THE IMPACT OF GLOBAL FINANCIAL CRISIS ON THE NIGERIA BANKING INDUSTRY [A CASE STUDY OF THE FIRST CITY MONUMENT BANK (FCMB)]

ABSTRACT

The global financial crisis is a contemporary economic issue prevailing in the world today both in the developed and emerging economy and has affected almost all sectors of the economy. In the wake of the world been a global village, Nigeria is not immune to the effect of the crisis. This has an impact on some sector including the banking industry.

The study conducted and assessed the impact of the Global Financial Crisis in the Nigeria banking industry using First City Monument Bank (FCMB) as a case study. And to show the relationship that exists between the Global Financial Crisis and the Nigeria Banking Industry.

The project reviewed the nature, causes, effect of the crisis on the Nigerian banking industry as well as the possible action taking by the government to curb the effect of the crisis.

Data were predominantly gathered, using the questionnaire administered on the workers at different cadre of the first city monument bank (FCMB).

The data collected were analyzed using the descriptive and inferential statistical analysis, Chi-Square statistic was precisely employed in the analyzing of the data collected.

The study revealed that the global financial crisis affects the banking industry in all ramifications to include the share prices of the Nigerian banks, the performance and profitability of the banks and the banks’ credit policy.

However, this study concluded that the government should profer solution to the ongoing crisis. Hence, it recommends that effective and immediate actions should be taken to solve the problem of the crisis.

TABLE OF CONTENT

                                                                                                                         PAGE

Title page                                                                                                                    i

Certification                                                                                 ii

Dedication                                                                         iii

Acknowledgement                                                                               iv –v

Abstract                                                                                         vi – vii

Table of content                                                                       viii - ix

CHAPTER ONE                                                                                  

1.0     Introduction                                                                                          1      

1.1      Background of the study                                                  1- 4

1.2     Statement of the research problem                                  4 - 5

1.3     The aims and objectives of the study                                          5

1.4     Research question                                                                       5 - 6

1.5     Research hypothesis                                                           6 

1.6     Research methodology                                                                6 - 7

1.7      Significance of the study                                                       7 - 8

1.8      The scope and limitations of the study                             8 -9

1.9      Organisation of the study                                                     9 – 10

CHAPTER TWO (literature review)

2.0     Introduction                                                                         11 – 13

2.1      Meaning and concept of global financial crisis            13 – 16

2.2     Causes of the global financial crisis                              16 – 18

2.3       The build-up to the crisis                                      18 – 20

2.4      The onset of the crisis                                                20 – 24

2.5       Consequence of the crisis                                     24 – 25

2.6      What is the outlook for Africa                                       25 – 32

2.7      policy responses to the crisis                                  32 – 36

CHAPTER THREE (structural composition)

3.0     Introduction                                                                 37 – 38

3.1     overview of the Nigerian economy prior to the crisis         38 – 40

3.2     Shocks in the Nigerian capital market                           41 – 43

3.3     Shocks in the banking system                                       43 – 46

3.4     Impact on federal government medium to long term bonds   46

3.5    Global financial crisis and the Nigerian oil sector            46 – 49

3.6    Global financial crisis and the non-oil sector in Nigeria     49 – 51

3.7    Impact on foreign exchange earnings                      51 – 52

3.8     Impact on the current (2009) budget                              52 – 53

3.9     impact on the national debt                               53

3.10    impact on net capital flows                                                53 – 56

3.11    emerging fact from the economy since the advent of the crisis  56 – 57

3.12    policy response to the crisis in Nigeria so far                    57- 61

CHAPTER FOUR (research methodology, data presentation, analysis and interpretation of results)

4.0   Introduction                                                                     62

4.1   Research methodology                                                              62

4.2    Research design                                                                  62 – 63

4.3   Sampling techniques and procedures                                 63 – 65  

4.4    Sampling size and Sampling techniques                                65

4.5    Data sources                                                                       65

4.6   methods of data analysis                                                66 – 67

4.7   Data presentation                                                67 – 72

4.8   test of hypothesis                                               72 – 79

CHAPTER FIVE (summary, conclusion and recommendations)

5.1    Summary Of Finding                                                80 – 81

5.2    Conclusions                                                                            81 – 82

5.3    Recommendations                                                          83 - 84

          References                                                                           85 - 87

CHAPTER ONE

INTRODUCTION

            1.1   BACKGROUND OF THE STUDY

The global economy has witnessed one of the most drastic downturns in its financial system since the great depression of the 1930s and the stock market crash in late 1980s. The world economy is on the slowdown again due to the credit that engulfed the United State and its fallout on the economies of the United Kingdom, the European zone and the rest of the world. The global financial crisis has affected the domestic economy and has implication on different sector including the today’s business.

The last quarter of the year 2007 when it all started what some expert describe as the worst global financial crisis in decades, the worst of its kind since the Great Depression. Alan Greenspan, the former head of the United States reserve system described it as “an event that occurs once in 100years”. From the Wall Street financial headquarters in the United States, across to Europe, Japan and China, the Global Financial system around which the modern free market economy and capitalism is built is crashing like the pack of cards.

