JEIEFB - Adolphus J. Toby - Daerego S. Thompson PDF

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)
An Online International Monthly Journal (ISSN: 2306-367X)

Volume:2 No.6 December 2013
Modeling the Effects of Banking Sector Reforms on Bank

Management Practices in Nigeria
Adolphus J. Toby,
Department of Banking and Finance,
Rivers State University of Science and Technology,
Rivers State, Nigeria.
E-mail: tobyadolphus@ust.edu.ng
Daerego S. Thompson,
Department of Banking and Finance,
Rivers State University of Science and Technology,
Rivers State, Nigeria.
___________________________________________________________________________________
Abstract
This study models the effects of banking sector reforms on bank management practices in
Nigeria. Comparable data for the pre-reform period (1960-1985) and the post-reform period
(1986-2008) were generated from the Central Bank of Nigeria (CBN) Statistical Bulletin and
analyzed with descriptive and inferential statistical tools. The explanatory power of the
specified multiple regression models is robust since the average Variance Inflation Factors
(VIFs) and tolerance values confirm the non-existence of multicollinearity among the
independent variables (IVs). The descriptive statistics show steeply rising lending rates and
widening bank margins in the post-reform period. Critical bank management variables like
bank liquidity ratio (BLR) and loan-to-deposit ratio (LTDR) fell outside prudential limits,
portraying continuing compliance lapses in the post-reform period. Moreover, the liquidity
and funding capabilities of banks did not improve significantly with falling savings rates and
cash reserve ratio (CRR). In the pre-reform period, the banks adopted conservative lending
policies as the prime lending rate (PLR) became more significant in determining their
liquidity and funding profiles. In the post-reform period, bank management was aggressive in
their lending policies as the loan-to-deposit ratio was more significantly sensitive to changes
in the maximum lending rate (MLR). Both prudential and policy incentives made banks to
expand funding to all sectors irrespective of their risk class. Marginal increases in the
treasury certificate rate (TCR) and minimum rediscount rate (MRR) brought about a
significant reduction in the cash reserve ratio (CRR), hence facilitating banking
intermediation. Current reforms should, however, moderate rising lending rates, promote
prudential compliance and ensure sound financial management of the banks. Complementary
monetary policy reforms should aim at minimizing rent-seeking behaviour, moral hazards
and consequential systemic failure.
_____________________________________________________________________
Keywords: Modelling, Banking Reforms, Bank Management, Bank Performance
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1. Introduction
The banking sector as an important sector in the financial services industry needs to be
reformed from time to time in order to enhance its competitiveness and capacity to play the
fundamental role of financing investment. Reforms in the banking sector are necessary to
ensure the safety of depositors funds and deepen the financial system to engender growth of
the economy (Somaye, 2008; Okpara, 2011). The widespread reforms that characterized the
Nigerian banking industry in recent times are aimed at addressing weak corporate
governance, risk management, operational inefficiencies and undercapitalization for the
purpose of complying with international best practices.
The Nigerian banking industry has evolved in seven stages since its inception in 1891.
The first stage (1891-1951) was the free banking era, characterized by unregulated banking
practices and hence massive bank failures. The second phase (1952-1959) started with the
enactment of the Banking Ordinance (1952) which provided for a clear definition of banking
business, prescription of minimum capital requirements for the expatriate and indigenous
banks, maintenance of a reserve fund, adequate liquidity and banking supervision. The third
stage (1959-1985) came with the commencement of the Central Bank of Nigeria (CBN) in
June 1959. The CBN Act of 1958 incorporated all the requirements in the 1952 Ordinance
and introduced mandatory liquidity ratio in the banking business.
The fourth stage of banking sector reforms (1986-1992) was liberalization of the banking
industry that hitherto was dominated by Government-controlled banks. During this period the
banking sector suffered deep financial distress which necessitated another round of reforms
designed to manage the distress. The fifth phase (1999-2002) saw the return of liberalization,
accompanied by the adoption of distress solution programmes.
The era also saw the
introduction of universal banking which empowered the banks to operate in all aspects of
retail banking and non-banking financial markets (Balogun, 2007a). The sixth phase (20042008) was described as the consolidation period which focused on strengthening the financial
system through banking mergers and acquisitions, foreign exchange market stabilization,
interest rate restructuring and the pursuit of stabilization as against structural adjustment
policies for monetary and inflationary controls (Soludo, 2005).
The seventh stage also called the post-consolidation period (2008-2011) witnessed an
interplay between the adverse effects of the 207-2009 Global Financial Crisis and heavy riskconcentrations in the previously consolidated banks. The CBN developed a blueprint for
reforming the Nigerian banking industry built around four pillars (a) enhancing the quality of
banks, (b) establishing financial stability, (c) enabling healthy financial sector evolution and
(d) ensuring the financial sector contributes to the real economy. There was also greater
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emphasis on requisite disclosure, transparency and risk-based supervision (RBS) to restore

