Consequently of the financial system and especially

Consequently upon the downturn of the
economy, the Nigerian government initiated a series of reform measures aimed at
bringing about economic growth and stability. Paramount among these policies was the
financial sector reform. In view of this, the paper examines the financial
sector reforms and bank performance in Nigeria. Using both descriptive
statistic and econometric methods one hypothesis was tested: policy reforms
which results in increased in exchange rate devaluation; interest rate (MRR) restructuring
and treasury bills rate may have had positive effects on banks performance. The
empirical results confirm that era of pursuits of market reforms was
characterized by improved incentives. However, these did not translate to
increased credit purvey to the real sector. One of the lapses of reforms
identified by the study is the frequent reversals and/or non-sustainability of
reforms. In concluding, the study notes the need to bolster reforms through the
deliberate adoption of policies that would ensure convergence of domestic and
international rates of return on financial markets investment.

 

SECTION ONE

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  INTRODUCTION

For more than
two decades after independence, the Nigerian financial system was depressed as
evidence by the ceilings on interest rates and credit expansions, selective
credit controls, high reserve requirements and restriction on entry into the
banking industry. The situation inhibited the functioning of the financial
system and especially constraints its ability to mobilize savings and
facilitate productive investment. In fact, Agene (1987) also confirmed that between
1958 and 1960, that is, two years before independence when Central Bank of
Nigeria (CBN) was established there was little or no reform in the banking
industry and the financial system was underdeveloped because most of the
complex ramifications which are integrated to it today were not there.

Also, the
Nigerian fiscal policy before the independence was rudimentary, since the
financial system was dominated by foreign banks with absence of rural banking. The
introduction of the structural adjustment program (SAP) in 1987 with
deregulation of interest rates commenced the financial sector reform in Nigeria.
Since then, major reforms have taken place in the financial sector in terms of establishment
of new banks, capital market reforms and introduction of indirect monetary
controls by the CBN. In addition, the reforms include interest and exchange
rates liberalization, promotion of highly competitive and efficient financial
system and market-based system of credit allocation, and strengthening the
regulatory and supervisory framework. Generally, the perception is that financial
sector reform is the best option for an economy.            

More so, Honohan
(2000) argues that the financial liberalization process with its associated
distributional consequences may increase the variability of interest rates. This
informed the CBN in August 1987 after the introduction of SAP to deregulate both
deposit and lending rates of banks in order to sustain the efficient allocation
of financial resources. More so, by fixing only the minimum rediscount rate to
indicate the desired direction of interest rate changes (Asogwa, 2005).

The main reason
for this is to allow high level competition within the financial system in
order to reduce banking industry concentration by only few cartels namely First
bank, Union bank and United Bank for Africa that dominated the banking business
before this time. However, the experience of several countries in the 1980s and
1990s indicate otherwise and this evident that benefits of liberalization are
overstated. For example, Caprio and Kliengebiel (1995) reported that many
banking systems witnessed problems immediately after deregulation because in Chile
the banking problems occurred subsequent to financial sector liberalization.

In addition, Bakeart
et al. (2001) observed that financial liberalization may not yield intended
benefits especially in developing countries based on the strength of their
domestic institutions and couple with other factors.  As for Demirgue Kunt and Detragiache (1998) the
benefits of financial liberalization should be weighed against the increased
potential for financial fragility. In many developing countries, the
pre-liberalization period was associated with administrative control of
interest rates by setting retail lending and deposit rates below market
clearing levels (Scholnick, 1996). This brings an impression that the only solution
to credit allocation problems, which occur due to financial repression, is
liberalization. Furthermore, Hannan and Berger (1991) also observed that either
size of the customer base or market concentration occurred by the rigidity in retail
interest rate but with the conclusion that price rigidity is more evident in a
more concentrated market.

In the nutshell,
the main objective of financial sector reforms is to regulate or deregulate or
both the banking operations in order to align the operational performance of
the banks with the economic objective of the country. This objective could only
be realized if these reforms should impact positively on the individual
performance of the banks (Ezirin 2001; Sani and Yakpogoro 2000). Ofanson,
Aigbokhaevbolo and Enabulu (2010), described the period as the period guided by
the passion for self-reliance.

The study is
highly significant, in that, it highlights the impact of banking reforms on
banking sector performance by identifying the benefits derived from the reforms
as well as pointing out the cost of reforms switch. This will assist financial
authorities in the formulation of the right banking sector policy in Nigeria. In
view of the foregoing, this paper attempts to examine the relationship between
financial sector reforms and banks performance in Nigeria.

The
remainder of this paper is organized as follows. Section 2 deals with
theoretical framework and review of the existing literature on the links
between financial services liberalization and long run economic growth. Section
3 presents the methodology used in the study while a description of the data
and regression results can be found in section 4 of the paper. Finally, section
5 spells out conclusion and recommendations.

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