FINANCIAL SECTOR REFORMS AND ECONOMIC DEVELOPMENT IN NIGERIA: THE ROLE OF MANAGEMENT

BY DR ESTHER O. ADEGBITE DEPARTMENT OF FINANCE UNIVERSITY OF LAGOS

BEING A PAPER DELIVERED AT THE INAUGURAL NATIONAL CONFERENCE OF THE ACADEMY OF MANAGEMENT NIGERIA AT ABUJA, NIGERIA TITLED MANAGEMENT: KEY TO NATIONAL DEVELOPMENT NOVEMBER 22 23, 2005 , AT ROCKVIEW HOTEL, ABUJA

INTRODUCTION Governmentleddevelopment was the ruling economic development paradigm in Nigeria up to the 4 th quarter of 1986. Under this paradigm the private sector was a passive partner in development, while the public sector dominated all other sectors of the economy agriculture, commerce, services, (especially, transportation) industry etc. Government designed what are known as National Development Plans, meant to guide the nation in its development path. In the 1960s and 1970s government had sufficient financial resources to finance a reasonable proportion of each development plan. By the middle of the 1990s however, the nation had become saddled with an excruciating external debt burden, falling terms of trade in the international market place, slow growth of output, high rate unemployment etc, that the government had to do a rethink of the underlying philosophy of development in Nigeria. The result was a shift in the economic development paradigm from government led to private sector led development. In line with this paradigm shift was the need to relief every sector of all strangulating regulations that had hitherto characterised every sector, in governments bid to have firm control over every sector and ensure that they all move in line with governments perceived goals for the nation. Therefore, by the 4 th quarter of 1986 a programme was fashioned out for the nation called the Structural adjustment Programme (SAP). The SAP attempted to move the country away from government direct control of economic activities to indirect control, (i.e. control of economic activities (through the market forces). So, all sectors of the economy were deregulated trade, exchange, finance, industry etc. Prior to the deregulation of the economy the financial sector had been the most highly regulated. The reasons for this are not far fetched. First to finance development funds are needed, and the stock-in-trade
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of the financial system is fund, so government needed to have a good grip over that sector especially its banking sub-sector. The financial system not only provides the intermediation that pools funds from savers and channel to investors, it also provides the payments system that facilitates trade and exchange. Furthermore in the working of governments monetary policy to provide macroeconomic stability for all economic agents, the financial sector provides the platform for the working out of this policy. Given the key position of the financial system especially the banking subsector, the government rigidly controlled every aspect of their activities. For instance for the banking subsector government regulated how much interest banks could charge on the loans that go the different sectors, and how much loans banks could give (i.e. what proportion of their loan portfolio) to different sectors. Government controlled how much interest they could pay on their deposits and at what rate their credit could grow. There were rigid regulations guiding entry into the banking system. In the end the financial sector was repressed, especially the banking subsector which constituted the greatest proportion of the sector and so could neither generate enough savings at the ruling rate of interest, nor find enough investment for meaningful capital formation and development. Thus at the onset of deregulation the financial sector was also deregulated; interest rates were freed, and credit became free to move into whatever sector it desired. Rules concerning entry into the financial system were relaxed and there was a massive inflow of new players into the financial sector. By 1992 the number of banks in the Nigerian banking sector had risen from 56 in 1986 to 120. In the whole financial system there had been increase in the number of old type of institutions (e.g. commercial and merchant banks) and entry of
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new kind of financial institutions, (e.g. finance houses, bureaux de change, Community banks), and entry of a great variety of new financial instruments etc. Table 1 below gives the picture of the transformation in the Nigerian Financial Scene. Table 1 Institutional Development In The Nigerian Financial sector After Deregulation.
Banks/Institutions Development Banks Specialised banks (i.e A+B) Community Banks -A People's Branches) -B Educational Bank Urban Development Bank Maritime Bank Specialised Financial Institutions Financial Houses Insurance Companies (Reporting) Discount Houses Primary Mortgage Institutions NERFUND NEXIM NSITE (NPF) Commercial Banks Merchant Banks Bureaux de change Stock Brokerage firms Issuing House Registrars 1990 4 169 169 82 80 1 1 1 58 49 88 80 14 1991 4 287 66 221 126 100 23 1 1 1 65 54 102 110 14 1992 4 629 401 228 871 618 105 145 1 1 1 66 54 132 140 141 32 1993 4 882 611 271 673 310 105 3 252 1 1 1 66 54 144 140 147 33 1994 4 1,089 813 275 679 390 103 4 279 1 1 1 65 54 191 140 162 40 1995 4 1,410 1132 275 1 1 1 745 368 90 4 280 1 1 1 64 51 223 162 162 40 1996 4 1,077 796 278 1 1 1 409 125 90 5 186 1 1 1 64 51 223 162 162 41 June 1997 4 1,077 721 278 1 1 1 409 25 90 5 186 -1 1 1 64 51 223 162 162 41

