Bank Consolidation and Interest Rate Deregulation Effects on the Level of Competition in the Nigerian Banking Industry

BANK CONSOLIDATION AND INTEREST RATE DEREGULATION EFFECTS ON THE LEVEL OF COMPETITION IN THE NIGERIAN BANKING INDUSTRY

ABSTRACT

This study was to determine the effect of interest rate deregulation and consolidation on the level of competition in the Nigerian banking industry. The study employed a multiple Ordinary Least Square regression (OLS) to test the effect of the independent variable on the dependent variable, before which a pre-test for stationary was employed.

After establishing the fact from the results that there is a long-run relationship. The study confirms that a more concentrated industry with few banks resulting from consolidation via merger and acquisition does bring about the economics of scale, innovation, and heightened competition in the banking industry.

CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND TO THE STUDY     

The bank deregulation in Nigeria started in 1987. Consequently, the number of banking institutions (DMBs and Merchant Bank) increased from 41 in 1986 to 50 in 1987, 119 in 1993, dropped to 115 in 1996. 

However, presidential measures such as the increase in the requirement in bank paid-up capital in 1989 and the reform of their accounting procedure (1990) appeared insufficient. To restrain the immoderation of the financial sector, the government placed a total embargo on bank licensing in 1991 to halt this growth. 

The profitability of investment and access to credit and foreign exchange were significant motives for bank ownership. The new banks were generally small and undercapitalized, which later led to an upward review of bank minimum operating capital in 2004. 

The embargo placed on bank licensing is yet to be lifted. Between 1998 and 2004, the number of banks in operation ranged between 89 and 90. However, by 2005, the number plummeted to 25, then 24 in 2009, following the increased bank capital base of N25billion and subsequent consolidation exercise. 

The competitiveness was resulting from the entry of new banks and the deregulation of interest rate brought about a sharp rise in nominal deposit and lending rates from 3% and 7% to 14% and 17.5%, which is a growth rate of 366.7% 150%, respectively from 1970 to 1984. The occasional reposition of interest rate ceilings.

Nevertheless, the average deposit and lending rates doubled in the third year of the reform. Financial sector deregulation is expected to narrow the spread between deposit and lending rates due to competition expected to ensure in the financial sector, following the inflow of new entry and market-determined interest rates. 

The interest rate spread (lending-deposit rate margins) has been dramatically wide. In Nigeria in the post-reform period than pre-reform era.

1.2   STATEMENT OF THE PROBLEM

        The current financial deregulation in Nigeria, which started in 1987 and the associated financial innovation, has generated unprecedented competition in the banking industry.

The deregulation initially provided powerful incentives for expansion both in size and number of banking and non-banking financial institutions. The consequent phenomenal increase in the number of banks and non-bank institutions providing financial serving institutions, and between banks and non-bank financial intermediaries.

Therefore, the deregulation of the economy and its associated interest rate reduction in the financial sector was expected to be more competitive in their marshalling of financial resources. The resulting competition was expected to increase the banks' savings mobilization efficiency and the consequent expansion of credit to the economy for investment by the Machnnon Shaw (1973) savings and investment hypothesis.

The reduction of interest rate and elimination of government power in capital flow, allowing independent bureau de change, abolition of selective credit and other dimensions of deregulation provide customers with the opportunity of bargaining.
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Over time, this opportunity of possible customer shifts forces banks to innovative customer attracting practices. Higher deposit rates and lower lending rates increase market share relative to a competitor, reducing aggregate lending and deposit rates.

To this end, data obtained from the Central bank of Nigeria CBN (2010) indicate a widening interest rate spread, especially after consolidation exercise in (2004), suggesting poor or absence of competition. Thereby forcing us to question if consolidation reduces competition, causing the collision of banks.

Therefore, this study is carried out to determine the effect of bank consolidation and interest rate deregulation on the level of competition in the Nigerian banking industry.

1.3   AIM AND OBJECTIVES OF THE STUDY    

Given the background above and the problems arising, this study's main objective is bank consolidation and interest rate deregulation effect on the level of competition in the Nigerian banking industry.

       The specific objectives to examine are:

i.     The impact of consolidation on the banking industry.

ii.    The impact of consolidation on the Nigerian economy at large.

1.4   RESEARCH QUESTIONS

The research question that relates to this study are as stated below:

i.     Does bank consolidation have any impact on the banking industry?

ii.    How can we examine the impact of consolidation on the Nigerian economy at large?

