ABSTRACT
This study analyses the roles of commercial banks and merchant banks in Nigeria. Banks are germane to economic development through the financial services they provide. Their intermediation role can be said to be a catalyst for economic growth. The efficient and effective performance of the banking industry overtime is an index of financial stability in any nation. The extent to which a bank extends credit to the public for productive activities accelerates the pace of a nation’s economic growth and its long – term sustainability.The instrument used for collecting data is questionnaire. Descriptive statistics (simple percentage) was used to analyze the data. Based on the findings of the research, Merchant and commercial banks have a great role on the economic growth and development in Nigeria.Recommendations are therefore made that the government should see to it that most banks are provided with adequate capital. Also the board members and management staff should try to uphold and promote the basic pillars of sound cooperate governance and accurate reporting and compliance with regulatory requirements.
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
A bank is a financial institution that accepts deposits from the public and creates credit.Lending activities can be performed either directly or indirectly through capital markets. Due to their importance in the financial system and influence on national economies, banks are highly regulated in most countries. Most nations have institutionalized a system known as fractional reserve banking under which banks hold liquid assets equal to only a portion of their current liabilities. In addition to other regulations intended to ensure liquidity, banks are generally subject to minimum capital requirements based on an international set of capital standards, known as the Basel Accords.(Hoggson, 1926).
Banking in its modern sense evolved in the 14th century in the rich cities of Renaissance Italy but in many ways was a continuation of ideas and concepts of credit and lending that had their roots in the ancient world. In the history of banking, a number of banking dynasties — notably, the Medicis, the Fuggers, the Welsers, the Berenbergs and the Rothschilds — have played a central role over many centuries. The oldest existingretail bank is Banca Monte deiPaschi di Siena, while the oldest existing merchant bank is Berenberg Bank.(Hoggson, 1926).
In 1892, African Banking Corporation and British West Africa, now First Bank of Nigeria, were established in Nigeria. In 1925, Anglo-Egyptian Bank and National Bank of South Africa gave birth to Barclays Bank in Nigeria. In 1948, the British and French Bank for Commerce and Industry started operations in Nigeria, which metamorphosed into the United Bank for Africa (Richard L. (2015). The first domestic bank In Nigeria was established in 1929 and called Industrial and Commercial Bank. The bank liquidated in 1930 and was replaced by Mercantile Bank in 1931. The African Continental Bank was created in 1949 as the only sustainable indigenous bank after the liquidation of the Industrial and Commercial bank. The year 1947, shows the emergence of agricultural bank called Nigeria Farmers and Commercial Bank. (Duncan, 2015)
According to Orjakor (1999) holds that the organ of the Nigerian Banking system dates back to the colonial period.
In 2010, Central Bank of Nigeria re-modified the existing Universal Banking Model that permits the holder of commercial banking license to operate in other non-core banking either directly or indirectly through designated subsidiaries. The introduction of this scheme classify banking licenses into commercial, Merchant and Specialised/Development Banking Licenses.
The activation of the extra territorial merchants in the former West African colonies and the establishment of settle territorial government created need for locally based financial institutions in 1894, the banks for British West African was established in Lagos mainly to facilitates commerce between Nigerian and their British counterparts in business.
Commercial bank is the banks and other financial instrument decree of 1991 defined a commercial bank as any bank in whose business includes the acceptance of deposits, withdrawableby cheques. Commercial banks are meant to be profit oriented and they render resale banking services.
Commercial banks are able to provide current bank clearing house. They can clear cheques through the clearing system. For the reason, commercial banks are called banks in Britain.
Merchant banks is a bank established to provide medium and large scale (wholesale) and specialized banking services at a profit. It should be noted that commercial banks also do most of things listed above as business of merchant banks.
In Britain, their merchant bank are either called issuing houses or acceptance house. While issuing houses deals in issuing of newshares for companies, accepting house accept bills on behalf of their clients or add their own acceptance to bills already accepted by their client as a means of providing finance to them.
Nigeria Banking reform can be divided into two main phases 2004 and 2009. Each phase with significant effect on the economic thus: This reform focus on bank consolidation through the mechanism of merger and acquisition.This resulted in rebasing of commercial banks from N2billion to N25billion, while the number of existing 89 Commercial banks to 25 in the country.
The apex bank apart from capitalization also invested in banking automation which enhances banking returns. The reform established a reporting portal for bank customers for the purpose of information sharing. Under this reform, deposit from public sectors and government own agencies can be collected by the commercial banks in order to enhance their level of liquidity.