Source: (i) Umoh, P.N and Ebhodagbe, J.U. (1997) Bank Deposit Insurance in Nigeria Lagos. NDIC. (ii) CBN (1997) Statistical Lagos, CBN. However in spite of the increased number and variety of financial institutions the real economy showed no marked improvement. In fact by the beginning of the new millenium (2000-2002) all macro economic indicators were declining. The country was still stuck with a
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suffocating external debt overhang and a suffocating high level of inflation, as high as 72.8% in 1995, high level of fiscal deficit, and unemployment low capacity utilization in industry and agriculture. For the financial sector itself, there was high level insolvency, high level of non-performing loans and general distress in the system. Table 2 below shows the degenerating macroeconomic indicators, while table 3 reveals the deteriorating financial sector performance.

Table 2. Selected Macroeconomic Indicators In Nigeria 1990 to 2002.

Real GDP Growth Rate

Capacity Utilization Rate

Inflation Rate

Outstanding External Debt in billions of Dollars

Balance of Payments in billions of Naira

Fiscal Deficit % of GDP

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Average Benchmarks IMF/WB MDG + East Asia

8.20 4.73 2.98 2.64 1.33 2.14 3.40 3.15 2.31 2.71 3.87 4.21 3.26 3.38 5.00 7.00 9.00

40.3 42.0 38.1 37.2 30.4 29.3 32.5 30.4 32.4 34.6 36.1 42.7 44.3 36.18

.5 13.0 44.0 57.2 57.0 72.8 29.3 8.5 10.0 6.6 6.9 16.5 16.1 26.6

33.1 33.4 27.6 28.7 32.6 28.1 27.1 28.8 28.8 28.3 28.3 29.8

-5.7 -15.8 -101.1 -42.0 -42.6 -195.3 -53.3 0.1 -22.1 -326.6 314.1 24.7 -525.7

-8.50 -11.00 -7.20 -.15.50 -7.70 0.10 1.60 -0.20 -.4.70 -8.40 2.90 4.70 5.60

Sources (i) Ajakaiye D.O (2003) (See Reference) (ii) CBN (2002) STATISTICAL BULLETIN + Millenium Development Goal. (iii) Obadan M. I. (2004) (See Reference)

Note that fiscal deficit which as far back as 1986 the IMF/ World Bank had recommended that it be not more than 3% of GDP was still as high as 15.5% in 1993, in spite of the rolling back of government and the supposed enthronement of the private sector. As for the real GDP growth rate it was as high as 8.20% in 1990 (i.e. within the first three years of reform) but by 1994 it has dipped to as low as 1.33%

which is less than a quarter of its 1990 level. The performance of the financial sector inspite of the deregulation reforms is also disturbing, as shown in table 3 below: Table 3 Performance of the Banking Subsector In The Era of Deregulation.
Year Total Number of Banks Number of Banks In Distress Deposits of Distressed Banks To Total Deposits In Banking Industry 14.6 4.4 18.1 19.2 29.4 14.1 14.7 9.0 3.5 1.6 2.5 2.0 Assets of Distressed Banks To Total Assets In Banking Industry 23.7 16.4 20.9 18.6 18.6 19.8 11.0 7.6 3.9 1.5 20.0 3.0 Amount Required For Recapitalization of Distressed Banks N billion 2.0 2.4 2.4 23.6 23.4 30.5 43.9 42.8 15.5 15.3 10.3 12.1

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

107 119 120 120 116 115 115 115 89 90 89 90

9 8 16 33 55 60 50 47 15 13 12 9

Source : Alashi S.O. (2003) See Reference. It is important to note that of the 120 banks than were in existence in 1993 four of them had collapsed by 1994 and another one collapsed by 1995. Of the 115 banks left in the system by 1995, 60 (or more than half) were distressed. In terms of deposits the proportion of the distressed banks to the total banking industry was almost 30% in 1994, and to restructure the system the country needed some N23.4 billion naira, this figure almost doubled by 1997 to N42.8 bill. Notice that even as of 2001 there were still 9 distressed banks while some 26 banks collapsed between 1997 and 1998.

This

trend probably explains why the government through the CBN

came up in July 2004 requesting that all banks beef-up their capital base from the mandatory minimum of N2 bill to another mandatory minimum of N25 bill, an increase of over 1000%. The banks were given till 2005 December to effect the change. One of the reasons given by the CBN for this latest financial sector reform is that many of the banks are still in distress, and if they are allowed to fail the ensuing confidence-crisis might lead to disintermediation, demonetization, a collapses of the payments system and a serious depression of the economy. The questions then arise what went wrong with the reforms? Were the reform packages inherently faulty? Could the problem have to do with the management of the reforms? Could the management of the reforms have been improved upon in terms of management of the timing of the financial reforms, and the sequencing of the etc. These questions form the focus of this paper. While we discuss the financial sector reforms in general our major focus is on the banking subsector, for obvious reasons. In sector two of this paper we take a look at what the literature says concerning deregulation, liberalization reforms in a repressed economy and economic development. In section 3 we describe all the reform measures introduced from the inception of economic deregulation and liberalization policy in 1986 up to the year 2004. In section 4 we analyse the impact of the financial sector reforms both on the financial system itself and on the economy in general. In section five we make a case for sound management of
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reforms,

