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RETAIL FINANCIAL SERVICES IN THE NIGERIAN BANKING INDUSTRY OPPORTUNITIES AND CHALLENGES POST CONSOLIDATION (A STUDY OF DIAMOND BANK PLC)

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1-5 chapters |



ABSTRACT

The   banking   industry   in Nigeria     has been undergoing transformation both  through government  regulations and  the dynamic  nature   of the  finance sector generally. In  the same fashion, retail  financial  services and  products  have changed tremendously   both   in   design   and   delivery. These changes and transformation have therefore prompted my research interest  in  the area  of  retail  financial  services.  This  research work appraises the impact and effects of the consolidation and reform of the banking industry in Nigeria on the retail financial services and products.

Equally  assessed  are the  effects of the  consolidation and reform  exercise   on   the   overall   performance   of  banks in Nigeria in the areas of ;

1.       Effective and efficient services delivery.

2.       Corporate and business performance as regards earnings generation.

3.      Confidence    level    of    the    banking    public    on    the consolidated banks.

4.       Opportunities  and  challenges  facing  the  consolidated banks.

5.       Contributions  of  the  banks  on  the  general  economic growth and development in Nigeria post consolidation.

This study will also x-ray the framework and operations of the consolidated banks and the regulatory authorities. This work also  looked  into  new   financial   products  and   services  by Nigerian banks. The study goes further to determine how the consolidation and reform have encouraged savings and investments by the banking public.

The way forward for sustaining the confidence level of the banking public on the sector is recommended.  Similarly, post  consolidation  outlook  of banks in  Nigeria, together  with current  innovations  by  both  government  and  operators  in the  sector   are examined. The impact of these innovations and trends on the development of banking and finance institutions

CHAPTER ONE

INTRODUCTION

1.1     Overview and Background of Study

Banks  in  any  given  economy  are  one  of  the  main  engines

towards  the  growth  of  that  economy  (Ndukaife,  2004:21). Banks, basically  in any  economy are financial  intermediaries that perform two  main  traditional  functions  which  include deposit   collection   and       lending.   According   to   Hanson (1972:409), a bank is an institution that is prepared to accept deposits of money and repay cash on demand.  However, today banks’  functions,  have      been     greatly     transformed   and expanded to   include trading   in   financial   instruments and foreign exchange and its derivatives,   underwriting    of  new securities,  equity  issues,  brokerage , investment management and insurance.

The   Nigerian   banking industry   has   grown   over the years,  and  a lot  of  changes,  reforms and  development  have taken   place to position  the  sector    for   transformation   and optimal   performance, and   at the same time   align   their operations   and   practices with   international   standards. Globalization and internationalization in the 21st  century have

thrown  up  new  challenges,  opportunities  and  threats in  the

banking  and  finance  industry.  Advancement  and sophistication  in  Information       and  Communications Technology (ICT) have   made   banking   and   financial transactions  more robust, flexible, efficient and  standardized. The era of manual and paper works in financial services transactions extincted with the 19th  century. Today, automation and electronic banking have taken over.

The   banking   industry   is the   engine   and wheel   that drive  economic  activities, and   thus is strategic in  a nation’s efforts at development.  In the  words of  Ojiakor (2003-2006:28) “the role of banks   in the   economic life   of any nation is so strategic   that   every effort is made by   appropriate national authorities to   regulate and effectively supervise the banking business”.  The Nigerian banks provide a wide range of  retail financial  services,  geared  toward customers’ satisfaction and stimulation of economic activities in all the sectors of the economy. Banks in  the 21st  century  have moved a step  further

from  merely accepting  money deposits and  lending  same  to

individual  and   corporate  bodies including government at all levels,   to   rendering   other   financial   services, such as trade and investment advisory services, local   and   international money   transfer services, Automated   Teller   Machine (ATM) services,    internet    and    mobile    banking  services,    home banking services,  etc.

The   landscape   of the Nigerian   banking prior   to the reform  and  consolidation  exercise  had been  characterized by the   need to strengthen   the   institutions   in the   financial intermediation process with  the banks playing  a critical role in the    mobilization  of  funds   (Alio  and  Ukandu,  2006;  76-83). With  the consolidation and  reform,  a  lot of opportunities and challenges have been thrown up in all   the   operations   and practices of the    banking   industry. With a unified and deregulated financial  services operations granted to banks in Nigeria, there has been keen competition in products design and offerings.  Retail financial services have been transformed

and  continue  to  evolve  to  meet  customers’  needs  and  also

encourage  savings and  investments.    Most  financial  services and products are now personalized and formulated to meet the ever changing needs of the banking public. Automated and electronic banking  is now  the order of the day,  and as a result, retail  financial   services have been tailored to be in tune with modern    technology and, thus,    meet the standard    of international  best  practices.

