GLOBAL ECONOMIC RECESSION: ITS IMPACT ON THE BANKING INDUSTRY IN NIGERIA

CHAPTER ONE

1.1INTRODUCTION

Recession is a general slowdown in economic activities over a sustained period of time or a business cycle contraction. An increasing commodity and energy prices and a disruption in the financial and capital market characterize a recessionary economy. As the topic imply “global economics recession in banking industry the researcher intend to contribute his own knowledge on recession. The word “recession” is a general slowdown of an economic activity over a sustainable period of time or business cycle contraction. Historically, The first recession can be traced back to 1930 when the great economic down turn ever experienced in global economy took place. This lasted from 1929 to 1931.Little wonder why it is referred to as “the great depression of the 1930s

The current economic crisis have been tagged numerous name like; Economic Meltdown, Economic Depression and so on. Whatever name it is called, it simply means a gradual slowdown in economic activities globally. The most recent one, which has spread to other part of the world, started in 2007 in United State of America due to unrestricted lending to sub/prime mortgage. The reasons for this crisis are varied and complex, but largely it can be attributed to a number of factors in both the housing and credit markets, which developed over an extended period. Some of these include: the inability of homeowner to make their mortgage payments, poor judgment by the borrower  or lender, speculation and overbuilding during the boom period, risky mortgage products, high personal and corporate debt levels, financial innovation that distributed and concealed default risks, During recession many macro economic indicators vary in similar ways, production as measured by Gross Domestic Product (GDP), employment level, investment spending, capacity utilization, household income and business profit all fall.

Indexes from various Governmental and non-governmental bodies like: the International Monetary Fund (IMF), World Bank (WB), and the Central Bank of Nigeria (CBN) and so on, all tend to be predicting and forecasting an impending and gradual slowdown in other developed nations like Britain. The developing countries of Africa are not left out either. For instance, the Central Bank of Nigeria had recently released a report, forecasting an anticipated slowdown in economic growth in 2010. It is therefore pertinent to carry out an empirical assessment of the effect of the current global economic recession on the various sectors of the Nigerian Economy especially the banking sector. This will help to establish a roadmap to be adopted in rescuing the economy from total collapse. Of major interest to the researcher is the Nigerian-banking sector, hence the topic: The Global Economic Recession: Its impact on the banking industry in Nigeria.

1.2 STATEMENT OF THE PROBLEM

The role of the banking industry in the Nigerian Economy cannot be over emphasized. Banks are part of the infrastructure of the country within which development takes place. They certainly help in the shift from a subsistence economy to a cash crop economy by encouraging both the use of money and confidence in it. They provide a convenient means of making payments between people easy by the use of cheques and also provide safe places for depositing money.

Furthermore, they aid development by their ability to make loans. Undoubtedly, banks and other financial institutions especially commercial banks play the all important role of intermediating funds between the surplus and deficit sectors of the economy which in turn aid development of the latter.

However, the banking sector is an intricate part of the economy and this means it does not operate in isolation. Therefore, it is likely to be plagued by crisis in the larger economy. Consequently, the desire to empirically study the impacts of the current Global Economic Crunch on the banking sector is borne out of the realization of the importance of the sector to the Nigerian economy

1.3 OBJECTIVE OF THE STUDY

The research work will be conducted deliberately to establish the impact, adverse or otherwise of the Global Economic Depression on the banking industry in Nigeria. The aim of this research study therefore is to examine the impact of the current global financial crisis on the Nigerian banking industry. The outcome of this research study is expected to assist Nigerian policy makers, banks management teams and banks regulatory bodies in Nigeria in the following ways.

v  To know the major causes of the financial crisis in Nigeria.

v To determine the extent of the impact of the global financial crisis on the Nigerian banking industry and the entire economy.

v  To determine various options that could cushion the impact as well as avoid future occurrence.

v  To elucidate the origin of the current Global Economic Crisis.

v  To determine the effect of the economic crisis on investors’ confidence both locally and internationally.

v  To find out what to do in order to rescue the economy from the present meltdown.

v  To suggest ways of dealing with the complexities arising from the current economic crunch.

1.4 SIGNIFICANCE OF THE STUDY

This research work will be useful to all stakeholders and players in the banking industry. The banks regulatory authorities will particularly find the result of this research very relevant in formulating and regulating policies for the financial sector.

This research work will contribute to the already existing body of knowledge. It will try to push back the frontiers of findings already existed on the topic and also add to the solutions earlier proffered by previous researchers in tackling the complexity brought about by the global economic meltdown.

1.5 RESEARCH QUESTION

The researcher attempted to find answers to the following questions:

Ø  What is the impact of the ongoing Global Economic Recession on the Nigerian banking industry?

Ø  How does the ongoing Economic Recession affect the role of the banking industry?

Ø  What is the correlation between the ongoing Global Economic Crisis and the performance of the banking sector?

Ø  What was the position of banks before the global financial crisis?     

Ø  What were the impacts of the global financial crisis on the Nigerian banking industry?

Ø  What made the crisis spread to the Nigerian banking industry?

ØIs the banking sector immune to the present Global Economic Crisis?

Ø  Can the banking sector help in rescuing the Nigerian economy from the current Global Economic Recession?

Ø  How does the CBN Banking polices & regulation increase or reduce depression in the banking industries.

1.6 RESEARCH HYPOTHESES

Ho:     The ongoing Global Economic Recession has no effect on the Nigerian banking sector.

Hi:     The ongoing Global Economic Recession has effect on the Nigerian banking sector.

Ho:     The ongoing Global Economic Recession does not affect the roles of the Nigerian banking sector.

Hi:     The ongoing Global Economic Recession affects the roles of the Nigerian banking sector.

Ho:     There is no correlation between the ongoing economic recession and the performances of the Nigerian banking sector.

Ho:     There is a correlation between the ongoing economic recession and the performances of the Nigerian banking sector.

1.7 SCOPE AND LIMITATION OF THE STUDY

This research work was directed more at the banking industry. It will empirically seek to unveil the impacts of the Global Economic Crunch on the performance and sustenance of the industry.

Though emphasis was on the banking sector, however, other parts of both the global and local economy were considered

1.8 DEFINITION OF TERMS

RECESSION: This refers to a general slowdown in economic activities over a sustained period of time.

DEPRESSION: Same as above

GLOBAL ECONOMY: This refers to the totality of the economy of different countries of the world.

ARM: Adjustable Rate Mortgages

GLOBAL ECONOMIC RECESSION: This refers to a gradual and sustained slowdown in the world’s economy.

MBS: These are financial products called mortgages backed securities on sales in the US Financial market.

ECONOMIC ACTIVITIES: These refer to the various activities that take place within the economy e.g. production, investment, consumption and trading.

MACRO ECONOMY: This refers to the economy as a whole.

MACRO ECONOMY VARIABLES: These refer to economic indicators such as production, capacity utilization, employment level, investment spending, household income and business profit.

FINANCIAL MARKET: It refers to the market where short and medium term funds can be sourced .e.g. banks.

CAPITAL MARKET: It refers to the market where long-term funds can be sources e.g. the Nigerian Stock Exchange (NSE).

SME: Small and Medium Scale Enterprises.

CBN: Central Bank of Nigeria

IMF: International Monetary Fund