APPRAISAL OF THE IMPACT OF GOVERNMENT REFORMS POLICIES ON FINANCIAL INSTITUTIONS IN THE ECONOMY.
ABSTRACT
This paper examines the financial sector reforms and its effect on the Nigerian
Economy. The financial sector is without no doubt a very essential part of the economy of a
nation and any reforms carried out in it extend to other parts of the economy representing a
transformational moment for the economy and its people. This study employs the ordinary
least square method in carrying out this research. The study covers the period 1980-2008. It
can be seen that the financial sector developments that were experienced in Nigeria`s
economy at one point or the other had effect on the activities of the economy. However, this
does not imply that the reforms in the financial sector are solely responsible for the sector
being better off. In this research study, an improvement in financial intermediation was
considered a necessary condition for stimulating investment, raising productive capacity and
fostering economic growth. It is therefore recommended that there should be macroeconomic
stability, as the activities in all other sectors affect this or is affected by it. Also there should
be political stability as this also affects the effective operation of the financial sector.
CHAPTER 1 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
One of the most important tasks before developing countries is to achieve higher rate of economic
growth. Due to the influence of the activities in the financial sector on the economy at large, every
nation strives to have a proper and up to date financial sector.
The Financial sector is in no doubt a very essential part of the economy of a nation and any reforms
carried out in the financial sector extends to other parts of the economy representing a
transformational moment for the economy and its people. Financial sector reforms however have been
a regular feature of the financial system. The reforms have evolved in response to the challenges posed
by developments in the system such as systemic crisis, globalization, technological innovation, and
financial crisis. Financial reforms in Nigeria dates back to 1952 when the banking Ordinance was
enacted. The deregulation of banking in 1986 provided the impetus for the Structural Adjustment
Programme. The 1986 reform of the financial system saw a policy shift from direct control to a market
based financial system, especially as regards monetary management, risk management and asset
holding capabilities of the institutions. A number of other reforms followed including the
consolidation policy in banking in the year 2005 and insurance in 2007.
For clarity, the financial sector does not only mean the banking sector, the banking sector only holds a
major stake in the financial sector of the economy making it more pronounced than other sectors of the
economy. We also have the Non-Bank Financial institutions (NBFI) which includes Insurance
companies, Discount Houses, Unit trust, the capital market institution through which bond, stocks and
other securities are traded, interest rates are determined and financial services are produced and
delivered around the world. The money and capital markets, alongwith the financial system that
support them, are an exciting area for study. The capital market has also experienced a lot of reforms
over the years and is still in place, especially as regards the capital requirements of the operators, the
operational and ethical standards of the institutions and the modalities of the market mechanism. The
reforms in the system impacted positively on the growth of the financial system and the economy in
general. What goes on daily in these markets and within the financial system, as a whole, has a
powerful impact on the economy. Broad changes are forever remaking the financial market as new
institutions, new methods, new problems and new services continually appear. The reforms often seek
to act proactively to strengthen the system, prevent systemic crisis, strengthen the market mechanism,
and ethical standards. Likewise recent reforms have also been evident in the banking sector with the
abolishment of universal banking, reduction in the tenure of MD/CEO of banks, introduction of Asset
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Management Company with its sole responsibility of buying back toxic assets from banks currently in
need and return capital to the banks, improve liquidity and prepare grounds for the Central Bank of
Nigeria to exit from the affected banks
Statement of the problem
Critically examining the nature of Nigeria’s financial sector challenges, arguments have been raised on
the way and manner in which reforms are being carried out by LamidoSanusi, the Central Bank of
Nigeria (CBN) Governor, whose actions have been regarded as playing a one man show in a
disintegrated gathering.(Ayo ,2010).
However, the major problem posed in this study is on the question of both the long and short run
possible effects of the recent financial sector reforms being carried out especially the one by the CBN
under the leadership of Prof. CharlesSoludo and continued by his predecessor LamidoSanusi, due to
unsatisfactory results of past reforms. By so doing, comparisons are done on reforms carried out
before now and those done currently to actually determine the true state of Nigeria’s financial sector
and how far it has helped in the economic development of the nation. Of the major problems are lacks
of proper attention to the needs of the real sector of the economy, inadequate policy framework for
financial development, weak regulatory supervision in a highly liberalized financial environment
allowing banks become over confident, audacious, less transparent and less accountable in the
handling of their diverse portfolios of services.
There is undue preference by banks for financing general merchandise rather than manufacturing.
agriculture, power, and the importation of finished goods rather than raw materials, plants and
equipment. The real sector is a vibrant part of the economy that needs special attention but due to lack
of funds, it has since been in a poor state.
The government has adopted policies aimed at achieving specified objectives, such as; interest rate
ceilings and selective sectorial policies .Those policies were introduced with the intention of directing
credit to priority sectors and securing “inexpensive “ funding for their own activities (Fry ,1998). The
ceiling on interest rate and quantity restriction on loanable funds for certain sectors ensures that a
larger share of funds is made available for favored sectors hindering financial intermediation since the
financial markets will only be accommodating the credit demand of the government plan and ignoring
risks.
Regulatory agencies empowered with the task of monitoring the affairs of financial institutions have
relaxed resulting to less transparency in financial records, inefficient operations and ultimately fraud
and other unethical practices.
Objective of the study
The broad objective of this study is to evaluate the financial sector reforms in the Nigerian economy
and its impact on the growth of the economy.
The specific objectives however are:
- To examine the relevance of financial sector reforms on economic development of Nigeria;
- To examine the trend of the financial reforms;
- To ascertain the long and short run effects of the ongoing reforms, and
- To examine the contributions of the financial sector to the real economy.
Research hypothesis: The research work will be guided by the following hypothesis.
(a)H0: There is a positive relationship between banking reforms, real sector financing & economic
development in Nigeria.
H1: There is no positive relationship between banking reforms, real sector financing & economic
development.
(b)H0: Financial sector reforms have brought about changes to the economy.
H1: Financial sector reforms have not brought any change in the economy.
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(c)H0: The financial sector has contributed to the real sector of the economy.
H1: The financial sector hasn’t made any contribution to the real sector of the economy.
Organization of the study
This research work is divided into five parts. The introduction, which present the background of the
study; the statement of problem; the objectives of the study, the statement of research hypotheses and
the organization of the study which is part one. This is followed by the Literature review, as part two,
the methodology of the research is part three. While part four is the presentation and analysis of
regression results. Part five shows the research findings and recommendations.
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