Abstract
This study investigates the impact of bank regulations on Nigeria's economy, focusing on monetary regulation, financial inclusion, and liquidity ratio. Utilizing an ex-post facto research design, secondary data from financial publications such as the Central Bank of Nigeria's Statistical Bulletin and annual reports of 21 listed deposit money banks were analyzed. The Ordinary Least Squares (OLS) method was employed to estimate the model, which aimed to regress selected bank regulation variables on economic growth, proxied by GDP. The findings reveal that monetary regulation and liquidity ratio have a positive and significant effect on GDP, while financial inclusion shows a negative but insignificant impact. Despite challenges in data collection, the study concludes that bank regulations significantly influence Nigeria's economic growth. It recommends that monetary authorities consider minimum capital base in banking reforms, and that the Central Bank of Nigeria (CBN) effectively manage liquidity to foster a healthy banking environment. Additionally, a stable macroeconomic environment is essential for financial market development and supporting real sector growth.
Keywords: Bank Regulations in Nigeria, Impact of Financial Regulations, Nigerian Economic Growth, Banking Sector Reforms, Economic Policy Nigeria.
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
1.1 Background of the Study
1.2 Statement of the Research Problem
1.3 Objectives of the Study
1.4 Research Questions
1.5 Research Hypotheses
1.6 Scope of Study
1.7 Significance of the Study
1.8 Organization of the Project Report
CHAPTER TWO: LITERATURE REVIEW
2.1 Conceptual Clarifications
2.1.1 Bank Regulations
2.1.2 Rationale for Bank Regulation
2.1.3 Types of Bank Regulation
2.1.3.1 Monetary Regulation
2.1.3.2 Structural Regulation
2.1.4 Bank Regulation Indicators
2.1.4.1 Capital Reserve
2.1.4. 2 Financial Inclusion
2.1.4.3 Liquidity Management
2.1.4.4 Credit-risk Management
2.1.5 Concept of Economic growth
2.1.6 Bank Regulation and Economic Growth in Nigeria
2.2 Related Theories
2.2.1 Public Interest Theory
2.2.2 Agency Theory
2.2.3 Liquidity preference theory
2.3 Review of Empirical Literature
2.4 Theoretical Framework
CHAPTER THREE: METHODOLOGY
3.1 Research Design
3.2 Population of the Study
3.3 Sample and Sampling Techniques
3.4 Method of Data Collection
3.5 Measurement of Variables
3.7 Model Specification
3.8 Method of Data Analysis
3.9 Limitations of the Study
CHAPTER FOUR: DATA PRESENTATION, ANALYSIS AND DISCUSSION OF FINDINGS
4.1 Descriptive Analysis
4.2 Unit Root Test
4.3 Bounds Test
4.4 Test of Hypotheses
4.5 Diagnostics Test
4.6 Discussion of Findings
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Finings
5.2 Conclusion
5.3 Recommendations
REFERENCES
APPENDIX
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Banks are a vital part of a nation’s economy. In their traditional role as financial intermediaries, banks ensure the transmission of funds from surplus to deficit units and serve to meet the demand of those who need funding (Larson, 2011). Banks facilitate spending and investment, which fuel growth in the economy. However, despite their important role in the economy, banks are nevertheless susceptible to failure. Banks, like any other business, can go bankrupt. However, unlike most other businesses, the failure of banks, especially very large ones, can have far-reaching implications. As it was seen during the great depression and most recently, during the global financial crisis and the ensuing recession, the health of the bank system (or lack thereof) can trigger economic calamities affecting millions of people. Consequently, it is important that banks operate in a safe and sound manner to avoid failure. One way to ensure this is for governments to provide diligent regulation of banks (Larson, 2011).
The operation of banks can have a key impact on economic growth and the stability of the economy. It affects long-term economic growth through its effect on the efficiency of intermediation between the savers and final borrowers of funds; through the extent to which it allows for monitoring of the users of external funds, affecting thereby the productivity of capital employed; and through its implications for the volume of saving, which influences the future income-generating capacity of the economy. It affects the stability of the economy because of the high degree of leverage of its activities and its fundamental role in the settlement of all transactions in the economy, so that any failure in one segment risks undermining the stability of the whole system (Alain et al., 2006).
