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IJTEMT; www.ijtemt.org; EISSN: 2321-5518; Vol. II, Issue IV, ug 2!13 Banking Sector Reforms And Economic Performance: Analysis Using Credit To Private Sector. Angahar Jacob Sesugh. Department of Economics Kwararafa University, Wukari Taraba State, Nigeria. Abstract This study focuses on the implications of Credit to private Sector on the economic growth of Nigeria. Reforms have been introduced and implemented in Nigeria over the last three decades. The impact of these reforms on the economic gr
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   IJTEMT; www.ijtemt.org; EISSN: 2321-5518; Vol. II, Issue IV, ug 2!13 IJTEMT; IN E#IN$:   %lri&', (J, $oogle S&'ol)r, J-$)te, S&ri*+., . o&sto& )+ Sli+es')re ;Vol. II, Issue IV, ug 2!13     -   )   g   e     1    .  Banking Sector Reforms And Economic Performance:  Analysis Using Credit To Private Sector . Angahar Jacob Sesugh . Department of Economics Kwararafa University, Wukari Taraba State, Nigeria. Abstract T     his study focuses on the implications of Credit to private Sector on the economic  growth of Nigeria. Reforms have been introduced and implemented in Nigeria over  the last three decades. The impact of these  reforms on the economic growth have not been well felt by the citizens. The study is to  determine the relationship between Credit to  private Sector and economic growth of Nigeria.  Regression model was used to present the estimates evaluated with T-test, F-test, DW-test  and standard error estimates used to test the level of significance. The study found out  statistical significance between Credit to  Private Sector (CPS) and Real Gross Domestic  Product (RGDP) in billions (N).furthermore, if  there is one (1) million of Credit Private Sector (CPS) in the economy, the real output (RGDP)  of the economy will increase by some  significant percent of total increase in Credit to  Private Sector (CPS).The Nigerian banking  sector should increase the amount of credit  given to private sector; this will in turn  contributes greatly to the growth of Real Gross  Domestic Product (GDP)bringing about increase in economic growth of the economy at large. The research concludes that bank  reforms have resulted in making banks more efficient, reliable and their intermediating  potentials have also been revived.  Keywords : Bank, reforms, economic growth, credit and private sector Introduction The relevance of banks in the economy of any nation cannot be overemphasized. They are the cornerstones of the economy of a country. The encyclopedia Americana International edition put the position thus “economic activities as it is known could not be sailing without the continuing flow of money and credit. The economies of all market oriented nation depend on the efficient operation of complex and delicately balanced systems of money and credit. Banks are indispensable element in these systems. They provide the bulk of the money supply as well as the primary means of facilitating the flow of credit”. Consequently, it’s submitted that the economic wellbeing of a nation is a function of advancement and development of her banking industry and the economy at large.   The financial deregulation in Nigeria that started in 1987 and the associated financial innovations have generated an unprecedented degree of competition in the banking industry. The deregulation initially pivoted powerful aid for the expansion of both size and number of banking and non-banking institutions. The consequent phenomenal increase in the number of banking and non-banking institutions providing financial services led to increased competition amongst various banking institutions, and between banks and non-banking financial intermediaries all targeted at increasing the level of economic growth.   Apart from the keen competition with the range of financial activities, banks have also faced problems associated with a persistent slowdown in economic activities viz economic growth, severe political instability, virulent inflation, worsening economic financial conditions of their corporate borrowers and increasing incidence of fraud and embezzlement of funds. Hence, the continuing decline in the financial standard of banks and increasing incidence of bank failure since   IJTEMT; www.ijtemt.org; EISSN: 2321-5518; Vol. II, Issue IV, ug 2!13 IJTEMT; IN E#IN$:   %lri&', (J, $oogle S&'ol)r, J-$)te, S&ri*+., . o&sto& )+ Sli+es')re ;Vol. II, Issue IV, ug 2!13     -   )   g   e     1    5  deregulation have raised question about the state and nature of the Nigerian banking sector. Banks facilitate economic growth in variety of ways. In the first instance, they act as financial intermediaries between the surplus generating units and the deficit spending ones. Ubom (2009) This is a twofold function involving the mobilization of saving from the former group which are then channeled to the later to support productive economic activities, Afolabi (2006). This intermediary role is important in two respects, first, by pooling t   ogether savings that would have otherwise been fragmented, banks are able to achieve economies of scale with potential benefit for the users of such funds, secondly in the absence of banks each person or business seeking credit facilities would have had to individually look for those with such funds as negotiable with them directly.   