Financial Systems of Ghana and Nigeria

Financial Systems of Ghana and NigeriaSince the idea of tenner Smiths invincible touchs in any case known as invincible hand of the market, the allocative power of the market has been generally recognised. These ideas lay down been reinforced by the observable failure of Keynesian theories of organization intervention to stand the test of time. As a result of the adoption of SAP (Structural Adjustment programme) by roughly growing countries including Ghana and Nigerian which be my main concentration, the get by of easiness versus intervention has been rekindled. The major(ip) area of concentration is if these exploitation countries (Ghana and Nigeria) with imperfect markets piddle benefitted from recent relaxation behavior efforts in the structural try-on programme.Financial slackening is usually an important comp unitarynt of a countrys st appreciategy for scotch emersion. In an old fashion way, monetary loosening, has come to be most universally linked with fre eing of entertain marks, however now monetary liberalization is seen as a process involving a much broader set of measures adapt toward the excreting of various restrictions on the pecuniary field, such as the removal of portfolio restrictions on the lodgeing welkin, the clear of the external sector, and similarly changes in the workings of the monetary indemnityTHE pecuniary SYSTEM OF gold coast AND NIGERIA.A key represent fact about pecuniary systems in kick downstairsing countries is that they are henpecked by commercial banks (Fry, I995, pp. 4-5 Rojas-Suairez and Weisbrod, I995, pp. 4) Ghana and Nigerias pecuniary system consists of a giving fragmented informal sector and formal sector. The formal sector is coiffe up of central bank(Bank of Ghana and Central Bank of Nigeria) at the apex, with 42 commercial banks for both countries Nigeria (26) and Ghana (16), increment banks (Nigeria, (5), Ghana (3) , and merchant banks (30) Nigeria), (Ghana, (10), ind emnity companies, stock exchange, building society, community banks. The structure of Nigerias fiscal system leave be explained be lowlyRegulatory Authorities they regulate the Nigerian fiscal system, and they include Central Bank of Nigeria (CBN), the Federal Ministry of Finance (FMF), Federal mortgage Bank of Nigeria (FMBN Nigeria Deposit Insurance Corporation (NDIC), Securities and Exchange Commission (SEC),), and the issue Board for Community Banks (NBCB, National Insurance Commission (NIC). These restrictive g all overnment activity will be explained in detail below.1. Federal Ministry of Finance the utilisation of this regulatory authority is to advise the Federal administration on its financial operation and make sure it follows whatever the central bank of Nigeria says concerning the monetary matters of the country.2. FEDERAL MORTGAGE BANK OF NIGERIA (FMBN)The role of the is to provide banking and advisory services, and also to undertake research activities pertaini ng to housing. After the adoption of the National Housing insurance insurance in 1990, The FMBN is empowered to licence and control main mortgage institutions in Nigeria and act as the peak regulatory body for the mortgage finance industry.3. The central bank of NigeriaThe central bank of Nigeria has the same responsibilities as the bank of Ghana. It was established by the central bank of Nigeria act of 1958 and commenced operation on July 1, 1959. Their major regulatory objective is to issue legal tender to the prudence, banker of utmost(a) resort, financial adviser to the government, enhance monetary stability and a proficient financial environment which will be of benefit to the country in the short and long remain. the central bank of Nigerias success is patchly as a result of the rise in crude crude fossil oil prices.4. The Nigerian Deposit Insurance Corporation Its role is to complement the supervisory and regulatory role of central bank of Nigeria (CBN). It has the ri ght to examine the books and affairs of the check banks in Nigeria and former(a) deposit taking financial institutions.ORIGIN OF FINANCIAL LIBERALIZATION IN NIGERIANigerias economy has always been dependent on oil prices since the earlyish 1960s. As a result of the collapse of origination oil prices and the reduction in the production of petroleum in the early 1980s, the personality of the countrys economic and financial position became very weak and vulnerable. This led to inlet and economic deterioration. The economy was characterised by shortages in its foreign exchange, debt crises, negative economic harvest-tide and gritty rates of unemployment, Indeed, beginning from 1982, and finished 1984, the country had mystify saddled with negative trends in economic return as indicated by the decline in the gross domestic help product (GDP) (0.35% in 1982 -5.37% in 1983 and -5.18% in 1984), persistent ongoing account and budget deficits, a grand number of uncpmleted projects in the familiar sector, factory closures, large-scale retrenchment, acute shortages of ind salubriousing commodities and galloping inflation, (Odusola,2001,p4). The government decided to carry out many short run stabilisation measures, one of which was to foster employment through the creation of public sector