Whether the Consolidation of the Banking Sector Has Led to GDP Growth - Essay Example

1. Introduction Every country in the world has at some time to undergo a process of economic reforms and the primary objective is to achieve high andsustainable growth. Along with the manufacturing and services sector, the financial sector has to be reformed for overall benefits of reforms. The formal financial system in Nigeria comprises of banks and non-banking financial institution which are all governed by various financial institutions (Poyi, 2006). The incidence of distressed and technically insolvent banking institution had been the reason for reforming the banking sector in Nigeria (Umoh, 2004). To help strengthen the players in the banking sector in Nigeria and to ensure longevity and shareholders’ returns in the long run, the consolidation of banks was enforced by the Central Bank of Nigeria. The banks would either have to raise their capital base to N25 billion or face liquidation and quit the industry (Upaka, Akpata & Olasope, 2005). The purpose of the reforms was to reduce poverty and generate employment while leading to wealth creation. This was expected to lead to GDP growth over a period of time. 2. Research aims and objectives Many of the small banks were plagued with low capital base and weak corporate governance. Consolidation of the banking system was to ensure a diversified, strong and reliable banking sector, ensure safety of depositor’s money, play active developmental roles in the country’s economy and make Nigerian banks competent and competitive players in the global financial system (Poyi, 2006). This would lead to diversification and emergence of specialized banks. The lending rates of the banks were very high and lending was concentrated in the short term due to lack of long term savings. The impact of the consolidation of the banks was felt in different sectors but there is not much literature available on the after-effects. The aim of this research is: 1. To determine whether the consolidation has led to an increase in long-term savings. 2. To determine if banks are able to take additional risk with significantly increased capital. 3. Whether the consolidation of the banking sector has led to GDP growth as envisaged and if there is a major deviation, the reasons thereof. 3. Literature review Theory suggests that consolidation of banks could potentially increase the bank size which could in turn increase the bank returns through revenue and cost efficiency gains (Ajayi, 2005). It could also reduce industry risks through elimination of weak banks. This helps to eliminate the weak banks. The top ten banks account for nearly and account for more than 50% of the total assets. The small banking sector suffers from concentration of risks. They can provide fewer services and the costs for providing such services are high. Because of lack of effective competition, they are unable to exploit economies of scale. Consolidation became essential because there was over dependence on public sector deposits, which made the banks weak and volatile (Ogunleye, 2005). While the inter-bank market was adversely affected, the depositors were also apprehensive of the survival of their banks. The banks in an effort to raise additional capital funds have reported over-subscription. Theory suggests that the size of the banking margins do not indicate the competitiveness of the banking system. The competitiveness of the industry cannot also be measured by the number of institutions (Claessens & Laeven, 2003). Research suggests that decision-makers give disproportionate attention to strategic fit as compared to integration issues (Olie, 1994). One of these issues is the ‘cultural fit’ where the fundamental differences manifest in thoughts, actions and behavior of employees. This in turn leads to conflicts and may hinder agreement over management issues. 4. Key Factors The factors that can influence the impact of reforms include the country’s macro-performance and stability, the form and degree of taxation, the service delivery efficiency of the merged banks, the risk taking capability of the banks, and the judicial system. The factors that would be considered for this research would include the macro-economic environment, the changes in a firm’s potential, and the risk taking capability of the banks concerned. it would also consider how taxation influences the investment decisions of the people. 5. Methodology This study would require an in-depth analysis which means a qualitative approach would be adopted. Logical positivism employs the quantitative and experimental methods to test deductive generalizations (Amaratunga et al., 2001). This requires independence of the observer from the subject being observed. Hypotheses have to be formulated in advance for subsequent verification. The explanations in this method are reduced to the simplest possible elements in order to facilitate analysis. 6. Project structure Literature on how other countries have faced the consequences of consolidation of banks would be considered which would help to compare the effects in Nigeria. Hence literature review would be the secondary support provided to the research. The opinions from various segments that have been affected would have to be considered before arriving at any conclusion. This would include a few selected business houses as well. 7. Time Plan Two weeks - to collect the data of firms, associations and banks that would be interviewed. Two weeks - Literature review Two weeks – framing the questionnaire based on the existing literature reviwed. Two weeks - send out preliminary emails asking appointments for the interview Two weeks - collection and assimilation of data Three weeks - interpretation 8. Sources of data (Primary and secondary data) Qualitative interviews would be conducted which help to capture some of the subtle complexities underlying the decision-making process that can be missed by large-scale statistical analyses (Herod, 1993). Interviews would be conducted of some senior officials of banks as well as Presidents of business associations. This would give both sides of the story. A literature review would help in emphasizing on the findings of the primary data. Data obtained from secondary sources generate new understand through reflection or knowledge integration (Feurer & Chaharbaghi, 1995). Literature from government sources would be obtained which would help to get a true picture of the results of consolidation of banks. 9. Bibliography References: Ajayi, M., (2005), BANKING SECTOR REFORMS AND BANK CONSOLIDATION:CONCEPTUAL FRAMEWORK, 25 Dec 2007 Amaratunga, D., Baldry, D., Sarshar, M., & Newton, R., (2002), Quantitative and Qualitative Research in the built environment: application of mixed research approach, Work Study, Vol. 15 No. 1 2002, pp. 17-31 Claessens, S., & Laeven, L., (2003), What Drives Bank Competition? 25 Dec 2007 Feurer, R., & Chaharbaghi, K., (1995), Researching strategy formulation and implementation in dynamic environments, Benchmarking for Quality Management & Technology, Vol. 2 No. 4, 1995, pp. 15-26 Heord, A., (1993), Gender Issues in the Use of Interviewing as a Research Method, Professional Geographer, 45(3) 1993, pages 305-3 17 Ogunleye, G. A., (2005), REGULATORY CHALLENGES IN A CONSOLIDATED NIGERIAN BANKING SYSTEM – NDIC PERSPECTIVE, Nigeria Deposit Insurance Corporation, 25 Dec 2007 Olie, R., (1994), Shades of Culture and Institutions-in International Mergers, Organization Studies 1994; 15; 381 Poyi, B. B., (2006), The Effect of Recent Changes In The Financial Sector Development In Nigeria, The African Rural and Agricultural Credit Association (AFRACA), 25 Dec 2007 Umoh, P. N., (2004), CAPITAL RESTRUCTURING OF BANKS: CONCEPTUAL FRAMEWORK, 25 Dec 2007 Upaka, J., Akpata, O., & Olasope, Y., (2005), Nigeria: CBN Guide To "Marriages" And Acquisitions, 25 Dec 2007 Read More