CHAPTER TWO

REVIEW OF LITERATURE

INTRODUCTION

Our focus in this chapter is to critically examine relevant literature that would assist in explaining the research problem and furthermore recognize the efforts of scholars who had previously contributed immensely to similar research. The chapter intends to deepen the understanding of the study and close the perceived gaps.

Precisely, the chapter will be considered in three sub-headings:

• Conceptual Framework
• Theoretical Framework

Concept of Banking

The Banking System

In his work on financial intermediation by banks and economic growth, Badun (2009) notes that there might be some confusion with the terms used in existing research on financial intermediation and growth. He noted that different terms like financial intermediation, finance, financial development, financial system, financial markets and so on, have been used by different authors. However, in almost all papers same indicators are used and all refer to financial intermediation by banks. According to Otto et al. (2012), there are four vital components of a financial system. These include; financial institutions, financial markets, the regulatory authorities and financial instruments. The study also noted that the system in Nigeria has undergone remarkable changes in terms of ownership structure, the depth and breadth of instruments employed, the number of institutions established, the economic environment and the regulatory framework within which the system operates currently. The Nigerian financial system include banks, capital markets, insurance, pension asset managers and other financial institutions with the Central Bank as the apex institution. The banking industry in Nigeria is dominated by the commercial banks. The commercial banks dominate in both size and profitability In Nigeria, the financial system is the hub of productive activity, as it performs the vital roles of financial intermediation and effecting good payments system, as well as assisting in monetary policy implementation. Ofanson et al. (2010) note that the process of financial intermediation involves the mobilization and allocation of financial resources, through the financial (money and capital) markets by financial institutions (banks and non-banks) and by the use of financial instruments (savings, securities and loans). They also suggest that the efficiency and effectiveness of financial intermediation in any economy depend critically on the level of development of the country’s financial system. In effect, the underdeveloped nature of the financial system in most developing countries accounts largely for the relative inefficiency of financial intermediation in those economies. In these countries the financial system is dominated 10 by banks, which are typically oligopolistic in structure and tend to concentrate on short-term lending as against investments with long-term gestation period. The alternative/complementary source for financing development projects is the development of debt or equity markets which at best, is at the rudimentary stage of development. It is in this regard that specialized financial institutions, including government owned development banks have been established in Nigeria to bridge the gap.

History of Banking

The history of banking began when empires needed a way to pay for foreign goods and services with something that could be exchanged easily. Coins of varying sizes and metals eventually replaced fragile, impermanent paper bills. Coins, however, needed to be kept in a safe place, and ancient homes did not have steel safes. According to World History Encyclopedia, wealthy people in ancient Rome kept their coins and jewels in the basements of temples. The presence of priests or temple workers, who were assumed devout and honest, and armed guards added a sense of security.Historical records from Greece, Rome, Egypt, and Ancient Babylon have suggested that temples loaned money out in addition to keeping it safe. The fact that most temples also functioned as the financial centers of their cities is a major reason why they were ransacked during wars.3 Coins could be hoarded more easily than other commodities, such as 300-pound pigs for example, so a class of wealthy merchants took to lending coins, with interest, to people in need. Temples typically handled large loans and loans to various sovereigns, and wealthy merchant money lenders handled the rest.

The First Bank

The Romans, who were expert builders and administrators, extricated banking from the temples and formalized it within distinct buildings. During this time, moneylenders still profited, as loan sharks do today, but most legitimate commerce and almost all government spending involved the use of an institutional bank According to World History Encyclopedia, Julius Caesar, in one of the edicts changing Roman law after his takeover, gives the first example of allowing bankers to confiscate land in lieu of loan payments. This was a monumental shift of power in the relationship of creditor and debtor, as landed noblemen were untouchable through most of history, passing debts off to descendants until either the creditor or debtor's lineage died out. The Roman Empire eventually crumbled, but some of its banking institutions lived on in the form of the papal bankers that emerged in the Holy Roman Empire and the Knights Templar during the Crusades. Small-time moneylenders that competed with the church were often denounced for usury.

Visa Royal

Eventually, the various monarchs that reigned over Europe noted the strengths of banking institutions. As banks existed by the grace, and occasionally explicit charters and contracts, of the ruling sovereignty, the royal powers began to take loans to make up for hard times at the royal treasury, often on the king's terms. This easy financing led kings into unnecessary extravagances, costly wars, and arms races with neighboring kingdoms that would often lead to crushing debt. In 1557, Philip II of Spain managed to burden his kingdom with so much debt (as the result of several pointless wars) that he caused the world's first national bankruptcy—as well as the world's second, third, and fourth, in rapid succession. This occurred because 40% of the country's gross national product (GNP) was going toward servicing the debt.5 The trend of turning a blind eye to the creditworthiness of big customers continues to haunt banks today.