sanity in the banking system.
In 2010, the CBN introduced the new banking model aimed at withdrawing the
permission given to banks to engage in non-traditional banking activities. A bank will not be
allowed to own subsidiaries, and may also be restricted in certain geographical markets
(Mike, 2010). This will ensure that a bank concentrates and specializes in the core banking
business rather become the so-called financial supermarkets witnessed under the erstwhile
Universal Banking Programme.
Under the new model, a bank will become either commercial or merchant. A merchant
bank is required to have a minimum paid-up share capital of N15billion. A commercial bank
may be one of the three types regional, national and international with minimum paid-p
capital requirements of N10billion, N25billion and N50billion respectively. The model also
provides for specialized banks which include primary mortgage institutions (PMIs), discount
houses, development banks, micro-finance banks (MFBs), and non-interest banks which may
be either regional or national.
A holding company model is an essential part of the new licensing structure. The primary
activity of a holding company will be to provide banking and other financial or non-financial
services depending on its regulatory authorization through its subsidiaries within the area
specified in its operating license. The assets of the holding company constitute essentially
investments in subsidiaries, which are represented by the sum of share capital and reserves on
the liability side of the balance sheet.
However, recent works on the effects of banking reforms in Nigeria have shown mixed
results. Somoye (2008) has argued extensively with empirical data that the consolidation of
the Nigerian banking industry in 2006 did not improve the overall performance of the banks
and contributed marginally to the growth of the real sector. Ubirimie (2008) using a panel
data comprising 1,153 observations of 138 Nigerian banks over the 1980-2007 period and
industry-level indices over the same period has argued that the recent banking reforms did not
significantly improve bank profitability and stability.
Azeez and Oke (2012) have equally found that banking reforms have not adequately and
positively impacted the Nigerian economy. Oputu (2010) has, however, noted that the policy
responses to the banking crisis in Nigeria emphasized the need for structural reforms in the
financial and corporate sectors, in addition to the implementation of appropriate
macroeconomic policies. Sanusi (2012) has argued that the Central Bank of Nigeria (CBN)
undertook various banking reforms to enable the banking system play its actual role of
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intermediation, strengthen its growth potentials, and establish its global presence in the
international financial markets.
It is documented in Curtie (2003) that the introduction of new ownership structures,
market mechanisms and financing techniques under policies of liberalization and privatization
are not necessarily solutions without providing for changes in economic, societal and legal
infrastructure. Uppah (2011) has shown empirically that in India foreign and non-private
sector banks are much better in performance when compared to nationalized banks in the
post-banking sector reforms period. The works of Boateng and Huang (2010) have shown
that the liberalization of the Chinese banking business to foreign banks in 2003 has an
encouraging effect on the banking sector, although the evidence is not statistically significant.
At macroeconomic level, higher per capita GDP and lower unemployment have been
significantly related to better bank performance.
The major research questions, therefore, are (1) what is the effect of variations in bank
rates on bank liquidity management in Nigeria before and after the banking reforms? (2)
what is the nature of the relationship between selected central bank rates and the cash reserve
requirements before and after banking reforms? and (3) what is the effect of bank rates on
bank funding management before and after banking reforms?
In this study we test three major null hypotheses:
H01: There is no significant relationship between bank rates and bank liquidity ratio in the pre
and post reform periods.
H02: There is no significant relationship between CBN rates and cash reserve requirements in
the pre-and post-reform periods.
H03: There is no significant relationship between bank rates and loan-to-deposit ratio in the
pre-and post reform periods.
The next part of the paper review relevant literature in the contexts of Nigerian banking
reforms, the experience of other countries and the nexus between banking sector reforms and
bank performance.
This is followed by the data sources, methodology and model
specification, and then results and discussion. The paper ends with summary, conclusion and
recommendations.
2. Review of Relevant Literature