Regulation is a set of rules and laws that banks are required to follow which include certain restrictions, guidelines and requirements” (Eugene & Mouhamadou, 2015). These are set of rules ensure that there is transparency in business that banks conduct with other entities in the financial sector (Financial Stability Oversight Annual Report, 2013). Financial regulation refers to a process in which there is a monitoring of the financial institutions by a body that is directed by the government in an effort to achieve macroeconomic goals through monetary policies as well as other measures permissible by law. Thus, regulations are concerned, they must be extensively considered and skillfully administered because in appropriate or ineffective regulatory measures results in catastrophic economic problems (Kevin& Nicol, 2010).
The presence of practical regulations is crucial in maintaining a well-functioning financial system. Over the past decades, the banking sector has undergone significant changes due to globalization and innovation of new financial products, leading to greater complexity and market incomprehensibility. Amidst the evolution of the financial landscape, regulators have increased attention in monitoring the aggregate risks in the financial system. The regulatory authorities have constantly proposed new rules to safeguard the financial stability by making institutions appear “unquestionably strong” to withstand unexpected shocks (Australian Prudential Regulation Authority, 2017). Banking systems will work efficiently if the government defines regulatory rules and establish several authorities that will assist in implementing the laws. The main goal of regulation in the financial system is to safeguard stability of the financial system. Further, bank regulations are meant to guard lenders (depositors) against activities of the bank (mediator), protect the economic system against negative externalities caused by banks and alleviating additional risk-taking ventures. These risky ventures can affect the interest of creditors leading to systematic risk that affect the economic system (Eugene & Mouhamadou, 2015).
In spite of the various safety net devices that have been adopted in most countries, instances of bank instability and failure continue to occur. Some of these failures were caused by regulatory failure thus prompting wide-ranging debates on how best to adapt regulatory devices, including deposit insurance, to ensure stability and minimize the effects of failure. One of the main arguments is that effective formal institutions are the important determinant of countries’ long-term growth (Acemoglu et al., 2014). Recent research in the nexus of finance and growth reveals that well-structured banking institutions have a powerful influence on economic growth in 84 countries from 1975-2004 (Demetriades & Rousseau, 2016). Banks support financial development by providing funds for investment projects with long-term economic benefits. When banks perform their due diligence to select appropriate borrowers, this step helps a country to allocate resources more productively, and spur economic growth. However, if the banking system allocates resources poorly (by distributing the funds to the cronies and politically connected firms without a proper selection process), these activities will not only distort the capital allocation but also hinder economic growth (Nanda, 2019).
According to Eden (2014) bank regulations aimed at bringing the benefit of high growth through stable financial system. As with all regulations, they also create a cost in the economy which makes the sector difficult to participants. Through this nature, the level of bank regulations involves so many complex trade-offs since cost and benefits from bank regulation may have some similarity. It is the choice of each country to go above or below the minimum requirement with the exception of those which are member of international accords. This option based regulatory variety have its own limitation due to the likely high cost of bank regulation. Since banking sector spreads the economy, the increasing cost of the economy from inappropriate regulation of the banking sector have a broad consequence. This implies that, it is important to assess the effect of bank regulation carefully before its execution and regularly appraise to avoid the cost of unfitting bank regulation from the economy.
The real effect of the regulation on the banking industry has no clear cut even from theoretical perspective. The public interest theory states that the government regulates the bank to enhance efficiency and avoid failures in favor of the public (Calicec et. al., 2016). While private interest theory states that bank regulation is in favor of the few not the general public which impact banks’ performance (Barth et. al., 2013). Since developing countries see economic growth as the optimal goal, the objective of this study is to understand how and why country’s experiences vary in banking regulation and oversight and how that has influenced their economic growth. This study examines the effect of banking regulation on Nigeria economy.