Adam Smith and Modern Banking

Banking was already well-established in the British Empire when Adam Smith introduced the "invisible hand" theory in 1776. Empowered by his views of a self-regulated economy, moneylenders and bankers managed to limit the state's involvement in the banking sector and the economy as a whole.1 This free-market capitalism and competitive banking found fertile ground in the New World, where the United States of America was about to emerge. Initially, Smith's ideas did not benefit the American banking industry. The average life for an American bank was five years, after which most banknotes from the defaulted banks became worthless. These state-chartered banks could, after all, only issue banknotes against the gold and silver coins they had in reserve. A bank robbery meant a lot more then than it does now in the age of deposit insurance and the Federal Deposit Insurance Corporation (FDIC). Compounding these risks was the cyclical cash crunch in America. Alexander Hamilton, a former Secretary of the Treasury, established a national bank that would accept member banknotes at par, thus floating banks through difficult times. After a few stops, starts, cancellations, and resurrections, this national bank created a uniform national currency and set up a system by which national banks backed their notes by purchasing Treasury securities, thus creating a liquid market. The national banks pushed out the competition through the imposition of taxes on the relatively lawless state banks. The damage had been done already, however, as average Americans had already grown to distrust banks and bankers in general. This feeling would lead Texas's state to outlaw corporate banks—a law that stood until 1904.

Merchant Banks

Most of the economic duties that would have been handled by the national banking system, in addition to regular banking business like loans and corporate finance, fell into the hands of large merchant banks because the national banking system was sporadic. During this unrest that lasted until the 1920s, these merchant banks parlayed their international connections into political and financial power. These banks included Goldman Sachs, Kuhn, Loeb & Co., and J.P. Morgan & Co. Originally, they relied heavily on commissions from foreign bond sales from Europe, with a small back-flow of American bonds trading in Europe. This allowed them to build capital.

At that time, a bank was under no legal obligation to disclose its capital reserves, an indication of its ability to survive large, above-average loan losses. This mysterious practice meant that a bank's reputation and history mattered more than anything. While upstart banks came and went, these family-held merchant banks had long histories of successful transactions. As large industries emerged and created the need for corporate finance, the amounts of capital required could not be provided by any single bank, and so initial public offerings (IPOs) and bond offerings to the public became the only way to raise the required capital. The public in the United States, and foreign investors in Europe, knew very little about investing because disclosure was not legally enforced. For this reason, these issues were largely ignored, according to the public's perception of the underwriting banks. Consequently, successful offerings increased a bank's reputation and put it in a position to ask for more to underwrite an offer. By the late 1800s, many banks demanded a position on the boards of the companies seeking capital, and if the management proved lacking, they ran the companies themselves.

J.P. Morgan and Monopoly

J.P. Morgan & Co. emerged at the head of the merchant banks during the late 1800s. It was connected directly to London, then the world's financial center, and had considerable political clout in the United States. Morgan and Co. created U.S. Steel, AT&T, and International Harvester, as well as duopolies and near-monopolies in the railroad and shipping industries, through the revolutionary use of trusts and a disdain for the Sherman Antitrust Act. Although the dawn of the 1900s saw well-established merchant banks, it was difficult for the average American to obtain loans. These banks didn't advertise, and they rarely extended credit to the "common" people. Racism was also widespread, and although bankers had to work together on large issues, their customers were split along clear class and race lines. These banks left consumer loans to the lesser banks that were still failing at an alarming rate.

The Panic of 1907

The collapse in shares of a copper trust set off a panic, a run on banks, and stock sell-offs, which caused shares to plummet. Without the Federal Reserve Bank to take action to calm people down, the task fell to J.P. Morgan to stop the panic. Morgan used his considerable clout to gather all the major players on Wall Street to maneuver the credit and capital they controlled, just as the Fed would do today.2

The End of an Era

Ironically, this show of supreme power in saving the U.S. economy ensured that no private banker would ever again wield that power. Because it had taken J.P. Morgan, a banker who was disliked by much of America for being one of the robber barons along with Carnegie and Rockefeller, to save the economy, the government formed the Federal Reserve Bank (the Fed) in 1913. Although the merchant banks influenced the structure of the Fed, they were also pushed into the background by its formation.Even with the establishment of the Fed, financial power and residual political power were concentrated on Wall Street. When World War I broke out, America became a global lender and replaced London as the center of the financial world by the end of the war. Unfortunately, a Republican administration put some unconventional handcuffs on the banking sector. The government insisted that all debtor nations must pay back their war loans, which traditionally were forgiven, especially in the case of allies, before any American institution would extend them further credit. This slowed down world trade and caused many countries to become hostile toward American goods. When the stock market crashed on Black Tuesday in 1929, the already sluggish world economy was knocked out. The Fed couldn't contain the crash and refused to stop the depression; the aftermath had immediate consequences for all banks. A clear line was drawn between banks and investors. In 1933, banks were no longer allowed to speculate with deposits, and Federal Deposit Insurance Corporation (FDIC) regulations were enacted to convince the public it was safe to come back. No one was fooled and the depression continued.

World War II Stimulates Recovery

World War II may have saved the banking industry from complete destruction. WWII and the industriousness it generated stopped the downward spiral afflicting the United States and world economies. For the banks and the Fed, the war required financial maneuvers using billions of dollars. This massive financing operation created companies with huge credit needs that, in turn, spurred banks into mergers to meet the demand. These huge banks spanned global markets. More importantly, domestic banking in the United States had finally settled to the point where with the advent of deposit insurance and mortgages, an individual would have reasonable access to credit.