The works of Balogun (2007a) review the perspectives of banking reforms in Nigeria in
five eras: pre-SAP (1970-85), the post-SAP (1986-93), the reforms Lethargy (1993-1998),
pre-Soludo (1999-2004), and Post-Soludo (2005-2006).
Using both descriptive and
econometric methods, the study found that each phase of reforms culminated in improved
incentives, that policy reforms resulted in increased capitalization and exchange rate
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devaluation. Interest rate restructuring and abolition of credit rationing had positive effects
on real sector credit. The empirical results confirm that eras of pursuits of market reforms
were characterized by improved incentives without necessarily increasing the credit purvey to
the real sector. Also while growth was stifled in the eras of control, the reforms era was
associated with rise in inflationary measures. Among the pitfalls of reforms identified by the
study are faulty premise and wrong sequencing of reforms and a host of conflicts emanating
from the adoption of theoretical models for reforms and above all, frequent reversals and/or
non-sustainability of reforms.
The study notes the need to bolster reforms through the
deliberate adoption of policies that would ensure convergence of domestic and international
rates of return on financial market investments.
In another study, Balogun (2007b) focuses specifically on the Soludos banking sector
reforms. A review of the theoretical qualifications to the Soludos reform shows that in
thoughts, it is rooted in the classical traditions of Says Law, acts monetarist, but expects a
Keynesian outcome that money can stimulate expansion in aggregate domestic product. In
conclusion, the study noted the need to adopt an interest rate operating procedure for
monetary policy in addition to moving the economy consciously towards the law of one
market and one price for the domestic and foreign money markets.
Earlier studies on the effects of banking sector deregulation in Nigeria found that initially
deregulation seems to enhance profits and profitability at the expense of bank liquidity and
capital adequacy (Toby, 1994). Medium-term strategy emphasized new patterns of portfolio
behaviour with greater emphasis on bank liquidity than on bank profitability. The challenges
of financial deregulation in Nigeria between 1986 and 1992 occasioned a consequential shift
in banks assets and liabilities, an increasing proportion of rate-sensitive components of assets
and liabilities, and growing interest elasticity of balance sheet items (Toby, 1993). The bank
distress that followed the post-liberalization period, and the resolution measures are aptly
documented extensively in Toby (1999, 2002, 2005). Empirical results have, however, raised
the question of whether or not capital adequacy requirement affects banks asset quality, and
hence limit risk concentrations in the Nigerian banking industry. The works of Toby (2005)
argue that well-capitalized banks reveal poor asset quality characteristics, while
undercapitalized banks display better asset quality in their loan portfolio.
More recent studies have revealed that the minimum liquidity ratio (MLR) was irrelevant
in controlling industry non-performing loans (npls) portfolio prior to banking consolidation in
2006 (see Toby, 2007). The cash reserve ratio (CRR) was found to be a more effective tool in
controlling the level of npls in the industry as a whole and the distressed banks in particular.
An extensive survey of X-efficiencies and scale economies in banking in the pre and post
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reform periods raises a caution against the wholesome implementation of deregulation and
consolidation in developing banking systems (Toby, 2006. It is also shown that the adoption
of loose monetary policy regimes in the post-consolidation era (2006-2011) provided further
constraints on banks balance sheets as banks still relied more on purchased funds to meet
liquidity and lending requirements (Toby, 2010). Toby (2011) also found that the pursuit of
consolidation and risk-based supervision (RBS) moderated npls without a corresponding
impact on liquidity and lending growth.
In terms of policy thrust the banking sector reforms are expected to build and foster a
competitive and healthy financial system to support development and to avoid systemic
distress (Soludo, 2007). The traditional view in general is that banking sector reforms is
encapsulated in institutional, monetary and exchange rates restructuring, and can be analyzed
via the body of their transmission mechanisms (Balogun, 2007a). The literature notes four
major channels between instruments of monetary policy and its ultimate targets (inflation
control and growth in real output). These are (i) direct interest rate effects, which affect
investment and consumption decisions, (ii) indirect effect via other asset prices, such as
prices of bonds, equities and real estate, which will influence spending through balance sheet
and cash flow effects,
(iii) exchange rate effects, which will change relative prices of
domestic and foreign goals, influencing net imports, and also the value of currency
denominated assets, with resulting balance sheet effects, and (iv) credit availability effects,
which may include credit rationing if there are binding ceilings on interest rates.
It is argued that the Central Bank of Nigeria (CBN) initiates financial sector reforms to
enhance competition, reduce distortion in investment decisions, and evolve a sound and more
efficient financial system (CBN, 2011). The reforms which focused on structural changes,
monetary policy, interest rate administration and foreign exchange management, encompass
both financial market liberalization and institutional building in the financial sector.
The works of Toby (2006) show that the liquidity management practices of Nigerian
banks were at variance with monetary policy targets both in times of intense deregulation
and guided deregulation. The evidence confirms that a reduction in the cash reserve
requirement necessitated an increase in average bank liquidity and a paradoxical decline in
aggregate credit to the economy. The study also shows that interest rates moderated in times
of guided deregulation with commercial banks playing a dominant role in the Certificate of
Deposit (CD) and Commercial Paper (CP) markets.
In the post-global crisis era (2007-2009), the emphasis was on loose monetary policy
direction in the medium-term (Toby, 2010). However, Mora (2010) found that the bankcentred nature of the crisis made it harder than in the past for banks to attract deposit and
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provide liquidity to borrowers shut out of securities markets. Saxegaard (2006) examines the
pattern of excess liquidity in Sub-Saharan Africa and its consequences for the effectiveness of
monetary policy. The study suggests that excess liquidity weakens the monetary transmission
and thus the ability of monetary authorities to influence the demand conditions in the
economy.
Ziorklui (2001) has argued that many developing countries embarked on financial sector
reforms to remove the vestiges of financial market repression in order to promote financial
market efficiency and savings mobilization.
Ziorklui reviews in-depth with policy
implications, Ghanas financial sector reform, the Financial Institutions Sector Adjustment
Programme (FINSAP) to address the endemic problems of Ghanas financial sector. The
efficiency of financial markets in promoting financial deepening and savings mobilization of
financial resources is widely recognized in the literature (McKinnon, 1973; Shaw, 1973).
McKinnon postulates that an increase in holding financial assets (financial deepening) by the
public promotes savings mobilization which leads to higher levels of savings, investment,
production, growth and poverty alleviation.
However, financial market intervention by
governments in developing countries constrains the potential of financial markets in