1.5   RESEARCH HYPOTHESIS     

Looking at the primary purpose of this study; it will be reasonable to hypothesize as follows:

i.     Banking consolidation does not significantly impact the banking industry.

ii.    Banking consolidation does not significantly affect the Nigerian economy at large.

1.6   SIGNIFICANCE OF THE STUDY 

The significance of this study is as follows:

i. It will contribute to knowledge.

ii. It adds to the body of existing literature.

iii. It will be helpful in the area of policy-making in the banking industry.

iv. It is relevant to banking-related students, banking sector workers, the government and appropriate monetary authorities.

1.7   SCOPE OF THE STUDY 

The study covered 1986 to 2013 and focused on pre-SAP (Structural Adjustment Program) and post-SAP deregulation.

1.8 OPERATIONAL DEFINITION OF THE TERM "BANK."

A bank can be defined as a place of business that receives, lends, issues, or exchanges. Takes care of money, extends credit, and provides ways of sending money and credit quickly from one place to another.

CONSOLIDATION

The reduction in the number of banks and other deposit-taking institutions with the simultaneous increase in the size and concentration of consolidation entitled in the sector:  Section 13 in 2001.

COMPETITION

Describes a situation in which people or organizations compete for something that not everyone can have.

DEREGULATION

Also known as financial liberalization or reform in its broadest sense. It simply means the deliberate and systematic removal of regulation controls, structure, and operational guidelines that may discourage orderly growth and efficient competition in the allocation of resources in the financial system.

In other words, it means to remove all the controls which government impose on the economy and business of all kinds. The introduction of SAP in 1986 was a unique opportunity for Nigerians to review all the existing controls on economic activities. There are three (3) types of deregulation in support of restructuring the economy: price deregulation, product deregulation, and geographical deregulation.

1. Price deregulation; this is the removal of charges on the various financial system. It can be referred to as removing legal restrictions on various financial charges attendant to their operators.

2. Product deregulation; is used to describe the lifting of restrictions on the types of services that the institutions can carry out.

3. Geographical deregulation; this is referred to as the removal of limitations on the geographical spread in which financial institutions operate in their bid to mobilize deposits.

INTEREST RATE

Interest rates, an integral part of the financial system, are equivalent to the cost of capital following the Keynesian hypothesis. Interest rate is the price of money borrowed and the reward for money lent out—consequently, the amount borrowed initially.

A standard definition of interest rate going by the economics dictionary is that: Interest rate is the difference between what is lent out; and must be repaid after a specific period. Expressed as a proportion of the amount of money lent out. While the banking dictionary said that interest rate is the price of credit, It is the price that a borrower pays for using credit that a lender advances. The interest rate charged by lenders depend on two significant factors:
(a) The general level of interest rate in the economy and
(b) The safety of loan, which in turn is a function of use to which the advance is put.
The interest rate can be classified into two namely:
(i) Nominal interest rate (ii) Real interest rate.

The nominal interest rate measures the monetary interest payment on money lent at any given time. In contrast, the real interest rate is the nominal interest rate less the inflation rate.

FINANCIAL REPRESSION

Financial repression as defined by McKinnon and Shaw (1973) is the establishment of interest rates that equate the demand for and the supply of savings. They believe that financial liberalization is a pre-requisite economic reform for economic development, because it would encourage savings and investment, the adoption or appropriate technologies. Learning by doing an income equalization.

FINANCIAL DEEPING

Financial deeping is the growth of the capital market especially the stock exchange in a deregulated economy where the market forces permit efficient resources mobilization and allocation thereby increasing the stock of financial assets.

Financial deeping therefore exist were:

i.            There is growth in domestic savings (capital accumulation) which will provides the real structure for the creation of a diversified financial claims.

ii.          There is active operations of financial institution in the financial markets.

iii.       There is growth in financial intermediation.

CHAPTER TWO

LITERATURE REVIEW

2.1      THEORETICAL LITERATURE

The theoretical literature for deregulation is the financial liberalization theory. The theory brought about financial sector reforms which introduced deregulation of the economy and financial sector. The theory can be best appreciated by examining two competing hypothesis on the role of banks in the saving-investment process. The financial repression hypothesis and the neo-structuralist hypothesis. These hypothesis offer conflicting views on the effect of deregulation in the banking system on economic development.

