GLOBAL FINANCIAL MELTDOWN AND ITS EFFECTS ON NIGERIA BANKING SECTOR (A CASE STUDY OF INTERCONTINENTAL BANK AND FIRST BANK PLC)
CAUSES OF ECONOMIC RECESSION (MELTDOWN) IN NIGERIA
Arthur (2009) broadly defined a recession as a down turn in a nation’s activity. The consequence typically includes increased unemployment, decreased consumer and business spending and dealing stock prices.
The global financial crisis, brewing for a while, really started to show its effects in the middle of 2007 and into 2008. Around the world stock market have fallen, large financial institutions have collapsed or been brought out, and government in even the wealthiest nations have had to come up with rescue packages to bail their financial systems.
Many blame the greed of Wall Street for causing the problem in the first place because it is in the US that the most influential banks, institutions and ideologies that pushed for the policies that caused the problem are found.
For the developing world, the rise in food prices as well as the knock-on-effects from the financial instability and uncertainty in industrialized nation are having a compounding effect.
Former governor of the central banks of Nigeria Prof, Chukwuma Soludo on the 18th of March 2009 at a special briefing of the federal executive council said “resources flows and capital flow around the world are frozen up” Nigeria depends for more than as percent of its foreign exchange on oil and the prices has crashed to the extent that from above July last two years the out flow of foreign exchange has actually fallout stripped the inflows. He said 2008 Nigeria sold above a billion dollars a month, to the bureau de change but early this year the inflow has been about $800 million a month.
The causes of this new great depression in Nigeria are many factors such as those listed below.
Over dependence of the nation on petroleum as a source of income, according to the former CBN Governor, Nigeria gets over 95% of its revenue from oil resources mismanagement (not just petroleum but natural gas as well) countries like Malaysia and Singapore in the 1970’s had the same revenue with Nigeria but today make more than II time the Nigeria.
Niger–Delta Militant Activities; this factor has worsened the situation as the barrels of crude produced per day has dropped due to militant activities like kidnapping, stopping operations and damaging of oil wells.
High rate of importation; This has been a great menace to the Nigeria economy as many commodities are imported and on the long run other economic benefit from Nigeria. For example many electronic product are imported from China
The game (on all levels), “Nigeria as a country is still heavily indebted to the world bank and international monetary fund (IMF).
The changing dynamic of over population has also affected the Nigeria economy because adequate plan have not been put in place for the nation in creasing population.
Outright cooperate greed exhibited by various companies and service providers also have a major contribution to the economic situation in the country.
The national relocation of employment and the changing of means of labour also have a part many people are migrating to major cities like Abuja, Lagos, Port-Harcourt causing these cities to be over populated and few people left to form in the other cities.
Growing gap between the elite and the impoverished also has its fair share on the nation economic meltdown; other factors are the erosion of human dignity, the erosion of dignity of life.
2.4 NIGERIAN BANKS AND CAPITAL MARKETS
Ndunugwe (2008) the Nigeria stock exchange, the flagship of Nigeria capital market has witnessed unprecedented turbulence since April 2008. First the downward slide of the stocks on the market dominated by the banking sector made expert restore and regulatory authorities jittery. While accusing fingers were being pointed at different directions as the cause of the slide, the market began a feer-fall never witnessed in the history of capital market operations in Nigeria. Both local and foreign investors who had taken advantage of the optional return on investment on the stock exchange began to scamper elsewhere in desperation. The director General of the securities and exchanged commission, Musa Alfaki, worried about the current liquidity squeeze in the market, says the economic will suffer, if the situation continues, Acting on government directive, SEC the apex regulator of the capital market, issued new rule to stabilize the capital market.
He warns that if government increase taxes, disposable income will go down, which may lead to low level of investment in the capital market and people would have little money at their disposal for day to day activities. In this kind of situation prospective investors will lack appropriate capital for business expansion. Such business will not grow, unemployment will rise, then disposed income will again go down and people will not be able to invest in the capital market.
The former governor of the CBN, Prof. Chukwuma Soludo, however, said that institutional investors should be held responsible for the misfortune of the capital market. Speaking at the town hall meeting in Abuja, the former Governor said that the dwindling this misfortune of Nigeria’s capital market was as a result of divestment by institutional investors. According to Soludo, the reason for the downturn is simple, given the credit crunch in the advanced industrial world several of the institutional investors in those markets began to pull out of our own markets. That is the origin of our own crisis here because unless we understand it, then we will go on and like what have been going in this country now. He also observed that the origin of the problem is the credit crunch that started globally and the institutional investors were then pulling out in order to service their facilities elsewhere and then stock prices went down. And as it went down, he stressed, most of the investors in the Nigerian market who are now and therefore the short shine, mostly, for speculative purpose, began to sell” that triggered off two quick reactions. The first reaction was the panic response on the part of all the stakeholders, the banks panic by also selling quickly to repay their looms he argued.
Prof. Soludo however assured that Nigeria’s foreign reserves are safe. In his words, people call me to ask about the safety of our foreign reserve. Whether the failure of these banks threatens our foreign reserve and I want to quickly use this occasion to say that out foreign reserve are safe and we have been very prudent in terms of where we put them, the institution where they are and I think so far and I believe they are safe.
The other crisis which has not manifested yet and we pray it does not spill over into a currency crisis, so far the US dollars has still managed not to weaken substantially rather it has in fact strengthened against some other currencies and I think that is relatively a good news because where this crisis also gets on to become a currency crisis and major countries began to lose confidence in the dollar as a reserve currency then we might have a new spiral of some other global financial crisis but thank God we haven’t got there”
Curiously, which the bank shares are tumbling, their operating projects have increased in the market. The Nigeria stock exchange (NSE) brokered a bailout plan where six banks agreed to contribute a total of N600 billion each to share up the liquidity situation in the capital market.
On it’s part, the CBN, the regulator of the banking sector and share of the banking committee, an umbrella organization for all Nigeria banks, said that there was absolutely nothing to bailout.
The banks committee meeting was summarized at the instance of the CBN to appraise the global financial crisis and examine the possibility of it having a major impact in Nigeria we needed to have the emergency meeting to review global financial problems, look at where we are and the way forward. We did find out from the banks about the quality of their assets depositor’s funds are safe and the situation is good”.
At the same forum, the managing Directors and Chief Executive Officers of Zenith Bank plc, spring bank plc and Diamond Bank Plc respectively, made strenuous efforts to make sure that the strength of the financial system is strong, advising that Nigerians should be rest assumes that all is well with the financial system.
The Managing Director of Zenith Bank, one of the banks reported to be involved in the bailout plan, stated that the Nigerian economy is some how insulted from the problem of the global financial crisis because we are not operating the same economy like those in US, UK”. He stated that no bank has sought for financial bailout as did some financial institutions in the US and UK because no Nigeria banks has recorded looses rather they have reported huge profits which has translated into strong capital bases. He further said that downward trend of capitalization in the capital market is due to the self-correcting mechanism of the market then be come or is called crisis.
