AN EVALUATION OF THE EFFECTIVENESS OF NEW FINANCIAL PRODUCTS IN NIGERIAN COMMERCIAL BANKS

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The era of oil boom in 1970’s in Nigeria economy lead to the nations over reliance on oil as its main source of revenue and there by ignoring other sectors of the economy hence a mono-product economy. Because of this, most of the industries established during this period depended on imported components and raw materials for their operations, and the upsurge in oil revenue during the period in question and structural distortions, it engendered assumed crisis proportions in 1986 because of the severe decline in crude oil price of that year.

A number of measures were taken by the various governments to correct the situation, but unfortunately these measures failed because the country was on mono-product economy where there are heavy dependence on oil exports and other sectors of the economy were neglected. It would also be recalled that monetary policies within this period were designed for short term crises control management, but by 1986 till date, the situation has been getting out of control which necessitated a long term crises management of the Structural Adjustment Programme (SAP). The policy was to facilitate attainment of a lost objectives and to correct various distortions in the economy, (SAP) sought within a two year-period to correct the distortation and imbalance inherent in the economy by de-emphasing the unhealthy reliance of the country economy on oil as its main source of revenue.

The banks were chosen as main avenue through which the objectives of SAP and second tier foreign exchange market (SFEM) operation could be met, the effect of this was an unprecedented growth in the Nigeria financial sector. SAP bough to eliminate all the complex administrative both necks and this encourages reliance on market force in all sectors of the national economy.

The financial sector being very strategic for progress and development was given the latitude and encouragement to grow. This was aimed at inducing competition so that it’s full potentials particularly in areas of credit expansion and general overall good of the economy. Prior to this period, banking institution was characterized by the arm chair banking and true to their conservative tradition inherited the clearing banks of London, made modest effort, offered limited  traditional product rate of growth and in order to this, deregulation has changed permanently the face of the banking industry, and has been characterized by a number of developments which sparked off stiff competition among banks which were the principal actors in the foreign exchange market operation made pretentious profit in their transactions and theirs rose significantly as a result of the boost in the naira hoping of financial institution when their foreign balance were converted to naira.

Because of the heavy turnover in the transactions, the outside investors were motivated into investing in the industry and there was motivated into investing in the industry and there was corresponding proliferation of application for banking license, this subsequently led to the registration of many new banks in the economy which was a welcome development. With this new development of multiple registrations of more banks, all those old grant banks that monopolized the business have to be alert and were ready to scramble for resources that were previously taken for granted. This lead to constant movements of staff, management and boards, in and out, new banks opening almost everyday, frequently destabilizing struggles in board rooms, the potential guidance and frequent change in regulation by the central Bank of Nigeria.

The general deregulation permitted banks to do a lot more business and particularly the distraction between Merchant and commercial Banking became very thin. Other subsequent issues are the guidelines like the increase in the statutory deposit of banks (N25 billion recapitalization) at the CBN, rough cash and liquid ratios, abolition of foreign guarantees as collateral for naira denominated loan, stabilization securities, increase in capital adequacy ratio and the prevention guidelines went further to aggravation and the cash squeeze thereby tightening the already stiff competition.

In addition to the competition between Banks and individual, the industry as a whole has been competing with non-Banks financial institutions have now become similar to those provided by commercial Banks. As a result of the competitive environment, Banks have been scrambling for deposits, which formed the main raw materials for their operations.

Banks traditionally perform the function of intermediary between savers and investors, the mobilize depositors from the surplus sector which is made up of those with many investment projects requiring more funds than they have. They also act as catalyst in capital formation which is regarded as the major policy governing the rate of economic growth and self reliance. In addition they occupy a prime and sensitive position in accelerating the development of other units in the system.

The resultant effect of licensing more Bank, monetary measures and deregulation in that the Banks are forced out to look for other avenue for deposit hence the craving to introduce new financial products to win more client and increased deposit base to enable them survive the rest of time. The growth in the number of financial products being offered by banks has been of the most striking development in the industry over the years and which has been associated with deregulation of the system in the wake of SAP.

The number of such products has grown to a far reaching competitive level and many more products are still to come, the ones in circulation now includes, weekend services , farmers guide to agricultural lending vigor, money transfer, western union money transfer, value card, smart card, UBA save for school, UBA money gram, Diamond paycard. All these products have been introduced as a result of the increased competition within the environment to enable the commercial Banks survive the stiff situation.

1.2     STATEMENT OF PROBLEM

The environment in which the commercial Banks operate has been the direct result of the financial sector explosion in the number of commercial Banks and the deregulation of the financial sector of the Nigerian economy. There is keen competition among Banks and non-Bank financial institution, it is now the survival of the fittest. There is more scrambles for deposit now than before, since deposits form the major raw materials for their operation.

A good number of new financial products have been introduced since 1988 till date in the Banking industry for the fear of losing their deposits to some fraudstars that find their way into the industry. The banks have to wake up from their slumber by mapping out measure to enable them stand the test of time. It would be necessary here to lift a few of the regulatory measures that have shaped the industry and lengthened competitive stake they included the series of direct measures applied by the CBN to mop up excess liquidity, sectoral credit allocation guidelines, interest payment on current accounts, allocation of foreign exchange.