mobilizing savings for growth and development.
The major objectives of financial sector reforms in developing economies include market
liberalization for the promotion of more efficient resource allocation, expansion of savings
mobilization base, promotion of investment and growth through market-based interest rates
(Omoruyi, 1991). It is argued that the reform of the banking sector is imperative to enable it
play a key role in primary and trading risks and implementing monetary and fiscal policies
(Balogun, 2007a). In this vein, banking reforms are expected to address the issues which
mitigate the efficiency of the banking sector such as shallow depths of the capital market,
dependence of financial sector on public sector and foreign exchange trading as sources of
funding, apparent lack of harmony between fiscal and monetary policies and above all, poor
loans repayments performance as well as bad debts (Ojo, 2005; Nnanna, 2005).
Many studies have reviewed the impact of the post-reform period on the performance of
banking institutions in India. Ahluwalia (2002) has argued that the deregulation of the Indian
banking industry has some positive outcomes such as a fall in the share of non-performing
loans, increased entry of new private sector banks, branch expansion or financial widening as
well as deepening, and the achievement of the minimum capital adequacy ratio by 90 per cent
of domestic banks. More et al (2006) have shown strong evidence that the sharp increase in
growth post 1994 was bank credit-led. There is, however, the general perception that public
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sector involvement in the banking sector blunts incentives to effectively respond to marketbased reforms (Bhattacharya and Patel, 2003; Kumbhakar and Subrata, 2003).
Price-setting behaviour may be endogenous not just to market structure, but also to size
and deregulation. Interest rate deregulation may lead to an increase in bank funding costs and
a fall in bank profitability. This could be countered through an increase in the number and
price of services offered by banks (Humphey and Pulley, 1997) a strategy that is easier for
larger banks to effect. This is consistent with a fall in spreads for large banks with high noninterest expenditure and incomes.
Kumbhakar et al (2001) study whether and how deregulation, assumed to generate
increased competition, affected the profitability of Spanish savings banks between 1986 and
1995. Their panel study uses a flexible variable profit function and incorporates time-varying
technical efficiency, high rates of technical progress and increasing trend growth in
productivity.
Liberalization of volume and interest rates has been observed to raise profitability in the
banking sectors of Norway (Berg, et al, 1992) and Turkey (Zaim, 1995).
Berger and
Humphrey (1997) have noted that the effects of deregulation may depend on industry
conditions prior to reform and on the type of measures implemented. There is also empirical
evidence that shows a decline in cost productivity immediately after deregulation (Berger and
Mester, 2003; Humphrey and Pulley, 1997), though improved output and quality of output
led to higher profit productivity (Berger and Mester, 2003). A number of studies for US
banks suggest that liberalization of deposit rates has little or no effect (Bauer, et al, 1993);
Hughes et al (1996) and Jayaratne and Strahau (1998) find that geographical expansion has
affected profitability in the U.S.
2.1 Nexus between Banking Sector Reform and Bank Performance
Brissimis et al (2008) examine the relationship between banking sector reform and bank
performance-measured in terms of efficiency, total factor productivity growth and net interest
margin-accounting for the effects through competition and bank risk-taking. The results
indicate that both banking sector reform and competition exert a positive impact on bank
efficiency, while the effect of reform on total factor productivity growth is significant only
towards the end of the reform process. Brissimis et al also found that the effect of capital and
credit risk on bank performance is in most cases negative, while it seems that higher liquid
assets reduce the efficiency and productivity of banks.
Three interrelated determinants of bank performance are extensively reviewed in the
literature and these include the financial reform process, the degree of competition and the
risk-taking behaviour of banks (Brissimis et al, 2008). The leading works of Keeley (1990)
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argue that the deregulation of the US banking sector in the 1970s and 1980s increased
competition and led to a reduction in monopoly rents and thus, through worsened
performance, to a higher equilibrium risk of failure. The Keeleys paradigm has provoked a
number of studies examining the relationship between deregulation, bank risk-taking and
competition, yielding rather conflicting results (Matutes and Vives, 2000; Bolt and Tieman,
2004; Allen and Gale, 2004). One group concludes that deregulation boosts efficiency
through operational savings, thus leading to a surge in productivity growth (Kumbhakar et al,
2001; Isik and Hassan, 2003). The alternate group found that deregulation has a negative
effect on the performance of banks, as it stimulates a decline in productive efficiency and/or
total factor productivity growth (Griefell-Tatje and Lowell, 1996; Whealock and Wilson,
1999).
In the econometric contributions of Simar and Wilson (2007) and Khan and Lewbal
(2007), bank performance, measured in terms of productive efficiency (PE) and total factor
productivity (TFP) growth, is derived via nonparametric techniques and then the scores
obtained are linked to reform, competition and bank risk-taking. In this context, Brissimis et
al (2008) have specified the following empirical model to study the relationship between the
performance, reform, competition and risk-taking in banking.
(1) Pit = 1 + 1refc + 2i + 3xit + 4mt + it
where the performance P of bank i at time t is written as a function of a time-dependent
banking-sector reform variable, reft, an index of banking industry market power, ; a vector
of bank-level variables representing credit, liquidity and capital risk, x; variables that capture
the macroeconomic conditions common to all baks, m; and the error term, .
The
methodology suggested by Uchida and Tsutsui (2005) has been widely used to measure the
evolution of competitive conditions over time in the banking system. The model jointly
estimates a system of three equations that correspond to a translog cost function, to a revenue
equation obtained form the profit maximization problem of banks and to an inverse loan
demand function:
InCit = bo + b1 Inqit + b2 (Indit)2 + b3 Indit + b4 (Indit)2 + b5Inwit + b6 (Inwit)2 + b7 (Inqit)
(Inwit) + b8 (Inqit) (Indit) + b9 (Indit) (Inwit) + ecit
(2) Rit = c Rit + rit qit + Cit (b1+b2 Inqit + b7 Inwit + b8 Indit + Cit qit (b3+b4 Indit + b8
Inqit + b9 Inwit)
Ht
dit
s
+ e it
In Pit = go (1/t) Inqit + gi Ingdpgt + g2 Iniri + eit
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Where C is the total cost of bank I at time t, q is bank output, ds are deposit, w is bank
output other than deposits, R is bank revenue, r is the interest rate on deposits, p is the price of
bank output and e is the error term. Variables with bars are defined as deviations from their
cross-sectional means in each time period, so as to remove their trends. The variable gdpg
and ir are exogenous variables that affect demand. The degree of competition in each year is
given by, which represents the well-known conjectural variations elasticity of total industry
output with respect to the output of the ith bank.
3. Data Sources, Methodology and Model Specification

The data for this study were generated from the Central Bank of Nigeria (CBN) Statistical
Bulletin and NDIC Annual Reports for the period 1960-2008. The pre-reform period (19601985) was distinguished from the post-reform period (1986-2008). Both dependent and
independent variables were identified. The major dependent variables are bank liquidity ratio
(BLR), cash reserve ratio (CRR) and loan-to-deposit ratio (LTDR).
The independent
variables include both bank and VBN rates. The bank rates in this study are savings rate
(SR), prime lending rate (PLR) and maximum lending rate (MLR). The CBN rates are
minimum re-discount rate (MRR), treasury bills rate (TBR) and treasury certificates rate
(TCR).
The first level of analysis involves the calculation of simple averages and standard
deviations for critical bank management and performance indicators in the pre- and post
reform periods, with some highlights on the liberalization and consolidation periods in
selected intervening years. The liberalization period is 1986-92, while the early years of
consolidation are from 2006 to 2008. The second level of analysis involves the specification
of the multiple regression models for inferential purposes to test the research hypotheses.
3.1 Model specification
The multiple regression models specified and tested in this study are given in equations 3-5:
(3)
BLR = + 1SR + 2PLR + 3 MLR + i
(4)
CRR = + 1MRR+ 2TBR + 3 TCR + i
(5)
LTDR = + 1SR + 2TBR + 3 TCR + i

