The Negative Effects of Deregulation on Commercial Banks in Nigeria

Background of the study: In the 1980s and 1990s, Nigeria went through radical economic reforms in which economic regulation was abolished in most major industries and product markets, which included the banking industry in Nigeria, thereby giving banks greater freedom to operate and compete in the marketplace (Ogunbode, 2004). This policy has allowed commercial banks to operate more freely; however, it has also led to consequences that have greatly affected bank performance as well as customer service delivered by these institutions. The purpose of this study is to evaluate the effects of deregulation of commercial banks in Nigeria on their profitability and customer service delivery.

Nigeria’s economy has been dominated by banks since 1894, when the first bank, the Bank of Lagos, was established in Nigeria to facilitate trade in the country. More than a century after the establishment of this bank, the banking industry in Nigeria has not changed significantly even with the entrance of new players into this sector and have remained one of the major players in the economy of Nigeria, being one of the biggest employers in Nigeria as well as being one of the largest profit generators for government and contributing to more than 25% to Gross Domestic Product (GDP).

Deregulation has come to stay in the Nigerian banking system, but its impact has been mixed on banks’ performance and economic growth. The need to transform the banking sector into an effective instrument of economic growth has not received the attention it deserves, as the banking sector has been negatively affected by deregulation.

The Negative Effects of Deregulation on Commercial Banks in Nigeria

Introduction

This study investigates deregulation, its causes and effects. It attempts to show that at a macroeconomic level, deregulation gives rise to some immediate positive effects (for example, reductions in inflation rates), but it also has negative long-term consequences for developing countries, particularly with regard to employment creation. This can be attributed to deindustrialization, as firms have been exposed to increased competition from more efficient foreign competitors. The period of rapid economic growth typically associated with deregulation is also short-lived and produces little structural change. Thus it is not surprising that many developing countries have reversed their policies of liberalization, often doing so after much damage has already been done. However, Malaysia remains committed to such policies and boasts one of the fastest-growing economies in East Asia, largely due to outward-oriented development strategies. Although there are similarities between Malaysia and other Asian countries, which indicate that there may be lessons to learn from its experience of over two decades of relatively successful deregulation, it should not be assumed that Malaysia’s model will necessarily succeed elsewhere. Therefore if Malaysia wants to maintain its current success, then it must continue making progress toward becoming an industrialized country. The result would help increase exports especially manufactured goods which would reduce dependency on primary commodities in international trade, which would increase GDP per capita by reducing the unemployment rate hence increasing demand for domestic consumption hence stimulate economic growth since consumption creates demand for production, therefore, producing a multiplier effect thus raising output levels. While government policy toward industry must play an important role in achieving industrialization, strong private sector investment is equally essential because, without business initiatives, domestic industries cannot emerge and grow successfully.

Background

During deregulation, banks are subjected to certain activities not regulated by them before. These new activities may include the production and sale of credit cards and investment banking services, among others. This makes competition difficult for commercial banks as only those with sound financial management abilities can survive. The major implication is that commercial banks adopt differential marketing strategies leading to predatory lending, especially to individuals and small businesses who may have limited choices. In general, deregulation is believed to have contributed significantly to financial crises around the world. Underlying reasons include complacency arising from the unquestioned belief that market forces will produce correct outcomes with no role for regulation (efficient markets hypothesis) and incentives facing regulators, which lead them to neglect their regulatory role [6].

Methodology

The method that was used to come up with these results was extensive research that involved analyzing and comparing key economic indicators of commercial banks in two periods, i.e. pre-liberalization and post-liberalization periods. The data used were secondary data obtained from various sources, including secondary journals and databases such as African Development Indicators (ADI) published by World Bank, Economists Intelligence Unit (EIU), UK; Central Bank of Nigeria (CBN); Federal Office for Statistics Germany (Destatis); International Monetary Fund (IMF); National Bureau of Statistics(NBS) etc. Furthermore, primary data collected were also analyzed using standard statistical techniques like regression analysis and correlation coefficient. These techniques are useful in assessing how changes in one variable affect changes in another variable over time while controlling for other factors that might affect both variables. In order to make sure that there is no error or bias during analysis, all variables are entered into the regression model one at a time so as to determine which variable is significant enough to be included in the final model. After the inclusion of significant variables into the final model, all independent variables are then included so as to ensure that their effects do not cancel each other out, thus producing a more accurate result. This step is called the inclusion of interaction terms which helps explain how much impact each independent variable has on the dependent variable while controlling for other independent variables.

Results

As of 2014, more than 20 commercial banks were deregulated from CBN’s (Central Bank of Nigeria) intervention. In addition to that, there are over 70 other financial institutions that are currently operating without a banking license. Prior to deregulation, after issuing a certificate for commercial banks and other allied institutions, CBN was still responsible for all their activities as if they were still under its supervision. Since the deregulation process started, like date, anybody with little capital could start a financial institution without any paperwork from CBN due to a lack of regulation from the National bank of Nigeria (NBC). This opened an avenue for many fraudsters to do their operations at will, thereby affecting negatively almost all bank users and the general public. The reason why I feel so is that some people who have never been trained or had no experience in running a business, especially those who have never been to school before, would open up new institutions, which eventually collapse when they run out of money. They then move on to another business with the same modus operandi, which eventually collapses again. This has affected negatively not only small scale businesses but also major corporations and individuals who keep their money in these banks. The effects of these collapsed banks include: loss of jobs, closure of businesses, reduction in demand for goods and services due to low purchasing power, among others

Conclusion The Negative Effects of Deregulation on Commercial Banks in Nigeria

While deregulation can result in increased competition, it is possible for large banks to use their size and market share to achieve increased economies of scale. Large banks may also have advantages when it comes to lobbying for favourable regulation. There may be significant costs and risks associated with deregulation, including consumer fraud and predatory lending. Banks are essential to modern economies and should remain regulated institutions with solid corporate governance. In most circumstances, large regulatory agencies such as the FDIC should have power over deregulation issues. However, a case could be made that small businesses or community banks would benefit from some level of deregulation. Because there is no one-size-fits-all solution, countries would do well to follow a system that provides flexibility based on their unique political environment and financial system.