coordination of the macro-economic policies that impact the reforms

the process by the monetary and fiscal authorities as the panacea for poor reform results, and we also we summarize and conclude the paper. 2.0 Financial Sector Liberalization Reforms and economic Development: The Literature. A discuss of the financial sector reforms and economic development usually begins with the path-breaking works of McKinnon (1973) and Shaw (1973). Prior to their studies there had been a general consensus that there is some positive relationship between the financial sector development and economic growth. While Schumpeter (1934) agreed that financial institutions provide efficient means of mobilizing and allocating funds in the economy and hence assist in the economic development process, he did not perceive the financial sector development as being the cause of economic development. Robinson (1954) has called the financial sector the handmaiden of economic development. In other words the financial sector is a passive sector that only responds to the needs of the real sector, and hence tends to grow as the real economy grows. However the works of McKinnon (1973) and Shaw (1973) came up with the argument that the financial sector can be more than an handmaiden to the real economy, that infact it can be the major driver of economic growth and development if it can only be relieved of its own fetters. They argued that when a financial sector is repressed then it can only respond passively to the real-sector needs. If the financial sector is liberalized however, it can be the major drive for economic growth and development. What are the features of a repressed economy? Mckinnon and Shaw argued that a repressed financial system is characterized by:

(i) (ii) (iii) (iv)

Administered interest rates both on deposits and loans Direct control of allocation of credit Ceilings on credit expansion Unduly restrictive entry rules into the financial sector especially into the banking industry.

Williams on and Mahar (1998) arguing along the lines of Mckinnon and Shaw maintain that if the financial sector is free it can provide the necessary filip for economic growth and development. They argued that there are six kinds of reforms that need to be put in place in order to free a repressed financial system, so that it can take the initiative to pull up the real sector. These six reforms are: i. ii. iii. iv. v. vi. the deregulation/liberalization of interest rates. Removal of credit controls Relaxation of Entry-rules into the financial sector especially the banking subsector Bank autonomy/which frees the banks from bureaucratic controls). Privatizing the ownership of banks Deregulating international capital flows.

Fry (1988) confirmed that when real interest rates are rising the level of financial intermediation rises and output growth also tend to rise. Levine et al (2000) also confirmed that as the components of financial intermediation grow there seems to be positive growth in the real sector. The causal direction was however not established. When the financial sector is freed, then the market can, based on the price signal pool funds and efficiently allocate them. The market signal of price allows funds to move to where its value marginal product is highest rather than where some political expediency needs it (Patrick 1966).
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When the financial market is free and the nominal rates of interest respond to inflation in such a way that the real rates of interest are positive, savers will be encouraged to save. In the face of a large pool of financial resources banker themselves are forced to look out for investors and would be investors encouraging them, and giving them other needed support as is done in Germany and Japan, so that the level of investment rises. Freeing the credit allocation function from the monetary authorities and placing it in the hands of the market ensures that funds will not go to borrowers that cannot ensure a meaningful return on the money. In her study (Adegbite 2004) using the ratio of broad money supply (M2) to GDP as her measure of financial sector growth and deepening, found a positive correlation between financial sector growth and real sector growth in Nigeria. However Adegbite did not attempt to establish a causal link between the two Beneirenga and Smith (1991) argued that in a well developed financial system where the securities market is also developed the ability of the financial system to impart liquidity to long-term instruments stimulates savers to hold their wealth in productive assets (debentures, stocks, preferential stocks etc) and this contributes to productive investment and growth. Though many do not agree that financial development causes real sector development as Mekinon (1973) and Shaw (1973) would like to argue, it is however settled from most research works that there is a definite, positive and significant relationship between financial sector growth and real sector growth. Asogwa (2005) identified about ten indices of financial sector growth and development or financial sector deepening. These include the rate of growth of broad money relative to GDP, the interest rate spread, the ratio of financial systems assets
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to GDP and the ratio of gross savings to GDP. As the financial system deepens the ratio of financial assets to GDP is expected to rise while the interest rate margin between lending rates and deposit rate is expected to narrow. 3.0 Financial Sector Reform Measures 1987-2000