In order to avoid the systemic distress and failures witnessed in the banking and finance industry in the 1990s, the Central   Bank   of   Nigeria   (CBN)  introduced   wide   ranging reforms  and  changes  in  the  sector.  According  to  the former Central Bank governor, Soludo (2004), “it became necessary to take  preemptive  measures  to  avoid  the  cycle  of  boom  and burst” adding that it was time to set up a structure that creates a strong base relative, to the kind of economy we are operating where banks become   channels to  do  proper intermediation. Continuing, Soludo averred that our banking  system should be

part of the global change and one that is strong, competitive

and reliable, a banking system which depositors can trust, and investors can rely upon.

With the reform and consolidation exercise over, Nigerian banks are now formulating and packaging their products and services uniquely to meet special needs of target customers. In the same way, banking practices and operations have changed tremendously over the years reflecting the current global trends in financial services delivery. The era of arm-chair banking and banking as an all-comers affair are gone and gone for good. The distress and failures of many banks in Nigeria during the 1990s was due largely to

(1)     Poor capitalization ;

(2)     Poor products and services delivery;

(3)     Lack   of   adequate   and   regulatory   framework   by relevant authorities;

(4)     Inadequate experienced professionals in the industry;

(5)     Over reliance on manual and paper works, resulting to

inefficiency and  huge bank frauds;

(6)     Poor   and   inadequate   infrastructural   development, among other factors.

It is as a result of all the changes that have taken place since after the reform and consolidation of banks that a look into the retail financial services by the banks becomes imperative. Commercial banking today presents a new picture – a picture of innovations   in   practice,   of   wider   horizons   and   of   new enterprises (Basu,  1971:268).  The twenty  five  (25)  banks that emerged after the consolidation exercise have been positioning themselves to remain relevant and competitive in the dynamic and ever changing banking and finance sector. Because of the importance of banks to the economic growth and development, their services are of immense concern to both governments and corporate  bodies,  including  individuals.  The  peculiar importance of banks, distinguishing them from other financial institutions  (insurance  companies,  building  societies,  money

lenders,  etc) which also  lend and  borrow  money, is derived

from the fact that claims against them, called bank deposits, are themselves unmistakably money (Sayers, 1960:2).

This study will therefore focus on the retail financial services provided by the consolidated banks and the opportunities and challenges that have arisen following the consolidation. Diamond Bank Plc is used as a reference point being a second generation  bank in Nigeria. However, the study also  appraised  generally  the  retail  financial  products  and services of other banks, examples, GT Bank, UBA, Zenith Bank, etc.

1.2     Statement of the Problem

Following the introduction of Universal Banking in Nigerian Banking system in   the year   2000 by the CBN, the regulatory barriers, which separated commercial and merchant banks were completely removed (Ndukaife:32). Uniform capital base was therefore set for all operating banks in Nigeria to meet up with the globalization and revolution both, in information

technology and in economic activities. Banks’ capital base was

raised to five hundred million naira (N500m) as minimum paid- up  capital  and  in 2002, the  banks minimum  paid  up  capital was raised to one  billion naira (N1bn) for  existing  banks  and two billion  naira (N2b) for  new banks (Ibid).

The consolidation and reform of banks having brought up new opportunities and challenges have equally made the business of banking very competitive and dynamic. Financial   products design and  delivery  have  become  so critical  to the survival and sustenance  of banks that  problem areas  now  exist  and demands  in-depth  study  and  analysis.  It  is  therefore  with regards to this that the study will look into:

      How today’s retail financial  services by the consolidated banks  impact  on the  banking  habits  of Nigerians  and their effects on savings and investments;

      The problem of advancement in information technology and the automation and electronic banking operation and services ;

   The global  competitiveness of Nigerian  banks and  the

challenges facing  the post consolidated  banks;

      The  regulatory   framework  and  its  efficacies  on  the consolidated  and  recapitalized  banks; and

      Finally,   the  way forward   for the banks  and   how   to position     them  for     more  efficient     and     effective operations  and services aimed  at moving  the economy in the right direction for optimal performance.

