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THE IMPACT OF NEW MONEY MARKET PRODUCTS ON PROFIT PERFORMANCE OF COMMERCIAL BANK IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1   Background of the Study

The dynamic effects the activities of commercial banks have on both local and national economies make it imperative to constantly study how efficiently their resources are employed. One of the most important determinants of the rate of growth and development of an economy is its financial sector (Adoms, Yua, Okaro & Ogbonna 2020).Financial institutions, especially banks all over the world, are coming up with more creative ways to design improved financial products and services, faster and more efficiently. The overall aim of financial product design and development is to enable the institutions grow their revenues over time, maximize shareholder wealth, increase market share, improve upon existing ones by modifying certain features of the products, expand frontiers into new markets, help to maintain sales, transform the institution, shape the future of the organization and ensure the institution is ahead of the competition and is well repositioned to exploit existing and future opportunities (Kotler, 2002). Banks do greatly influence economic development especially with their roles of financial intermediation which include, trusty money creation; this is so most especially when one considers the fact that more than 50% of the total money supply in the Nigerian economy since year 2000 to date was created by commercial banks via demand deposits (CBN, 2019).

Secondly, as a keeper of assets (monetary and non-monetary) for both individuals and groups, there is an increasing proportion of commercial banks total assets to Gross National Product (GNP) i.e. from 30% in 2004 to 60 % in 2010 and increase of 100 % (CBN, 2018). The role of intermediation of funds that is, attracting deposits at low costs from the surplus segment of the economy and lending these out to the deficit segment at higher rates, this affects not only the pace but also the pattern of economic activities especially in a developing country like Nigeria (Mwangi, 2007). Economic development, as posited by Sanusi (2011) is about enhancing the productive capacity of an economy by using available resources to reduce risks, remove impediments which otherwise could lower costs and hinder investment. The banking system, he argued, plays the important role of promoting economic growth and development through the process of financial intermediation. Many economists have acknowledged that the financial system with banks as its major component, provide linkages for the different sectors of the economy and encourage high level of specialization, expertise, economies of scale and a conducive environment for the implementation of various economic policies of government intended to achieve non-inflationary growth, exchange rate stability, balance of payment equilibrium and high level of employment (Okaro, 2018).

The primary goal of a bank is to maximize its deposit mobilization with a view to enhancing its liquidity position and optimize positive returns on shareholders' funds. Customer deposit, which is the sum total of funds put in trust with the banks, are the liabilities upon which the banks depend to transact legitimate businesses with a view to making profits. Thus, the principal objective of banks product or service is to attract customer deposit. These customer deposits which form the capital employed by banks to engage in trade transactions thus become the most important factor for their survival, a measure of strength and a pointer to good condition of health. These all-important deposits are usually attracted from customers through the instrumentality of bank products. This raise concerns on whether a significant relationship exists between bank products and bank financial performance. Consumers have become more aware of their rights in the business environment. They have also become aware of the availability of several product alternatives. The incidence of Covid19 pandemic has further dwindled the fortunes of financial institutions, with banks as the worst hit. In the Nigerian scenario, present realities show that the case is worse than imagined. The Nigerian Banking system has undergone remarkable changes over the years in terms of the number of institutions, ownership structure as well as depth and breadth of operations. These have been largely influenced by challenges posed by the need to conform to international standard Okafor, Ogbonna and Anaemena (2020). The stress test of 2009 by the regulator-Central Bank of Nigeria (CBN) has further confirm the woes of the financial institution, with result showing that about 8 out of 24 banks (-33 %) in the country have negative share capitals (CBN, 2010).

This was the origin and a precursor to the banking tsunami of August 14, 2009, with a most shocking pronouncement by the CBN governor that led to the sacking of eight (8) MD/Chief executives Officers and numerous directors of the banks. With further threats of revocation of operating licenses, withdrawal of inter-bank guarantees, nationalization, outright sales or acquisition of erring banks, enormous pressure is being mounted on the banks to create more businesses and maximize retained profits towards meeting up with the demands of the regulator. To escape from the big hammer wielded by the regulators such as Securities and Exchange Commission (SEC), Central Bank of Nigeria (CBN), Nigeria Deposit Insurance Company (NDIC), affected banks faced with the dilemma, have taken the option of mergers and acquisition (M&A). This is followed by recent signing of Transaction Implementation Agreement (TIA) being witnessed at that time. The aim of TIA to take over the erring banks from the original owners, whose capitals have been eroded and handed over to new owners, with vested interests and whose capital is used to rescue the erring institutions, to avoid total and monumental collapse, with resultant effect of loss of depositors funds, loss of trust and confidence on Nigeria financial institution by oversea counterparts, and loss of wealth by shareholders. These have led to increase in competition, with each bank struggling to have a sizeable wallet share of the available market (Okeafor, 2013).

The introduction of the Structural Adjustment Program (SAP) in 1986 brought in its wake, liberalization polices in which economic determinants were left to the forces of demand and supply. There was upsurge in the number of licensed banks, interest rates and foreign exchange rates were left to market forces determination. The resultant competition became so intense which led to aggressive marketing, designing and introduction of financial products, innovative attractions, also services were polished and improved upon, while customers were being treated as kings in order to ensure a fair share of 

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