The Asset Management Corporation of Nigeria AMCON was established in 2009 by the National Assembly of Nigeria. The institution acquires non-performing loan of commercial banks. The financing of AMCON is composed of N50billion CBN fund and 0.3% of total assets of participating commercial banks. It also support the implementation of International Financial Reporting Standards (IFRS) for global reporting compliance in term of reporting. This reform reviewed the Universal Banking Model by restricting commercial banks to only banking activities. The reform also addresses excessive banking interest by the creation of non-interest bank. (Mathias, 2015).
Sarah Alade, Deputy Governor of the Central Bank of Nigeria, announced that five Nigerian bank CEOs were being dismissed in August 2009. Five replacements were named with immediate effect including OlufunkeIyaboOsibodu to lead the Union Bank of Nigeria and Suzanne Iroche who took over as CEO of FinBank. (Samule,2015)
Banking reforms have been an on-going phenomenon around the world right from the1980s, but it is more intensified in recent time because of the impact of globalisation which isprecipitated by continuous integration of the world market and economies. Banking reforms involve several elements that are unique to each country based on historical, economic and institutional imperatives.
In Nigeria, the reforms in the banking sector preceded against the backdrop of banking crisis due to highly undercapitalization deposit taking banks; weakness in the regulatory and supervisory framework; weak management practices; and the tolerance of deficiencies in the corporate governance behaviour of banks (Uchendu, 2005). Banking sector reforms and recapitalization have resulted from deliberate policy response to correct perceived or impending banking sector crises and subsequent failures. A banking crisis can be triggered by weakness in banking system characterized by persistent illiquidity, insolvency,undercapitalization, high level of non-performing loans and weak corporate governance, among others. Similarly, highly open economies like Nigeria, with weak financialinfrastructure, can be vulnerable to banking crises emanating from other countries throughinfectivity.
Banking crisis usually starts with inability of the bank to meet its financial obligationsto its stakeholders. This, in most cases, precipitates runs on banks, the banks and theircustomers engage in massive credit recalls and withdrawals which sometimes necessitateCentral Bank liquidity support to the affected banks. Some terminal intervention mechanismsmay occur in the form of consolidation (mergers and acquisitions), recapitalization, use ofbridge banks, establishment of asset management companies to assume control and recoveryof bank assets, and outright liquidation of non redeemable banks. Bank consolidation, which isat the core of most banking system reform programmes, occurs, some of the time, independentof any banking crisis.
Irrespective of the cause, however, bank consolidation is implemented to strengthenthe banking system, embrace globalization, improve healthy competition, exploit economiesof scale, adopt advanced technologies, raise efficiency and improve profitability. Ultimately,the goal is to strengthen the intermediation role of banks and to ensure that they are able toperform their developmental role of enhancing economic growth, which subsequently leads toimproved overall economic performance and societal welfare. The proponents of Bankconsolidation believe that increased size could potentially increase bank returns, through revenue and cost efficiency gains. It may also, reduce industry risks through the elimination ofweak banks and create better diversification opportunities (Berger, 2000). On the other hand,the opponents argue that consolidation could increase banks’ propensity toward risk takingthrough increases in leverage and off balance sheet operations. In addition, scale economiesare not unlimited as larger entities are usually more complex and costly to manage (De Nicolóet al., 2003).
Banking sector reforms in Nigeria are driven by the need to deepen the financialsector and reposition the Nigeria economy for growth; to become integrated into the globalfinancial structural design and evolve a banking sector that is consistent with regionalintegration requirements and international best practices. It also aimed at addressing issuessuch as governance, risk management and operational inefficiencies, the centre of the reformsis around firming up capitalization. (Ajayi, 2005)
Capitalization is an important component of reforms in the Nigeria banking industry,owing to the fact that a bank with a strong capital base has the ability to absolve losses arisingfrom non performing liabilities. Attaining capitalization requirements may be achievedthrough consolidation of existing banks or raising additional funds through the capital market.
In his maiden address as he resumed office in 2004, the current Governor of CentralBank of Nigeria, Soludo, announced a 13-point reform program for the Nigerian Banks. Theprimary objective of the reforms is to guarantee an efficient and sound financial system. Thereforms are designed to enable the banking system develop the required flexibility to supportthe economic development of the nation by efficiently performing its functions as the pivot offinancial intermediation (Lemo, 2005). Thus, the reforms were to ensure a diversified, strongand reliable banking industry where there is safety of depositors’ money and position banks toplay active developmental roles in the Nigerian economy.