For our given set of data, the values of the alpha () and beta () coefficients can be
determined mathematically to minimize the sum of squared deviations between predicted

dependent variable and the actual dependent variable scores. In this study we employed the
Software Package for Social Sciences (SPSS) to estimate the relevant variables and
parameters in the specified equations. The package provided us with multiple correlation
coefficient (R), t-test, F-ratio and coefficient of determination (R2). Our null hypothesis will
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be accepted if the t-statistic falls within the relevant critical values, otherwise it will be
rejected. The model is significant if the F-ratio falls outside the critical region, otherwise it is
not significant.
Within the framework of the classical linear regression model (CLRM), the specified
multiple regressions models assume the absence of multicollinearity. Multicollinearity means
that within the set of independent variables (IVs) some of the IVs are nearly or totally
predicted by the other IVs. In this study, we estimated the condition index, variance inflation
factors (VIFs) and tolerance values.
As noted in the literature, if the condition index (CI) is between 10 and 30, there is
moderate to strong multicollinearity and if it exceeds 30, there is moderate to severe
multicollinearity (Belsley et al, 1980). As a rule of thumb, if the Variance Inflation Factor
(VIF) of a variable exceed 10 (this will happen if R2 exceeds 0.90), that variable is said to be
highly collinear (Kleinbaum, et al, 1988). The tolerance values should not be close to zero.
4. Results and Discussion

4.1 Collinearity Diagnostics
The tests of multicollinearity are found in Appendixes A and B. On the average the
Variance Inflation Factors (VIFs) have values of less than 10. Moreover, the tolerance values
are not close to zero in most of the cases. A rule of thumb is to label as large these condition
indices in the range of 30 or larger. We find that this condition is not met for any of the IVs.
Although in some cases we could find large proportions of variance (0.50 or more), they did
not correspond to large condition indices (30 or more). The absence of multicollinearity
among the IVs means that the explanatory powers of our models are robust.
4.2 Descriptive Statistical Analysis
The data in Table 1 show selected monetary policy and bank management indicators in
the pre and post-reform periods.
The results also show the average changes in these
indicators in the liberalization and consolidation periods. The average savings rate increased
from 8.0% in the pre-form period to 9.41% in the post-reform period. Average savings rate
peaked at 11.09% in the liberalization period, and began a downward trend after the banking
consolidation which commenced January 1, 2006. In 2011, average savings rate dropped to
an all-time low of between 2.00-2.5%.
While average savings rate began a downward trend between the liberalization period and
the post-consolidation era, the prime lending rate has witnessed a pronounced rising trend
from 20.54% in the liberalization period to 34.43% in the consolidation period. Generally,
the average prime lending rate rose steeply from 9.95% in the pre-reform period to 23.77% in
the post-reform period. The same upward trend is noticed in the average maximum lending
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rate from 11.6% in the pre-reform period to 27.41% in the post-reform period. The average
MLR rose from 23.34% in the liberalization period to 38.41% in the consolidation period.
The average bank margin increased from 3.6% in the pre-reform period to 14.19% in the postreform period.
The bank liquidity ratio (BLR) declined from 52.76% in the pre-reform period to 49.30%
in the post-reform period, showing glaring deviations from the stipulated minimum liquidity
ratio of 35-4-%. The consolidation era recorded an average bank liquidity ratio (BLR) of
47.50% still above the repeated prudential target. The average cash reserve ratio (CRR)
declined from 8.61% in the pre-reform period to 6.10% in the post-reform era. The average
CRR dropped to 2.54% in the consolidation period.
The loan-to-deposit ratio (LTDR)
declined from 74.37% in the pre-reform period to 66.82% in the post-reform period.
However, LTDR peaked at 83.9% on the average in the early years in the early years of the
consolidation period, showing another prudential breach above the regularly maximum of
80.0%. Specifically, prudential compliance improved marginally from 27.76% in the prereform period to 22.55% in the post-reform period. However, prudential breaches were more
evident in the early years of banking consolidation (29.83%). Prudential compliance is
measured by the difference between actual and prescribed financial ratios as published by the
Central Bank of Nigeria. The wider the gap, the lower the level of compliance.
The standard deviation () shows that the bank liquidity ratio (BLR) was more variable in
the pre-reform period ( = 7.8152) than it is in the post-reform period ( = 5.0642). The cash
reserve ratio (CRR) also showed greater variability in the pre-reform period (( = 2.5623)
than in the post-reform period ( = 1.7498). However, the loan-to-deposit ratio was more
variable in the post-reform period ( = 6.5880) than in the pre-reform period.
Table 1: Average Monetary Policy and Bank Management Indicators (Pre and Post Reform Eras )
S/N
Bank Performance Indicator
Pre-Reform
Period
Liberalization
Period
Consolidation
Period
Post-Reform
Period
Savings Rate (SR)
8.00
11.09
7.04
9.41
Prime Lending Rate (PLR)
9.95
20.54
34.43
23.77
Maximum Lending Rate (MLR)
11.6
23.34
38.41
27.27
Bank Margin (%)
3.6
8.12
31.37
14.19
Bank Liquidity Ratio (BLR)
54.26
44.98
47.5
49.30
Cash Reserve Ratio (CRR)
8.61
6.02
3.54
6.10
Loan-to-Deposit Ratio (LTDR)
74.37
65.88
83.92
66.82
Prudential Compliance (PCR)
27.76
19.98
29.83
22,55
S.D. () for pre-reform period: BLR (7.8152), CRR (2.5623) & LTDR (3.3498)
S.D. () for post-reform period: BLR (5.0642), CRR (1.7498) & LTDR (6.5889)
Sources: Authors Calculations based on the CBN Statistical Bulletin (1960-2008)
935