Though the deregulation reforms in Nigeria started in the fourth quarter of 1986 with the setting up of a foreign exchange market in September 1986, the reforms pertaining to the banking industry proper did not commence Alawode 2001, Asogwa 2005). The first reform in the banking sector was the deregulation of the rate of interest both on loans and on deposits. Banks became free to charge whatever rates of interest they desired on their different products based on the forces of demand and supply for them. As interest rates were being deregulated government also brought out new rules for setting up of banks and issuing of licenses. The new rules made entry into the banking system much easier than previously. The immediate response of the system to these two policies was a sudden up-surge in the number of banks from 56 (Merchant and Commercial bank) in 1986, the figure rose to 109 by 1990 and 120 by 1992. As reforms were taking place in the financial sector so were they taking place in the trade and exchange sectors. In the exchange sector, the exchange rate was freed from government administration and a market for auctioning forex was set up. At first there were two windows, the official window where forex was sourced for government imports and official transactions at administratively controlled rates,
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until January 1987. (See Ikhide and

and the non-official window where licensed foreign exchange dealers (usually banks) bid for foreign exchange on behalf of their clients, and the foreign exchange rate was determined by forces of demand and supply (See Adegbite 1994). By 1987 however the two foreign exchange windows were merged to form one door called the foreign Exchange Market(FEM). By 1988, in order to absorb the parallel foreign exchange market into the official market and cater for the needs of small users of forex government granted licenses for bureau de change operators. As government was granting licenses to the bureaux de change operators in the trade and exchange sector, it was also relaxing the rule that had hitherto forbidden banks from taking up equity position in firms (i.e nonfinancial enterprises) while at the same time granting them permission to engage in insurance brokerage. In the face of a much greater number of financial institutions especially banks, than the country had ever had, the government thought it expedient to protect depositors by setting up a deposit insurance scheme. Hence the Nigerian deposit insurance corporation was established in 1988 and started operation in Jan. 1989. The Central bank of Nigeria deployed some of its staff to start off the corporation. The NDIC is supposed to ensure financial stability and provide a healthy banking platform for the economy.

By 1994 another reform measure was introduced. Hitherto banks in Nigeria had not been paying interest on demand deposits otherwise known as current account, but now they were granted permission to
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do so. The cash reserve ratio which before the reforms had been virtually stagnant was revised, to now begin to work as an indirect instrument of credit control, granting of loans on the strength of foreign exchange held in foreign accounts was prohibited. All government deposits held by the commercial and merchant banks were withdrawn, so that the banks could function without undue government interference. In 1993 the Open Market Operations as an indirect instrument of monetary control was introduced. The first discount house took off in 1993 known as Associated Discount House, subsequently others followed, and by 2003 there were 5 discount houses. The discount houses intermediate between the Central bank and the other banks, off loading government treasury securities from the CBN and auctioning same to the banks. Where the banks cannot pick-up all of the treasury securities the discount houses warehouse them. The reforms introduced also affected the capital base of banks as the capital funds adequacy ratio was reviewed. The capital adequacy ratio was moved from 1:12 to 1:10. The purpose of adjusting the capital adequacy ratio was to ensure that the banks have sufficient capital to absorb shocks in times of operational losses, and also to ensure that shareholders in banks have sufficient stake in the system to do a thorough oversight job of bank management. Hence the prudential Guideline was released by the CBN in 1990. As this was going on other reform measures to deepen and expand the financial system were also going on. Special institutions were in 1989/90 created, this include the Peoples Bank, the Community Banks, finance companies and Leasing companies.

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Concerning the capital adequacy issue government through the CBN Introduced a risk-weighted measure of capital adequacy. The regulation identified five risk-weights these are 0%, 10%, 20%, 50% and 100%. The banks were told to maintain capital funds of at least 7.26% of total risk weighted assets. The reform also required that at least 50% of a banks capital must take the form of core or primary capital i.e equity plus reserves. In 1990 the equity capital of commercial banks was raised from N20 million to N50 million, while that of the Merchant banks rose from N12 million to N40 million.The 1990 Prudential Guideline directed banks to make adequate provisions for bad and doubtful debt. Banks were required to stop accruing interest on non-performing loans, while interest that had already accrued on such accounts should be discountenanced and not recognised as income. Something that used to be in the system before deregulation was reintroduced this is the stabilization securities. Stabilization securities are CBNs debt instrument made compulsory for banks to purchase and they are non-transferable and non-negotiable. The Stabilization securities carry higher yield than treasury bills. In 1991 two new decrees were put in place to enhance the powers of the regulatory and supervisory authorities of the financial system to enable them manage the reform packages well. The first is, a Central Bank of Nigeria Decree 24 of 1991 and the, Banks and Other Financial Institution Decree, 25 of 1991. The new banking sector regulatory reforms gave the CBN power to issue banking licenses and to revoke them. It gave the CBN power to apply any type of measure to handle ailing financial system. be