Theoretical Framework and Literature Review Banks occupy a vital position in the economic life of nation, be it developed or developing. They are the pivot on which the economy of any nation revolves. The word “Bank” is derived from the Italian word “Banco” meaning bench. The laws in Lombardy, the early bankers conducted their businesses in the market place. (Goshit, 2008). According to Afolabi (2006), a bank is a financial house established for the purpose of accepting deposits and other related precious commodities from the public for safe keeping as well as acting as intermediaries between owners of deposits funds or lenders and users of the funds. On the other hand, Bergrof and Roland (1995) describes banks as the most entity in a country’s financial system of mobilizing funds. As a result they constitute the centre piece of the financial system. While Ubom (2009) describes banks “as financial intermediaries that assist in channeling funds from surplus economic units to deficit one to facilitate business transaction and economic developments in general.”  An Overview of the Banking Reforms in Nigeria This research has utilized reforms in the banking sector from the 1990s. This is because the 1980s reforms are outdated for current review. Therefore, prospective banking sector reforms in Nigeria overtime include the following: The Post SAP Era ! #$ This era witnessed a brief period (1993) of renewed regulation (with interest and exchange rates fixed subsequently, the period of guided deregulation. The deregulation approach to monetary management and the resultant proliferation of banking and financial institutions in the early 1990s brought about an increased number of players far beyond what could be effectively managed by the CBN. As a result, the financial industry witnessed serious waves of distress that caused crises of confidence in the industry (Ayanwale 2007). The failed banks (Recovery of Debts) and financial malpractice in Banks Decree was promulgated in 1994 to sanitize the banking industry. The Reform %ethargy ! # & ! '$ This phase of reform led to the reduction regulations. During this period the banking sector suffered deep financial distress, beginning with the civilian democracy in 1999, while it led to the return to liberalization of the financial sectors, accompanied with the adoption of distress resolution programmes. This era also saw the introduction of universal banking which empowered the banks to operate in all aspects of retail banking and non-banking financial markets (Hancock 1995). Pre Soludu Era ! # $%%&' During this phase of banking reforms, the number of banks in the economy did not change (i.e. remained at 89). But it was noted that, the number of banks’ branches increased from 2306 to 3383 (CBN statistical bulletin 2005). The total assets base of banks increased within this phase from 15.6 billion dollars, 21.9 billion dollars and 24.2 from 2001, 2002 and 2004 billion dollars respectively. The capital   IJTEMT; www.ijtemt.org; EISSN: 2321-5518; Vol. II, Issue IV, ug 2!13 IJTEMT; IN E#IN$:   %lri&', (J, $oogle S&'ol)r, J-$)te, S&ri*+., . o&sto& )+ Sli+es')re ;Vol. II, Issue IV, ug 2!13     -   )   g   e     1    /  and reserves of banks increase in billions of Naira from 394.6 in 2000 to 821.9 in 2002 and 1060.0 in 2004 (CBN statistical Bulletin 2005). The Soludo Era ())* + ()),$ The banking sector reforms which started in 2004 and focused on strengthening and consolidating the banking system, ended on December 31 st  2005 (CBN Briefs 2006 – 2007). The major emphasis of the reforms on recapitalization and proactive regulation under a risk-based or risk-focused supervision fr   amework-has ensured competition and safety of the system and has proactively positioned the industry to perform its role of intermediation and economic development specifically, the successful consolidation of the industry has ushered in a number of positive developments to the banking sector in particular and economy at large (Soludo 2004). The Soludo’s banking sector reforms is the most well recognized reform since the history of the Nigerian banking sector. The nature of these reforms and outcomes can be categorized under Bank consolidations, Foreign exchange market stabilization, Interest rate restructuring, and the pursuit of stabilization as against an inflationary control and Currency control. Post Soludo ()), - ()).$ After the Soludo’s consolidation, several issues occurred. Following the successful consolidation of the Nigerian banking industry, a number of consolidation challenges emerged. These challenges relate to the stake holders in the industry particularly the operators, regulatory authorities and the government. In this case operators lost focus; regulators became corrupt and failed in control, while government also became corrupt and did not monitor. Sanusi Era ()) + ()!