COMPETITIVE STRATEGIES AND CHANGES IN BANKING INDUSTRY IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The name Bank is derived from the Italian word banco “desk/bench” used during the Renaissance by Florentine bankers, who used to make this transaction above a desk covered by a green tablecloth. However there are traces of banking activity even in ancient time.

In fact, the word traces its origins back to the ancient Roman Empire, where money lenders would set up their stalls in the middle of enclosed courtyards called Macella on a long bench called Bancu, from which the word Banco and bank are derived.

As a money changer, the merchant at the Bancu did not so much invest money as merely convert the foreign currency into the only legal tender in Rome that of the imperial mint. .

McKenna and Fleming in 1995 described competition as a market condition which exist when there are large number of business enterprise, all able to supply the same or similar products or service to a large number of purchase/buyers.

In this last decade there has been a high competition within the banking industry in Nigeria, with the licensing and establishment of more banks bringing the total number of commercial and merchant bank in the country to about eight-seven, there has been high tendency for various banks in the industry to fend for themselves for survival.

A commercial bank is defined as an establishment which accepts deposit from customers that are prepared where loans and advances and general financial business concerning all forms of trade are made. Example of such trade are retail, wholesale, import and export trade.

The 1991 banking decree defines a commercial bank as any institution which carries out banking business in Nigeria which includes a commercial banks, a discount house, financial institution and an acceptance house (Federal Republic of Nigeria 1991).

The banking industry in Nigeria has been positively and negatively affected by competition. In attempt by banks to fend for themselves, many method have being adopted to improve corporate efficiency and maximize profit. This method led the Nigeria banking into scientific approach and investigation into better ways to achieve corporate goals and objective. Some suggested method include expansion of existing operational facilities to area of wider market, improving corporate efficiency, diversification of port folio and investment banking, appropriate marketing, application of combined branch and a little degree of unitary banking, good publicity, employment and development of capable staff and carrying out research for onward positive development and growth.

Also, each day competition in the industry is heightened by emergence of new brand in banks, many of the older banks have bring forced to change in their operation due to the competition. It is interesting to watch older banks paying as much as 14-19% same deposit. Before the 1986 deregulation in the banking industry has been highly regulated.

Economic regulation in general, embraces controls, which government imposes on economic and business activities reaching the maximum regulation, the government can be said to be participating in some non-traditional public sectors activities in order to foster competition and improve economic efficiency. When regulation fails, as it often does the process of deregulation inevitable begins in a bid to avoid a collapse of the whole system. Economic deregulation is defined as deliberate and systematic removal of regulatory controls, structures and operational guideline in the administration and pricing system in the economy.

The underline philosophy of the deregulation of an economy or its component segment is the belief that factors of production, goods and services are optimally priced and allocated when their prices are freely determined in a competitive environment. The aim of the study is to determine competitive strategies and changes in Nigeria banking industry.

1.2 THE PURPOSE OF THE STUDY

The relevance of banks in the economy of any nation cannot be over emphasized. They are the cornerstones, the linchpin of the economy of a country.

The financial deregulation in Nigeria started in 1987 and the associated financial innovation have generated an unprecedented degree of competition in the banking industry. The deregulation initially pivoted powerful incentives 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 provide financial services which led to increased in competition amongst various banking institution and banking and non-banking financial intermediaries.

Apart from the keen competition with the range of financial activities banks have also faced problem associated with a persistence slow down in economic activities, severe political instability, virulent inflation, worsening economic financial condition of their corporate borrowers and increase incidence of fraud and embezzlement of funds. All these factors of deregulation, competition, innovation economic recession political instability, escalating inflation and frequent reversal in monetary policy have combined to create a challenging and precautious financial environment for banks. Consequence of new financial environment has been rapidly declining profitability of the traditional banking activities. Thus, in a bid to survive and maintain adequate profit level in this highly competitive environment banks have tended to take excessive risk. But, then the increasing tendency for greater risk taking has resulted to insolvency and failure of a large number of banks.

Hence the sole aim of the study is to determine how competition affects the banking industry either positively or negatively

1.3 STATEMENT OF RESEARCH PROBLEM

This research work is an attempt to answer the following research questions

i. Can we determine the strategies that affect competition in the banking industry?

ii. Can we determine how environment affects competition in the banking industry?

iii. Can we correlate the number of banks and each of the financial strategies namely deposits, total assets, loans and advances?

iv. Can we determine how customers service affect competition in the banking industry?

1.4 THE OBJECTIVES OF THE STUDY

The main objective of the study is to determine the competitive strategies and changes in Nigeria banking industry.

The subsidiary objectives include:

i. To determine the various strategies that affects competition in Nigeria banking industries.

ii. To determine how financial strategies affect competition in Nigeria banking industry.

iii. To determine how the environment affect competition in the banking industry.

iv. To determine how customers services affect competition in the banking industry.

v. To determine the characteristics relevant to the banking industry in a perfectly/imperfectly competition market

1.5 SIGNIFICANCE OF THE STUDY

This study is significant because of the following reasons:

i. It will generate information in the new millennium on environment, customer service, financial and marketing strategies that will make banks in Nigeria to cope well with the competition.

ii. It will provide information on the various strategies of competition as it would be useful to economic policy makers. Banks manager and financial institution.

iii. It will be useful to the researcher, student in business management, banking and finances.

iv. It will be useful to the public in general.

1.6 RESEARCH HYPOTHESES

Spiegel (1992) observed that in an attempt to reach decisions, it is useful to make assumption or guesses about the populations involved. Such assumptions which may or may not be true are called statistical hypothesis and in general are statements about the probability distribution of the populations. In this research work four hypotheses will be tested that the proportion of the respondents who agreed that:

i. There are financial strategies that affect the competition of the banks.

ii. There is freedom of entry and exit of firms in the banking industry.

iii. The better bank is the one that is capable of offering that little extra service over and above what other competition offer.

iv. There are some artificial interference’s with the activities of banks and their customers.