ECONOMIC DEREGULATION AND BANKING PERFORMANCE IN NIGERIA: (1980 – 2009)

CHAPTER ONE

INTRODUCTION

• BACKGROUND OF THE STUDY

Over the years, the banking sector has unable to significantly support the long – term financial needs of the real sector.  This is inspite of the fast that the growth of the national economy hinges on the extent to which the real sector, which play a catalytic role in the growth process.

Modern banking started in Nigeria dated back to their early colonial period.  This was the period when the activities of transaction of the colonial government were high in Nigeria.

The connection between the financial service sector and economic literature, as earlier as the beginning of the 20th century Levines (1998) findings suggest that the legal environment facing banks can have a significant impact on economic growth through it’s effect on bank behaviour.

The Nigerian banking legislation for the past three decades has been described as unduly restrictive.  The need to amend some restrictive provisions in the banking laws which might not encourage the banks to operate in the desired dynamic and innovative manner ushered in the new era of deregulation unclear the structural adjusted programme (SAP).  The rationale for deregulation the financial system is stated in the 1987 CBN monetary policy circular no 21 to banks thus “in formulating the current economic policy measure conscious effort have been made to gradually dismantle the various controls which had encourage corruption, price distortions and inefficiency in the economy generally.

The major policy instrument of deregulation adopted since SAP include: deregulation of interest rates and foreign exchange market, liberalization of entry into the banking industry, relaxation of exchange controls, changing of institutional among banks.

Deregulation of interest rate seems to be the most significant financial reform since SAP. Before 1986 changes in interest rate were strictly controlled by the monetary authorities since 1987, however, the tight grip over interest rate variability has been relaxed to avail banks of the opportunity to changes in market rate to their depositors.  In addition, the spread between deposit and lending rate of interest and also per competitive rate to their depositors.  In addition, the spread between deposits and lending rate was narrowed further during the course of 1988 by the complete elimination of tending rate differentials among economic sector.  By the interest rate on lending was against pegged at 12 percent in 1991 and later cancelled at the beginning of 1992 leaving the market forces to determine the interest rate.

The financial system has also changed in terms of the increased number of the entrants in the system.  The monetary authorities have been more liberal in licensing new banks than pre – SAP period, an act which has caused unprecedented upsurge in the number of banks operating in the country.  Between July 1986 and December 1991, a total of 75 new merchant and commercial banks were established.  By December 1991, a total number of bank branches office increased from 1,655 in 1985 to 2,025. Moreover, special financial institutions were also established such as the people’s bank and community banks, with the objectives of tackling the financial problems of rural investment programme of the government.  In Nigeria, many financial institutions have been permitted to venture into activities outside their traditional domain.  These include permission of banks to have some level of equity participation in enterprises with effect from 1988, commercial banks incursion into leasing activities like the unit trust scheme.  (Established in 1990).

It is notable that significant reforms have taken place in the foreign exchange operations with the introduction of the structural adjustment programme (SAP) in 1986, there was a shift from administratively determined to market determined exchange rate system and the foreign exchange market was established has mechanism for the determination of a realistic exchange rate for the naira.  In order to broaden the foreign exchange especially for small users, bureaux de change have since 1989 been authorized to act as dealers in the spot market for foreign exchange, between 1989 and 1991, a total of 102 bereaux de change had been licensed.  External trade activities have also been substantially liberalized and coupled with simplifying the process of international trade and exchange activities through the financial institutions.

There have been significant institutional reforms, these include the established of the Nigeria deposit insurance corporation (NDIC) for the purpose of insuring bank deposit against bank failures and ensuring safe and sound banking practices in the country.  The C.B.N has also been recorded increased regulatory and supervising powers over the nations of Nigeria decree no 24 of 1991 and banks and other institution decree no 25 of 1991. With the implementation of the structural adjustment programme largely because of the following factors.  It’s shop time frame and poor implementation of policies, and policy instability and lack of political will (for 2000) consequently, the problems of the economic persisted well into the Abacha’s regime.

In response to the above mentioned economic crisis successive administrations come up with different kinds of reforms aimed at returning the economy on the path of recovery.

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