THE FINANCIAL REPRESSION HYPOTHESIS THEORY is associated with the works of Cameron et al (1972) McKinnon (1973) and Shaw (1973). It held that financial development would contribute most significantly to economic growth and the real size of the financial system. Measures such as the imposition of foreign exchange controls, interest rate ceilings, high reserve requirement and the suppression of private capital markets can all increase the flow of domestic resources to the public sector. Successful financial restriction of funds from the financial system being transferred to the public at a very low cost.

Selective or sectoral credit policies are common components of financial restrictions used to encourage private investment in what the government regards as priority activities. Instead rate on loans for such approved investments subsidized.

McKinnon and Shaw maintained that to the extent that banks observe loan rate ceiling non-price rationing of loanable part of financial institution risk premia cannot be expected productivity of the investment projects but according to transaction costs and perceived risks of difficult loan rate ceiling discourage when ceilings are binding and effective hence, a large proportion of potentially high yielding high risk investments.

Subsidized loan risks which encourage high delinquency and default rates reduce the flexibility and increase the fragility of the financial systems.

McKinnon and Shaw demonstrated that liberalizing the interest rate and abolishing non-price credit rationing will increase the incentive to save and invest and raise the average efficiency of investment. It will also deter enterprises from undertaking low yielding investment as they will not be profitable under high interest rates hence, the average return on investment will increase. The rate of economic growth will rise in this process and shift the saving function (McKinnon 1983, pp. 56 61 Shaw 1973 pp. 811).

On the other hand, Stiglitz and Weiss (1981) developed a theoretical model which showed that financial liberalization will not guarantee efficient allocation of investable funds as banks will engage in a voluntary credit worthiness of potential borrower because the cost of doing so may be very high, raising loan rate of interest will not necessarily increase a banks expected return, even if there is excess demand for loans at the existing loan rate. Thus contrary in McKinnon and Shaw’s models allocation efficiency is not guaranteed even when interest rates are liberalized. Broll and Gilroy (1986 pp. 365) also showed that when information costs about borrowers riskiness are high, a bank expected return from lending may not increase even with an increase in collateral requirements. All these happen because investors that choose to borrow at high interest rate of high collateral requirement will tend to choose riskier projects and banks will avoid them since the expected return from lending to them will be low.

It is therefore evident that efficient resource allocation when the banking system has been liberalized cannot be guaranteed. Cho (1986) therefore, advised that the development of an efficient equities market as a supplement to the banking sector is necessary for the success of any liberalization programme.

THE NEO-STRUCTURALIST MODEL such as those of Taylor (1983) and Van Wijnbergen (1982) assert that financial liberalization that results in increase in interest rates and exchange rate devaluation can produce cost pushed stagnation (an acceleration in the inflation rate) and a reduction in the rate of economic growth at the same time. The most important feature of neo-structuralist model is the importance of unregulated financial institution which are assumed to be more efficient due to the absence of central bank controls such as reserve requirement.

        Taylor (1983) and Van Wijbergen (1982) pointed out that whether liberalization of interest rates does increase the total supply of credit depends on the required reservation and on whether the increased deposits come as a result of liquidation and on whether the increase deposits as a result of liquidation of investment or reduction in the deposits of unregulated financial institution. They however, conclude that in Prachie, financial liberalization is likely to reduce the rate of economic growth by reduction in total real supply of credit available to business firms. The same conclusion was reached by Buffie (1984) who remarked that “once will allow for repercussion in the curb (for informal) market. Financial liberalization becomes a perilous undertaking”. Hence to enhance economic growth the models advocate a reduction in the required reserve ratio or the payment of the market loan rate on required reserve.

        Although the predictions of the neo-structuralists hypothesis have been supported by empirical studies, the main intellectual basis for IMF’s financial sector analysis and policy advice over the past two decades are those propounded by McKinnon and Shaw.

        However, the most credible explanation for de-regulatory spectre which is haunting most developing countries were those espoused by price water house in 1991. The accounting firm succinctly observed in its publication that:

The economic shocks of the eighties and the consequent shrinking international credit in response to the debt crisis have convinced many developing countries to rely more on market forces to develop their economics and financial sector. In an effort to promote financial deeping and domestic capital formation developing countries have moved to liberalize interest rate and capital controls and phase out directed credit policies. A number of countries are also privatizing state owned financial institutions.

        The deregulation of the banking system in the particular case of Nigeria is very much consistent with the basis espoused by price water house. The deregulation of the banking system is a part and parcel of the deregulatory train brought by the Structural Adjustment Programme (SAP). The main elements of the SAP, as can be recall, were basically aimed at strengthening the resistance of the economy to shocks, improving its resilience and increasing insensitivity to market forces.