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By 1991 some of the reform measure of 1987 were reversed, a cap was replaced on interest rates standing at 21% for lending rates and 13.5% for deposit rates. Also a maximum interest rate spread was specified this was 4%. By 1992 government divested itself from the seven banks where it had 60% equity holding in line with the new private sector driven development and privatization. It was believed a full private sector owned banks would be more efficiently managed and hence more effective in its operations and have improved performance. There were reforms in the capital market too which include the freeing of stock-prices from administrative determination by the Securities and Exchange Commission (SEC) to a market determined system. By 1997 additional capital market reforms were introduced, while by 1999, fully foreign owned banks were given licenses to operate. By the year 2000 foreign currency deposits had become institutionalized while by 2001 government went the whole hog and introduced universal banking, such that a bank can be a single-point unit for an investor, as a bank with a universal license can carry out merchant banking functions commercial banking functions insurance functions and also deal in issue of securities (a capital market function). At the wake of universal banking government introduced a new capital of N1000 million or N1 billion for each category of banks, and raised it by the year 2002 to N2 billion. By 2004 July the CBN announced a new capital base for banks, and this is N25 billion. In the next section as we analyze the effects of these reforms on the financial system in particular and the economy in general we will explain the rationale for the new recapitalization in the banking industry.

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4.

Effects Of Financial Reforms On The Nigerian Economy: 1987 2004

The liberalization reforms introduced into any repressed financial system is supposed to work in the following ways. First free interest rates especially after a long-time of being kept low by regulation, this move tends to encourage higher level of savings. In the face of increased savings all the investment projects at the margin can now find funding. What is more-with freedom of entry into the system the increased competition is supposed to ensure that the interest rates are kept within reasonable limits. The liberalization reforms that brings a financial sector to the forefront is supposed to transform the financial system into a supply leading sector. As a supply leading sector the financial sector is expected to transform the traditional sector (Patrick 1966) by making large funds available (which for instance can transform a traditional subsistence agricultural sector into a large commercial plantations., providing latest agricultural implements, sellings etc). and also making available technical expertise. The freedom of credit to move is supposed to promote efficiency in resource use, as credit is expected to move in response to the rate of return on it in a given sector. This is in contradistinction to the previous movement of credit to supposedly socially desirable sectors but that are not able to provide the expected rate of return. As productive sectors access funds, productivity is expected to rise, output is expected to rise the rise in output is expected to bring down prices. The increasing deepening and expansion of the financial system is expected to lead to increased variety of financial instruments not only in the banking subsector but also in the capital market. Greater availability of varieties of financial institutions and instruments is
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expected to deepen the financial system. Financial deepening can be measured using several kinds of indices, a few of these are: the ratio of the growth rate of broad money (M 2) to that of the gross domestic product; ratio of Total banking assets to GDP, Gross Savings in the economy to GDP as well as Gross Domestic Investment to GDP as well as the Interest Rate Spread (i.e the difference between lending rate and deposit rate). The more deepened the financial system the more expanded the level of output and the rate of growth of output are supposed to be. A look at the Nigerian economy since the onset of liberalization reforms in 1986, especially financial sectors reforms, which started in 1987 really give cause for concern. As shown in section I tables 2 and 3 all of the macroeconomic indicators after the first three years of reform seem to have taken a plunge downwards. For instance the real GDP growth rate which used to be in the order of 2.8% to 3% in the 1980 1987, climbed as high as 8.20% by 1990. However from 1991 it started a steady plunge downward which reached its lowest ebb by 1994 when it hit the 1.33% mark. Thereafter the economy struggled to improve but could not. For the rest of that decade up to the new millenium the real GDP growth rate did not reach the IMF/WB recommended 5%, nor the millenium development Goals of 7% nor the Asian countries performance of 9%.

Inflation climbed down initially from its 2-digit level to get as low as 7.5% in 1990, but by 1995 the season of mass bank failure and general distress in the financial system, inflation rose to be as high as

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in different sectors of the economy to as low as 6.6% by 1999,since the new millenium however it has started an upward rise again. As for financial deepening the result of our analysis shows that midway into the era of reforms the earlier results of increased financial deepening started to reverse itself. The table below shows the preReform And Post Reform level of financial deepening in Nigeria using some of the includes of financial deepening.

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Table 4 Indices Of Financial Deponing Financial Sector Reforms. Year Interest Gross Rate savings to Spread. GDP % In Nigeria Pre-And Post Gross Investment to GDP % Currency Outside Banks to Broad Money 22 25 25 20 23 21 21 21 22 25 23 27 28 29 34 34 31 30 30 27 26 26 25

1980 3.50 11 7 1981 4.60 13 5 1982 1.25 15 8 1983 4.00 17 12 1984 3.50 17 17 1985 2.25 17 18 1986 2.50 19 10 1987 5.20 17 11 1988 2.67 16 9 1989 5.03 11 5 1990 6/64 11 7 1991 4.38 12 4 1992 10.70 10 2 1993 12.58 12 7 1994 7.35 12 7 1995 7.04 5 2 1996 7.80 5 2 1997 13.47 6 2 1998 12.31 30 9 1999 16.39 30 24 2000 13.39 30 25 2001 13.08 35 14 2002 22.91 4 3 Calculate From CBN (2003) Statistical Bulletin

