decrees were promulgated to further regulate the financial system. These were the money laundering decree, the Nigeria instrument promotion commission decree and the foreign exchange (monitoring and miscellaneous provision) i.e Decree no.3, no16, no17 respectively. The aim of decree no.3 is to prevent drug money and other illegally required asset from entering into the financial system, so that the damaging effect of such monetary injection is forestalled. This decree stipulated limited amount of cash dispositions or payment to be made or accepted in our banks to N500, 000 (five hundred thousand Naira) for an individual and N 2,000,000 (two million Naira) for a corporate entity, unlike the institution before this decree when one was forced to pay in or withdraw any amount of cash from the bank. The Nigerian investment promotion commission is challenged with the responsibility of encouraging. Promoting and co-coordinating investment activities in Nigeria. The commission is also empowered to institute and support the measures that would enhance the investment conditions for both Nigeria citizens and foreign investors too. On the other hand, the foreign exchange decree no.17 answers the CBN with the approval of the finance minister to issue guideline to regulate the producers for transaction in the ministry to market as well as other matter, which may enhance the effective operations of the market. The decree provides for any convertible foreign currency to be traded in the foreign exchange market. In 1994, the central bank of Nigeria –CBN decree no25 both of 1991 was amended. This includes the withdrawal of autonomy of the CBN with its supervision placed under the federal ministry of finance. The power of the CBN over the financial system was enhanced by this decree. This decree, also fixed the minimum capital requirement of both commercial and merchant banks at a uniform level of N 500m.(five hundred million naira) instead of the former N50m (Fifty million Naira) and N 40m (forty million naira) for commercial and merchant banks respectively. In addition, the Nigerian deposit insurance corporation (NDIC) decree no 22 of 1988 was amended to give more power to the corporation to deal with insured banks and act independently of CBN on matters affecting banks. 2.3 The Nigeria banking system Many countries of the world have for a long time now recognized the importance of banking services in the promotion of economic growth. In fact, to have a firm control of the economy, the entire financial system must be under control. In this order, a body, an entity or an agency must be in charge. In Nigeria, the central bank of Nigeria-CBN is the main organization that supervises the operation of the financial system; the CBN act of 1958 commenced its operations on 1st July, 1959 with the sole aim of making the monetary policies of the country. The CBN is the apex bank, the lender of last resort, banker’s bank, and it is responsible for the regulation of the entire banking operations. All these functions and more are being performed with directives from the presidency through the federal ministry of finance and in collaboration with Nigerian deposit insurance corporation (NDIC). One of the principle objectives of the CBN is to promote monetary stability and soundness of the financial system. To actualize this, CBN conducts regular supervision and examination of banks as a means of maintaining surveillance on banking operation to ensure compliance to decree spelt out by the industry authorities (CBN 2007). On the hierarchy of monetary management, the apex bank (CBN) comes first, then followed by other banks. These banks include commercial banks, merchant banks, development banks, people’s bank and community banks, amongst others. The peoples banks, has continue to increase in number from the date of establishment and as at 1996, the number of branches has come up to 175. The micro-finance bank is a self-sustaining or a group of communities. All the community banks are under the regulatory supervisory control of started in December 1990. As at 1996, the central bank of Nigeria (CBN) had given provisional license to 1366 community banks. The above is an x-ray of the banking industry in the country. An overview of commercial banking in the country is therefore relevant for a thorough understanding of the research. 2.4 An overview of commercial Banking In Nigeria A commercial bank could be defined according to section 41, subsection (1) Of the Nigerian banking decree of 1964, and paragraph (a) as â€Å"any person who transacts banking business in Nigeria and whose business includes the acceptance of deposits, withdraws able by cheque† The possession of a valid license duly granted by the commission of companies, duly incorporated in Nigeria is also a prerequisite for the transaction of banking business. Commercial banks are dual intermediaries in the domestic and international spheres. At the domestic level, the banks mobilize fund from the surplus sector or unity of the economy and at the international level, they provide the channel through which foreign exchange is transferred to or received from other countries of the world in the settlement of international transactions. Commercial banks are different from other banks because of the nature of services they render to their customers, which commercial banks started operation in 1982 and performed some functions. These Functions include acceptance of deposits, granting of loans and advances, the operation of payment and settlement mechanism. Merchant bank on their own are wholesale banks that take deposit and carter for need of corporate and institutional customers. Their main role is to provide a medium for long term financing by engaging in a activities such as equipment, leasing, loaning, syndication, debt factoring project financing. The first merchant bank in Nigeria is the Nigeria acceptance limited (NAL). This bank started operates in 1960. However, by December, 1996, there were about 51 merchant banks, with about 147 branches nationwide, while their total asset amounted to 111,206.9million compared with 91,803 million in 1995 (CBN OPP.5). On the other hand, the development bank in the country including the Nigeria Industrial Development Bank (NDIB) was established in 1964 to provide credit and other facilities to industries, especially to medium and large scale enterprises. The Nigeria bank for commerce and industry (NBCI) come into existence as a result of the promulgation of decree 22 of 1973, with the aim of developing indigenous enterprises particularly, the small and medium scale once. The Nigeria agriculture and commercial bank was established in 1973 mainly to financed agricultural development project and allied industries, Decree No22 of 1990 establish the people’s bank. The bank was ear-marked by the federal government in 1988 budget with an initial allocation of N 30m, through with legal statute in 1990. The bank was established to meet the credit needs of small borrowers who cannot satisfy the stringent collateral requirement being demanded by other banks. Other banks cannot do. These are the acceptance of saving account, current account and fixed deposit account from individuals, retail and corporate customers and the payment and collection of cheques. The service which commercial banks and other banks perform includes discounting of bills, undertaking of executorships and trustee services, safe custody of securities and other valuables. Commercial banks in the country have continued to dominate banking sector accounting for 82.6% and 90.4% of the banking industries total asset and deposit liabilities, respectively in 1996. The introduction of the structural adjustment programme (SAP) in 1987 brought about the establishment of many banks in the country and made banking business a lucrative nature. As at 1996, there were about 64 commercial banks in Nigeria with 2,402 branches as against 30 banks with 2397 in 1986. (CBN OPCIT P, E).The reason for this rapid growth is due to the introduction of SAP which led to the gradual deregulation of the economy. The increased number of banks notwithstanding, a significant proportion of the liabilities and assets of all commercial banks in Nigeria are still in the hand of 3 big banks (first bank, union bank, zenith bank and).since the event of global meltdown, they are the only banks in Nigeria capable to declared dividend. The control of the banking sector is in their hands and the rate at which they feel the impact of the monetary policies, bank regulation and deregulation would range from those of the smaller banks and the new generation banks. 2.5Monetary Policies in Nigeria Monetary policies could be seen as one of the policy tools available to the managers of the economy. It involves the variation in credit conditions- cost availability, impact with a view to achieving the economic objectives such as price stability that is prevention of inflation or deflection (as the case may be), economic growth and development, balance of payments equilibrium, high level of employment and equitable distribution of income. In other words, monetary policy could be defined as the regulation of the supply of money and bank credit for the promotion of selected economic objectives. According to Hanson (2007) â€Å"The purpose of monetary policy is to influence the supply of money in order to expand or contract the volume of the purchasing power in the volume of the purchasing power in the country. He went further to say that an increase in the volume of purchasing power is expected to stimulate demand and investment, increase output and reduce unemployment. The policies used by each country are varied in accordance with some economic laws, aimed at steering the economy towards a desired direction. However, these and other government directives or pronouncement are among the banking and deregulation policies.