The Evolution Of The Nigerian Banking Sector

The banking operation began in Nigeria in 1982 under the control of the expatriates and by 1945, some Nigerians and Africans had established their own banks. The first era of consolidation ever recorded in Nigerian banking industry was between 1959-1969. This was occasioned by bank failures during 1953-1959 due to the liquidity of banks. Banks, then, do not have enough liquid assets to meet customer demands. There was no well organised financial system with enough financial instruments to invest in. Hence, banks merely invested in real assets which could not be easily realised to cash without loss of value in terms of need. This prompted the federal government then, backed by the World bank report to institute, of the loynes commission on September 1958.

The outcome was the promulgation of the ordinance of 1958, which established the Central bank of Nigeria(CBN). The year 1959 was remarkable in the Nigerian banking history not only because of the establishment of Central Bank of Nigeria(CBN) but that the treasury bill ordinance was enacted which led to the issuance of our first treasury bill in April, 1960.

The period (1959-1969) marked the establishment of former money, capital markets and portfolio management in Nigeria, in addition, the company acts of 1968 were established. This period could be said to be the genesis of serious banking regulation in Nigeria. With the CBN in operation, the banking industry restructuring was motivated by the need to establish a healthy banking sector that will carry out its financial intermediation role at a minimal cost which effectively provides services consistent with world standards. The major aim of the consolidation program was to store up the capital base of banks consolidated through mergers and take-over to local banks. This allows foreign banks to participate in the banking industry by providing additional capitalisation through investment infrastructure in new banking products, operating technologies and buying shares of the existing banks. The banking sector reforms, involve the reform of the regulatory and supervisory framework, the safety net arrangement as well as mechanisms to speed up attempts at resolution of banks non-performing loans. In an attempt to revitalize the banking system, a package were comprising among others.

The Development Of Banking Industry In Nigeria

Banking services development in Nigeria as a sideline to other commercial activities of Elder Dempster Company. According to available information, the first real bank in Nigeria was the African Banking Corporation founded in 1892. In 1894, Bank of British West African Banking Corporation which called the bank of West African on Nigeria‟s Independence and later called the Standard Bank of Nigeria Limited and subsequently changed its name to First Bank of Nigeria Ltd now Plc had complete monopoly of business in the banking industry until the establishment in 1917 of the colonial bank. The Colonial Bank opened branches in Jos, Kano, Lagos and Port Harcourt. In 1952 the bank changed its name to Barclays Bank DCO and is now called Union Bank of Nigeria Plc.

Indigenous participation in the Banking Industry started in 1929 with the establishment of the Industrial and Commerce Bank by a group of Nigerian and Ghanaian Entrepreneurs. The Bank failed in 1930 due to inadequate capital, poor management, hostile and unfair competition from the foreign established banks.Undaunted by the failure of the first attempt at establishing an indigenous bank, another group of entrepreneurs, this time all Nigerians among whom were the late Dr. A. Maja, Chief T. A. Doherty and Late H. A. Subair established the Nigerian Merchant Bank in 1933. The bank was more successful than its predecessor, but like it, also failed in 1936. Meanwhile the same group of indigenous pioneers in field of banking had established in 1993 the National Bank of Nigerian Limited, which was to make history by being the first indigenous bank to survive though with some few problems to the 1952 Banking Ordinance. The success of National Bank Limited through careful management by the Western Regional Government inspired other Nigerians to go into banking business and in 1945, Chief Okupe established the Agbonmagbe bank. As a private enterprise it thrived. It thus became the fourth indigenous bank to be established. It also survived though it ran into difficulties in 1967, it was saved by the Western Nigerian Development Corporation (WNDC), later IICC and now Odua Investment Corporation who took over its operations and changed its name to Wema Bank Limited. The Nigerian Penny Bank was the fifth indigenous bank to be established but it packed up operations with disastrous consequences to depositors soon after registration in 1946. In 1946, Dr. Azikiwe established the Tinubu Bank to serve the Zik Group of the Companies, which was established in 1941 called Tinubu Properties Ltd. The name of the bank was changed to the African Continental Bank in 1947 with its first office in Yaba. In 1949, another foreign bank, British and French Bank was established. The bank was re-established in 1961 by a consortium of five foreign banks. Since then it has been known as the United Bank for African (UBA). In order to have further insight into the history and development of the Banking industry in Nigeria, from the establishment of the first in 1892 to date, it will be convenient to drive the period into three distinct eras.

The earliest recorded banking in Nigeria was by Elder Demister company and the African banking corporation in 1894. The banking activities of these corporations were later taken over in 1894 by the British West Africa. It remained as until 1971, when the colonial bank opened officers in Jos, Kano, Lagos and Port Harcourt (Lemo 2005).

The bank of British west Africa later become standard bank of Nigeria ltd and now FBN PLC. The colonial bank was also renamed Barclays bank. Its name change against to union bank of Nigeria limited on 12th March 1979. The first indigenous bank was the industry and commercial bank, which was established in 1929. It collapsed in 1931 and went out of business in 1936. In 1933 the national bank of Nigeria was opened. The next important event was not until 1945, when the Agbonmag be was established. The African continental bank was formed in 1946 as the Tinubo bank and changed to its WEMA Bank Plc, Bank of the North was established in 1959, Cooperative Bank was established on 1962.