        The banking policy reforms brought about by the SAP can be categorized into those aimed at strengthening and enhancing the performance of the regulatory framework and those aimed at improving the reliance of the banking industry on market forces.

        The range of reform measures in the first category include:

a.           The establishment of Nigeria Deposit Insurance Corporation (NDIC) in 1988.

b.           The granting of greater autonomy to the CBN in 1989.

c.           The issuance of capital adequacy and prudential guidelines in 1991 and

d.          The promulgation of the Central Bank of Nigeria, degree No 24 and other financial Institution Decree on 25 of 1991.

The second category of reform include:

a.           The abolition of import license in September 1986.

b.           The partial dismantling of exchange control in September 1986.

c.           The partial deregulation of the foreign exchange market

d.          The liberalization of the issuance of license to new banks.

e.           The deregulation of interest rate in august 1987.

f.            The lowering of the cash reserve ration to 3% (later increased to 6%).

g.      The removal of restriction on commercial banks to engage in equipment leasing.

h.    The relaxation of the restriction on equity participation in companies by banks and

i.      The licensing of other financial institutions: the community banks, finance companies and mortgage or savings and loan institutions. Other significant de-regulatory steps that were also embarked on include:

a.           The use of indirect tools for monetary control

b.           The establishment of discount houses.

c.   The deregulation of capital market and the establishment of private funded inter-bank settlement system.

These de-regulatory measures have, had and would continue to have tremendous impact on the role of banks in Nigeria.

In a time series empirical survey of eighteen countries of the world that have deregulated its financial system. Millard Long yoon Choo et al (1981) reported that financial deregulation carried out against an unstable macro-economic background can make the instability worse. For example complete liberalization of interest rate in countries with high and unstable economies to keep interest rates in line with the productivity of the real sector. Hence removal of capital control allows for a volatile capital. How and undermines monetary controls.

However, countries with reasonable macro-economic stability were able to avoid this pitfall of high real rate. Fluctuations in the real exchange rate and insolvency among firms and banks. Some countries with considerable macro-economic instability chose to deregulate gradually while retaining certain controls on interest rates. Capital flows and encouraging greater-competition and adjusting interesting rates to reflect market conditions. Nigeria falls within this category where although, there is a deregulation of interest rates. This Central Bank of Nigeria still forces the Minimum Rediscount Rate (MRR) to serve as an indication on signal to the direction of interest rates.

It is usually believed by some economists that financial deregulation may not lead to high rate to interest but also to increase in price level. Lucke (1980) contended that “tight money means high rate of production cost and higher production rate of production cost and higher production cost means higher consumer price” this view was also expressed by Rasheed Gbadamusi in 1989 in a seminar organized by the World Bank office on “the effect on high interest rate on economic development in Nigeria,” he contended that the present escalating interest rate in Nigeria which increased from 18% to 20% in nine months (January to September 1989) in most commercial banks scare away investors from borrowing and worsen inflation which was already at 50% as at July 1989. Sanusi in 1990 also subscribed to this view when he said that high interest rate place a premium on the cost of credit although, it could also be an effective method of regulating money and hence control inflation. But in the face of an inelastic demand for credit due to prevailing rigidities in production procedures. Processes and financial methods, high interest rates would automatically translated into an additional cost burden to be passed on to consumers. In such a situation inflation results with all its unfavourable consequences for the economy.

2.2   EMPIRICAL LITERATURE

        Some Authors suggest that a less concentrated banking sector with many small bank is more prone to financial crises than a concentrated banking sector with a few large banks. (Allen and Gale, 2002, 2003). First proponents of the “concentration-stability” view hold that large banks can diversify better so that banking system characterized by a few large banks will be less fragile than banking system with many small banks. (Diamond, 1984) second, concentrated banking system may enhance profit and therefore lower bank fragility. High profits provides a buffer against adverse shocks and increase the franchise value of the bank, reducing incentives for bank owners to take excessive risk (Hellmann, Murdoch and Stiglitz 2000) third, some hold that a few large bank are easier to monitor than many small banks, so that corporate control of banks will be more effective and the risks of contagion less pronounced in a concentrated banking system. According to Allen and Gale (2002), the U.S. with its large number of small banks support this concentration stability.

        An opposing view is that more concentrated banking structure enhance bank fragility. (Stiglitz 1972) view that large banks frequently receive subsidies through implicit policies. This greater subsidy for large banks may in turn intensify risk-taking incentives, increasing the fragility of concentrated banking system (Boyd and Runkle 1992). Boyd and De Nicolo (2003) stress that banks with greater market power tend to charge higher interest rate to firms, which induces firms to assume greater risk.