Banks are germane to economic development through the financial services they provide. Their intermediation role can be said to be a catalyst for economic growth. The efficient and effective performance of the banking industry over time is an index of financial stability in any nation. The extent to which a bank extends credit to the public for productive activities accelerates the pace of a nation’s economic growth and its long-term sustainability.
The credit function of banks enhances the ability of investors to exploit desired profitable ventures. Credit creation is the main income generating activity of banks (Kargi, 2011). However, it exposes the banks to credit risk. The Basel Committee on Banking Supervision (2001) defined credit risk as the possibility of losing the outstanding loan partially or totally, due to credit events (default risk). Credit risk is an internal determinant of bank performance. The higher the exposure of a bank to credit risk, the higher the tendency of the banksto experience financial crisis and vice-versa.
Among other risks faced by banks, credit risk plays an important role on banks’ profitability since a large chunk of banks’ revenue accrues from loans from which interest is derived. However, interest rate risk is directly linked to credit risk implying that high or increment in interest rate increases the chances of loan default. Credit risk and interest rate risk are intrinsically related to each other and not separable (Drehman, Sorensen, and Stringa, 2008).Increasing amount of non-performing loans in the credit portfolio is inimical to banks in achieving their objectives. Non-performing loan is the percentage of loan values that are not serviced for three months and above (Ahmad and Ariff, 2007).
Due to the increasing spate of non-performing loans, the Basel II Accord emphasized on credit risk management practices. Compliance with the Accord means a sound approach to tackling credit risk has been taken and this ultimately improves bank performance. Through the effective management of credit risk exposure, banks not only support the viability and profitability of their own business, they also contribute to systemic stability and to an efficient allocation of capital in the economy (Psillaki, Tsolas, and Margaritis, 2010).
The Nigerian banking industry has been strained by the deteriorating quality of its credit assets as a result of the significant dip in equity market indices, global oil prices and sudden depreciation of the naira against global currencies (BGL Banking Report, 2010).The poor quality of the banks’ loan assets hindered banks to extend more credit to the domestic economy, thereby adversely affecting economic performance. This prompted the Federal Government of Nigeria through the instrumentality of an Act of the National Assembly to establish the Asset Management Corporation of Nigeria (AMCON) in July, 2010 to provide a lasting solution to the recurring problems of non-performing loans that bedeviled Nigerian banks. According to Ahmad and Ariff (2007), most banks in economies such as Thailand, Indonesia, Malaysia, Japan and Mexico experienced high non-performing loans and significant increase in credit risk during financial and banking crises, which resulted in the closing down of several banks in Indonesia and Thailand.
A total of twenty commercial banks operate presently in Nigeria, out of which cluster sample of five was drawn. The banks in no particular order include First Bank Plc., United Bank for Africa Plc., Guaranty Trust Bank Plc., Zenith Bank Plc., and Access Bank Plc. The basis for the selection rests on the fact that these banks have been rated as the topmost five Nigerian banks by Fitch rating and Bankers’ magazine as at January 2012 and they account for over fifty percent of deposit liabilities in the Nigerian banking sector.
Many Developing Countries implemented financial reforms as part of broader marketoriented economic reforms since the late 1980’s (Uboh, 2005). Globally, activities of banksreflect their unique role as the engine of growth in any economy. The importance of thefinancial sector of an economy which comprises banks and non – banks financialintermediaries, the regulatory framework and the ever increasing financial products, instimulating economic growth is widely recognised especially in developmental economics.
(Uboh, 2005) set the pace for the landslide of other works on the interdependent relationshipbetween banks and economic growth. Stressing further that the pioneering work of Gurley andShaw (1956) on the relationship between real and financial developments shows that financialintermediaries, monetisation and capital formation determine the path and pace of economic development.
The Nigerian banking system has undergone remarkable changes over the years, interms of the number of institutions, ownership structure, as well as depth and breadth ofoperations. These changes have been influenced largely by challenges posed by deregulation of the financial sector, globalization of operations, technological innovations and adoption of supervisory and prudential requirements that conform to international standards.