jobs, this exerted to a greater extent than pressure on the budget, non withstanding that, public sector employment grew by a further 18 per cent mingled with 1981and 1984. This form _or_ system of government promoted migration into cities, as the annexs in government salaries during this period compared to that of the rural areas was more party favorably. Urban migration and its attendant unemployment problems became even more pronounced in 1981 when the Government change magnitude the minimum wage rate to the entry level wages of public sector employees. Urban unemployment increased significantly, from 2 per cent in 1980 to 10 per cent in 1985, while rural unempl oyment rose from 4 per cent to 6 per cent over the same period. Real per seat of government income fell significantly as well, from US$1,010 in 1981 to US$850 in 1985 (Odusola, 2001, Pp4). Nigeria financial sector was characterised by rigid exchange and stake rate controls, sartorial allocation of bank realisation (Okpara, 2010, P54), the naira was overvalued, all of which made the economy more exposed to risk of default and practically led to distortions that resulted into low direct investment, which in turn led to financial repression. it will be discussed more in-depth below. Financial repression discouraged investment in information corking it also discouraged salves mobilization, in the sense that it was not vigorously pursued. The financial system incurred a lot of cost in financial in depotediation, and it was as a result of inactive liquidity and liability solicitude and incentives to increase ability. Not only was Nigeria the only country going through this problem of financial repression, much of the twentieth century saw escalate financial repression (Caprio et al, 2001 p5), for model, Ecuador, Uruguay, Mexico, Ghana, Malawi, Tanzania etc, all had the problem of financial repression in their economy. As a result of the financial repression in the economy, the government decided to adopt a financial sector crystallise to help increase the countries economy. The programme they adoptive was called Structural revision programme (SAP).STRCTURAL ADJUSTMENT PROGRAMME IN GHANA AND NIGERIA.The Ghanaian economy also went through the same problems as the Nigerian economy during the early 1980s. They had similar problems as the Nigerian economy which include, high default rates, high rates of inflation, weakened confidence in the financial system. These affected the ability of the banks to perform their intermediation function properly (Acquaye and Sowa, 1999, p395). The major objectives of this SAP were, among others, toRestructure the economy in a way to edit out its dependence on oil as its main source of income. renew the financial sector by creating new institutionsReduce fisal proportionality of digest problemsPromote non-inflationary economic growth.The key policies designed to achieve these objective wereThe liberalization of the external trade and payments system-dismantling of price,trade and exchange controlsImplementation of methods to encourage domestic production and expand the supply base of the economyThe setting up of a Second-Tier Foreign Exchange Market (SFEM) as a chemical mechanism ofrealistic exchange rate.The rationalization and restructuring of public sector enterprises and overhauling ofthe public sector administrative structure.Reinforcement of important and strong demand management policies much rationalisation and restructuring of tariffs in parliamentary procedure to aid industrial diversificationThe elimination of price controls and commodity boardsThe key reforms that withdraw already been implemented as part of the financial liberalization policies includeChanging of the concept of a credit ceiling with OMO(Open market operation)Promoting competition and efficiency in the financial systemLiberalizing interest rate, exchange rate, precisely in general the financial sector.The financial sector reforms were thrown into crisis by the sequencing of reform measures and the lack of the necessity prerequisites for liberalization. Particularly, the deregulation of interest rate and the requirements for market entry led to the mental unsoundness of the financial system. A series of corrective measures had to be adopted, raising questions of policy credibility (Aiyeetey et al, 1997, P196).THE STRUCTURAL ADJUSTMENT PROGRAMME THEORETICAL BASIS well-nigh every sub Saharan African country including Nigeria and Ghana see major changes in the overall direction of the content economic policy in the early 1980s. These policy reforms were implemented as an integral part of the stru ctural trying on programmes (SAP) prescribed by the World Bank and the stabilization programme of the international monetary fund (IMF) (Olasupo, 2005, p 7). The structural adjustment programme had a lot of objectives, solely the major objective of this reform programme was to correct the alleged distortions which made preserve economic growth and recovery in the economies difficult. Notwithstanding the general purpose of the countries to undertake the adjustment programme, there has since the start of the 1990 decade, been wide ranging argument surrounding the theoretical paradigm underlying the SAP and their