ASSESSMENT OF THE EFFECTS OF BANKING REFORMS IN THE DEVELOPMENT OF SMALL AND MEDIUM ENTERPRISE

CHAPTER ONE

1.1  Background of the study

It is incontrovertible that the banking system is the engine of growth in any economy, given its function of financial intermediation. Through this function, banks facilitate capital formation, lubricate the production engine turbines and promote economic growth. However, banks’ ability to engender economic growth and development depends on the health, soundness and stability of the system. The need for a strong, reliable and viable banking system is underscored by the fact that the industry is one of the few sectors in which the shareholders’ fund is only a small proportion of the liabilities of the enterprise. It is, therefore, not surprising that the banking industry is one of the most regulated sectors in any economy. It is against this background that the Central Bank of Nigeria, in the maiden address of its current Governor, Prof. Charles Soludo, outlined the first phase of its banking sector reforms designed to ensure a diversified, strong and reliable banking industry. The primary objective of the reforms is to guarantee an efficient and sound financial system. The reforms are designed to enable the banking system develop the required resilience to support the economic development of the nation by efficiently performing its functions as the fulcrum of financial intermediation (Lemo, 2005). Thus, the reforms were to ensure the safety of depositors’ money, position banks to play active developmental roles in the Nigerian economy, and become major players in the sub-regional, regional and global financial markets. The key elements of the 13-point reform programme include: Minimum capital base of N25 billion with a deadline of 31st December, 2005; Consolidation of banking institutions through mergers and acquisitions; Phased withdrawal of public sector funds from banks, beginning from July, 2004; Adoption of a risk-focused and rule-based regulatory framework; Zero tolerance for weak corporate governance, misconduct and lack of transparency;

1.2                                 Statement of the Problem

The Nigerian banking sector witnessed dramatic growth post-consolidation. However, neither the industry nor the regulators were sufficiently prepared to sustain and monitor the sector’s explosive growth. Prevailing sentiment and economic prevailing attitude all encouraged this rapid growth, creating a blind spot to the risks building up in the system.

The following question was raised for this research work

1.                 Does a large and sudden capital inflow lead to Macro-economic instability?

2.                 Does bank consolidation lead to major failures in corporate governance at banks?

3.                 Are weaknesses in the business environment attributed to bank reform?

1.3            Objectives of the Study

The objective of this study is to evaluate the prospects of banking reforms in the development of small and medium enterprise.

1.3.1  General  objective

To investigate the effects of corporate governance of the banking system of performance of small and medium enterprises in Nigeria.

1.3.2  Specific objective

1.                 To find out the causes of macro-economic instability during the banking reforms.

2.                 To identify reasons for corporate governance failure in banks.

3.                 To examine the business environment in relation to bank reformation.

1.4     Research Hypothesis

The following hypotheses are formulated.

Hypothesis 1: Banking reforms leads to development of small and medium enterprise

Hypothesis 2: Bank reforms have led to weaknesses of small and medium enterprise

1.5     Significance of the Study

The banking industry has aided small and medium enterprise and business development attracted public and press criticism and has been a much complicating issue. It is obvious therefore, that this study will be significant in pointing out the need the weaknesses and strength of bank consolidation.

Moreover, the study will show the banks investment and services have helped small and medium enterprise development and the investors will benefit from this study by knowing the provision (loans, advances etc) which the banks offer.

In addition, it will identify the effect (positive or negative), which the banks roles have on the small and medium enterprise growth and development. Amongst others, government will greatly benefit from the findings of this study, in that with the knowledge of the positives effects that the banks reforms of 2004 have on the small and medium enterprise decisions and policies which are favourable to bank and the economy as whole.

Lastly the study will be useful for future researcher, as it will serves as a source of information

1.6     Scope and Limitations of the Study

This study is to evaluate the prospects of banks during the consolidation era. Also the effect such reformation has on the development of small and medium enterprise . The study will also cover the period of 2004 – 2009.

It is expected that this study may experience the following limitations.

Firstly, this work will not be able to study all the public sectors in Nigeria as such this may in a way limit the scope of this study.

Secondly, it expected that the management and staff of the Kaduna north local government may not want to divulge certain data required for the study and this may in way reduce the quality of data for the study. However, the researcher will try his best to mitigate these limitations and others unforeseen ones. This will be done by structuring and designing the instrument for data collection to elicit non sensitive information from them.

1.7     Definition of Terms

Bank Credit: It is a major determinant of the money supply and it embraces the amount of loans and advances given by the financial institutions of Nigeria – Commercial banks and Merchant banks to economic agents.

Capital adequacy ratio: This ratio is defined as the total qualified capital to total risk weighed asserts.

Cost of Capital: Is the cost incurred in securing funds or capital for productive purposes.

Bureau De Change: this is financial institution licensed to buy and sell foreign exchange to small scale users e.g. individual and businesses.

Balance of Payment (BOP): These are records of economic and financial transactions between the residents of a country and the rest of the world during a given period of time. Discount House: Is a financial institutions that trades in government securities both at the primary and secondary segments.

 Exchange Rate: this is the price of one currency expressed in terms of another.

Spot Rate: Is the interest rate submitted by dealers at which they can buy securities.

Open Market Operations: This involves the discretionary power of the Central Bank of Nigeria to purchase or sell securities.

 Treasury Securities: are money market instruments created by government for financing short – term fiscal operations. Prime Lending Rate: This is the interest rate applied to loans made to customers with the highest rating for each bank rate also represents the minimum lending rate.