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Format: MS WORD
| Chapters: 1-5
| Pages: 78
THE EFFECT OF FINANCIAL REFORM ON BANKING PERFORMANCE IN AN EMERGING MARKET
CHAPTER ONE
INTRODUCTION
BACKGROUND OF THE STUDY
The banking sector has recently witnessed significant reforms and hard choices had to be made to tackle the lingering effects of the global financial crises, which culminated in the contraction of some banks’ balance sheets with the attendant economic losses. It is worthy to note that these problems have been surmounted through series of reforms undertaken by the Central Bank of Nigeria (C.B.N). The banking sector reforms and consolidations has been ongoing economic phenomenon. Reforms generally are predicated upon the need for reorientation and repositioning of an existing status quo in order to attain an effective and efficient state. Banking reforms involves several elements that are unique to each country based on historical, economic and institutional imperatives. According to Gyrary (2012), the reforms in the banking sector predicted against the backdrop of banking crises due to high undercapitalization of existing banks, weakness in the regulatory and supervisory frame work, weak management practices and the tolerance of deficiencies in the corporate governance behaviors banks.
In line with the above, undercapitalization, poor management, hostile and unfair competitions were some of the reasons for collapse of a number of banks in Nigeria in the early 50s. The period was described as unregulated banking activities as a result of the problems. According to Odufu (2013), subsequent efforts at strengthening the regulatory framework resulted in the enactment of the following banking legislations:
· The Central Bank of Nigeria act of 1958
· The Bank act of 1969
· Nigerian Deposit and Insurance Corporation act of 1991
· The CBN act of 1991
The foregoing shows that reforms have been ongoing in the Nigerian Banking sector. The form it takes depends on the challenges posed or causative factors.
According to Dele (2015), GDP is usually measures in three ways all of which should in principle gave same result. These are the production (or output or value added) approach, the income approach and the expenditure approach. The most direct of the three is the production approach which sums the output of every class of enterprise to arrive at the total. One thing people want to know about their economy is whether its total output of goods or services is growing or sinking.
The recent development in the banking sector indicated a mixed trend in the performance of banks. Available data from the CBN Annual reports of 2011, 2012, 2013, 2014 and 2015 indicate that the banks satisfactory rating has been on the decline since 2001 from 63 banks to 51 banks in 2004 and down to 24 banks as at 2011. And according to Nigeria Stock Exchange Publications, the number of banks in Nigeria as at February, 2016 is 22. During the years under review, the number of banks categorized as sound had exhibited a mixed trend, while the marginal banks have been on the merit. The reasons attributed to the development were undercapitalization, illiquidity, weak/poor assets quality which resulted in poor earnings. Though the banking system in Nigeria is on the average rated satisfactory, adetailed analysis of the condition of individual banks showed that no bank was
rated very sound (Soludo, 2011). It is against the above problem that the statement of research problem centered on:
1. The issue of shareholders’ equity on gross domestic product.
2. The issue of retained earnings on gross domestic products.
3. The effect of loans & advances on gross domestic product.
4. The impact of total asset on gross domestic product.
5. The effect of profitability on gross domestic product.
The objectives of the study is to find out the Banking Sector reforms and its impact on Nigeria economy. Other purposes of this study are to:
1. establish the effect of shareholders’ equity on gross domestic product (GDP).
2. determinehow retained earnings affect gross domestic product (GDP).
3. determine the effect of loans& advances on gross domestic product (GDP).
4. investigate the impact of Total Assets on gross domestic product (GDP).
5. establish the impact of profitability on gross domestic product (GDP).
To obtain the understanding of the studied problems, the following will be relevant:
1. To what extent does shareholders’ equity affect gross domestic product (GDP)?
2. To what extent does retained earnings affect gross domestic product (GDP)?
3. How do loans and advances affect gross domestic product (GDP)?
4. Does total asset affect gross domestic product (GDP)?
5. How does profitability affect gross domestic product (GDP)?
The research work will be guided by the following hypothesis
HO1: There is no significant relationship between shareholders’ equity and gross domestic product. HO2: There is no significant relationship between retained earnings and gross domestic product.
HO3: There is no significant relationship between loans and advances and gross domestic product. HO4: There is no significant relationship between total asset and gross domestic product.
HO5: There is no significant relationship between profitability and gross domestic product.
The research study covers the cause or effect of the Banking sector reforms. It will also show the impact on the Nigerian economy as a whole. The research work was carried out in Asaba, Delta State of Nigeria. The study covers 15 Banks namely: Access Bank Plc, Diamond Bank Plc, EcobankPlc, Fidelity Bank Plc, First Bank Plc, First City Monument Bank Plc, Guaranty Trust Bank Plc, Heritage Bank Plc, Keystone Bank Plc, Skye Bank Plc, Stanbic IBTC Bank Plc, Sterling Bank Plc, Union Bank Plc, Wema Bank Plc, and Zenith Bank Plc, all in capital city of Delta State, Nigeria.
The study covers the period from 2000 – 2015 for analysis. The data used in this research is secondary data and the type of secondary data employed is the time series data.