        Berger et al (1999), suggest that bank consolidation do not significantly improve the performance and efficiency of the participant banks. In contrast, Berger and Mester (1997), Berger and Humphrey (1992), Allen and Rai (1996) and Molyneuk et al (1996) indicate that is a substantial potential for efficiency improvement from merger of banks. However, the prospects for scale efficiency gains appear to be greater in the 1990’s than the 1980’s. This finding is ascribe to technological progress regulatory changes and the beneficial effect of lower interest rate (Berger et al 1999).

        On deregulation, Rahala et al (2010) examined that long run and short run association among investment, savings, real interest rate on bank deposits and bank credit to the private sector, when exposed to financial deregulation in Pakistan.

        Bandiera et al (2002) constructed an index of financial deregulation on the basis of eight different component: Interest rate, pro-competition measures, reserve requirement, direct credit, bank ownership, prudential regulation, securities market deregulation and capital account deregulation. Interest rate and inflation for adjusting for capital gains and losses leave result unchanged. The panel result indicates that a likelihood ratio test that imposes equality of coefficients in the pre and post deregulation period can be rejected at conventional level. The real interest rate has a significant and positive effect and aggregate index of deregulation has a negative effect on savings. The effect of the aggregate financial deregulation index (which is significantly negative) is large to offset the estimated positive effect on the increase in real interest rates.

        A bank is a financial institution which performs services connected with many especially keeping money for customers and paying it out on demands (Okigbo 1981). Ebodaghe in 1997 posited that the banking sector in any economy serves a catalyst for growth and development. Banks are able to perform this role through their crucial functions of financial intermediation. Production of an efficient payment system and facilitating the implementation of monetary policies.

In intermediation banks mobilize savings from surplus units of the economy and channel such funds to the deficit ones. Particularly private business entrepreneur, for the purpose of expanding productive capacity. In operating the payment mechanism, the banking system liability serves as the medium of exchange. In the execution of monetary policies, banks serves as agents through which those policies are implemented. W.A. Lewis (1970) in his development process state that development occurs in all directions simultaneously. Growth and development run into bottlenecks if there is no appropriate balance between sectors. All sectors most expand as income grows from the standpoint of the whole economy, the financial sector plays the role of an engine of growth and development through the process of financial intermediation channeling funds from surplus to deficit units of the economy this encouraging productive innovation.

        The concept of “financial deeping” introduced by Shaw and McKinnon in (1973), as a measurement of efficient allocation of capital by shifting more of the available resources to those with better investment opportunities also provide theoretical support for this assertion. While cautioning that financial deeping (i.e. increase in stock of financial assets relative GDP should be a complement to and not a substitute for the accumulation of physical capital, they also point out that inflation and interest rate are crucial to the development process.

        In the view of Huge Patrick (1966), the constitution of financial sector to the development is a function of the quality of its services and the efficiency with which the services are provided. The emphasis here is that a well functioning banking system will promote rapid economic development while a banking system that is characterized by massive failure would return growth and development in the real sector of the economy.

2.3 NATURE OF THE NIGERIAN FINANCIAL LIBERALIZATION PROGRAMMES

        In Nigeria, domestic financial liberalization commenced when the government abolished rate ceilings in August 1987, the rates were left to market determined. On the external from, financial liberalization came with the introduction of the second tier foreign exchange market (SEEM) which later became the inter-bank foreign Exchange market (IFEM). The SFEM (Now IFEM) an auctioning system replaced the former fixed exchange regime when the rate was fixed by administrative fiat since the SFEM was introduced, the environment in which banks make foreign exchange-related earnings has been changes in a fundamental manner. Besides with SFEM (IFEM). The Nigeria naira has substantially depreciated. This world of course have volume effects on the banking industry.

        The Burea de change, the name given to the licensed dealers in the parallel market, were expected to transact their business at market determined rates. In a similar vein, Domiciliary Accounts that were expected to ask questions from depositors on the sources of their funds this was expected to encourage capital inflow and encourage the repatriation of the Nigerian capital that had earlier fled.

        While there was no compelling evidence to suggest that the monetary authorities were more liberal on the conditions for granting banking license, the government’s programme of financial liberalization witnessed an upsurge in the number of licensed banks. It is possible that this upsurge in the number of licensed banks is the credit result of the new market opportunities created by the changes in regulatory environment rather than being a deliberate effort on the part of monetary authorities to license more banks. After all even if the monetary authorities want to license more banks, they would be unable to do this if investors are not interest in operating new banks.

