IMPACT OF MARKETING ON VIABILITY OF NIGERIAN BANKS (A CASE STUDY OF SELECTED DEPOSITE BANKS)

CHAPTER TWO

REVIEW OF RELATED LITERATURE

HISTORICAL BACKGROUND

Marketing has become a major consideration in the present day service industry as a result of dynamism and competitiveness of the economy. Competition in this sector of the economy grows more intense and steadily more professional especially in the banking and other financial institutions. The age of specialization in the banking industry has changed to one where most organisations offer a wide range of services in competition with each other (Abdulqadir, 2010). It has, therefore become essential to use all the resources and techniques that marketing offers to survive and succeed in the ever changing business environment in the world with reference to our country Nigeria (Bale &Akpan, 2009). Thus marketing communication comes into consideration as it is intended both to communicate with and to sell to customers. At independence in 1960 there were 12 commercial banks in the country with 160 branches. (Ajibade,1984). Resulting from deregulation and liberalization in the Nigerian banking industry, the industry environment has changed in many ways. Before 1987, there was little or no competition because the governent restricted entry with the concentration of activities on the four largest banks (First Bank, United Bank for Africa, Union and International Bank for West Africa) (Redasel,1989, 1990). Later, developments in the economy witnessed series of business transactions and the emergence of banks became very desirable. The desirability aided the proliferation of many new banks and the rapid growth of existing ones. The number of banks grew from 45 in 1986 to 122 in 1992, comprising 67 commercial and 55 merchant banks. This was in addition to specialized banks like Peoples Bank, primary mortgage institutions, urban development banks, and non-bank financial institutions like finance houses, all of which were offering one specialized service, product or another. The market became more aggressive and competitive. This competition was further exacerbated by the emergence of finance houses, mortgage banks and community banks in the late 80’s and early 90’s, all competing for the same deposits in varying forms (Abdulqadir, 2010). Another phenomenon in the banking industry in Nigeria, which posed serious challenge to the sector is the issue of financial distress in the banks. As at March 1994, no fewer than 29 banks had been declared technically insolvent by the Central Bank of Nigeria (Isiaka, 1997). In 1997, interest rate deregulation was reimplemented while entry restriction was again relaxed in 1999 (Asogwa, 2004). The banking industry in Nigeria in January 2001 witnessed an important development – the introduction of Universal Banking. Universal Banking is a system of banking in which the operators licensed to undertake the business of banking are permitted to offer full-range of financial services.

Marketing is also the prime tool of the banking sector because it satisfies customer benefit and deals with both the banker and the customer. It deals with the customer by providing their deep wants and desires and also the banker because it assists in identifying and targeting potential clients. The aim of marketing is to serve and satisfy human needs and wants making it a strategic factor in the economic structure of any society. This is because it efficiently allocates resources and has a great impact on other aspects of economic and social life (Ogunsanya, 2003). The power of marketing is essentially the same but there may be some qualitative and quantitative differences like fewer products and services moving through the system and various types of services offered (Baker, 1985). A company’s first task is to ‘create customers’ as identified by Drucker (1999), however customers are faced with several choice of products, prices and suppliers of services and products. It can be a challenging task for a company to create its own customers which are the purchasers of its services or products, but they can make it less difficult and maximize their standards by forming value expectations and acting upon them. According to Okuonghae (2009), the only way to thrive in competition is to partake in strategic marketing, identify customers’ needs and also scan the environment. There is also the need for bank operators to articulate policies geared towards customer satisfaction. Financial products are those products offered by banks to its customers. There are six categories of products as stated in Aigbiremolen (2004).They are retail banking products, corporate banking products, foreign operations, corporate financing and electronic banking.

1. CONCEPTUAL CLARIFICATIONS

The Concept of Marketing of Banking Services

Marketing of banking services is to convince the customer to buy your own products or services. This is because your own services you render is better than that of your competitors, all aimed at satisfying the needs and wants of your customers (Salami and Adewoye, 2006). In Nigeria as a nation, banking consolidation has been an ongoing process, that of June, 2004 increased that capital base that made the number of banks in Nigeria to down from 89 banks to 25 and later 22 banks. Marketing is a way or philosophy of life discipline, as well as an organizational function. As a way of life marketing is as old as man in the society. But as a full-fledged discipline and major function of organizations, it is of recent antecedence when compared with the other members of the ubiquitous managerial sciences. A market focused on the customer and organization first determines what its potential customer’s desire, and then builds the product or service for a marketing plan to be successful, the mix of the four “PS” (product, price, place and promotion) must reflect the wants and desires of the consumers or shoppers in the target market (Peter and Sylvia, 2008). Trying to convince a market segment to buy something they don’t want is extremely expensive and seldom successful. Marketers depend on insights from marketing research, both formal and informal, to determine what consumers want and what they are willing to pay for. The goal of marketing of banking services is to build and maintain a preference for the bank and increase its profitability within the target markets (Akpan, 2003). The goal of any business is to build mutually profitable and sustainable relationship with customers. Evans and Berman (1995) define marketing as the anticipation, management and satisfaction of demands through the exchange process. Olakunori and Ejionume (1997) see marketing as the identification and satisfaction of peoples’ needs through the exchange process. It involves the performance of a broad spectrum of activities, right from the identification of people’s needs through their satisfaction with the appropriate goods and services. Marketing is an inter-disciplinary socio-economic activity. It is about people and organization and how they interact to identify and satisfy needs. Hence, marketing is the identification and satisfaction of people’s needs through the exchange process (Olakunori, 2002).