Table four reveals that the interest rate spread which is supposed to be getting smaller the more efficient a financial system becomes as a results of deepening, actually started to rise from 1992. Though the spread came down by 1994, it was never as low as it used to be in the era of regulation, and in fact from 1997 it rose to much higher levels than before. This is an indication that whatever reform happened they did not seen to have improved financial system
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efficiency significantly. With respect to the improved savings - mobilization effect of reforms there was indeed a great measure of this from 1998-2001 after the system had experienced a great collapse that allowed the government introduce more painstaking supervision and surveillance on financial sector activities especially banking sector activities. The result of a more closely watched regulation and supervision after a heavy collapse and some sanitization brought improved performance in terms of savings mobilization. The same thing applies to investment, in fact in the case of investment the years 1994, 1995, 1996 when the financial system was engulfed in a systemic distress the ratio of investment to GDP plunged to as low as 2%. What went wrong? There have been several researches into the banking crisis that engulfed the Nigerian financial system a few years into the liberalization reforms (Umoh and Eghodaghe 1977, Alashi 2002, Adewumni, 2002). What happened is that the liberalization of the financial sector especially the banking sector posed some immediate challenges to the sector. First was that of insufficient skilled manpower to mann the several banks that have suddenly emerged at the same time. Second was the ability of the banking system to cope with competition having been stifled of all initiative and steam in the regulatory era. The third was the incidence of bugging in the system. This is a situation where borrowers go to borrow with no intention of paying back (see Kayode and Odusala 2004). This coupled with insider abuses to ensure that a lot of the loans of some banks went bad. In fact for some banks insider-abuses made as much 70% of the loans went loan recovery difficult if not bad. Their impossible;

sometimes the loans were given without collateral, where it was given
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with collateral the collateral were not perfected. Junior managers gave loans above prescribed limits. All of these were aggravated by macroeconomic variables, continuously high fiscal deficits which fuelled inflation, caused lending rates to rise higher, and led to adverse selection. In the face of rising interest rates there was moral hazard. As shown in table 3 of section I all of these problems resulted in a systemic crises which led to the failure of 26 banks by 1997 and to the failure of another 6 by 2001 Government had to firm up its legal and supervisory framework by creating new legal instruments to penalize bank officials and directors that colluded to sap theirs, banks, and by giving the NDIC and the CBN more powers.

Table 5 Loans and Advances (N' billion)

Year Industry Distressed

Non-Performing Loans and Advance (N' billion)

Industry Distressed

Proportion of Nonperforming Loans and Advances (N' billion)

Industry Distressed

1989 1990 1991 1992 1993

23.1 27.0 32.9 41.4 80.4

4.3 6.4 5.4 15.7 25.3

9.4 11.9 12.8 18.8 32.9

22

2.9 4.7 4.1 6.8 14.7

40.8 44.1 39.0 45.5 41.0

67.1 72.8 76.5 43.0 58.0

1994 1995 1996 1997 1998 1999 2000 2001

109.0 175.9 213.6 290.4 327.2 370.2 519.0 803.0

54.6 48.9 51.7 49.6 24.2 29.1 26.4 123.1

46.9 57.8 72.4 74.9 63.3 24.8 111.6 135.7

29.5 29.5 33.9 40.7 18.7 21.0 29.0 35.4

43.0 32.9 33.9 25.81 19.3 25.6 21.5 16.9

64.6 68.9 75.5 81.92 77.3 72.2 75.8 28.9

Source: Alashi S. O. (2002). Table 5 shows the proportion of the banking system loans and advances that were distressed, the proportion that actually went bad (i.e of the bad and doubtful loans, which proportion actually became bad), the proportion of the non-performing loans relative to the loan portfolio of the institution. For the distressed banks as much as 81.92% of their loans went bad as of 1997. The effects of the systemic crises were erosion of the publics confidence, no wonder the proportion of currency relative to broad money went up (see table 4) as people lost confidence in banking instruments and would rather hold cash. Portfolio shift as a result of crises probably account in part for increased capital flight in Nigeria. The interest rates that are supposed to come down in the face of competition did not do so investors could not access loans at the unduly high rates. No wonder ratio of investment to GDP plunged to as low as 2% in 1994, 1995, and 1996. By the year 2003 there was still evidence of looming crisis given the fragile capital base of the banks. The capital base of N2 billion proved too small for the needed functions of capital i.e provision of cushion for operating losses, provision of funds for fixed assets and expansion as well as promotion or fostering depositors confidence.
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Table 6 Ratio of Shareholders Funds to Total Assets of Banks (1995-2003) (1) (2) (3) (4) Year Shareholde Total assets Ratio (%) (2)/(3) rs Funds (Nbillions) (Nbillions) 1995 11.6 414.4 2.8 1996 17.3 491.5 2.8 1997 29.6 627.3 3/5 1998 70.9 760.6 4/7 1999 99.9 1,108.0 9.0 2000 133.8 1,962.6 6.8 2001 183.7 2,449.1 7.5 2002 229.9 2,980.5 7.7 2003 211.1 3,365.2 6.3 Source: Umoh P.N. (2004). Table 6 shows the proportion of bank capital to their total assets. In 1995 it was as low as 2.5%. Such a low stake on the part of shareholders in the banks can lead to reckless and carefree attitude. Besides there is need for greater reform in terms of capitalization to give the banking system a more solid base hence the new N25 billion recapitalization reform. In the next section we look at ways in which shrewd management could have helped the reform strategy achieve its set objective. 5. 5.1 Skillful Management Of financial sector Reform Process. The Role Of Management In Financial Sector Reforms.