($ The CBN is empowered to regulate both the micro and macro-economic policies on behalf of the federal government and has sweeping authority in financial matters to regulate the sector and ensure the sustainability in the long run (Sanusi 2010). An important responsibility of the central bank is to regulate the banking sector as well as act as the lender of last resort. (CBN 2005) On assumption of office in June 2009, the CBN governor Mallam Sanusi Lamido Sanusi launched a crusade aimed at sanitizing the banking sector which was at the verge of collapse going by the result of the joint Audit - inducted by the banks depositors insurance Scheme (NDIC 2010). Sanusi’s crusade was basically aimed at sanitizing the sector and to streamline the banking industry along the lines of good corporate governance and internationalizes its practice (Sanusi, 2010). The reforms ensured that banks pay greater attention to the design of their international process and procedures with respect to risk management. In this perspective, the asset management initiative was established in order to ensure that banks operate with international standard. The ACM was an initiative which was adopted during the period of financial crisis in 2007. The ACM initiative is basically established in order to improve the capital and liquidity positions by taking over toxic assets from banks and stimulate bank lending by equity injection in other to stabilize the banking sector (Sanusi 2010). In a nutshell Uwu (2010) summarizes the four basic pillars of Mallam Sanusi’s reforms to include ,enhancing the equity of banks, establishing financial stability, ensuring that the financial sector contributes to the real economy. It is important to note clearly that since this era is still in process and has to end part of these reforms have been achieved. The CBN governor, Barro (1991) held that the reforms in order to achieve its goals must encapsulate a holistic set of strategies designed to stabilize the banking sector and the economy as a whole. These strategies include, fixing the problems the banks, tighter regulation of the banking sector, adoption of a risk based supervision, effective consumer protection and the reform of the CBN itself. Broad O()ectives of Banking  Sector Reforms The literature is replete with studies which show that the objectives of financial,   IJTEMT; www.ijtemt.org; EISSN: 2321-5518; Vol. II, Issue IV, ug 2!13 IJTEMT; IN E#IN$:   %lri&', (J, $oogle S&'ol)r, J-$)te, S&ri*+., . o&sto& )+ Sli+es')re ;Vol. II, Issue IV, ug 2!13     -   )   g   e     1    0  sector reforms are broadly the same in most countries of sub-Sahara Africa, Levine and Zervos (1998), CBN (2005) and several financial sector analysts summarized the objective to include: (a) Less intervention in the market with the view to promote a more efficient resources allocation. (b) Expending the saving mobilization base in support of investment and growth through market base interest rates. (   c) Improving the regulatory framework and procedures so as to forestall distress. (d) Laying the basis for minimal inflationary growth or conclusive enabling environment. Among the policy instruments often employed to attain these objectives are: i) Foreign exchange markets and interest rates deregulations. ii) Adaptation of market base approach to credit allocations. iii) Pursuit of sustainable fiscal and monetary policies iv)   Reforms or restructuring of financial markets via legislative changes. v)   Active use of prudential regulations and enforcement of capital adequacy requirements. Theoretical Framework on economic  growth Economic literature as developed over time states two most basic growth theories that have been developed since the thirties (Hahn 1964) as cited by Ubom (2009). The theory that serves as the point of departure in economic survey and the one that usually receives first consideration in any current discussion of modern growth theory is one that relates the growth rate of economy’s aggregate output to that of its capital stock. In this approach, capital is the only factor of production explicitly considered, and it’s assumed that labour is determined with capital in fixed proportions (Shapiro, 1985). With regards to this, the theories in this respect include the classical theories of economic development and the endogenous growth model. Hence, it is essential to mobilize domestic and foreign savings in order to generate adequate investment to accelerate economic growth for an economy to take off In this case the increase in capacity output in Harrod-Domar growth involves a simple production function that relates the generation of total output to the stock of capital via the capital output ratio.(Jhinghan 2003) In contrast) the marginal capital - output ratio ∆ K/  ∆ Y tells us how much additional capital to that flow of output. The marginal ratio need not be equal to the average ratio as long as technology changes over time. Hence, this theory of growth came into a conclusion that capital output ratio should borrow and fill the gap between aggregate capital, savings and investment. *orrelates of Economic Reforms and Economic +rowth There is fair agreement in literature that economic reforms, especially what came to be tagged structural adjustment program (SAP), have almost always been pressured response to national financial distress whose foundation could be traced to macroeconomic distortions Levine and Renelt (1992). While such distress manifest mainly as deep economic problems (stagflation and huge external debts), distortions are often evident in the pursuit of unsustainable fiscal, monetary and exchange rate policies in addition to widespread government intervention in enterprises that can best be handled by the private sector. In general, several analysts believe that economic mal-adjustment is associated with policy pursuits which depart from free market pricing policies (Chiber et al, 1986; Ray, 1986). Although there exist an extensive body of literature on the link between finance sector development, economic growth and poverty reduction, there is no consensus on the effects of explanatory variables on economic growth. For
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