Authorities across the globe are alarmed at the spate of the meltdown in major stocks. Financial authorities are bemused as there seems to be no handy solution to the crisis. Could this be an historical imperative that must be full course before correcting itself? If as Alan Greenspan opined it were an event that most occur, then it would naturally correct itself after the turmoil.

On the other hand, was the crisis fallout of the rapacious and uncontrolled global capitalism that boomeranged with never anticipated consequences? Many think the latter is the case. This group of people attribute the crisis to the “law of jungle capitalism” or what is known as “casino capitalism” that pervades the global financial system.

What is the meaning of all this? We are in a system where capitalism no longer invest in production and job creation but invest money in stocks in a totally unfettered manner. Money is used to chase money artificially to amass stupendous profit, line the pockets without commensurate work or productivity. It is akin to high-stake gambling, it could flourish for a long time during which time the gamblers lose recorded huge profits could wiped out in one flash. This form of capitalism is destroying the world economy. Whereas, the west has the capacity to absorb the shock, the developing world is particularly imperiled because of lack of solid productive base and wide spread poverty.

The current global financial crisis has been described by many economists a as great challenge to the world economy. They are of the opinion that the current crisis is largely different from past crisis which are usually region-based. As a result of the current financial turmoil this is rapidly spreading across the continents. Concerned parties such as the economist, financial analyst have been pointing to the need to take serious actions to shore up faltering economies and restore confidence in the global economy.

The reason for the crisis are varied and complex. The crisis can attributed to a number of factors pervasive in both the housing credit market, which was developed over an extended period of time. There are many different views on the causes including the inability of homeowners to make payments, poor judgment by the borrowers and/or the lenders, speculation and over building during the boom period, risky mortgage products, high personal and corporate debt levels, complex financial innovations that distributes perhaps concealed default risk, central policies and government regulations. The significant decline in housing prices led to delinquencies in mortgage payments and foreclosures which cause a ripple effect across the financial market and global banking systems, as investments related to housing prices declined significantly in value, placing the health of key financial institution and government sponsored enterprises at risk.

Reputable organizations in the United States such as Dow Jones have been witnessing cyclical bear market since July 2 2008 coupled with series of panics related to financial instability caused by the failure and/or Sub-prime mortgage lending difficult to the investment banking industry. It is however noteworthy that this wild financial period is not confined to the United States. According to a Time Magazine essay, the global stock market lost a whooping $8.5 trillion as measured by standard and BMI Global (an index of major market worldwide) on October 6 and 7, 2008 alone. The world as become a global village sewn together through telecommunications and technological advancements. Financial products particularly mortgaged backed securities (MBS) are traded across boarders online, hence one global market.

This is a clear indication that the global economy is inter-related, hence, what affects the one country directly or indirectly affects the others. Here in Nigeria, how are we affected by the ravaging economic depressions? What measures are needed to cushion the impact on the economy and the people? The economy of Nigeria, as a developing country, largely depends on the economies of various foreign developed countries that are being plagued by the global financial crisis.

         1.2 STATEMENT OF THE PROBLEM

The financial turmoil has justified a modest reduction in the baseline forecast for the global growth, but will not by itself prevent a gradual recovery in the future. Advanced and emerging economies are moving in the same direction, that is, growth is slowing everywhere effectively ending earlier hopes of a growth decoupling the marked the slowdown in global activities is been led by major advanced economies, which are either close to recession or experiencing growth far below potentials. In the United States housing and credit market remain at the core of slowdown. The growth slowdown as spread to Europe, Japan, amid weak business and consumer sediment, terms of trade losses, the impact of strong currency on trade and tightening credit condition. Activity also is decelerating in the developing economy.

At the same time energy and commodity prices have receded. Inflation pressure as risen around the world to the fastest since the 1990. In advance economies, inflation have accelerated to around 4.5% in July, driven mainly oil prices rises. However, core inflation has remained contained. The recent resurgence has gone much further in developing economies, although risks have receded recently. Inflation climb to 9% in the aggregate mid year and a lot of countries are experiencing double digit inflation.

Having identified that the Nigeria economy as a system which operates within an environment that is greatly influenced by other actors broader system (global economy). The impact of the financial crisis on the Nigerian economy cannot be overemphasized as this manifest in the performance of the capital market by the drastic fall in price of stocks since early 2008 and still finding it difficult to rise till date.

         1.3 OBJECTIVES OF THE STUDY

Since the commencement of the current global financial crisis, fears have been expressed on its likely implication on the Nigerian economy. Without prejudice to the assurance given by those who should know that the Nigerian economy is immune to the global financial crisis, there is the need to look at the wider implications of our economy. It is imperative therefore to consider how the global financial crisis affects the Nigerian economy; this will be the main objective of this study. The specific objectives include the following;

1.           To know the implication of the global financial crisis on the price of crude oil.

2.           To ascertain how the global financial crisis have affected the capital market.

3.           To examine the effect of global financial crisis on the Nigerian foreign reserves.

4.           To know how the global financial crisis has actually affected the banking sector.

5.           To determine possible ways which the Nigeria can be bailed out of the crisis.

      1.4               RESEARCH QUESTIONS.

1.      What are the possible causes of the global financial crisis?

2.     How has the crisis affected the global economy at large?

3.     What are the implications of the global financial crisis on Nigeria economy?

4.     Does the global financial crisis have any effect on the capital market, banking sector, foreign reserve, crude oil prices, investment, and the ICT sector?