4.3 Inferential Results

The inferential results in Table 2 (Model 1) reveal the beta and correlation coefficients,
including the relevant t-test statistics in the pre-reform period. Changes in average savings
rate provided a negative sensitivity to changes in bank liquidity ratio (BLR). The beta
coefficient of -0.7608 shows that as the savings rate rises by 100%, we should expect the
bank liquidity ratio to fall by 76.08% and vice-versa. The association between SR and BLR
is extremely weak both in terms of overall correlation and partial correlation coefficient.
However, the negative beta coefficient is significant at the 5% level since the computed t-test
of -1.8940 falls outside the H0 acceptance region of 0.0714.
A beta coefficient of 0.5603 shows that as the prime lending rate (PLR) rises by 100%,
we should expect the computed t-test of 1.681 falls outside the acceptance region of 0.1068.
The beta coefficient of 0.2931 shows that as the maximum lending rate (MLR) rises by 100%,
the banks liquidity ratio (BLR) rises by just 29.31%. In this case the beta coefficient is still
significant at the 5% since the t-test of 0.9980 falls outside the H0 acceptance region of
0.3291.
Table 2: Effects of Banking Reforms on Selected Bank Management Ratios in the Pre-Reform Period
Model/Variables
Beta
Coefficient
SE Beta
Corr.
Model 1 (DV* BLR)

SR
PLR
MLR
-0.7608
0.5603
0.2931
0.4016
0.3332
0.2937
-0.0901
0.1192
0.0591
Model 2 (DV**CRR)
TCR
TBR
MRR
0.2940
-0.4516
-0.1642
0.4452
0.8902
0.9111
-0.2531
-0.3506
-0.3416
Part.
Corr.
t-test
Sig.t (5%)
-0.3718
0.3300
0.1959
-1.8940
1.6510
0.9980
0.0714
0.1068
0.3291
0.1006
-0.1802
-0.3562
0.6610
-0.5070
0.1800
0.5158
0.6170
0.8587
Model 3 (DV***LTDR)
SR
-0.1001
0.0209
-0.0489
-0.2340
0.8173
PLR
0.2815
0.1158
0.1658
0.7930
0.4364
MLR
-0.1431
0.05679
-0.0956
-0.4570
0.6520
SR: Saving Rate PLR: Prime Lending Rate MLR: Maximum Lending Rate TCR: Treasury
Certificate Rate TBR: Treasury Bills Rate MRR: Maximum Rediscount Rate DV: Dependent
Variable
Source: SPSS Print-Out
The Table 2 (Model 2) results show the relationship between CBN rates and the cash
reserve ratio in the pre-reform period.
The beta of 0.2940 shows that as the treasury
certificate rate (TCR) rises by 100%, we should expect the cash reserve ratio (CRR) to rise by
29.40%. This relationship is significant at the 5% level since the t-test of 0.6610 falls outside
the H0 acceptance region of 0.5158. The treasury bill rate (TBR) is not significantly related to
the CRR at the 5% level since the computed t-test of -0.5070 falls within the H0 acceptance
region of 0.6170. The MRR is not significantly related to the CRR.
936

The nature of the relationship between bank rates and loan-to-deposit ratio (LTDR) in the
pre-reform period is summarized in Table 2 (Model 3). The beta coefficient (-0.1001) for
saving rate (SR) and LTDR is not significant at the 5% level since the computed t-test of 0.2340 falls within the critical region of 0.8173. The maximum lending rate (MLR) is
insignificantly related to the LTDR at the 5% level since the computed t-test of -0.4570 falls
within the acceptance region 0.6520. However, with a beta-coefficient of 0.2815, we find
that a 100% increase in the prime lending rate (PLR) results to a 28.15% increase in LTDR
and vice-versa. The beta coefficient is significant since the calculated t-test of 0.7930 falls
outside the critical region of 0.4364.
In the post-reform period, savings rate continues with a negative beta coefficient of 0.6610
Table 3 (Model 1). This indicates that as savings rate rises by 100%, we should expect
the bank liquidity ratio to fall by 66.1%. The beta coefficient is significant at the 5% level
since the computed t-test of -3.3030 falls outside the H0 acceptance region of.0.0037. In the
case of the prime lending rate (PLR), a beta coefficient of 0.0908 shows that a 100% increase
in the PLR brings about an insignificant increase of 9.08% in bank liquidity ratio (BLR) at the
5% level. Similarly a beta coefficient of 0.0996 shows that a 100% rise in maximum lending
rate (MLR) produces an insignificant rise in bank liquidity ratio of 9.96% at the 5% level.
The t-test of 0.4090 falls within the H0 acceptance region of 0.6874.
The relationship between CBN rates and cash reserve ratio (CRR) in the post-reform
period is shown in Table 3 (Model 2). The selected CBN rates show beta coefficients of 0.6570 (TCR), 0.1042 (TBR) and 0.7989 (MRR). As the treasury certificate rate (TCR)
increases by 100%, we should expect the cash reserve ratio (CRR) to fall by 65.70% and viceversa. This inverse relationship between TCR and CRR is significant at the 5% level since
the computed t-test of 0.6610 falls outside the region of . The Treasury bill rate (TBR) is not
significantly related to the cash reserve ratio (CRR) at the 5% level since the t-test of 0.5270
falls within the H0 acceptance region of 0.6046.
As the minimum rediscount rate (MRR) increases by 100%, we should expect the cash
reserve ratio (CRR) to rise by 79.89%. This positive relationship is significant at the 5% level
since the computed t-test of 2.5230 falls outside the critical region of 0.0207.
The significant determinants of the LTDR in the post-reform period are summarized in
Table 3 (Model 3). The savings rate is not significantly related to the LTDR at the 5% level
since the computed t-test of 0.1490 falls within the H0 acceptance region of +0.8833.
However, both PLR and MLR are significantly related to LTDR at the 5% level of
significance since the computed t-test falls outside the critical H0 acceptance region. The PLR
937

is negatively sensitive to LTDR, with a correlation coefficient of -0.3472. With a correlation

coefficient of 0.6475, we find a significantly positive association between MLR and LTDR,
and this is significant at the 5% level.
Table 3: Effects of Banking Reforms on Selected Bank Management Ratios in the Post-Reform Period
Model/Variables
Beta
Coefficient
SE Beta
Corr.
Model 1 (DV* BLR)

