How Has the Banking Consolidation in Nigeria Affected Customer Long-Term Savings - Case Study Example

How has the banking consolidation in Nigeria affected the long-term savings by With many economies across the world opening up their markets to foreign corporations and the greater proliferation of market opportunities, the factors affecting the per capita incomes and prospects for long term investments have also altered significantly. Nigeria is not exception to this phenomenon. One of the most prosperous nations in the African continent, Nigeria had announced its arrival on the international stage with its discovery of oil rich regions within. Ever since, the Nigerian economy had been driven and shaped by the outcomes of this crucial industry. The consolidation of banking industry in Nigeria is also intricately linked to its new found economic prosperity. This essay will discuss the question of a centralized and concentrated banking system and its impact on the long term savings by customers, local or foreign. The spurt of economic growth in Nigeria coincided with the financial deregulation policy implemented by the government in 1987. With the doors thrown open for foreign investors and foreign financial institutions to participate in the country’s economy the result was the launch of numerous new banks, leading to a period of intense competition. Again, the policies of the then Nigerian government had been favourable for such rampant activity in the banking sector. But as is the common pattern in all emerging markets, this intense competition led to some acquisitions and mergers; some of the players were simply outperformed by stronger competitors, resulting to a consolidated banking sector with fewer but bigger financial institutions dominating the industry (Gebert & Steinkamp, 2007) The recent statistics indicate that the benefits of this consolidated banking environment are yet to trickle down to the customers, be it for the short term or the long term. This is so because the existing players in the banking sector are still recovering from the effects of intense competition of the decade gone by. It would be unreasonable to expect immediate returns at this juncture in time. Nevertheless, the consequences of a consolidated banking industry should bear fruit to its customers in the long term (Crow, 1997). But regulatory interventions and unfair corporate practices such as monopolization can alter the outcomes for the investments made by customers. Nigeria has had a history of excessive government intervention in the affairs of private institutions. This trend had traditionally harmed the investment returns of lay customers. This point is elucidated by Emeka Nwagwu, a noted Nigerian economist, thus: “The extent of state involvement in the Nigerian economy has drawbacks, since there has been much mismanagement, and progress can only be made if there are complementarities between budgeting and planning. This will allow budgeting to become a means to mobilise resources to help promote economic development. A reform of the countrys administrative and political systems is also needed if development goals are to be achieved, and regulations must be reduced in order to reduce constraints holding back growth.” (Nwagwu, 2002) While there is some uncertainty over the political stability and competence in Nigeria, its economic growth had been steady in recent years, which should be good news for investors. The following graph (cited from Oxford Reference source) illustrates the point. The consolidation has the potential to bring rewards to the customers if the sustainability of the existing companies in the banking industry is taken care of. Of course, this is the domain of the Nigerian government and its policies. If suitable plans were made to cater to the growing telecommunications and infrastructure needs of the banking industry, then both the banks and its customers will benefit. Most large banks were compelled to bear heavy expenditures for the “installation and maintenance of infrastructural facilities; costs which could have been indirectly borne by the state in an efficient system of public utilities were passed on in full to these banks” (Mambula, 2002). While some of these banks are flush with funds and are fortunate in their access to ready finance from financial institutions abroad, they cannot take responsibility for basic infrastructure facilities. This inevitably will have to come from the government. Given the record of the Nigerian Public Works Department over the years does not augur well for the future (Mambula, 2002). The leading banks are also affected by shortages in skilled workers. Without a pool of appropriately skilled workers to choose from, banks are hampered in providing their full range of services to their customers. Some banks are sending their new recruits overseas to train them on essential skills, but this arrangement can only be a temporary one. It is obvious that the prospects of the long-term savings of