1.3     Motivation, Aims and Objectives of Study

The  banking  industry is very  crucial  and  critical  to the economic  development  of  a nation  and  its economy. Finance and banking industry is the engine and wheel that   drive economic activities and this is strategic in a   nation’s effort at development. In the words of Cooper (1984:21), “in the 1970s and early 1980s, control of the banking system has become   a

major preoccupation  of governments and control authorities in

the UK, the other   members of   European Community and generally throughout the world”. The   preoccupation   has focused on two  quite  separate types  of control,  prompted by two distinct  groups of  factors: prudential  control designed to ensure  that  banks     are     prudently  run,  with  the  aim  of protecting depositors and   avoiding   major upheavals   in confidence and  the movement  of funds; and monetary control, designed to use the banking   mechanism as a positive tool in the  conduct of macro economic policy generally or, at the very least to prevent the banking mechanism from pulling   in the opposite    direction    from,  and  thwarting,  other measures of economic policy.

With   the   reform   and   recapitalization   of   banks   and financial  institutions in  Nigeria  in  2005,  the  framework  and operations have transformed radically in tune with government policy goals and objectives. Initially, twenty five (25) banks emerged after the twenty five billion naira (N25bn) minimum

capital  base  requirement  by  the  apex  bank.  But  with  the

merging of IBTC and Stanbic banks into Stanbic IBTC, we now have twenty four (24) banks in Nigeria.   This development spurred my interest in the retail financial products and services offerings by the recapitalized banks. Equally, my motivation to study  the banking system post consolidation stems from  the deregulated  operations  and  services  embodied  in  the  CBN policy guidelines and regulations.

The  aims  and  objectives  of  this  study  therefore  are basically:

1.       To determine the retail financial products and services offering by the consolidated banks, and then appraise their quality and appeal to the banking public.

2.       To  determine  the  impact  and  import  of  the  retail financial services on savings and investments, and how the new products and services offerings have impacted on the economy generally and on the welbeing of the banking public particularly.

3.       To  determine post-consolidation outlook  of Nigerian

banks,   together   with   current   innovations   in   the banking industry. Similarly, the effects of these innovations and trends on the development of banking and finance institutions are critically examined.

4.       Finally, this study will determine how the consolidated banks are performing under the new regulatory framework, and the role of government and the regulatory   authorities   on   the   liberalized   banking system.

Together, the way forward for improvement or sustenance of the confidence of both the banking public and government are proffered.  It  is my  view  that  the  results above  will  help  in appraising the contributions the banks have made and are making  on  the  growth,  development  and  stability  of  the banking and finance sector in particular and on the economy in general. The study and findings will help make a comparative analysis of the retail financial services in the banking industry

pre and  post consolidation.  Also, areas of  opportunities and

growth potentials will be outlined and the challenges in the face of global competition explored. In the same vein, areas of improvements are examined,          and        future        prospects assessed.

Finally, recommendations will be made for the improvement, stability and growth of retail financial services and the banking industry in Nigeria.

1.4     Research  Questions

In order to look into the issues raised in the objectives of this study, the following pertinent questions will be asked:

1.            The first question is: How have the pre consolidation retail          financial products and services of the banks in Nigeria  been  transformed  and  repackaged  to  meet  the ever changing needs of the banking public.

2.            The second question is:  Are there new retail financial

products and services by banks post consolidation.

3.            Thirdly, how have these retail financial products and services served  to meet the needs and demands of  the banking public. In other words, what is the level of patronage enjoyed by these products and services?

4.            Another question is: In which areas and in what forms have the products and services thrown up new opportunities and challenges to the bankers and the banking sector.

5.            What is the appraisal rating and performance of the consolidated banks in providing these retail financial services   to   the   banking   public?   Corollarily,   had   the provision of these products and services encouraged banking habit, savings and investments?

6.            Finally, this study looks at the ways of attaining and sustaining effective and efficient banking practice and services in Nigeria.

Scope and Limitations of Study

To appraise the operations and services of all the consolidated banks’ retail financial services will be an uphill and almost impossible task at this point. Therefore, due to the specialized nature of banking, coupled with the lack of adequate, appropriate and timely information on the activities and operations of banks in Nigeria, the scope of this work will only cover the following areas:

      General outline and overview of banking products and services as they relate to the banks in Nigeria, and to the banking public.