SR
PLR
MLR
-0.6610
0.0908
0.0996
0.2001
0.2541
0.2438
-0.5910
-0.1190
-0.0526
Model 2 (DV**CRR)
TCR
TBR
MRR
-0.6570
0.1042
0.7989
0.3165
0.1979
0.3167
-0.0377
0.0920
0.2801
Part.
Corr.
t-test
Sig.t (5%)
-0.5993
0.0648
0.0741
-3.3030
0.3570
0.4090
0.0037
0.7249
0.6874
-0.4101
0.10406
2.5230
-2.0750
0.5270
2.5230
0.0518
0.6046
0.0207
Model 3 (DV***LTDR)
SR
0.0284
0.1906
-0.1543
0.0257
0.1489
0.8833
PLR
0.1408
0.2420
-0.3472
1.0056
0.5820
0.5675
MLR
-0.7503
0.2323
0.6473
-0.5583
-3.2300
0.0440
SR: Saving Rate PLR: Prime Lending Rate MLR: Maximum Lending Rate TCR: Treasury
Certificate Rate TBR: Treasury Bills Rate MRR: Maximum Rediscount Rate DV: Dependent
Variable
The model summaries are found in Table 4. The coefficient of determination (R2)
increased significantly from 0.1526 in the pre-reform period to 0.3746 in the post-reform
period. The explanatory power of the selected bank rates (SR, PLR and MLR) improved
significantly with the introduction of several banking reforms. Specifically, a 100% change
in the Deposit Money Banks rates brought about a 15.26% change in the bank liquidity ratio
(BLR) in the pre-reform period. However, the same change in the bank rates brought about a
37.46% variation in the BLR in the post-reform period.
The CBN rates affected the cash reserve ratio (CRR) more significantly in the postreform period than the pre-reform period. R2 increased from 0.1400 in the pre-reform period
to 0.2581 in the post-reform period. The variation in the LTDR was not significant with a
significant change in the bank rates in pre-reform period. With a coefficient of determination
(R2) of 0.0378, the computed F-ratio of 0.2880 fell within the critical region of 0.8340.
However, in the post reform period, a 100% change in the bank rates brought a 43.24%
variation in the LTDR.
Table 4: Effects of Banking Reforms on Bank Management Practices:Model Summaries
Model Summary
Pre-Reform
Post-Reform
Model 1 with BLR*

MultR
2
R
0.3907
0.1526
0.6120
0.3746
938

0.0371
0.2758
1.3210
0.2930
3.7930
0.0280
Model 2 with CRR**

MultR
2
R
2
Adj. R
F-Ratio
Sig. F
0.3742
0.1400
0.0227
1.1940
0.3350
0.5081
0.2581
0.1410
2.2040
0.1210
Model 3 with LTDR***

MultR
2
R
2
Adj. R
F-Ratio
Sig. F
0.1944
0.0378
-0.0934
0.2880
0.8340
0.6575
0.4324
0.3427
4.8240
0.0120
Adj. R
F-Ratio
Sig. F
* Model 1: BLR = + 1 SR +2 PLR + 3 MLR + i

** Model 2: CRR = + 1 MRR +2 TBR + 3 TCR+ i
*** Model 3: LTDR = + 1 SR +2 PLR + 3 MLR + i
5. Summary, Conclusion and Recommendations

Based on description statistics, major lending rates (PLR & MLR) showed an upward
trend from the pre-reform period to the post-reform period.
The average bank margin
increased form 3.6% in the pre-reform period to 14.19% in the post-reform period. The
average bank liquidity ratio (BLR) exceeded the prudential limits in the pre- and post-reform
periods, although the prudential breach was more pronounced in the pre-reform period. The
loan-to-deposit ratio (LTDR) peaked at 83.92% in the early years of the consolidation period,
showing another prudential breach above the regulatory maximum of 80.0%.
The bank rates significantly affected the bank liquidity ratio (BLR) in the pre-reform
period.
In the post-reform period, the savings rate affected the BLR significantly, but
negatively at the 5% level. Both the prime lending rate (PLR) and the maximum lending rate
(MLR) were insignificant in determining variations in the BLR in the post-reform period.
The treasury certificate rate (TCR) was significantly related to the cash reserve ratio (CRR) in
the pre-reform period. However, the treasury bill rate (TBR) and the minimum rediscount
rate (MRR) were not significantly related to CRR. In the post reform period, both TCR and
MRR were significantly related to CRR.
In the pre-reform period, the prime lending rate (PLR) was more significantly related to
the loan-to-deposit ratio (LTDR). However, in the post-reform period paid, the maximum
lending rate (MLR) was more significantly related to LTDR. The explanatory powers of the
bank rates in determining the bank liquidity ratio (BLR) and the loan-to-deposit ratio (LTDR)
939

