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This study examined the impact of financial sector reforms on the performance of the Nigerian banking sub-sector. The study aimed to test the impact of financial sector reforms lags on the performance of the banking sub- sector. Variables were incorporated in the model to capture other variables that can impact on the performance of the banking sector. While money supply was proxy for financial sector reforms, interest rate was proxy for banking sector performance and variables such as inflation, real GDP and money supply lags were introduced. Data collected covered the period between 1980 to 2010. In analyzing the model, the Ordinary Least Square (OLS) methodology was employed. Money supply, inflation rate, real GDP and money supply lags were revealed to have had significant impacts on the performance of the Nigerian banking sub-sector. However, this study further suggested that financial sector reforms must be consistently and continually conceived and implemented. The frequently encountered financial reform reversal and discontinuity must be mitigated if financial deepening, stability and efficiency must be achieved in the banking sector in Nigeria.



In Nigeria, the ability of the financial sub sector has been periodically punctuated by its vulnerability to systematic distress and macroeconomic volatility and policy fine-tuning inevitability which has worsen its contributions to the nations’ growth and development.

Siyan and Obi(2003) stressed that the “ability of the banking sector to play its fundamental roles in the growth and development of an economy through its financial intermediation function which is perhaps the most important function of the banks especially in developing countries like Nigeria has been frustrated periodically by its vulnerability to systemic financial crisis macro-economic instability. Other roles of the banks include serving as clearing and settlement institution and the medium through which the effect of monetary policy are transmitted to the rest of the economy. In a mission to finding a lasting solution to these lingering ugly incidence of bank distresses, worsening economic financial condition of their corporate borrowers and increasing incidence of fraud and embezzlement of funds. Thus, the need for a reform or overhauling of the entire sector by the regulatory authority “Central bank of Nigeria(CBN)” such that depositors can go to sleep while their monies or deposit are in safe hands.

In the light of the above, Nnanna (2005) posited that the policy makers have endeavored to deepen their financial system in order to enable banks play their roles most efficiently. The thrust of this research is on the impact of the financial reform on the banking industry. Financial reform according to Olekan (1993) are policy measures designed to deregulate the financial sector with a view to achieving a liberalized market oriented system within an appropriate regulatory framework.

In other words, Siyan and Obi (2003)depicted that “Financial sector reforms are meant to establish a solid foundation for the effective implementation of market based monetary policy since many aspects of these reforms have implications for the Central Bank’s achievement of the financial system stability. Anecdotal literature indicates that banking sector reforms are propelled by the need to deepen the financial sector and reposition it for growth; to become integrated into the global financial architecture and evolve a banking sector that is consistent with integration requirements and international best practices(Ajayi M.2005)

In most reforms, emphasis has always been on the capital adequacy in determining banks ability to operate and record appreciable performance by way of good returns to the shareholders and positive contribution to real growth in the economy. One of the latest reform whose deadline was 31st December, 2005 is on the increase in capital base of banks from the former two billion naira to twenty-five billion naira within a space of less than five years. The big question therefore is whether it is large capital base or high quality operation or both that will improve banks performance and reduce the probable incidence of systemic distress and bank failures experienced in the past Although the former Central Bank Governor, Soludo (2006)noted in one of his statements that “The Nigerian banking industry today is fragile and marginal, whereas the national goal should be a banking system that is part of the global change and which is reliable, competitive, strong and innovative.


In spite of the numerous financial sector reforms, little impact of it has been experienced by the banking sub sector.

The banking sub sector which is suppose to be affected directly by financial sector so as to achieve the much needed objectives of  financial deepening, financial development, financial stability amongst other monetary policy objectives has remained unaffected.

In the face of recent financial reforms, the financial system is becoming stable while the banking sub-sector is experiencing instability as it is being ably affected by both national and trans-national financial shocks. Obviously, the number of banks in Nigeria have constantly and continuously taken the path of shrinkage. This has led to the retrenchment of workers, which is contributing to the unemployment rate in Nigeria. Furthermore, embezzlement of people’s savings by top bank officials for personal enrichment and the insider trading in banks are obstacles that have over the years plagued the banking sector even in the face of increasing financial sector reforms in Nigeria.

For the Nigerian banks to meet up with the modern trend in service rendering and financial intermediation by banking institutions in first world countries, then the root cause of these problems pulsating the banking sub-sector which has impaired response to financial sector reforms must be identified and attended to. In the face of financial sector reforms, the banking sector have remained stagnate, why?


The general objective of this study is to examine the impact of financial liberalization on the performance of banks.

The specific objectives include:

  • To examine the impact of financial sector reforms on the banking sector in Nigeria.
  • To determine the time lag needed for the banking sector to be affected by financial reforms.


The important position occupied by the banking sector is the achievement of financial targets and at large economic objectives cannot be underscore. In the face of this, this study tends to capture financial sector reforms via financial liberalization which will be proxied by the volume of broad money supply while the performance of the banking sector will be captured using the lending interest rate.

This study is significant owing to the fact that it is the most recent research on the issue of financial sector reforms and its impact on the Nigerian banking sector.

In addition, while other studies such as Olajide et al (2011), Fadere (2010), Ajayi (2005), Iganiga (2010), Eregba (2010) amongst others, have given priority to financial deepening as a proxy for financial sector reforms as captured by the ratio of money supply to GDP, this study has deemed it necessary to bring a new dimension by using the money supply as a proxy for financial sector reform as captured by financial liberalization. Hence, a springboard has been founded on which other research works are expected to take off and through this, the problems of the Nigerian banking sector if not totally solved can be ameliorated.


The researcher shall test the hypotheses formulated below, using the available empirical evidence.

Null hypothesis (Ho): Financial sector reforms have no significant impact on the performance of the Nigerian banking sector.

Alternative hypothesis (H1): Financial sector reforms have a significant impact on the performance of the Nigerian banking sector.

 Hypothesis 2:

Null hypothesis(Ho): Financial sector reform lag has no significant impact on Nigerian banking sector with lags.

Alternative hypothesis(H1):Financial sector reforms lag has a significant impact on Nigerian banking sector without lags.


In the words of Agbonifoh and Yomere (1999) “knowledge possibilities are expansive, in other to ensure that a research investigation is directed and focused, every study has its own boundaries, otherwise, the study may require eternity for completion”.

In line with the above statement, the scope of this study is restricted to 31years, that is, the period covering 1980 to 2010. Essentially, secondary data on annual basis are used for the variables. The data are sourced from the statistical bulletin of the Central Bank of Nigeria and the National Bureau of Statistics.

In analyzing the data, the ordinary Least Square Estimator is adopted, this is because in a class of linearly unbiased estimators, it provides the research with estimates that are best linear and unbiased.


This study is likely to face the constraint of time length required for its completion and submission. In order to meet up with other academic requirements, limited time might be dedicated to this study, hence, any shortcomings noticed are due to the pressure of trying to meet up with the time required for submission