Prior to the recent reforms, the state of the Nigerian banking sector was very weak. Accordingto Soludo (2004), ‘‘The Nigerian banking system today is fragile and marginal. The systemfaces enormous challenges which, if not addressed urgently, could snowball into a crisis in thenear future. He identified the problems of the banks, especially those seen as feeble, as persistent illiquidity, unprofitable operations and having a poor assets base’’.
Imala (2005) posited that the objectives of banking system are to ensure price stabilityand facilitate rapid economic development. Regrettably these objectives have remained largely unattained in Nigeria as a result of some deficiencies in our banking system, these include; low capital base, as average capital base of Nigeria banks was $10 million which is very low,a large number of small banks with relatively few branches, the dominance of a few banks,poor ratingof a number of banks, weak corporate governance evidence by inaccurate reporting and non-compliance with regulatory requirements, insolvency as evidence bynegative capital adequacy ratios of some banks, eroded shareholders fund caused by operating losses, over dependence on public sector deposit, and foreign exchange trading and the neglectof small and medium scale private savers. The Nigeria banking sector plays marginal role inthe development of the real sector.
Soludo (2005) observed that many banks appear to have abandoned their essentialintermediation role of mobilizing savings and inculcating banking habit at the household and micro enterprise levels. The indifference of banks towards small savers, particularly at the grass-roots level, has not only compounded the problems of low domestic savings and high bank lending rates in the country, it has also reduced access to relatively cheap and stable funds that could provide a reliable source of credit to the productive sectors at affordable rates of interest.
Imala (2005) also comment that the current structure of the banking system has promoted tendencies towards a rather sticky behaviour of deposit rates, particularly at theretail level, such that, while banks’ lending rates remain high and positive in real terms, mostdeposit rates, especially those on savings, are low and negative. In addition, savingsmobilization at the grass-roots level has been discouraged by the unrealistic requirements, bymany banks, for opening accounts with them.
The commercial bank and the merchant banks. The commercial banks are referred to as retail banks because of the nature of their operations. They operate through a network of branches throughout the country and have board deposit base. That is the commercial banks accepts deposits from all and not from a particular sources (The deposits are usually called demand deposits).
According to Anyade J.O. (1990) commercial banks are institution set up purposely for safekeeping of money, valuable goods and documents like wills and others. he said the existence of banks has been a big boosts to business activities.
Commercial banking activities started 1892 with the establishment of the African Banking Corporation ledge depositor and CO. A shipping company based in Liverpool was instrumental in it’s formation. This bank was however, taken over in 1984 by the bank of the British West African which later became standard bank and now first bank of Nigeria Plc with the bank on observation.
The next was Bardays Bank and Company (now Union Bank of Nigeria Plc) was established in 1917. These banks were set up to provide banking services for the British commercial interest and the colonial administration in West African when the west African currency board (Gyasi Central Bank) was set up in 1912, the bank of British became the agent of the currency board.
The National Bank of Nigeria came into existence in 1933 as the first indigenous bank that was to survive other banks that were established before that time including the merchant banks, failed as a result of inadequate capital, fraudulent practices and poor management.
After the second world war, economic activities and with high export prices, many banks group up in the Nigeria economy. Between 1945 and 1947, four (4) other indigenous bank, Africa Continental Bank (ACB), Agbenmagbe, Nigeria Farmers and Commerce Bank were established but only two were able to survive the African Continental Bank and AgbenmagbeBank Now (Wema Bank).
The period (1945-1952) was a period of free for all banker. In the period (1905-1975) alone 18 banks were established but by 1975 most of them had gone to liquidation or close down by the police or never started business at all. a lot of factor lead to the fall of these banks must had insufficient capital, most expanded their offices too rapidly to cover trading and these were no banking regulations to specify the code of conduct.
Nigeria commercial banks have been divided into two (2) main categories namely:
1. Indigenous bank (owned 100% by Nigerian) and,
2. Mixed banks (with majority indigenous shareholders at least 60%) Nigerian law does not allow any foreign bank with a majority foreign interest.
Merchant bank is a financial institution providing capital to companies in the form of share ownership instead of loans. A merchant to the firms in which they invest. In the United Kingdom, the historical term “merchant bank” refers to an investment bank.
Merchant banks are infact the original modern banks. These were incented in the Middle Ages by Italian grain Merchant. As the lanbardy merchants and bankers grew in stature based on strength of the Lombard plains cereal crops, many displaced. Jews fleeing Spanish persecution were attracted to the trade. They brought them ancient practices from the middle and far East silk routes. Originally intended for the finance of long trading journeys, these methods were applied to finance the production and trading of grain.