1.2 Statement of the Research Problem
The banking sector of any economy is the mechanism for sustainable economic growth and macroeconomic stability because it influences economic activities (Alper & Onis, 2011). This shows that banks matter for the welfare of the general populace, and as such, they should be monitored and adequately regulated. Several motivations for investigations on banking regulation and supervision exist. The global financial crisis of 2007 – 2009, highlighted that global regulation and supervision was far from adequate. With greater reason, more than 100 systemic banking crises have devastated countries around the globe since the 1970s (Barth et al., 2013). All these banking crises at least reflect some defect in bank regulation and supervision. Several studies hold the view that the failure of a single bank has the potential of becoming systemic, therefore leading to a system-wide banking crisis (Maghyereh & Awartani, 2014; Milne, 2014; Rajan & Ramcharan, 2016).
The contradictive phenomenon between the incident of banking crises and the reduction of banking regulation in developing countries generates two issues that remain unanswered. First, the reasons for the variation in adopting banking supervisory and regulatory policy are not well understood, especially in Nigeria. Research on banking regulation also has inconclusive results about the determinant factors of adopting banking regulation. Some argue that political systems and economic factors are determinants of banking reform in a country (Abiad & Mody, 2015; Barth et al., 2006; Kim, Park & Suh, 2014). Others conclude political institutions are not significant predictors of banking regulation reform in a country (Li, 2007). Also, most studies on the determinant factors of banking regulation reform have focused on analyzing all the countries in general, and the results have failed to explain the situation in developing countries like Nigeria. Developing countries tend to have a greater uncertainty of the economy, are more open to a crisis, have weaker institutions, and have more dominant roles of banks than developed countries (Kim et al., 2014; Prasad, 2010). So, there needs to be further analysis of the determinants of banking regulation in developing countries like Nigeria.
1.3 Objectives of the Study
The main purpose of this study is to assess the effect of bank regulations on Nigeria economy. The specific objectives are;
- To examine the effect of monetary regulation on gross domestic product in Nigeria
- To assess the effect of financial inclusion on gross domestic product in Nigeria
- To determine the effect of liquidity ratio on gross domestic product in Nigeria
1.4 Research Questions
The following research question were asked to guide the study;
- How does monetary regulation effect gross domestic product in Nigeria?
- To what extent does financial inclusion affect gross domestic product in Nigeria?
- What is the effect of liquidity ratio on gross domestic product in Nigeria?
1.5 Research Hypotheses
The hypotheses stated in their null forms will be tested in the course of this study:
HO1:Monetary regulation has no significant positive effect on gross domestic product in Nigeria.
HO2:Financial inclusion has no significant positive effect on gross domestic product in Nigeria.
HO3:Liquidity ratio has no significant positive effect on gross domestic product in Nigeria.
1.6 Scope of Study
This study covers banking regulation in terms of the minimum capital requirement, liquidity management and credit risk management of deposit money banks in Nigeria and economic growth indicators such as gross domestic product. The period for the research is spanning from 2000 to 2022. This period was chosen because it corresponds to the most recent period for which we have available data.
1.7 Significance of the Study
This study is important because it expands our knowledge on the topic of banking regulation. This study contributes to the current research on banking regulation by examining how banking regulation is linked with economic growth. The role of government in spurring economic growth through a sound banking institution has received less attention in modern economic development studies
After reviewing the following three regulations such as reserve requirement, liquidity management, and credit risk management, the results of this study will contribute to further awareness expansion concerning central bank regulations of banks in Nigeria.
The study will be most beneficial to the following individuals, among others: Information would be offered to deposit money bank management teams as well as financial institutions that provide services that are almost identical to those provided by banks in general, management would use this data to assess how regulations impact the organization's activities and, as a result, be able to recognize places where things are going well or poorly, and then take corrective action. Through this work, the banks are informed on the effectiveness of their role with respect to the reforms undergone. From the outcome of this research work, the government is informed of whether the needed economic growth is achieved or not.
1.8 Organization of the Project Report
There were five parts to the study. The study's introduction was covered in the first chapter. The background of the study, the problem statement, and general and specific objectives for answering the research questions, research hypotheses, scope and organization of the study were all included. The second chapter summarized the theoretical and empirical literature review and offered a critical assessment of the identified gap. A concept framework was also created to depict the relationship between the dependent and independent variables. The third chapter presented a detailed overview of the data collection and analysis methodology and procedures. The study's results were summarized in the fourth chapter. Finally, chapter five presented a review of the study's results, conclusions, and recommendations.
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