suitability to African countries. The first which is the unrequited orthodoxy it emphasizes how well the adjusters have done in comparison to non adjusters. According to this perspective, the regime of confine inward looking policies resulted in over protected industrial structure, balance of payment problems (Olasupo 2005, p10). They also contend that development problem s will be work by more adjustment not less, with this they concluded that sub- Saharan African countries follow throughd poor macroeconomic growth and performance relative to their reciprocal ohm East Asian counterparts, because economies in the former were exposed to long term government intervention and restrictive macroeconomic and sectorial polices. The modified orthodoxy sees adjustment programmes in an economy as a necessary merely not sufficient condition for development, because adjustment is only capable of stabilizing economies in the short term. This orthodoxy believes that other measures must be put in fleck for African development to occur in the medium and long term. A strong proponent of this approach puts it, the most significant shortcoming of current structural adjustment programs is the lack of logical linkage between the short-run objectives of attaining balance-of-payments equilibrium and improving allocative efficiency and the long-term objective of susta inable development Nguyuru Lipumba, (p. 9)FINANCIAL LIBERALIZATION AND REPRESSION.Financial liberalization is the process of breaking off from a state of financial repression. Financial repression has been most commonly associated with government fixing of interest rates and its adverse consequences on the financial sector as well as on the economy.The term financial repression was before coined by economists interested in less developed countries (LDCs) Gupta, 2004, Pp2. It originated in the kit and caboodle of Ronald I. McKinnon and Edward S. Shaw in the early 1970s, to describe a developing countrys environment, defining it as the set of government legal restrictions preventing the financial intermediaries in the economy from run at their full capacity level. The most common forms that this intervention takes are interest rate regulations, directed credit schemes, and high reserve ratios. The belles-lettres on financial repression stresses that because parsimonys levels are sensitive to real interest rate, nominal interest rate controls cumulative inflation reduces the amount of the national income.The benefits of financial repression, as opposed to financial liberalization, are debated on some(prenominal) points Ozdemir Erbil, (2008). In theory, it is believed that financial repression can make it break to control working capital supply in an economy and also control over interest rate which will induce investment. Another argument in favour of financial repression is that government controls on financial markets are needed for developing countries. In practice, financial repression appears to have yielded government revenue in the order of 2 % of GDP on average in samples of developing countries (Giovannini and de Melo, I 993 Fry et al. I 996, p. 36).The main conviction of the advocates for financial repression is that the government knows better than the market. The repression mechanism works through the interest rate and the exchange rates. c onsequently moving from financial repression to financial liberalization would require extra budgetary measures and could create budgetary problems, Like in the case of Nigeria in the early 1980s when the government seeked to reduce unemployment in the urban areas and the outcome of this decision exerted more pressure on the budget.Financial liberalization whitethorn increase the fiscal deficit and the cost to finance, as the government loses revenues and is forced to pay more market-based interest rates on its existing debt.On the other hand, the most popular argument which favours financial liberalization is the rising growth opinion by motivating savings and investment. Financial liberalization may increase the level of savings and improve the allocation of savings among potentiality investors. This will lead to the creation of more available funds and so economic growth. Financial liberalization may decrease the cost of capital, but on the other hand, movements which cause th e crises and macroeconomic instability may have a negative concussion on economic growth Ozdemir and Erbil (2008). This debate highlights the need for further sound empirical state on the benefits of financial liberalization on economic growth, especially for small yield economies of developing countries.FINANCIAL LIBERALIZATION AND SAVINGSThe advocates of financial liberalization do not seek to induce savings, but to promote and increase the volume and efficiency of capital formation. While financial reform can affect saving through various potential channels, on the whole its net effect is ambiguous.