The study is significant because the work covers a total of fifteen years of study period. It is also significant because 15 banks were used out of the 22 existing banks. The percentage of the banks covered is 68% which makes the study significant. Additionally, five variables were used; which include shareholders equity, retained earnings, loans and advances, total asset, and profitability. It is hoped that the work will contribute to both theory and practice.
This study is limited to the impact of bank reforms in Nigeria. This study is also limited to the period because of the problems associated with non-availability of secondary data needed for the research work.
This study is also limited to the information from the respondents. Some of the respondents were even bias in releasing their information. There was also hording of information, fuel scarcity and logistics.
However, all these limitations listed above did not significantly affect this work.
1. GROSS DOMESTIC PRODUCT (GDP):
GDP is the total market value of all final goods and services produced in a country in a given year equal to total consumer investment and government spending plus the value of exports minus the value of import (Harward 2014)
2. SHAREHOLDERS’ EQUITY:
It is a firm’s total assets minus the total liabilities. Equivalently, it is the share capital plus retained earnings minus treasury shares. Shareholder’s equity represents the amount by which a company is financed through common and preferred shares (Bello 2015)
3. RETAINED EARNINGS:
Retained earnings refers to the percentage of net earnings not paid out as dividends, but retained by the company to be re-invested in its core business or to pay debt. It is recorded under shareholder’s equity on the balance sheet (Harward 2014)
4. LOANS AND ADVANCES:
It is the difference which constitutes the main source of bank earnings. The term loan refers to the amount borrowed by one person from another. The amount is in the nature of loan and refers to the sum paid to the borrower (Harward 2014).
5. TOTAL ASSETS:
Total asset refers to the total amount of assets owned by a person or entity. Assets are items of economic value, which are expended overtime to yield a benefit for the owner (Bello 2015)
6. PROFITABILITY:
It is the primary goal of all business ventures. Without profitability, the business will not survive in the long run. So measuring current and past profitability and projecting future profitability is very important. Profitability is measured with income and expenses (Odufu 2013)
The study is organized into five (5) chapters as follows:
Chapter one of the study introduces the problem statement and described the specific problem addressed in the study as well design components.
Chapter two presents a review of literature and relevant information associated with the problem addressed in this study.
Chapter three presents the methodology and procedures used for data collection and analysis. Chapter four contains an analysis of the data and presentation of the results.
Chapter five offers a summary and discussion of the researcher’s findings, implications for practice and recommendations for future research.
A country’s banking reforms and capitalization is its symbol of strength, stability and continued impact on the growth of the economy. This chapter talks about the background of the research with reference to how banking sector reforms has affected gross domestic product of the Nigerian economy through forms of shareholders’ equity, retained earnings, loans and advances, total asset and profitability.
CHAPTER ONE
INTRODUCTION
BACKGROUND OF THE STUDY
The banking sector has recently witnessed significant reforms and hard choices had to be made to tackle the lingering effects of the global financial crises, which culminated in the contraction of some banks’ balance sheets with the attendant economic losses. It is worthy to note that these problems have been surmounted through series of reforms undertaken by the Central Bank of Nigeria (C.B.N). The banking sector reforms and consolidations has been ongoing economic phenomenon. Reforms generally are predicated upon the need for reorientation and repositioning of an existing status quo in order to attain an effective and efficient state. Banking reforms involves several elements that are unique to each country based on historical, economic and institutional imperatives. According to Gyrary (2012), the reforms in the banking sector predicted against the backdrop of banking crises due to high undercapitalization of existing banks, weakness in the regulatory and supervisory frame work, weak management practices and the tolerance of deficiencies in the corporate governance behaviors banks.
In line with the above, undercapitalization, poor management, hostile and unfair competitions were some of the reasons for collapse of a number of banks in Nigeria in the early 50s. The period was described as unregulated banking activities as a result of the problems. According to Odufu (2013), subsequent efforts at strengthening the regulatory framework resulted in the enactment of the following banking legislations:
· The Central Bank of Nigeria act of 1958
· The Bank act of 1969
· Nigerian Deposit and Insurance Corporation act of 1991
· The CBN act of 1991
The foregoing shows that reforms have been ongoing in the Nigerian Banking sector. The form it takes depends on the challenges posed or causative factors.
According to Dele (2015), GDP is usually measures in three ways all of which should in principle gave same result. These are the production (or output or value added) approach, the income approach and the expenditure approach. The most direct of the three is the production approach which sums the output of every class of enterprise to arrive at the total. One thing people want to know about their economy is whether its total output of goods or services is growing or sinking.
The recent development in the banking sector indicated a mixed trend in the performance of banks. Available data from the CBN Annual reports of 2011, 2012, 2013, 2014 and 2015 indicate that the banks satisfactory rating has been on the decline since 2001 from 63 banks to 51 banks in 2004 and down to 24 banks as at 2011. And according to Nigeria Stock Exchange Publications, the number of banks in Nigeria as at February, 2016 is 22. During the years under review, the number of banks categorized as sound had exhibited a mixed trend, while the marginal banks have been on the merit. The reasons attributed to the development were undercapitalization, illiquidity, weak/poor assets quality which resulted in poor earnings. Though the banking system in Nigeria is on the average rated satisfactory, adetailed analysis of the condition of individual banks showed that no bank was
rated very sound (Soludo, 2011). It is against the above problem that the statement of research problem centered on:
1. The issue of shareholders’ equity on gross domestic product.
2. The issue of retained earnings on gross domestic products.
3. The effect of loans & advances on gross domestic product.
4. The impact of total asset on gross domestic product.
5. The effect of profitability on gross domestic product.
The objectives of the study is to find out the Banking Sector reforms and its impact on Nigeria economy. Other purposes of this study are to:
1. establish the effect of shareholders’ equity on gross domestic product (GDP).