In France during the 17th and 18th century, a merchant banker or “marchad-banquire” was not just considered a trader but also received the status of being an entrepreneur par excellence. Merchant banks in the United kingdom came into existence in the early 19th century, the oldest being Barings Bank.
In the 19th century, the rise of trade and industry in the US led to powerful new private merchant banks, culminating in J.P. Morgan& Co. During the 20thcentury, however, the financial world began to outgrow the resources of family – owned and other forms fo private equity banking business. For the same reasons, Merchant banking activities became just one area of interest for modern banks.
The second category of the licensed banks is the merchant banks, which are wholesale bankers in the sense that their deposits are usually in very large blocks. They operated from few branches in the commercial centers of this country. They also accept deposits from the public and private co-operations as well as wealthy individuals; their functions include medium and long-term financing, investment. Management, management of unit trust, debt factories equipment leasing and issuing and acceptance of bills of exchange.
As regards international trade the merchant banks have acquired a reputation for fast and efficient processing of international business transactions such as foreign exchange for companies engaged in importing and exporting of capital goods, the merchant banks provide services which include the processing of remittance and documentary draft for collection and letters of credit.
1.2 Statement of the Problem
In Nigeria today, fraud in the banking industry has been a topical issue not only to the shareholders, regulatory authorities but the public at large. This stem from the fact that frauds constitute a threat to the continued corporate existence of an organization. The growth of bank frauds over the years has constituted a problem. This is because all stakeholders, retirees, customers, present employee e.t.c rely on such system as a means of livelihold. Stemming the tide of bank frauds would go a long way in alleviating the economic hardship being experienced currently by these categories of citizens and would help again in reassuring the stakeholders and raising their confidence level in the system. This become pertinent now that the present policy thrust of CBN is on intermediation of excess fund outside the banking system estimated at about N400 billion. The overall result would have positive impact on the stakeholders in respect of the recently concluded recapitalization by way of heightening their confidence in the banking system.
The revocation of license of Peak Merchant Bank limited in the first quarter of 2003 and Savannah Bank on 19th February 2002 were due to shady deals. Ikpefan (2003) in his study pointed out that in a bid to come out of distress, Peak Merchant Bank collected Federal Inland Revenue Service (FIRS) cheque totaling N1,086,144.33 billion cleared through three commercial banks and converted the proceeds. Frauds has not helped discontinuity of distress in banks globally but has led to the closures of some banks in other part of the world and this phenomenon need to be checked in Nigeria if she need to advance politically, economically, industrially among the comity of nations.
1.3 Objectives of the Study
The broad objective of this study is to examine the impact of commercial and merchant banks in Nigeria.The specific objectives of the study are:
i. toevaluate the role of commercial banks and merchant banks in Nigeria economic.
ii. toevaluate the role of commercial banks and merchant bank’ credit on agricultural productivity in Nigeria.
iii. todetermine the influence of interest rate on commercial and merchant banks’ credit on agricultural productivity in Nigeria.
iv. todetermine the influence of interest rate on commercial and merchant banks’ credit on traders in Nigeria.
v. toexamine the role of loan-to-deposit ratio on economic growth in Nigeriaby commercial and merchant bank.
1.4 Research Question
(a) What are the roles of commercial banks and merchant banks in Nigeria economic?
(b) What are the roles of commercial banks and merchant bank’ credit on agricultural productivity in Nigeria?
(c) What are the influences of interest rate on commercial and merchant banks’ credit on agricultural productivity in Nigeria?
(d) What are the influences of interest rate on commercial and merchant banks’ credit on traders in Nigeria?
(e) What are the roles of loan-to-deposit ratio on economic growth in Nigeria by commercial and merchant bank?
1.5 Significance of the Study
The study is also considered significant in Banking/Finance in Nigeria. It will be of great value to practicing bankers, bank inspector, bank scholars and the general public. In all it will contribute to the stock of knowledge in finance in Nigeria.
The study is also considered significant in Banking and Finance inNigeria. The significance of the essay in therefore based on:
1. Identifying and analyzing advises to commercial banks on how to apply the economic situation in Nigeria.
2. Also in identifying, analyzing and providing advises to the government and central bank of Nigeria on how to adjust or improve the banking regulation.
3.