( Schmidt- Hebbel and Serven,2002, p2). Moreover saving is often considered beneficial for its financial dimensions. In open economies, raising national saving is a way to reduce the dependence on foreign saving, protecting the economy from external shocks. This is an important policy concern in a world of increasing financial integration. together with a strong and well-capitalize d financial system, saving represents a form of egotism -insurance to reduce the economys vulnerability to unexpected reversals of international capital flows. In this manner, saving can help reduce macroeconomic volatility, which empirically has been shown to hamper growth (Ramey and Ramey 1995 Fats 2000).Various researchers have shown some empirical evidence that although financial liberalization results in high interest rate and financial deepening , it does not really lead to higher savings. In legal age of countries, financial reforms are followed by declines in savings (Okereke,2009).Bandiera et al (2000) estimated an econometric relationship Showing the private saving ratio as a function of the real interest rate and degree of openness as an index for financial liberalization, along with income, inflation and public savings. analyze the experience of eight countries that underwent significant reforms in their financial systems, namely Chile, Ghana, Indonesia, Korea, Malays ia, Mexico, Turkey and Zimbabwe. confrontation this countries they measured the effect of liberalization on the volume of aggregate savings, their resultsTheir results do not provide a clear answer on the impact of reforms on saving, asthe effect appears significantly negative in some cases (Korea and Mexico), positive insome others (Greece and Turkey) and insignificant in the Indonesia, Malaysia, Zimbabwe, and Ghana. In a study similar to theirs i.e.(Bandiera et al), Loayza and Shanka(2000), used India as their country of observation, and the savings rate from India and found out that financial reform has not changed the savings rate, but moved the composition of savings in India towards a higher divide of durable goods.Ostry and levey(1995), in their findings maintained that financial development as a result of liberalization reduced savings. Bennett et al(2001), in their work, also found a negative significant effect on savings.CONSEQUENCES OF FINANCIAL LIBERALIZATIONPolicies t hat make an economy open to the rest of the world and they are needed for sustained economic growth. No country has achieved economic success, in terms of square(a) increases in living standards for its people, without being open to rest of the world. Trade disruption has been an important element in the economic success of East Asia, where the average import tariff has fallen from 30 percent to 10% over the past 20 years.Opening up economies to global economy has been crucial in enabling many developing countries to develop competitive advantages in different sectors of their economy. Countries that have opened their economies in recent years, foe example India in 1991, have experienced faster growth rate and more poverty reduction, a proof is that following the economic reforms, the country began to develop a fast paced economic growth. India is the eleventh largest economy in the worldThere are some negative effects experienced by countries or the world in general in terms of their reform policies that has outweighs the benefits of such reforms, this statement can be applied to the effects of financial liberalization despite its benefits in terms of access to more capital inflows. Financial liberalization creates exposure to various kinds of risk and they include a propensity to lead to financial internal and external financial crises, unequal to(predicate) access to funds for small scale producers etc.Many researchers have carried out empirical studies on financial liberalization on financial fragility of the economy, and their conclusion is that liberalization increases the fragility of the financial system. According to (Demirguc-kunt detragiache), one of the reason why financial liberalization may lead to increased financial sector fragility is that the removal of interest rate ceilings and also the reduction of barriers to entry reduces bark right values, thus exacerbating moral hazards problems. The moral hazards problem is a special case of inf ormation asymmetry, a situation in which one party in a motion has more information than another. Normally banks try to protect their franchise, and the risk of losing their franchise, but during a period of policy reform such as financial liberalization, where there is free entry in to the market or financial sector, so as a result of that there is more competition, this erodes franchise values. If the effort of reform does not incorporate adequate strengthening of the prudent regulations and supervision to realign incentives, lower franchise values are probable to lead to increased fragility (Stiglitz et al (2001)Tornell et al (2003), in their studies, they tell that financial liberalization is bad for growth because it leads to crises. Their empirical analysis shows that in countries with harsh credit market imperfections, financial liberalization leads to a more rapid growth but also a more higher incidence of crises. They also argued that liberalization leads to faster grow th because it eases financial constraints, but on one condition that this occurs if agents which are the government, investors and creditors take on credit risk which makes the economy fragile and prone to crisis.