customers is linked to the long term survival of the banks themselves; and without a dependable supply of skilled local bankers, both the bank and the customers’ savings are in jeopardy. Again, the banks are depending on the Education Ministry’s expeditious efforts to set right this deficit (Okonkwo, 2002). Similar grievances are expressed by the top officials of these banks as well. For instance, according to one experienced banker, “Difficulties in obtaining foreign exchange have been increased by the devaluation of the Naira. This made it harder than before to import even the vital equipment like computers and servers. It might be thought that this constraint could encourage local adaptation of technologies, but this does not seem to have happened. In the absence of such adaptation and innovation, some large banks have experienced serious difficulties in their operations. Running costs have increased markedly while profit margins have been squeezed” (Mambula, 2002). The aforementioned situation cannot be good for customers who have invested their savings in these banks. The other peculiarity of the Nigerian economy which makes savings and other investments a risky proposition is its dependence on oil. The country’s economy is almost totally dependent on oil alone and accounts for nearly ninety percent of total export earnings as well as four-fifths of total revenue for the government. Those customers who have invested in stocks of oil companies with a presence in Nigeria have literally gambled their hard-earned funds on a handful of corporations such as Shell, Apco, Chevron, Texaco and Mobil. The gradual spiralling of the price of crude oil (which rose from $25 a barrel to more than $125 as of June 2008) across the globe will prove to be catastrophic for many customers who invested in these companies. Unless this situation is remedied, long term customers will only see poor returns. (Rowell, 1995) The ability of the major banks to provide reasonable returns on their customers’ investments will also impinge on the general growth and vibrancy of the Nigerian economy as a whole. From the following table it could be discerned that most businesses in Nigeria are still small-scale enterprises and sole proprietorships. Until a gradual shift toward larger and better funded public corporations is made, the return on long term investments will only be moderate. Major Business Activity in Nigeria by Industry and Location (Mambula, 2002) Sole Limited Proprietorship Partnership Liability Industry (n=232) Agriculture 80 1 10 Manufacturing 58 3 12 Services: Low skills 41 1 3 High skills 9 1 1 Others 7 1 2 No response Location (n=232) Rural (10,000 people) 63 2 7 Small City (100,000) 55 1 3 City (1,000,000) 41 1 10 Metropolis (Over 1 m) 35 3 8 No response In conclusion, it could be stated that with the consolidation of the banking sector and the government policy to remove public sector funds from banks, the banking industry is expected to diversify their services to the formal and informal sectors of the economy. This can be done by devising innovative modes of offering services to its customers. This would favour investors and would also make the economy more sustainable. Alongside this, issues such as infrastructure development, availability of skilled workers, over-dependence on oil, need to be addressed so that the “banking sector in Nigeria and thus will translate to better banking services and cheap funds. More importantly, the public will not have fear of distress in any bank, since the consolidated bank will have enough funds.” (Gebert & Steinkamp, 2007) References: Okonkwo, Adora Theresa. "Nigeria funds launch of nationwide blood-transfusion centres.", The Lancet.  359.9304 (Feb 2, 2002): 414 Nwagwu, Emeka O.C. "Budgeting for development: the case of Nigeria. " Public Budgeting & Finance.,  12.n1 (Spring 1992): 73(10). Amaewhule, Wey. "Oil companies, communities, and social responsibility. " Training & Development.,  51.n7 (July 1997): 53(2). Mambula, Charles., "Perceptions of SME growth constraints in Nigeria. (Global Perspective)., " Journal of Small Business Management.  40.1 (Jan 2002): 58(8).  Key economic indicators, NIGERIA: Country Profile, Oxford Analytica, last updated on May 16, 2008. Rowell, Andy. "Oil, Shell and Nigeria: Ken Saro-Wiwa calls for a boycott. " The Ecologist.,  25.n6 (Nov-Dec 1995): 210(4).  Gebert, Diether, and Thomas Steinkamp., "Leadership style and economic success in Nigeria and Taiwan.", Management International Review.,  31.n2 (April 2007): 161(11). Crow, Patrick. "Back to Nigeria. " The Oil and Gas Journal.  95.n4 (Jan 27, 1997): 21(1).  "Nigeria is mulling a cut in its petroleum tax from the current rate of 85% to stimulate investment in the countrys oil and gas E&D. " The Oil and Gas Journal.  91.n16 (April 19, 1993): 2(2). "Nigeria picks Citigroup for oil warrant tender. " Euroweek.  989 (Feb 2, 2007): NA. "Fitch rates Nigeria level with Turkey, Ukraine and Brazil. " Euroweek.  939 (Feb 3, 2006): 20(1). Read More