EFFECT OF GOVERNMENT POLICY ON COMMERCIAL BANKS LENDING ABILITY

 

INTRODUCTION

Throughout the 35 years after the country’s independence, the financial system in Nigeria has seen significant changes. The banking industry changed from being predominately owned by a small number of foreign banks in 1960 to one where public sector ownership predominated in the 1970s and 1980s and where Nigerian private investors have played an increasingly significant role since the middle of 1989. Government policies also played a significant role in the changes that were made to the banking industry. Financial sector policies have a history of extensive government interference that started in the 1960s and became more pronounced in the 1970s with the aim of influencing resource allocation and fostering indigenization. Financial sector changes, including elements of liberalization and steps to strengthen prudential regulation and address bank distress, have been in place since 1987.The impact of government policies on commercial bank lending in Nigeria in the years following independence has been thoroughly examined. It looks at how public ownership and financial repression policies affected banks, the drivers of the expansion of local private sector banks, the root causes of the financial distress in the banking sector, and the effectiveness of implemented financial reforms. First, we want to look at two linked concerns regarding government regulation of the financial markets. Banks’ lending practices were negatively impacted, particularly in terms of the portfolio quality of their loans, by public ownership of the banks and the preference for allocative regulation over prudential regulation. Efficiency and competitiveness come second, with financial liberalization and other financial sector changes having minimal success in boosting the effectiveness of intermediation in the banking industry. Due to the legacy of pre-reform interference in banking lending, which left significant portions of the banking system in financial crisis, as well as the fact that some reforms were executed inconsistently and in the wrong order. on the business banks. Banking dominates the financial sector, and merchant banks together accounted for 85% of the total asset of the emerged during the 1980s. Other financial institutions, such as development finance institution (DFIS), insurance companies, and a multitude of finance houses, hire purchase companies, and mortgage companies, have been established in Nigeria. The majority of these banks were founded by Nigerian private investors, however several were established by state governments. After 1986, local private banks expanded rapidly, especially in the merchant banking sector. By 1992, 66 commercial banks were operating in Nigeria.

The three major banks, which account for 48% of the total deposits of the commercial banks and Afric Bank for another 7%, have maintained their control of the banking sector despite the growth of new entrants.

The banking sector has been plagued by widespread financial fragility, and in 1995, the regulatory authorities classified over half of all active banks as distressed or possibly troubled. The majority of the troubled banks were owned by the state.

STATEMENT  OF THE PROBLEM

The atmosphere under which commercial banks do their business is a direct outcome of the banking industry being heavily regulated by Nigerian government lending. Financial institutions, including banks and non-banks, compete with one another. The central bank of Nigeria and direct involvement of the federal and state governments throughout the post-independence period were significant drivers of interventionist policies. It is now true that only the strongest will survive. These policies had the characteristics of financial repression in that they reduced interest rates and diverted resources away from activities that would have generated the highest private rate of return. Since 1986, the allocate control has been somewhat loosened, but the lay area controls are still in place. The Union Bank of Nigeria’s efforts to affect resource allocation in banking lending through the application of administrative controls policies relating to public ownership of banks are described in this section. Nigerians, notably politicians and businesses, harbored deep animosity about the dominance of banking by foreign banks during the colonial era. They were accused of discriminating against indigenous businesses in the allocation of loans and failing to finance the developmental needs of the nation, instead focusing on the provision of short-term loan related finance to foreign companies. The expatriate banks were perceived as acting solely in the interest of their foreign owners rather than in the interests of Nigerians and of the Nigerian economy in particular. Hence, one of the goals of the government after independence was to increase local control over banking lending and to guarantee that priority sectors and indigenous firms had better access to finance. The Union Bank of Nigeria received broad authority to control the volume, pricing, and scope of bank loans during the 1960s. Due to inflationary pressures in the early 1990s, these powers were used to advance monetary management, a focus for the majority of the post-independence period. The Union Bank of Nigeria issued stabilization securities to those banks with surplus liquidity. The result was a decrease in the banking system’s overall liquidity, which helped to fuel a significant increase in interest rates on future bank deposits. When some banks started to default on their interbank lending obligations, inter bank rates jumped to us% and the amount of funds available on the interbank market significantly decreased.

The distressed banks’ accounts with the union bank of Nigeria grew increasingly overdrawn and illegal as a result of the challenges involved in deposit mobilization and the non-servicing of a sizable portion of their loan portfolios.

This effort aims to find the right response to the question posed since the issue with lending has successfully mobilized deposits for the banks.

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