There was of course the large number of commercial Banks and financial institutions in the country of which each should distinguish herself from others to plan for this, the first was to accept that the business environment changed and would continue to change with the century and only the institutions that are able and willing to make tough decisions and sacrifices necessary thing to become flexible, efficient and productive would survive. Another development that increased competition was the widening of the sphere within which Banks could operate. The general deregulation permitted banks to do a lot of more business, and particularly by the distinction between merchant and commercial Banking became very thin. Other subsequent issues at the guideline like the increase in the statutory deposits of banks to the CBN, high cash and liquidity ratio absolution of foreign guarantees as collateral for naira denominated loans, stabilization securities, increase in capital adequacy ratio and the prudential guideline went further to aggravate the cash squeeze thereby tightening the already stiff competition.

In addition to the competition between Banks, individuals, the industry as a whole has been competing with non-Bank financial intermediacies (NBFI) with this development, the service provided by non-Bank financial institution have now become similar to those provided by commercial Banks. As a result of the competitive environment, Banks have been scrambling for deposits which formed the main raw material for their operations.

Banks traditionally perform the function of an intermediary between savers and investor, they mobilize deposit from the surplus sector which is made up of those with many investment projects requiring more funds than they have. They also act as a catalyst in capital formation which is regarded as the major fact governing the rate of economic growth and self reliance. In addition, they occupy a primed sensitive position in accelerating the development of other units in the system by Nigeria Banks into the money market.

The problem is evaluated to whether these new financial products have effectively mobilized deposits for Banks and at the same time benefited the depositors. This work is aimed at finding the right answers to the questions raised above.

1.3     OBJECTIVE OF THE STUDY

(1)  To identify the various types of new financial products of the commercial Banks.

(2)  To determine the degree of responsiveness of the depositors of these products.

(3)  To ascertain the extent these financial products have been contributing to profit generation of banks.

(4)  To identify the factors influencing the use of these new products.

(5)  To analyze the prospects of existing instruments and the possibility of introducing new ones in the market.

(6)  To make recommendations which may assist commercial banks is solving the problems militating against the development of these new financial products.

1.4     RESEARCH QUESTIONS

1.   What are the various types of new financial products of the commercial Banks?

2.   What is the degree of responsiveness of depositors towards these products?

3.   To what extent have theses financial products contributed to the profit generation of Banks?

4.   What are the factors influencing the use of these new products?

5.   What are the prospects of existing instruments and the possibility of introducing new ones in the market?

6.   What are the recommendations which may assist commercial banks in solving the problems militating against the development of these new financial products?

1.5     RESEARCH HYPOTHESIS

(1)   Ho:  There is no significant degree of responsiveness

of the customers to these products.

Hi:  There is significant degree or responsiveness of

the depositors to these products.

(2)   Ho:  Financial products have not been contributed to

the profit generation of Banks to a significant extent.

Hi:  Theses financial products have contributed to

the profit generation of banks to a significant extent.

(3)   Ho:  Poor communication is a factor influencing the

use of these new products.

Hi:  Poor communication is not a factor influencing

the use of these new products.

1.6     SIGNIFICANCE OF THE STUDY

The study is significant for the fact that many products have been introduced and more are scheduled to hit the market as government progress on its efforts to bring sanity and restore confidence in the Banking industry (lost confidence) by the depositor.

It is of great importance to the operations in the banking industry in that it would enables them assess the degree of the success of their newly developed products and be able to identify unprofitable ones and phase them out of the market, redesign them for greater impact or concentrate effect on effective productions, it will also serve as a first information of new comers in the Banking industry and those intending to develop some, in determining their targets in financial products development. Against it will be beneficial to students in banking and finance and researchers who may be interested in the area of this study.

1.7     DEFINITION OF TERMS

(1)   Profitability:- This requires that assets must be deployed in a manner as to yield greatest returns. To achieve this objective, all assets of the bank should be deployed only where they earn the greatest interest.

(2)   Prudential Guideline: These are some of the monetary measures introduced by the CBN to inject sanity in Banking operations and performance reporting system. Basically, the prudential guidelines require all banks to categorize their loan portfolio into performing and non-performing proving their effectiveness.

(3)   Fraudsters:- Fraud in banking industry is defined as a conscious or deliberate effort aimed at obtaining an unlawful financial advantage at the detriment of another person who is the rightful owner of the fund (Orji 1998) while the fraudster is the person who specializes in deceiving and obtaining by tricks of which is the banking industry. The whole problem boils down on the depositors in the bank.

(4)   Liquidity:- This requires that a bank should be able to pay cash immediately when called upon to do so for all its demand liabilities.

(5)   Corporate Profits:- This means organizational performance translated into monetary terms. In other words it is the net profit of bank.

(6)   Financial Products:- These are products (innovation) introduced to support transactions in the financial market thereby increasing their level of activities. Some of the products are western money union transfer, UBA money gram, smart card etc.

(7)   New Financial Product:- These are current products introduced recently in the banking industries to enhance their operational level.