There was also the emergence of the United Bank for Africa in 1949. The last four banks mentioned above are still in existence.

The first banking ordinance appeared in 1951 and ruled that no bank would be allowed to operate without a license from the government. The ordinance established the central Bank of Nigeria which take over the issue of ensuring monetary stability and sound commercial banking operation in Nigeria.

In order to develop the rural area economically, the federal government in 1991 also ensured the concept of rural banking, also known as community banks. Community bank was found in practice of the Africa society, it was to this end that the then central bank governor, late Alhaji Abdulkadir pointed out that “community banks are bound to Nigeria today. The British and French bank which was established in 1947, later its name was changed to United Bank of Africa in 1961.

ERA OF UNRESTRICTED BANKING 1892 - 1952

From 1892 when the first bank was established and 1952 when the first banking ordinance was passed, there was excessive and unbridled proliferation of banks in Nigeria. Almost all fizzled away before December 1953 because of:

1. Inadequate capital base
2. Inexperienced staffing
3. Ill – equipped offices
4. Unskilled management
5. Inability to meet the demands of new government regulations. All that was necessary were registration of business name like in any other trade, office accommodation, signboards and a handful of bank clerks. The experience of this period is now a subject of history. The country witnessed indiscriminate establishment of banks by all comers and consequently catastrophic failure of many. Regrettably 22 of 24 banks that failed were indigenous, while the other two were of mixed ownership, which is foreign and indigenous.

THE PERIOD OF REGULATED BANKING

The collapse, for example, of the Nigeria Penny Bank in 1946, where depositors lost their savings, brought public outcry and Government was forced to set up the Paton commission of Enquiry. The recommendations of the commission were made known in 1948, and the first banking ordinance was passed in May 1952. This ordinance and the Act that later replaces it tried to give a definition of “bank” as any person who carried on banking business, and banking business is further defined as the business of receiving money on current account and collecting cheques drawn by or paid in by customers and of making advances to customers (Lemo 2005).

The ordinance also stipulated, among other things a minimum paid up capital of £12,500 (N25,000) if the bank head office is in Nigeria or £200,000 (N400,000) if the head office is outside Nigeria. The 1958 ordinance stipulated a penalty of not less than £50 (N 100) for each day any contravention continued. The paid up capital was again raised in 1969 to £300,000 (N 600,000) for indigenous banks and £750,000 (N1, 500,000) for foreign banks. The next landmark in the history of banking business was the enactment on 15th May 1958, of the Central Bank of Nigeria Act which provided for the establishment of a bank to issue, the notes and coins of which should be legal tender throughout Nigeria. The act also provided that the Central Bank is the Banker to the government and was given certain powers over all the commercial banks and financial institutions. Another major landmark in the banking industry was promulgation of the Companies Decree in 1968, which requires all companies, (including banks) operating in Nigeria to be locally incorporated as Nigerian companies irrespective of whether they were former branches of overseas companies or bankers with Headquarters abroad. The fourth legislative landmark was the promulgation of the Nigerian Enterprises promotion Decree of 1972, which empowers the Federal Government to acquire (40) per cent of the equity shares in all banking companies not wholly owned by Nigerians. The decree was later amended in 1977 to increase Government acquisition to sixty (60) per cent. Establishment of banks during this period was pursued with extreme caution. The First Bank to be established after the 1952 Ordinance was the Muslim Bank, which was established in 1958. It ceased operations in 1969 because it could not comply with the provisions of the banking Decree promulgated that year. The Co-operation Bank Limited and that of Co-op & Commerce were established, the Banque Internationale de L‟Afrique Occidentale (now Afribank Nigeria Plc) was established in 1959. The Bank of America was established in 1960. Chase Manhattan Bank (now merged with standard Bank) in 1961, Bank of India and Arab Bank in 1962. Three mixed Banks were also established during the period they are: The Bank of Lagos a joint venture between some Swedish and Nigeria national, the Berini Beinut Riyad Bank Ltd, and the Bank of the North Ltd, were formed in partnership with certain Lebanese group of Banks. The first two of these three banks, which were all established in 1959, have ceased to operate and the Government of Northern States of Nigeria has covered the third, Bank of the North Ltd (Lemo 2005).

THE POST CIVIL WAR ERA

The end of the Civil War witnessed the implementation of massive reconstruction projects by the various State Governments, and the establishment of state-owned banks. In 1970, the mid-Western State now Edo and Delta States established the New Nigerian Bank. This was quickly followed by the establishment of the Pan African and Mercantile Banks by the Rivers State and South-Eastern (now Cross River State) respectively. Notwithstanding the open pessimistic opinions expressed by renowned academicians against the establishment of state banks, records to date show that they are making steady progress until of recent when some started rearing symptoms of distress in the Banking Industry. Other state banks have since been established and these are the Kaduna Co-operative Bank Ltd., known as Nigerian Universal Bank and Kano Co-operative Bank known as Tropical Commercial Bank both established by the Kaduna and Kano State Governments respectively. Other banks established during this period are Continental Merchant Bank, First National City Bank of Chicago later became International Merchant Bank Ltd., ICON Limited (Merchant Bankers) and Societe Generale Bank (Nig.) Ltd, Inland Bank of Nigeria Plc.

