Twin Catalyst of the Financial Industry
By Enitar Ugwu
"A man was sound asleep when he was given a hard knock on his head. that woke him up slightly. But when a full bucket of cold water was added to the bargain, he became fully awake."
The above analogy adequately captures what the combined forces of globalisation and universal banking did to the finance industry in Nigeria.
Perhaps, it is the massive effect of this twin development on the industry that prompted the Institute of Directors to table this topic for discussion in their last meeting.
Taking up the gauntlet, the Managing Director and Chief Executive of First Bank of Nigeria Plc, Mr Jacob Ajekigbe pointed out that in Nigeria, the deregulation of the finance industry in line with the global standards made it possible for new operators to come into the system, thereby broadening the service base as well as improving service quality of banks.
He explained that the advent of universal banking also ensured increased specialisation as banks went into business areas they have proficiency in rather than being constrained by the nature of their licenses.
Apart from that, he noted that financial integration has also enhanced the depth and efficiency of the domestic financial system, with important feedback to investment and growth stressing that increased access to the domestic financial system by foreign banks has raised the efficiency of the intermediation process and borrowers, thereby lowering mark up rates in banking as well as the cost of investment and raising growth rates.
Based on that, he stated that in the Nigerian banking sector, globalisation and universal banking have had profound beneficial effects, the most important being increased specialisation and efficiency, better quality service and technological improvement as well as increased managerial capabilities and employment generation.
Contributing to the debate, Mr Samuel Kolawole, president/Chairman of Council, the Chartered Institute of Bankers of Nigeria (CIBN), noted that prevailing conditions in the domestic economy obviously affect the degree of competitiveness of the financial services industry, adding that socio-economic conditions in Nigeria have been at a level in which they cannot support stiff competition especially at the global level.
He pointed out that while the falling real incomes have left the populace with little or no savings, the growing number of banks continues to compete for limited funds available.
The introduction of universal banking, he said, has also induced more competitive pressure on the financial environment, creating in the process very turbulent time for operators in the industry.
Owing to that, he submitted that, a financial institution that will compete at the global market ought to be solid at the domestic market.
He lamented that the shallowness of the Nigerian financial market will make competition at the global market unfavourable for the Nigerian financial services industry, adding that the shallowness is worsened by the attitude of the Nigerian investor who does not believe in trading on any securities already acquired.
However, he said that the international financial sector continues to undergo significant structural and regulatory changes, pointing out that the market continues to globalise as national barriers to competition in financial services products are dismantled.
Based on that, he noted that the rapidly changing global market place and evolving regulatory environment and technology demand that financial service companies adapt to new changes.
He also added that the changing scenario calls for investment in end-to-end solutions and introducing innovative products and services as well as streamlining operations to meet customer requirements.
He also explained that the introduction of universal banking has brought with it, heightened competition in the industry because the spectrum of operation of each financial institution has expanded.
This development, he said, has enabled banks to diversify their product offering, thus widening their breath space for survival.
The basic question is,, in what way have globalisation and universal banking influenced the nation's financial industry?
Attempting the question, Mr Ajekigbe stated that globalisation and or universal banking have assisted in the transformation of the business landscape and the structure of the financial industry in the following ways;
provided a broader scope for markets to achieve a better allocation of financial resources, domestically and globally;
fostered competition in the financial services industry;
encouraged increased competition and an equal increase in high risks and potential disruptions that originate in or are transmitted through global markets;
facilitated entry of foreign players/operators;
provided strong impetus for financial innovation; and
emphasised greater exposure of banks to external shocks.
He explained that the increase in world trade and output made possible through globalisation ensures that consumers have a broad spectrum of choice and derive the best satisfaction since the best standards of quality are maintained through specialisation and competition.
Apart from that, he noted that rapid capital and financial integration has helped in the mobilisation of foreign savings for domestic investment and economic growth, pointing out that, in specific terms, the growing diversity of funding sources under financial globalisation reduces the risk of credit crunch.
He also explained that when banks in their own country are under straits, borrowers can raise funds by issuing stocks or bonds in domestic stock markets, or by seeking other financing in international capital markets, pointing out that, in the same vein, the availability of more choices allows borrowers and investors to obtain better terms on their financing.
The implication is that credit worthy banks and firms can reduce their borrowing costs now that they are able to tap a broader pool of capital from a diverse and competitive array of providers, he said.
Based on that, he explained that financial globalisation ensures a more rational allocation of savings in favour of relatively more profitable investments, and the enhancement o the depth and efficiency of the domestic financial market, which positively impacts on output and employment.
However, he said that the Nigerian economy has not taken hold of this advantage because perceived country risk by foreign lending institutions.
At this point, it is important to note that in as much as the twin factors of universal banking and globalisation has its benefits, its challenges abound.
Picking on this, Mr Ajekigbe noted that the major challenge posed by globalisation and universal banking is contagious risk; instability in one country is easily spread instantly to others.
He explained that the implication is that institutions and organisations are opened to risks that are beyond them, noting that the contagious effect of financial crisis spreads very rapidly.
He also pointed out that gains that have been recorded in growth and financial stability can easily be eroded through sustained capital outflow, adding that, a critical fallout of financial integration is the adverse consequences from the inability of a country to develop the required absorptive capacity to utilise inflow of capital, or sterilise the portion that cannot be deployed for economic development purposes.
Thus, economic over-heating may become manifest with dire consequences for future inflows, he said, adding that a reverse flow of capital may follow such over-heating when the situation is not well-managed.
Apart from that, he stressed that financial globalisation complicates monetary and fiscal policy since the open capital markets reduce the independence of monetary policy, pointing out that with greater integration of financial market on a global basis through technological advances, domestic regulators no longer have control over capital movements across their national boundaries.
The free flow of capital, the large sums involved and the unchecked power of big players and speculators, he said, have made it difficult for countries to control the level of their currency and flows of money in and out of the country.
Also, he noted that rapid capital flows arising from globalisation can pose difficulties for macro-economic management, adding that a weak external sector can be financed only temporarily as a hidden current account deficits easily show up when capital starts flowing outwards as soon as the investment climate becomes unfavourable.
Thus, excessive growth in investment financed by foreign capital when domestic savings is low could result in difficulties, especially current account deficits with concomitant problem for macro-economic stability.
He submitted that with the rapid integration of financial markets, it becomes difficult to control effectively the movement of capital across national boundaries, stressing that, more importantly, the distinction between destabilising and stabilising short term capital flows becomes blurred.
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