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EFFECT OF BANKING SECTOR REFORMS ON NIGERIAN ECONOMY

BY

AJAYI, L. B. (Ph.D)
DEPARTMENT OF BANKING AND FINANCE
FACULTY OF MANAGEMENT SCIENCES
EKITI STATE UNIVERSITY OF ADO-EKITI, NIGERIA
E-mail: boblaw2006@yahoo.com

AND
OPADOTUN B.A

DEPARTMENT OF BANKING AND FINANCE
FACULTY OF MANAGEMENT SCIENCES
EKITI STATE UNIVERSITY OF ADO-EKITI, NIGERIA
E-mail: bishopobey@yahoo.com

ABSTRACT
This paper investigates the effects of banking sector reforms on economic growth of Nigeria over the period 1986-2010. The study adopts multiple regression analysis of ordinary least square (OLS) and descriptive analysis in establishing the relationship between gross domestic products that proxy economic growth and interest rate, exchange rate, cash reserve ratio, total asset and loan and advances. The study shows that total asset, cash reserve ratio and interest rate has a significant impact on gross domestic product while exchange rate and loans and advances has no significant impact on gross domestic product. Based on these findings, it is recommended that government should stimulate total asset, cash reserve ratio and interest rate and in order to maintain significant impact on the economy. While loans and advances should be checkmated in such a way that loans issued out should be to the productive sectors of the economy so as to have significant impact on the economy. Also, exchange rate should be seriously looked into in-line with the economic growth policy. Government should ensure proper implementation and enforce strict compliance with banking reforms and exchange rate policies.

KEYWORDS: Banking Sector Reform, Economy, Gross Domestic Product

1.INTRODUCTION
In Nigeria, we recognize four phases of banking sector reforms since the commencement of Structural Adjustment Programme (SAP). The first is the financial system reforms of 1986 to 1993 which led to deregulation of the banking industry that hitherto was dominated by indigenized banks that had over 60% of federal and state governments’ stakes, in addition to credit, interest rate and foreign exchange policy reforms. The second phase began in the late 1993-1998, with the re-introduction of regulations. During this period, the banking sector suffered deep financial distress which necessitated another round of reforms, designed to manage the distress. The third phase began with the advent of civilian democracy in 1999 which was the return to liberalization of the financial sectors, accompanied with the adoption of distress resolution programmes. This era also saw the introduction of universal banking which empowered the banks to operate in all aspect of retail banking and non bank financial market the fourth phase began in 2004 to date and it is informed by the Nigerian monetary authorities who asserted that the financial system was characterized by structural and operational weaknesses and that their catalytic role in promoting private sector led growth could be further enhanced through a more pragmatic reform. The resolve of the central bank of Nigeria to place the banking system in a regional and international context and promote soundness, stability and enhanced efficiency of the system was the major reason behind the increase minimum base for all universal banks to N25billion effective from December 31, 2005. This invariably prompted a regulatory induced restructuring in the form of consolidation through merger and acquisitions. Regulation no doubt is needed to bring sanity into the banking sector as well as putting it is an internationally competitive status. The recapitalization policy as a form of reform of the banking sector aims among others at development of more resilient, competitive and dynamic banking system that support and contribute positively to the growth of the economy with a core of strong...
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