FINANCIAL LIBERATION ERA

The financial liberation and deregulation policies adopted in the wake of the Structural Adjustment Programme (SAP) introduced in 1986 resulted in phenomenal growth in the number and variety of Financial Institutions, volume and complexity of operation also on the number of products offer as a result of innovation and increased competition. The financial sector within this regime of deregulation, re-regulation, and guided deregulation witnessed increased number of banks in the economy (Lemo 2005). The explosion in the number and variety of Financial Institution between 1986 and 1991 resulted in over stretching of available managerial capacity, which manifested in financial distress and eventual demise for some financial institutions. In response to this unsavoury development the Regulatory/Supervisory Bodies had to withdraw two (2) Banks‟ Licenses in January 1994. One license had to be withdrawn in June 1995. The worst scenarios was in January, 1998 when twenty six (26) licenses were withdrawn, thus putting the total figure at thirty one (31) distressed banks in this era; a very sad event that has brought untold hardship to all stakeholders.

CONSOLIDATION ERA

This distress witnessed in the banking industry in the 90‟s brought about the loss of confidence in the sector. A number of measures were put in place to ensure adequate capital base for the banks. The minimum capital was increase to N2 billion in 2002. The reform agenda of the Federal Government led by Chief Olusegun Obasanjo brought the banking reform of year 2004 which put the minimum paid up capital of a universal bank at N 25billion. The primary objective of the reforms is to guarantee an efficient and sound financial system. The reforms are designed to enable the banking system develop the required resilience to support the economic development of the nation by efficiently performing its functions as the fulcrum of financial intermediation (Lemo 2005). The reforms were to ensure the safety of depositor‟s money, position banks to play active developmental role in the Nigeria economy, and become major players in the sub-regional, regional and global financial markets. Prior to the just concluded banking sector consolidation programme induced by the CBN 13-point reform agenda, which was announced on the 6th July, 2004, the Nigerian banking system was highly oligopolistic with remarkable features of market concentration and leadership. Lemo (2005) notes that the top ten (10) banks were found to control:  more than 50% of the aggregate assets  more than 51% of the aggregate deposit liabilities; and  more than 45% of the aggregate credits. Thus the system was characterized by: 

Generally small-sized fringe banks with very high overheads costs 

Low capital base averaging less than $10million or N1.4billion; 

Heavy reliance on government patronage (with 20% of industry deposits from government sources) Furthermore, twenty-four out of the eighty-nine deposit-money banks that existed then exhibited one form of weakness or the other. Prominent among such weaknesses are under-capitalization and /or insolvency, illiquidity, poor asset quality, weak corporate governance, boardroom squabbles, dwindling earnings and in some cases, loss making. The unhealthy competition that existed in the market, which was engendered by the relative ease of entry into the market as a result of the low capital base,necessitated some banks going into rent-seeking and non-banking businesses, which are not related to core banking functions. Some of the banks were preoccupied with trading in foreign exchange, government treasury bills and sometimes, indirect importation of goods through surrogate companies. From the foregoing it was apparent that a reform of the banking system in Nigeria was inevitable; it was only a question of time.

Bank Services

Banks as financial intermediaries have two basic traditional functions: deposit collection and lending. All services rendered by banks are more or less incidental to these two functions. For instances when banks collect deposits from customers for safe-keeping, they go ahead and pay interest to these customers. This is a way of encouraging the customers to save more. Other bank services either help to retain the deposit of customers by providing them with a one-shop facility where they can have access to other services or help to create an outlet for lending.

Concept of Commercial Bank

According to Barro, (2001), the banking industry in Nigeria comprises of the commercial banks, the merchant banks and the development bank. At the apex of the industry is the central bank of Nigeria (CBN). The commercial banks provides services like acceptance of deposits, granting of short and (very recently) medium term loans to customers, safe-keeping of valuables, offering of pieces of advice to investors ect. The merchant bank on the other hand provide medium and long-term loans etc. The development banks services the development activities by making available about medium and long-term finances for this purpose. The central bank functions regulate the activities of these banks.

Easily, we can point at a member of factors that may be contributing to the unhealthiness and instability in the banking sector. Such factors as unstable macro-economic and fiscal policies, unethical and unprofessional practices, as well as inadequate supervisory activities, rank high on the scale. Developments in the Nigerian political economy since the mid 80s have greatly led to changes in the structure and art of banking. The period witnessed the proliferation of banks and other financial institutions. From CBN annual report (1994), there were 66 (sixty-six) commercial banks and 54 fifty-four) Merchant banks in Nigeria. According to the CBN diary 2003, as at June 2002, we had the following licensed financial institution 89 (eighty-nine) commercial and Merchant banks, 6 (six) development finance institutions, 97 (ninety-seven), finance companies and 125 (one hundred and twenty five) Bureau de change companies in Nigeria.