It is obvious from the preceding sections that the reform measures in the financial sector have not been able to achieve the laudable objectives they were meant to. The question is what went wrong? Were the reform packages inherently faulty? What role could skillful

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management have played in ensuring that the reform measures achieved their set goals. We contend in this section that the reform measures were not inherently defective given that there are few nations that have used the same reform packages and got positive results. We argue here that management of the reform process skillfully would have gone a long-way in achieving the goals of the country. The question now is who then are supposed to be the managers of the reform process? It is the government and the bodies government put in place to oversee the monetary system in conjunction with the authorities put in place to oversee the fiscal affairs of the country. In other words the Central Bank, the Nigerian Deposit Insurance corporation the Ministry of Finance and the Presidency. Before we go ahead with our analysis we wish to put in perspective what management is. Management is said to be the process of planning organizing, leading and controlling the work of a group of stated group or organizational members of an organization and using all resources available to the group or organization to reach objectives or goals. The managers of any firm, group or nation are responsible for helping other members of the team achieve the set goals of the group. In planning, management takes a long-term view, so that it does not have to take short-term rescue-measures as unplanned-for-events arise. Also a good management team train workers for the job they are to perform and raise the quality of those who will have to supervise others. Good management requires that the members are encouraged to work closely together rather than focusing on their divisional distinctions (Stone and Freeman 1992). In line with the above role of management the monetary and fiscal authorities
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could not work as

a team to provide the needed macroeconomic

stability for reforms to work. First as the CBN makes efforts to stabilize prices, government fiscal indiscipline frustrates those efforts. High level of inflation was also coupled with high balance of payments deficit and a fast depreciating exchange rates to negate activities in the financial sector. Depreciating exchange rates raised the cost of inputs to the extent that firms that borrowed could not pay back. So the necessary harmony between the different divisions as good management practice dictates was not there. What is more-in good management there is supposed to be long-range planning, not ad-hoc activities as you stumble along some realities. For instance the deposit insurance meant to protect depositors and provide stability into the banking system came three years into the adoption of the reforms, something that ought to have been put in place ahead of the reform . The regulatory framework to prevent the fraud and all the malpractices that came up was not put in place before the reforms. What is more-in good management the workers are trained for the job. Both the staff of the supervisors, the NDIC and those of the regulators the CBN, needed to have gone through intensive training before the doors were flung open to allow a massive influx of new banks into the banking industry. The regulators/supervisors could not cope with the intense demand of the job. Skillful management also requires that the supervisors must be a stepahead of those they must supervise. This would have enable them detect early the cosmetic dressing of ailing banks books before their problems become critical.

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Further in planning the timing of the financial sector reforms needed to have been planned ahead. Time is one of the resources that good managers plan ahead for. Coming at a time when the trade and exchange sector had just been liberalized, and the exchange rate was soaring through the roofs, domestic producers were disadvantaged at the cost-end and also disadvantaged at the product-price and, as the imported competing goods somehow were cheaper than home produced ones. Many of the producers took loans and could not pay back. Even for the financial sector reforms alone, good management (on the part of the managers CBN, NDIC, Federal Ministry of Finance and the presidency) would have meant proper sequencing of the reforms (See Ikhide and Alawode 2001). Some more appropriate sequencing have been put forward in the literature. This include the provision of macroeconomic stability for the on-coming reforms through reduction in fiscal deficits and hence reduction in inflationary pressures. Liberalization of the financial sector before the liberalization of the trade sector and finally the liberalization of the capital account. Within the financial sector reforms some have argued that before allowing free entry into the financial system there ought to have been introduction of indirect monetary instruments first, then the bank regulatory framework should have been overhauled, then a gradual relaxation of entry rules into the system while the uncapping of interest rates should have been lasted. In Nigeria's case the uncapping of the interest rate came first coupled with exchange rate depreciating the cost of imported inputs and materials and the high interest rates drove producers out of the financial markets, and speculators then had a field day. The Nigerian economy became what Onimode tagged the CASINO ECONOMY, an economy that only trades and does not produce anything. All these were due to lack of
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sound