Concept of Financial Performance

There are several aspects of performance, each of which contributes to the overall performance in an organization. Despite the evolution of various available benchmarks and performance measurement, the answer to what is performance may still be hard to pin down. The banking sector aims for strong performance, but few banks worry about what constitutes such performance. The current run up of the stock market, at a time when corporate profits are fast declining, raises the question of whether or not banks are doing satisfactory good job for their shareholders (Ghouri& Khan, 2011), but this is not so in Nigeria. The situation in Nigerian banks vis-a vis shareholders shows that banks are doing a satisfactory job since dividends are given annually (Hasheem, 2010). Akinsulire, (2008) and Pandy (2003) points out that no performance review is beyond dispute, for instance, reported profit is a matter of opinion. If income is to be measured in terms of the increase or decrease in the wealth of an enterprise, obviously some definitions of that stock of wealth is required. Akinsulire, (2008) &Pandy, 2003 measure wealth in three categories; as financial capital – the equity stake in an enterprise in money terms; real financial capital, the equity stake in an enterprise in real terms (the proprietary concept); operating capacity capital, the ability of the enterprise to maintain its ability to provide goods and services (the entity concept). Hunger and Wheelan (1997) suggest performance as the end result of activity and the appropriate measure selected to assess corporate performance is considered to depend on the type of organization to be evaluated and the objectives to be achieved through that evaluation. Performance measurement is therefore the process whereby an organization establishes the parameters within which programmes, investments, outputs and acquisitions are reaching the desired results (Hunger and Wheelan, 1997). Hunger and Wheelan (1997) further explain that performance measurement involves ongoing data collection to determine if a program is implementing activities and achieving objectives, the ongoing monitoring and reporting of program accomplishments, particularly progress toward pre-established goals (This is typically conducted by program or agency management) and a system for assessing performance of development interventions against stated goals. From the above, it could be affirmed that performance measurement is a measure or evaluation of achievement with predetermined or expected target of an organization. It can also be looked at as the process whereby a company establishes the parameters within which achievements, programmes, investments, outputs and acquisitions are reaching the desired results. In banking industry, the regulatory authorities used common rating system, that is CAMEL to assess the performance of a bank for soundness or otherwise. However, the arrangement of CAMEL was criticized by Wirnkar and Tanko (2007) and suggested another acronym of CLEAM; however, this has not been tested either by the regulatory authorities or financial institutions. C is the test of capital adequacy; A is for the determination of the assets or loans and advances quality while M is for the assessment of management quality. The E is for the measurement of earning of the bank and the L stands for the test of liquidity ratio. The result of this rating system will confirm the condition of a bank. Evaluation of banks’ financial performance using this rating system (CAMEL) by Adah (2012) revealed that the causes of banks problems in Nigeria are: gross under capitalization in relation to the level of bank operations and low earnings with huge operational losses. Others are high level of classified loans and advances, illiquidity reflected in the inability of the bank to meet customers ’ cash withdrawals and weak management (Ebhodagbe, 1995). Evanoff and Fortier (1988) have adopted the common measures on banks’ performance as return on assets (ROA). Other banks performance measures include return on equity (ROE) and bank stock price (Maiturare, 2004). But Evanoff and Fortier (1988) consider the use of ROE as an inappropriate tool for the measurement of banks’ performance because banks can divide capital between debt and equity, making the comparison of equity values across banks difficult. Besides, ROE may not be practicable since equity alone is negligible when considering it in terms of percentage in shareholders’ funds in bank. This has rendered ROA as the most widely used banks’ performance measure as suggested by Evanoff and Fortier (1988). Business Week (April 9, 1984), and (April 8, 1985) also suggested that ROA is the single best performance measure for banks as cited in Rhoades (1987), but there is no justification for the assertion. The financial performance measurement in Nigerian banks depends on the banks in each case and the level and size of available information. This is because CAMEL has been put into used by both CBN and NDIC, some results revealed soundness of banks examined, yet these banks still had some financial and operational defects that had triggered financial crisis. Some banks with weak assessments using the CAMEL rating system had appeared to be better in performance than those confirmed healthy. Besides, the use of the information in the performance measurement is what is being considered. Another approach being considered today in measuring the performance of banks is the adoption mainly of the non parametric approaches. A non-parametric approach called the data envelopment analysis (DEA) has been extensively used in measuring efficiency and production changes in Nigerian banks. For instance, Tanko (2006) and Magaji (2009) adopted the DEA to measure the performance of Nigerian deposits money banks. The performance of firms can be measured in terms of their productive (cost and output) efficiency and allocative efficiency (market power). To measure efficiency, input and output have to be compared with each other and researchers of banking markets face the problems of how to define the inputs and output process. This explains why no techniques have been accepted and thus has brought considerable differences in the measurement of efficiency. From available literature, the broad performance measurements could be determined to assess the financial performance of Nigerian banking industry. The profit is the bottom line as all other performance measurements are measured by the returns in the form of what they can contribute to the overall profitability of the banking business. All the financial performance measurements adopted by the previous researchers were centered on one or two measures, that is, profitability/ROE and ROA. However, ROE, usually will not give the fair/expected result because the shareholders’ fund is always mistakenly or intentionally treated as equity (E) in banking. Besides, the multiple criteria used by CBN totally ignored profitability. The omission or ignoring profitability as performance measurement by the regulatory authority – CBN is fundamental.