Services of Commercial Banks

Since the day that the job of the service in regular day to day existence got clear, the services quality issue was considered as the principle highlight of rivalry among organizations with the goal that given the quality of services, the organization can be become different from its competitors and this results in achieving competitive advantage. Gronroos (2000) defined service as, “A service is a process consisting of a series of more or less intangible activities that normally take place in interactions between the customer and service employees or physical resources or goods and/ or systems of service provider, which are provided as solutions to customer problems”.Services are a continuous process of on-going interactions between customers and service providers comprising a number of intangible activities provided as premium solutions to the problems of customers and including the physical and financial resources and any other useful elements of the system involved in providing these services (Grönroos, 2004). Premium service quality is a key to gain a competitive advantage in services industry. The satisfaction level of customers is dependent on their perception of service quality and the trust in service provider (Ismail et al., 2006; Aydin & Özer, 2005; and Parasuraman et al., 1988). By providing better quality services to customers, a firm revives the perception of customers about quality of services.

Fogli (2006) defined term service quality as “a global judgment or attitude relating to particular service; the customer’s overall impression of the relative inferiority or superiority of the organization and its services”. The connection between services quality and consumer satisfaction has been submitted to exceptional investigation by leading service quality specialists (Bitner and Hubbert,1994; Bolton and Drew, 1994), just as the connections between quality, consumer satisfaction, client maintenance and gainfulness (Storbacka et al., 1994). Thus, as a core competitive strategy banks need to concentrate on service quality (Chaoprasert and Elsey,2004). One of the ways to improve quality of service is by fulfilling customers’ expectations. Kotler and Keller (2009: 143) characterize client focused quality and state quality is the entirety of highlights and attributes of an item or service that relies upon their capacity to satisfy expressed or inferred needs. We can say that the seller has conveyed quality when the item or service has met or surpassed client desires.

According to Blerry (2009) quality of banking services is measured in tangible variables. Those tangibles are things which have a physical existence and can be seen and touched. In context of service quality, tangibles can be referred to as Information and Communications Technology (ICT) equipment, physical facilities and their appearance (ambience, lighting, air-conditioning, seating arrangement); and lastly but not least, the services providing personnel of the organization (Blery et al., 2009). These tangibles are deployed, in random integration, by any organization to render services to its customers who in turn assess the quality and usability of these tangibles.

Reliability of Services: Reliability means the ability of a service provider to provide the committed services truthfully and consistently (Blery et al., 2009). Customers want trustable services on which they can rely. Reliability explains the promptness of delivering Ebanking services in an accurate way an inline advertised attributes. Many studies (Bacinello et al., 2017; Graupneret al., 2015; Masoud & AbuTaqa, 2017) argues that the success of e-banking heavily depend on e-banking services and reliability. Hasandoust & Saravi, (2017) confirmed that reliability is among the key factors that customers consider before and even during usage of E-banking services. Consequentially, prior researchers have revealed that reliability (such as prompt responses, attentiveness, and error free E-banking plat forms) have a considerable impact on customer satisfaction

Assurance: Assurance is developed by the level of knowledge and courtesy displayed by the employees in rendering the services and their ability to instill trust and confidence in customer (Blery et al., 2009).

Empathy: Empathy means taking care of the customers by giving attention at individual level to them (Blery et al., 2009). It involves giving ears to their problems and effectively addressing their concerns and demands.

Convenience: Convenience is considered to be the dimensions of E-banking that enables customers to access Ebanking services at any time and beyond the limit of geographical location (Villa-Real, 2014; Chu et al., 2012; Fonchamnyo, 2013; Chavan, 2013). The conveniences of E-banking for enabling customers to check their account balance, pay bills, apply for loan, trade securities and conduct other financial transactions 27/7; have make customers to become satisfied when they are able to perform their banking transition at any geographical location. Previous studies have also empirically acknowledged a positive relationship between e-banking convenience and customer satisfaction. For example, Chu et al., (2012); Raza et al., (2015); Amin, (2016) and Mou et al., (2017) explained convenience as the critical dimensions for the success of adopting and patronising E-banking among customers. Thus, it's therefore hypothesis in this study that conveniences a dimension of e-banking services has a positive impact on customer satisfaction.

Availability: E-banking availability is recognised as the ability of users to access banking information and services from the web. Customers can access e-banking services only when the services is available (Rao, 2017).

Quality customer service is the assessment of the merits or feature of a product or service”. Characterized as clients' appraisal on advantages or uniqueness of an item (Zeithaml, 2008:89). The service quality factors recognized by Parasuraman et al., (1994) are reliability, responsiveness, competence, accessibility, courtesy, communication, credibility, security, understanding and tangibility. According Zeithaml and Bitner (2008:112), service consists of five dimensions: Reliability, Assurance, tangibility, Responsiveness and Empathy.

1.Reliability is the ability to perform the services certainly and correctly. While responsive is the capacity to support clients and give quick services.

2. Assurance serves to increase customer confidence from service providers, who meet customer requirements.

3.While tangible dimension is physical appearance of service providers such as buildings, equipment layout, interior and exterior, and physical appearance of service providers ’personnel.

4. Empathy, is specialist co-ops' capacity to focus on clients. Service quality has several indicators: a) Ability to perform the promised services b) Knowledge and politeness c) Care for customers d) Willingness to help customers e)

Appearance of physical facilities One of the reasons of the switching of clients starting with one bank then onto the next bank is on the grounds that clients aren't happy with the manner in which the bank takes care of issues or handles issues. For researchers, Service quality is one of the most attractive areas over the last decade in the retail banking sector (Avkiran, 1994; Stafford, 1996; Johnston and Jeffrey, 1996; Angur et al., 1999; Lassar et al., 2000; Bahia and Nantel, 2000; Sureshchandar et al., 2002; Gounaris et al., 2003; Choudhury, 2008). Service quality is considered as one of the critical success factors that influence the competitiveness of an organization. A bank by providing high quality service, can make a difference from competitors (Mistry, 2013,).