CHAPTER THREE

RESEARCH METHODOLOGY

3.1   RESEARCH DESIGN

        The research design that relates to this study is the experimental research design. It permits the researcher to control conditions so that one or more variables can be manipulated in order to test hypothesis or investigate a claim. This is the most appropriate design for establishing or checking cause and effect relationships. For instance, checking the effect of motivation on workers performance. The use of this design will always require a control group and an experimental group.

3.2   POPULATION OF STUDY

        The population of this study is the banking industry as a whole and not individual bank basis or their market size as related to bank consolidation and deregulation effect on the level of competition of competition in Nigerian banking industry and does not centre on firm specific factor.

3.3   SAMPLE SIZE

        The sample size to this study is the Central Bank of Nigeria (CBN) and commercial banks because secondary data will be sourced from the Annual Statistical Bulletin of the Central Bank of Nigeria (CBN) covering the period 1986 to 2013.

3.4   RESEARCH INSTRUMENT

        The research instrument of this study is achieved through empirical analysis of data that was collected via secondary data. The secondary sources of data include the use of library works, institutional report, journals, textbook, articles and magazines, Central Bank of Nigeria Annual Statistical bulletin.

3.5   TYPE OF DATA

        The data were collected from secondary source from the Annual Statistical bulletin of the Central Bank of Nigeria (CBN) covering the period 1986 to 2013.

3.6   METHOD OF ANALYSIS

        The method of Ordinary least squares was used to estimate the models in the previous sub-section. The Ordinary Least Square estimate or estimates of parameter by minimizing the sum of squared residual when used to estimate the parameters of a single equation model, the estimation yields estimates which are best linear Via biased (BLV) and have the desirable property of consistency.

3.7   MODEL SPECIFICATION

        To determine the extent of which Bank consolidation and interest rate deregulation has affected the number of banks in Nigeria, we model the Number of bank (NB) as a function of Total number of deposit, Interest rate, exchange rate and total asset. We expect a positive relationship between (NB) and TND because as TND increases, there is greater incentive for more banks to be established.

        Model in functional form

        NB = F (TND, IR, EXR, TA).

Where: TA = Total Assets.

        NB = Number of banks

This has been used as a proxy to represent bank consolidation and deregulation.

        IR = Interest rate

Interest rate is used as a proxy to capture to effectiveness of the deregulation.

        EXR = Exchange rate

Exchange rate is also used to capture the effectiveness of the deregulation.

TND = Total number of deposits.

Total number of deposits captures the level of deposits available to commercial level deposit available to commercial bank. It capture the profitability level because the profit of a bank depend on its ability to convert liabilities (DEPOSIT) into asset (CREDIT) for  profitability purpose.  

TA = Total Asset is also use as a proxy to capture the effectiveness of deregulation and bank consolidation.  

        Model in linear form

NB = a₀ + a₁ TND + a₂ IR + a₃ EXR + a₄ TA + U_t

Where

        a₀ = Intercept or constant

        a₁, a₂, a₃ a₄ = Are the coefficients of the model.

        Ut = error term or stochastic error

                a₁>O₁ a₂ <O₁ a₃ > O a₄ > 0 are the priori expectations.

CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS

4.1      INTRODUCTION

Hypothesis relating to this study were earlier formulated in chapter 1 for the purpose of carrying out statistical test with a view to validating or nullifying the null hypothesis.

In this chapter, the relevant data collected for the study are presented and analyzed below.

4.2      DATA PRESENTATION

Table 4.1

Row data on regression variables.