2. determinehow retained earnings affect gross domestic product (GDP).
3. determine the effect of loans& advances on gross domestic product (GDP).
4. investigate the impact of Total Assets on gross domestic product (GDP).
5. establish the impact of profitability on gross domestic product (GDP).
To obtain the understanding of the studied problems, the following will be relevant:
1. To what extent does shareholders’ equity affect gross domestic product (GDP)?
2. To what extent does retained earnings affect gross domestic product (GDP)?
3. How do loans and advances affect gross domestic product (GDP)?
4. Does total asset affect gross domestic product (GDP)?
5. How does profitability affect gross domestic product (GDP)?
The research work will be guided by the following hypothesis
HO1: There is no significant relationship between shareholders’ equity and gross domestic product. HO2: There is no significant relationship between retained earnings and gross domestic product.
HO3: There is no significant relationship between loans and advances and gross domestic product. HO4: There is no significant relationship between total asset and gross domestic product.
HO5: There is no significant relationship between profitability and gross domestic product.
The research study covers the cause or effect of the Banking sector reforms. It will also show the impact on the Nigerian economy as a whole. The research work was carried out in Asaba, Delta State of Nigeria. The study covers 15 Banks namely: Access Bank Plc, Diamond Bank Plc, EcobankPlc, Fidelity Bank Plc, First Bank Plc, First City Monument Bank Plc, Guaranty Trust Bank Plc, Heritage Bank Plc, Keystone Bank Plc, Skye Bank Plc, Stanbic IBTC Bank Plc, Sterling Bank Plc, Union Bank Plc, Wema Bank Plc, and Zenith Bank Plc, all in capital city of Delta State, Nigeria.
The study covers the period from 2000 – 2015 for analysis. The data used in this research is secondary data and the type of secondary data employed is the time series data.
The study is significant because the work covers a total of fifteen years of study period. It is also significant because 15 banks were used out of the 22 existing banks. The percentage of the banks covered is 68% which makes the study significant. Additionally, five variables were used; which include shareholders equity, retained earnings, loans and advances, total asset, and profitability. It is hoped that the work will contribute to both theory and practice.
This study is limited to the impact of bank reforms in Nigeria. This study is also limited to the period because of the problems associated with non-availability of secondary data needed for the research work.
This study is also limited to the information from the respondents. Some of the respondents were even bias in releasing their information. There was also hording of information, fuel scarcity and logistics.
However, all these limitations listed above did not significantly affect this work.
1. GROSS DOMESTIC PRODUCT (GDP):
GDP is the total market value of all final goods and services produced in a country in a given year equal to total consumer investment and government spending plus the value of exports minus the value of import (Harward 2014)
2. SHAREHOLDERS’ EQUITY:
It is a firm’s total assets minus the total liabilities. Equivalently, it is the share capital plus retained earnings minus treasury shares. Shareholder’s equity represents the amount by which a company is financed through common and preferred shares (Bello 2015)
3. RETAINED EARNINGS:
Retained earnings refers to the percentage of net earnings not paid out as dividends, but retained by the company to be re-invested in its core business or to pay debt. It is recorded under shareholder’s equity on the balance sheet (Harward 2014)
4. LOANS AND ADVANCES:
It is the difference which constitutes the main source of bank earnings. The term loan refers to the amount borrowed by one person from another. The amount is in the nature of loan and refers to the sum paid to the borrower (Harward 2014).
5. TOTAL ASSETS:
Total asset refers to the total amount of assets owned by a person or entity. Assets are items of economic value, which are expended overtime to yield a benefit for the owner (Bello 2015)
6. PROFITABILITY:
It is the primary goal of all business ventures. Without profitability, the business will not survive in the long run. So measuring current and past profitability and projecting future profitability is very important. Profitability is measured with income and expenses (Odufu 2013)
The study is organized into five (5) chapters as follows:
Chapter one of the study introduces the problem statement and described the specific problem addressed in the study as well design components.
Chapter two presents a review of literature and relevant information associated with the problem addressed in this study.
Chapter three presents the methodology and procedures used for data collection and analysis. Chapter four contains an analysis of the data and presentation of the results.
Chapter five offers a summary and discussion of the researcher’s findings, implications for practice and recommendations for future research.
A country’s banking reforms and capitalization is its symbol of strength, stability and continued impact on the growth of the economy. This chapter talks about the background of the research with reference to how banking sector reforms has affected gross domestic product of the Nigerian economy through forms of shareholders’ equity, retained earnings, loans and advances, total asset and profitability.
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