Levine et al., (1997) as quoted in Badun(2009) distinguish five basic functions of financial

system, and these include;

i. Facilitation of risk management

ii. Allocation of resources

iii. Monitoring of managers and control over corporate governance

iv. Savings mobilization

v. Causing the exchange of goods and services

They also assert that financial systems differ in how successfully they are performing these

functions.(Badun, 2009).

Reasons Why People Use a Bank‟s Services.

1. To keep their funds safe and secure. There can be little doubt that this is the most fundamental and important reason of all. Cash kept at home will always represent a serious security hazard, and the greater the amount of cash kept there, the greater the hazard.
2. To obtain interest payments and other return on investment. In many respects this reasons goes hand-in-hand with the first one: people rightly regard interest payments and other returns as the reward for putting their money in a safe place (Barro, 2001).
3. To obtain convenient access to cash. Once the customer‟s funds are in safe hands and interest is being earned on them, the next most important reason for using bank‟s services is to give the customers access to cash. the majority of counter transaction undertaken at a bank branch involved the cashing of a cheques or
4. To obtain convenient access to payment facilities. After the need to obtain access to cash, obtaining access to payment facilities is clearly the customer‟s next big priorities. The new banking reform has brought about revolution in banking by proving customers with a remarkable range of payment facilities, mainly based around the plastic bank card.
5. To obtain access to loan facilities. Most customers -even very wealthy ones need access at some point in their lives to facilities to borrow money especially in order to buy especially in order to buy expensive items like machinery, vehicles or property. Facilities could also be in form of overdraft, which allows a customer to withdraw funds from his account or make payments from it over and above what his has in the account. Overdraft limits will typically be marked in advance and the customer is expected to adhere to them. The principal difference between loan and overdraft is that the loan is regarded as drawn as soon as it is made, with interest being levied on the whole amount of the loan, and whereas with the overdraft, interest is only levied on funds withdraw as part of the overdraft facility (Barro, 2001).
6. To obtain status and equality with peer groups. This is an increasingly important customer motivation for using a bank‟s services. Typical examples of products that seek to exploit the status-seeking desire of some customers are gold and platinum credit cards which usually come with certain special privileges, as well as access to a range of banking services (Barro, 2001).
7. Products that confer equality with peer groups are mainly important to the young. Most banks have some products designed to be targeted at younger customers, and usually marketed and advertised according to a youthful theme. Status seeking on the part of well-paid professional is an increasingly important motive for using and buying banking services, and likely to become even more important in the recent times. Banks are keen to increase their customer base of hardworking people with high incomes and will take all sorts of steps to win customers over using products that convey status.

The Factors Affecting Demand For Bank Services.

Theses are the factors that can cause a customer to buy or not to buy a particular service. These are:

1. The Price of the service

2. The Technology

3. Changes in Taste & Preference

4. The Price of other commodities (services)

5. Population (i.e. number of people demanding for the service)

6. Changes in income and wealth of customer.

Many commercial banks will say that price or interest rate is the most important factor in winning or losing business. If this is so, it implies that in all other respects of the bank relationship there is no difference between offerings in the market place. That is to say, banking services are no more or less than the sale of commodities which is solely a function of price. Clearly, this is not so and no self-respecting banker would deny his skills as a businessman able to solve business problems for his customers. Consequently, we need to consider what exactly is meant by price and what its role is in selling banking service (Barro, 2001). To find the answer it is important to look at the question from the customer‟s point of view. In deed, think back to when you last made a purchase of a significant item. Were you guided solely by considerations of price or was it a more subtle decision? If one considers the purchase of a portable television set, the reality is that you will consider the following points:

1. The quality of the picture

2. The record of reliability for this type of set

3. Whether a guarantee is provided for what period of time

4. The general image of the manufacturer

5. Availability of set/delivery time

6. Maintenance facilities

7. Credit Facilities

Price according to Barro, (2001) is not mentioned above although, of course, it is an important factor. In deed it is likely that in reviewing the range of sets available, you will have had as much if not greater influence on decision. Taking this into the banking field, the reality is that whilst price, plays its part, other factors are also important. So, in looking at a mortgage facility, the prospective customer is very interested to know the following:

How much can be borrowed?

2. How long the repayment period will be?

3. How quickly a mortgage can be arranged?

4. Whether any assistance can be given on bridging a sale to purchase a transaction.

5. If the bank can introduce a solicitor, surveyor and other professionals.

6. If the provision of a mortgage will have any effect on obtaining a loan to improve the property

These are dominant factors and only after they have been resolved satisfactorily will the question of price come into play. In fact, price in this case is defined in interest rate terms and yet the customer is generally more interested in how much it will cost each month. As an example in the corporate sector, let us consider a long term loan for buying plant and property to assist in the expansion of a company. Here, it must be remembered that the decision maker is not as straight forward as in personal sector and indeed may include more than one person. Consequently, a decision will be taken after careful appraisal of:

How much will be lent?