YEAR	NB	TND (M)	EXR (%)	IR (%)	T.A Million
1986	29	407,508.10	2.0206	10.5	39,678.8
1987	34	511,685.40	4.0179	17.5	49,824.4
1988	42	643,446.30	4.5367	16.5	58,027.2
1989	47	826,237.10	7.3916	26.8	65.874.0
1990	58	84,731.70	8.0378	25.5	82,957.8
1991	65	159,190.80	9.9095	20.01	117,511.9
1992	65	226,162.80	17.2984	29.8	159,990.8
1993	66	295,033.20	22.0511	18.32	226,162.8
1994	65	385,141.80	21.8861	21	295,033.2
1995	65	458,177.50	21.8861	20.18	2851141.8
1996	65	584,375.00	21.8861	19.74	485,777.5
1997	65	584,375.00	21.8861	13.54	584,375.0
1998	54	694,615.10	21.8861	18.29	694,615.1
1999	54	1,070,019.80	92.6934	21.32	1,070,019.8
2000	54	1,568,838.70	102.9762	17.98	1,568,838.7
2001	90	2,247,039.90	111.9433	18.29	2,247,039.9
2002	90	2,534,009.70	120.9762	24.85	2,766,880.3
2003	90	2,765,880.30	129.3565	20.71	3,047,866.3
2004	89	3,047,856.30	133.5004	19.18	3,763.277.8
2005	89	3,753,277.80	132.147	17.95	17,815,308.8
2006	25	17,753,809.80	128.6516	16.89	23,729,344.8
2007	24	18,400,123.70	125.8331	16.94	10,981,693.6
2008	24	19,700,500.50	124.7925	16.94	15,919,599.8
2009	24	10,015,005.76	146.4687	16.94	17,552,888.2
2010	24	24,752,450.10	146.4687	22.66	17,331,559.0
2011	24	25,700,950.60	148.3532	20.66	16,750,714.7
2012	24	28,567,112.50	148.3532	22.44	21,288,144.4
2013	25	30,120,540.50	148.3532	22.44	24,301,213.9

Source: Central Bank of Nigeria Statistical Bulletin 2013.

Table 4.1 is a table of raw data on NB, TND, EXR, IR and TA.

        The first columns contain the time series ranging from 1986-2013. Then the second data has column for Number of Banks (NB), the data on the third columns has Total Number of Deposit (TND), the fourth columns has variables of Exchange rate (EXR), fifth column contains the interest rate (IR) and the sixth column has that for Total Asset (TA).

        In 1986, the number of Banks has 29 and in 1999, the number increased to 54 and in 2013, it dropped down to 25.

        TND value in 1986 was 407,508.10m, in 1999, the value increased to 1,070,019.80m and in 2013 it also increased to 30,120,540.50 (m).

        In the year 1986, EXR was 2.0206, the rate increased to 146.4687 in 2009 and also increased to 148.3532 in 2009.

        IR value in 1986 was 10.5 and increased to 16.94 in 2007, there was also an increase in 2013 to 22.44.

        In the year 1986 TA was 39, 678.8m, it increased to 2,766, 880.3m and also in 2013 to 24,301,213.9m.

        Having explained the structural from of the table the researcher went ahead to analyze the raw data as follows:

4.3      ANALYSIS OF DATA

In analyzing the data we have to state the hypothesis

i.      Banking consolidation does not significantly have impact on banking industry.

ii.     Banking consolidation does not significantly affect the Nigerian economy at large.

        Arising from the above hypothesis and the following equation

        NB = F (TND, IR, EXR, TA)…………….. + 1

Equation 4.2 is the functional form of the regression equation where

NB = Number of Banks

TND = Total Number of Deposit

IR = Interest Rate

EXR = Exchange Rate

TA = Total Asset

        For the purpose of statistical test, 4.1 is rewritten to read

        NB = a₀ +a₁TND+a₂IR+a₃ EXR + a₄TA + Ut ……….4₂

                a₁a₂a₃anda₄>0:a₃>0 a priori expectations.

Equation 4.2 is the operational firm of 4.1 above where e defines the sample error term and the a’s are the parameters of co-efficient.

        In 4.2 the theoretical or a priori expectation of the parameter are stated.

        Thus, total number of deposit, interest rate, exchange rate and total asset are expected to have a positive relationship with the number of commercial banks, where the total number of deposit is expected to have an inverse relationship with the number of banks.

4.4      TEST OF HYPOTHESIS / INTERPRETATION

The regression output using E Views 3.1 software that relate to the mode is shown below.

Table 4.2

Dependent variable: NB

Method: Least squares

Date: 07/26/14 T

Time: 04:17

Sample: 1986/2013

Included observation: 28

Variable	Coefficient		Std-Error		T-Statistic		Prob.
C	24.05948		11.74020		2.049325		0.0520
TND	-3.15E-06		5.29E-07		-5.947670		0.0000
EXR	0.295539		0.60006		4.925.188		0.0001
IR	1.351601		0.569087		2.375032		0.0263
TA	3.84E-07		6.94E-07		0.552852		0.5857
R-squared		0.800976		Mean dependent variable		52.39286
Adjusted R-squared		0.766363		S.D Dependent variable		23.87365
S.E of regression		11.53957		Akaike into criterion		7.889874
Sum squared resid		3062.719		Schwarz criterion		8. (2776)
Log likelihood		-106.4582		F-statistic		23.14097
Durbin-Watson Stat		1.257107		Probability (F-Statistic)		0.000000

Source: E views 3.1 software

        Table 4.2 comprises 4 panels. The first panel shows the dependent variable, the method of least squares, the date and time, the sample and includes observation.

