A CASE STUDY OF UNION BANK OF NIGERIA PLC
Against the
backdrop of the role of banks as financial intermediaries and their function as
the engine of growth of the economy, this paper examines the extent to which
the banking industry has helped to stimulate economic activities in Nigeria and
what the prognosis looks like in the post-consolidation era. The paper notes
that the banking industry in Nigeria witnessed a remarkable growth in terms of
deposit base, number of branches, total asset and volume of loans and advances,
especially since the de-regulation of the financial services sector in the last
quarter of 1986. However, given the potentials
of the market, banks need to do
more, particularly infinancing the
real sector of the economy .It is argued that the consolidation programme is
expected to have a positive effect on employment in the long-run, and that has
drastically altered and redefined the nature of competition in the banking
industry. Furthermore, it argues that mere size would no longer be a critical
factor in the customers’ choice of which bank to patronize. Rather, emphasis
would shift to the ability to deliver superior value to customers.
Banks facilitate
economic growth in a variety of ways. In the first instance, they act as
financial intermediaries between the surplus generating units and the deficit spending
ones. This is a two-fold function involving the mobilization of savings from the
former group which are then channeled to the latter to support productive
economic activities. This intermediary role is important in two respects.
First, by pooling together savings that would have otherwise beenfragmented,
banks are able to achieve economies of scale with potential benefits for the
users of such funds. Secondly, in the absence of banks, each person or business
seeking credit facility would have had to individually look for those with such
funds and negotiate with them directly. This is a cumbersome and time consuming
process of double coincidence of wants. By matching the preferences of savers
with those of borrowers therefore, banks help in overcoming such difficulties.
It
is pertinent to note that it is from this intermediation function that banks normally
not only earn the bulk of their income by way of interest margin but also pay
out returns to savers, compensating them for the opportunity cost of their money.
It is important to bear this point in mind because, as we shall see later, if any
bank is unable to recover the funds it lends out, its own existence as a going concern
would be undermined rapidly and ultimately. This is to the extent that its ability
to meet the withdrawal needs of depositors would be impaired. It is for this reason
that the officials of any bank cannot afford to toy with the management of its
risk assets.
Towards ensuring that the funds they lend out are recovered, banks
have found it expedient to provide business advisory services to their
customers. The essence of availing their clients these services is to assure
themselves that the beneficiaries adopt modern management policies and
practices in running the affairs of their respective companies which benefit
from borrowed funds. The ultimate goal is to guarantee that these customers are
in a position of service their loan obligations as and when due. This, in turn,
would enable banks meet their obligations to depositors while also earning a
narrow margin to ensure business continuity and corporate growth.
Banks also play
a pivotal role in an economy by providing a mechanism for producers/buyers and
consumers/sellers to settle transactions between themselves. They do this not
only within a country but also across national boundaries through a highly
efficient and technologically enabled payments systems. In the process, banks
encourage specialisation and division of labour, a major advantage of which is
the enhanced production and economic growth of the country.
Furthermore, banks
act as a conduit for the transmission of monetary policy. They provide a
veritable platform when it comes to the implementation of monetary, credit,
foreign exchange, and other financial sector policies of the government. Among
other things, monetary policy is designed to influence the cost and availability
of loanable funds with a view to promoting non-inflationary growth. The
instruments available to the Central Bank to achieve this include open market operations
(OMO), the cash reserve ratio (CRR), liquidity ratio (LR) and of course, moral
suasion.
The capacity of
the banking industry to perform these functions effectively is, to a large
extent, determined by the financial health of the individual institutions themselves
and soundness and viability of the industry as a whole. For instance, where the
majority of banks are adjudged to be weak and unhealthy, that will impair the
ability of the industry to lubricate economic growth and vice versa. Against
this background, the objective of this presentation is to examine the extent to
which the banking industry has helped to stimulate economic activities in
Nigeria and what the prognosis looks like in the post-consolidation era, come January
2006. To achieve its objective, this paper is organized into five parts.
Following this introduction, we review the performance of the Nigerian banking
industry between 2000 and 2004 in section II. The challenges facing the banking
industry, which the current reform programme was designed to address, are
highlighted in section III. In section IV, we present the prognosis and outlook
during the post-consolidation era while section V contains the concluding
remarks.