      A  highlight  of  some  of  the  various  retail  financial products and services by the recapitalized banks, namely, (a) Diamond Bank Plc (b) United Bank for Africa Plc and (c) Guarantee Trust (GT Bank) Plc

      Finally, Diamond Bank is used as a representative of the consolidated banks for the assessment and appraisal of

the    retail    financial    products    and    services    post

consolidation.

Again, universal banking has been approved and introduced into the nation’s banking business.  As a result,  there are no restrictions as to which services to  provide, and as such  the banks are  operating  under  the same regulatory  environment unlike before. Therefore a study into the operations of the banks in the area of retail financial services can be undertaken in one or two of the consolidated banks. Similarly is the fact that there are many networks of branches of these banks scattered all over towns and cities in Nigeria. It is discovered that many of the banking public for one reason or the other, operate accounts in two or more of the banks. This means that if one of the banks is lacking in the provision of efficient services, the customer will switch to another bank with a more efficient services. Hence, one  of  the  banks  can  make  a   fair  representation  of  the assessment of the retail financial products and services offered by the banks.

Limitations

This study is constrained by:

1.            Inadequate working  funds to  run  around the major cities   and   towns   to collect   the   relevant data and materials to  prosecute  this study.

2.            Difficulties associated   with   sourcing relevant   data and information from   the banks as a result   of   certain orientation in the  banking  institutions  which make the availability   of   relevant and reliable information almost impossible.

3.            Finally   time   was   also   a   limitation   in   this   study considering other equally demanding engagements.

1.6               Significance  Of Study

In this era of advancement in technology vis-a-vis the sophistication in Information and Communications Technology (ICT) and the specialized nature of banking, this work becomes significant in many ways:

        This    study    will    x  ray    the  various    retail  financial products and    services  in the  banking industry  and how they   have been   impacted upon   and   transformed     by computerization and    electronic    data    transmission technology now   prevalent  in all   banking operations. The products and   services have   been   designed to   provide specific   and   personalized   services to the banking   public and will  avail the banking public the opportunity  to choose from  the  various forms  available  in  the  banking  sector. This will help them make sound choices and decisions, hence optimizing their benefits.

   This  study  will also  provide the banking  institutions the opportunities to look into their   operations   and then determine their    areas of    Strength,    Weaknesses, opportunities and Threat (SWOT).This will enable them confront any arising challenges inherent in  their operations    This  study  is equally significant to the  government  and regulatory   authorities   so   as to be   able   to   continuously monitor,    supervise  and    regulate    the      activities    and operations   of the banking industry. This is critical to the attainment of optimal performance, efficiency and stability in the sector. Highlighting the  challenges facing  the  sector will   help   the   regulators perform effectively to avoid any distress or  systemic  failures in the banking sector. This work  is also  important in  serving  to  educate and enlighten the public on the various products and services offerings by banks and other finance institutions post consolidation; and in this manner encourage savings and investments.   Microfinance banking is a new concept in Nigeria. The role of microfinance banks in the area of entrepreneurial development, Small and Medium Enterprises development and poverty reduction can no longer be over emphasized. According to Akinboyo (2007) micro finance is about providing financial services to the poor who are not traditionally    served    by    the    conventional    financial

institutions. It involves the provision of small loans (micro-

credit) to the poor to help them engage in new productive business activities. Even the conventional banks in Nigeria have ventured into this area by creating subsidiaries to operate and provide micro finance banking services.

           This  study  is  also  intended  to  give  an  insight  into  the operations of the consolidated banks and then discover how efficient to their customers these products and services are.

           Overall, the lessons from the reform and consolidation and the way forward for banks and finance institutions in Nigeria are  other  highlights  of  this  study  which  will  no  doubt position the banks for global competition and international best practices in the years ahead.

The rest of the project work is organized as follows: Chapter two is devoted to review of related literature as to have an insight into previous works on the subject matter. Chapter three consists of the methodology used in the research, which is the approach and design of the study. Included here also are: Sources and methods of data  collection  and analysis,  statement  of null and alternative   hypothesis   and   finally   hypothesis   test   statistics.

Chapter four is essentially presentation and analysis of data and then   hypothesis   testing.   Finally,   chapter   five   which   is   the summary  comprises  the  findings,  extensions,  recommendations and conclusions.


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