        The second panel captures the respective heads of each of the five columns:

Columns 1 Head is variable, column 2 head is co-efficient, column 3 head is standard error, column 4 head is t-statistic, column 5 head is probability value.

        The third panel contain the co-efficient, standard error, t-statistics, probability. Five (5) variable in the model and a constant variable represented by the letter C.

        The fourth panel consists of the indicators for assessing the overall performance of the model.

        The F-Statistics of 23.1 and their associated significant value of 0.0000 indicate that the regression as a whole is statistical significant at a very high level of confidence.

        The significant value shown as 0.0000 is interpreted to mean that we can reject the hypothesis that Ho: a₁ = a₂ = a₃ = a₄ = 0 at a very small level of significance.

4.5      MODEL SUMMARY

The adjusted R-squared is 0.80 suggest that 80% of the behaviour of the dependent variable is explained by the independent variable of the model Total number of deposit (TND), Total Asset (TA) EXR (Exchange Rate) Interest rate (IR).

The regression output shows that all the variable were found to agree with the theoretical expectation of either being positive or negative for instance the coefficient for TND variable was found to be -3.15, EXR = 0.30, IR = 1.35, TA = 3.84.

The coefficient of C is positive and the value is 24.05948 then the probability value is 0.0520 is in statistically significant so therefore the hypothesis will be rejected.

The coefficient of TND is negative and the value is-3.15 E-06 then the probability value is 0.0000 is statistically significant so therefore you accept the hypothesis.

The coefficient of EXR is positive and the value is 0.295539 then the probability value is 0.0001 is statistically significant so therefore you accept the hypothesis.

The coefficient of IR is positive and the value is 1.351601 then the probability value is 0.0263 is statistically insignificant.

The coefficient of TA is positive 3.84E-07 and the probability value is 0.58457, therefore is statistically significant so you accept the hypothesis.

CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION

5.1      SUMMARY OF FINDINGS

The following findings are summarized below.

1.          It as discovered that consolidation and interest rate deregulation has an effect on the level of competition in the Nigeria banking industry.

2.          The researcher discovered that there seem to be inconclusive evidence as regard bank consolidation and interest rate deregulation on the level of competition in Nigerian economy.

3.          The researcher discovered that deregulation has a great influence in the establishment of new banks in Nigeria is validated, hence, government financial liberation programme has brought about an unprecedented growth in the number of banks operating in Nigeria since 1987.

4.          The research also discovered that deregulation has increased banks mobilization of savings should be rejected. Interest rates are insignificant in influencing savings.

5.          The study provided convincing evidence that bank consolidation and interest rate deregulation will enhance competition in Nigeria banking industry.

5.2   CONCLUSION

        Having attained set objectives, and the deterministic ground on which our conclusion is based, we conclude that competition is of vital important and a necessary lubricant to ensuring efficiency in the development of the banking sector, as more competition will cause the deposit rate to increase to attract potential and existing customers into more savings and low lending or borrowing rate charges, to attract credible investor and credit seekers, therein a narrowing of the interest rate spread in aggregate. The study therefore infers that consolidation is an efficient tool to intensify competition, the same can also be said about interest rate deregulation. As both serve as good agents to reducing the interest rate spread and increasing efficiency in the Nigerian banking industry.

5.3   POLICY RECOMMENDATIONS

        The study recommends consistency in the implementation of reform and regulations in the industry especially as it relates to deregulation policies by the monetary and regulatory agencies in charge of money and banking in Nigeria. As the result has shown that deregulation indeed has the potency to bring about the needed competition in the industry, but its part efforts are yet to be significant which we ascribe to the inconsistency in the implementation of these policies. The high level of inconsistency reduces credibility and diminishes the confidence of the public not only to the bank but also the central bank as a whole. Also from the finding, it has been established that consolidation is also an effective tool to aggravating the level of competition in the industry. It is however noteworthy so suggest that the central Bank need to induce a more market based consolidation than a forced consolidation. As the latter are always resolves from urgency and necessity for survival, causing a spread of systematic risk, mismanagement, unnecessary diversification, poor corporate governance and market collusion.