management

on

the

part

of

the

managers

of

the

macroeconomy. 5.2 Conclusion

The adoption of financial liberalization reforms has been a very laudable initiative given the extent of financial repression that was prevalent prior to these reforms and the stifling effects of repression on both the financial sector itself and on the economy as a whole. The literature had made us expect that if the repressed variables and aggregates were let loose especially price and direction of credit, that savings would rise because real interest rates will rise, and investment will also rise. A look at the table on financial deepening shows that this expectation did not materialize at least not for any meaningful longterm. Rather the banks went into a system crisis that made 26 banks collapse in a single year and another 6 in less than five years after. All the macro economic indicators do not give cause for cheer. The real growth rate of GDP is less than the enviable Asian rate of about 9%, less than the desired one of 7% as envisaged in the Millenium Development Goals, and even less than the 5% recommended by the IMF/WB. We then wondered what went wrong, we know that the fact that some repressed economies adopted identical measures and had desired results means it may not be the reforms per se that were faulty but their management. We looked at the management concept and analyzed, whether good management practice has been demonstrated in the management of the reform measures and came to the conclusion that it have not.

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First the long-term planning of all resources required before the takeoff of a programme was not there, so that there was no NDIC to protect banking stability until three years into the reforms. Similarly there was no legal regulatory framework before the plunge into the reforms. Also provision for necessary macroeconomic stability needed for the success of the reforms was not made. The necessary harmony and unity required between different divisions of an organization was not there as between the fiscal authorities and the monetary authorities. Finally the sequencing of the reforms was bad. We suggested as recommended in the literature a better sequencing (see section 5.1). We hope the authorities will come together for better synchronization of fiscal and monetary measures to move Nigeria forward.

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REFERENCES Adegbite E. O. (2004) financial Institutions And Economic Development In Nigeria in Adejugbe Mo.O. A (ed) Industrialization, Urbanization And Development In Nigeria, 1950 1999. Lagos CONCEPT PUBLICATIONS. Adegbite E. O. ( 2005) Development Finance Institutions In Nigeria In Fakiyesi and Akano (eds) Issues In Money Finance And Economic Management In Nigeria, Lagos. University of Lagos Press. Adegbite E. O. (2004) Deregulating the Nigerian Financial Services Sector For Beneficial Globalization Published by the Nigerian Economic Society in Globalization And Africas Economic Development.. Adegbite E. O. (1994) Exchange Rate Regimes And Economic Performance: A Comparative Analysis. A Ph.D Thesis Submitted to the Department of Economics University of Ibadan. Adewunmi W. (2002) Financial Sector Soundness The Role of Regulatory Authorities in CBN (2002). Enhancing Financial Sector Soundness In Nigeria. Abuja. Alashi. S. O. (2002) Banking Crisis: Causes, Early Warning Signals And Resolutions in CBN (2002), Enhancing Financial Sector Soundness In Nigeria, Abuja. Ajakaiye D. O. (2003) Economic Development In Nigeria: A Review of Experience in Garba. A G. (ed) Development Thought, Policy Advice And Economic Development in Africa In The 20 th Century: Lessons For The 21st Century. Ibadan, Ibadan University Press. Asogwa R.C. (2005) Assessing The Benefits And Costs Of Financial Sector Reforms In Nigeria: And Event Study Analysis Paper Presented at the Nigerian Economic Society Conference, Ikeja, Lagos 23 rd 25th Aug.

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Fry, M. (1988) Money, Interest And Banking In Economic Development John Hopkins University Press, Baltimore. Ikhide, S. I. And Alawode A. A. (2001) Financial Sector Reforms, Macro Economic Instability and the Order of Economic Liberalization: The Evidence From Nigeria. Lenus, Ross; Norman Loynza; and Thorsten Beck (2000) Financial Intermediation And Growth; Causality And Causes. In Journal Of Monetary Economics. Mckinnon R.I. 1973 Money and Capital In Economic Development (The Brookings Institution) Washington, D.C. Masha et al (2004) Theoretical Issues In Financial Intermediating Financial Markets, Macro-economic Management and Monetary Policy in Financial Markets In Nigeria, CBN, Abuja. Obadan, M.I. (2004) Foreign Capital Flows And External Debt: Perspectives On Nigeria And The LDCs Group. Broadway Press Ltd, Lagos. Shaw, E. S. (1973) Financial Deepening In Economic University press, New York. Development. Oxford

Soludo C. C. (2004) Consolidating The Nigerian Banking Industry To Meet The Development Challenges Of The 21 st Century And Address by the CBN Governor at the special meeting of the BANKERS COMMITTEE on July 6 2004, CBN Headquarters Abuja. Umoh P. N. (2004) Capital Restructuring Of Banks A Conceptual Framework in Consolidation Of Nigerias Banking Industry CBN, Abuja. Patrick. H. (1966). Financial Development And Economic Growth In Underdeveloped Countries in Economic Development And Cultural Change Vol 141 No.2 Pp 174 189.

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