5.     What has been the major problem encountered in solving the problem?

1.5   RESEARCH HYPOTHESES.

1.     Ho: There is no significant relationship between the Global Financial Crisis and the Financial Sector.

Ha: There is a significant relationship between the Global Financial    Crisis and the Financial Sector.

2    Ho: The Global Financial Crisis does not affect the Real Sector.

        Ha: The Global Financial Crisis affects the Real Sector.

3   Ho: There is no significant relationship between global financial crisis    and foreign direct investment (FDI). 

Ha: There is significant relationship between global financial crisis and foreign direct investment (FDI).

1.6    RESEARCH METHODOLOGY

This area of the research work will explain in details, the mode of data Collection, Analysis and Interpretation.

1.6.1   Methods Of Data Collection.

For this purpose, therefore, two major sources shall be explored. They     are as follows:           

a)   Primary Sources: These sources of data will help the researcher to generate primary data. Primary data are those data that will originate from the researcher himself through various means such as: Observation, experimentation, survey, interview, and so on.

b)   Secondary Sources: These are those sources of data that do not originate from the researcher himself. In order to obtain the relevant variables for the purpose of answering the research questions, testing the hypothesis, and achieving the research objectives, the researcher will explore secondary sources of data like: Textbooks, Magazines, journals, News Papers, CBN research library, National Bureau of Statistics (NBS), Electronic Archives among others.

1.6.2 Method of data analysis.

All relevant variables will be gotten through the methods highlighted above and will be analyze with the use of statistical package for social sciences(SPSS) with the Chi-square technique being used to examine the extent to which the crisis affect some sectors of the economy and the whole economy at large.

      1.7     SIGNIFICANCE OF THE STUDY.

This study is justified since it is an exploratory one. The global economic depression is a global phenomenon in every economy and that of the developing nation is no exception. This study hopes to determine the areas which the crisis has affected the economy and possible steps to be taken to solve the problem.

The report of this study would be adopted by policy planners, government agencies, financial analysts and the masses. Apart from contributing new knowledge to academic discipline, the study serve as a good secondary data for other researchers who might be interested in conducting a further similar research in the area of the impact of  the Global Financial Crisis.

1.8       SCOPE AND LIMITATIONS OF THE STUDY.

The global financial crisis is a current issue in the world today. Perhaps ironically, because of the developing nation generally weak integration with the rest of the global economic system, as reported by Reuters, it is believed that many of the developing nations will not be affected with the crisis, at least not initially. The wealthier ones in which Nigeria is included who do have some exposure to the rest of the world, however may face some problems with her economy.

However the entire research work will concentrate on the impact of the crisis on the following sector of the economy;

1.     The Capital market.

2.     The Banking Sector.

3.     Crude oil prices.

4.     Foreign Reserve.

5.     Foreign Exchange.

6.     Investment.

7.     The ICT sector.

8.     Gross Domestic Product (GDP).

9.     Prices of Basic food commodities.

10.    Per capital income.

11.    Wage levels.

Because the topic is a contemporary issue in the world which has been mentioned earlier, the research will make use of data and information available from the genesis of the crisis (2007) to date for all relevant variables being studied.

Nevertheless, findings of this research will consider the peculiar circumstances of the study area.

It would be fallacious to claim that the research will be constraint-free. The research project will be limited to several constraints, chief amongst which are:

1.           Time Factor: The time duration will not be enough to collect and collate more past studies on the topic for evaluation so as to give more information on the topic;

2.           Financial constraint: The high cost of materials will definitely restrain the researcher from testing more models, which will further enhance the result to be derived from the study;

3.           Information: Another limitation likely to be faced by the researcher is the sensitivity and unavailability of certain data required for the purpose of this research. As such, this might lead to the dearth of relevant statistical information.

However, the researcher will make use of available time and data at its disposal that will give a reliable and dependable result.

1.9    ORGANIZATION OF STUDY

This study is divided into five chapters. In the first chapter, which the introduction, various objectives intended to be achieved in carrying out this research work is looked at. More so, the significance of the research study was highlighted. In addition, research methodology, research question, research hypothesis, justification of the study were stated among others things.

Chapter two, which is the literature review, examined the theory and concept of the topic in question. In chapter three, which is the structural composition the various instrument and techniques of analysis to be adopted was extensively analyzed.

Chapter four contains data analysis. The data analyzed was gotten from primary sources and the result was analyzed through the use of statistical package for social sciences (SPSS) with the chi-square technique being used and the Summary, Conclusion, and Recommendation are presented in Chapter Five.