were more significant in the post-reform period than in the pre-reform period. The variation
in the bank rates did not lead to any significant variation in the LTDR in the pre-reform
period. The CBN rates affected the cash reserve ratio (CRR) more significantly in the postreform period than the pre-reform period.
Recent banking reforms have failed to curb the rising cost of funds in Nigeria. Although
savings mobilization has been emphasized, most banks have boosted their liquidity ratios
based on sources other than savings. The level of prudential compliance has not improved
drastically. Both bank liquidity ratio (BLR) and loan-to-deposit ratios have always exceeded
their prudential limits, particularly in times of intense reforms. However, bank management
has always recorded significantly rising margins and profitability, even in the face of
increasing compliance lapses.
Under regimes of increasing treasury certificate rates (TCR) and minimum rediscount rate
(MRR) we should expect the cash reserve ratio to fall, thereby enabling banks to create more
credit. The significant beta coefficients in the post reform period are indicative of progressive
central banking activities aimed at boosting the real sector.
Most bankers were more conservative in lending during the pre-reform period as the
prime lending rate (PLR) manifested a significant beta relationship with the loan-to-deposit
ratio (LTDR). The preferred borrowers dominated their loans portfolio apparently because of
their tolerable risk class.
In the post-reform period, bank management became more
aggressive in lending irrespective of the risk class. The beta coefficient of the maximum
lending rate (MLR) is significantly correlated to LTDR, and could explain the rising risk
concentrations in the post-reform period, particularly after the liberalization of the banking
industry.
The multiplicity of specialized and CBN-guaranteed facilities to SMEs and
agriculture did not curb bankers risk appetite in boosting their risk assets portfolio.
Extensive monetary policy reforms could have resulted in the more significant
explanatory powers of both bank and CBN rates in determining bank management practices.
The cumulative effect of bank rates on bank liquidity ratio and the loan-to-deposit ratio could
portray the pursuit of aggressive monetary policy regimes in the post-regime period. Bank
management, however, remained insensitive to prudential standards. The current risk-based
supervisory framework should be sustained with emphasis on Basel III and IFRS compliance
issues. Monetary policy reforms should aim at minimizing rent-seeking behaviour, moral
hazards and consequential systemic failure. The monetary policy rate (MPR) should narrow
bank margins while minimizing the risk of insolvency. Current reforms should moderate
rising lending rates, keep liquidity and funding within prudential limits, and enhance sound
financial management of the banks.
940

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Appendix A
Variance Inflation Factors (VIFs) and Tolerance Values for the
Pre-and Post-Reform Periods
Independent Variables (IVs)

Period/Model
Model 1:
Pre-Reform Period
Tolerance
VIF
-7.667
7.9550
3.5633
2.8830
0.4466
2.2396
0.0817
0.0933
0.5099
0.5538
1.5989
5.0690
-2.0715
2.2730
-0.6571
2.2350
-0.5792
2.5660
0.0014
1.0030
0.7446
2.5680
-0.8690
4.1880
3.4429
2.8830
-1.4861
2.2390
0.5284
1.2160
0.3235
1.9610
-1.4513
1.8060
Model 1:
Post-reform Period
Tolerance
VIF
-0.6040
1.2160
Model 2:
Pre-Reform Period
Tolerance
VIP
Model 2:
Post-Reform Period
Tolerance
VIF
Model 3:
Pre-Reform Period
Tolerance
VIF
Model 3:
Post-Reform Period
Tolerance
VIF
945

Appendix B
Condition Indices for the Pre-and Post-Reform Periods
Model/Period
Model 1:
Pre-Reform Period
1
2
3
4
Model 1:
Post-Reform Period
1
2
3
4
Model 2:
Pre-Reform Period
1
2
3
4
Model 2:
Post-Reform Period
1
2
3
4
Model 3:
Pre-Reform Period
1
2
3
4
Model 3:
Post-Reform Period
1
2
3
4
Proportions
Eigenval
Cond.
Index
Variance
3.89493
0.08671
0.01269
0.00566
1.000
6.702
17.519
26.221
0.00081
0.04686
0.00572
0.94661
0.00234
0.28198
0.00211
0.71357
0.00076
0.00068
0.42480
0.57376
0.00086
0.00364
0.55271
0.44279
3.79188
0.16696
0.02578
0.01538
1.000
4.766
12.129
15.703
0.00265
0.02800
0.95081
0.01854
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Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

An Online International Monthly Journal (ISSN: 2306-367X)

Modeling the Effects of Banking Sector Reforms on Bank

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

The era also saw the

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

emphasis on requisite disclosure, transparency and risk-based supervision (RBS) to restore

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

This is followed by the data sources, methodology and model

2. Review of Relevant Literature

Using both descriptive and

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

The study notes the need to bolster reforms through the

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

(iii) exchange rate effects, which will change relative prices of

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

Ziorklui reviews in-depth with policy

However, financial market intervention by

governments in developing countries constrains the potential of financial markets in

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

3. Data Sources, Methodology and Model Specification

BLR = + 1SR + 2PLR + 3 MLR + i

CRR = + 1MRR+ 2TBR + 3 TCR + i

LTDR = + 1SR + 2TBR + 3 TCR + i

determined mathematically to minimize the sum of squared deviations between predicted

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

4. Results and Discussion

The results also show the average changes in these

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

The loan-to-deposit ratio (LTDR)

Bank Performance Indicator

Savings Rate (SR)

Prime Lending Rate (PLR)

Maximum Lending Rate (MLR)

Bank Margin (%)

Bank Liquidity Ratio (BLR)

Cash Reserve Ratio (CRR)

Loan-to-Deposit Ratio (LTDR)

Prudential Compliance (PCR)

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

4.3 Inferential Results

Model 1 (DV* BLR)

The beta of 0.2940 shows that as the treasury

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

is negatively sensitive to LTDR, with a correlation coefficient of -0.3472. With a correlation

Model 1 (DV* BLR)

Model 1 with BLR*

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

Model 2 with CRR**

Model 3 with LTDR***

* Model 1: BLR = + 1 SR +2 PLR + 3 MLR + i

5. Summary, Conclusion and Recommendations

The average bank margin

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

In the post-reform period, bank management became more

The multiplicity of specialized and CBN-guaranteed facilities to SMEs and

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

http://www.cenbank.org/Monetary Policy/Reforms.asp Accessed 10/10/2011.