1. Duration to return the borrowed sum
2. What security will be needed
3. Is there a repayment holiday on the phase of the loan?
4. Is it necessary to supply large amount of data/information to the bank to get agreement?
5. As the finance director, does it make my life easier?
6. As the owner of the business, does this have any adverse effect on getting my capital out of the company when I sell or retire?

Of course, price‟ also has its impact but it will come at a later stage in the research. Indeed, it is very often the last factor to discuss and resolve. It will therefore be seen that price does not figure as large in the customer‟s assessment as others thought it to be the case (Barro, 2001).

The Economic Importance of Commercial Bank in Nigeria

The distinguishing feature of a commercial bank is that it hold itself out as prepared to accept deposit of money from members of the public on current or deposit account to honour cheques drawn by its customers on their accounts, and to its customers and drawn on or issued by other banks.

Commercial banks deals in money, receiving it on deposit from customers, honouring customers drawings against such deposits of demand, collecting cheques for customers and lending or investing surplus deposits unit they are required for repayment. From the above functions of commercial banks it becomes clear that they are of great use to the government, the business community and the various individual, in the society. The government requires the corporation in execution its monetary policies, such as the restriction of expansion of credit as and when the need arise. In developing countries like Nigeria, the central bank is a substantial lender in the short term trough a treasury bill purchases as a lender of last resort to customers demands.

Bankers and Customer Relationship

Fiti (2001) in his book a dictionary of banking, he defined banks as “an establishment which deals in money receiving it on deposit from customers, honouring customers drawing against such deposit on demand, collecting cheques from customers and lending or investing surplus deposit until they are required for payment. From the above definition we can deduce that a bank is a financial institution which accept and safeguards deposits/money from customers and permit money to withdraw or transferred from one account to the other.

Doyle (2007) in his book titled “practice of banking” stated the relationship between a banker and his customer in essentially contractual, but fundamentally it is that of debtor (the banker) and creditor (the customer) vice versa depending on who is owing who. He also added that it could be referred to as the relationship of agent and principal in the wise, working relationship is governed by certain rules.

In his own contribution to the question of the banker and customer relationship, whiting stated that this relationship is governed by rules of agency, while appropriate for instance, where the banker acts as agent for his customer in collection of paying cheques on his behalf.

Concept of Bank Customers

Indeed there is no specific legal or statutory definition of a bank customer. While some people go to a bank to cash their personal cheques or cheques issued in their favour into their party, others go to deposit cash into their account or to make inquires of one or the other. As we have some who open account with the bank, there are others who visit the bank regularly for other motives. This group of people regard themselves as customers.

Adejanye (1991) in his book of monetary economic explained “banking service cut across various sections of people either individual or personal, both illiterates and literates, corporate organizations or business and government establishment who are usually represented by its agents.”

Thereis need for bankers to understand human behaviour as this will assist them in tackling difficult situations when they arise in dealing with customers, of course individuals are bound to vary in their approach and sense of reasoning.

These categories of people fall within the class of salary earners, petty traders who make little or nothing in terms of revenue. If they were to consider the effort put into making ends meet, they wouldn’t bother save their hard earned money in the bank. For them to part with their money they deserve to be given the best consideration.

Concept of Service Quality

In general, service quality is a global attitude or assessment of the superiority of services, although the real scope of this attitude is no uniformity of opinion. Parasuraman, et al. (1996), have developed a service quality measure called SERVQUAL (Service Quality), this SERVQUAL is a multi item scale with several questions that can be used to measure respondents’ perceptions of service quality, namely:

1. Physical evidence ( tangibles), including physical facilities, equipment, employees and means of communication. (2) Reliability, namely the ability of the staff to provide the promised service and pro- vide satisfactory service. (3) Responsiveness, namely the desire of the staff to help customers and provide responsive services. (4) Assurance, including knowledge, ability, politeness, and trustworthiness of the staff, free from danger, risk and doubt, and (5) Empathy, which is ease of relationship, good communication, personal attention and understanding of customers’ needs.

Concept of Customer Retention

Customer retention is the future tendency of customers to remain loyal or loyal to the use of goods or services (Ranaweera, 2003). According to Rust, et al. in Khan (2012), customer retention and attractiveness of new customers are used as drivers for increasing market share and revenue. Customer retention is used to diversify customer behavior or change customer defections to be loyal or have a strong relationship with the company for the long term (Hasan, 2013)

According to Hume (2006), the definition of customer retention is the decision of consumers to engage in future activities with a service provider and the form of such activity in the future. Further- more, Hume also believes that customer retention is the result of consumer attitudes or behavior to- ward the performance of the services they consume. So it can be concluded that the interest in repurchasing is the desire of consumers to buy or come back to the same organization.

Bank and Customer Relationship

This type of relationship arises when a person, society or firm makes an offer to become a customer, which the bank duly accepts; acceptance may be subject to:

A condition precedent: acceptance of the applicants offer condition subsequent e.g agreeing to open an account for the application immediately but the right retained to close the account if satisfactory reference are not ultimately received.

When can be deduced from the above fact is that once a person, society or firm open an account with a bank he/she they automatically becomes their customer.

2.2 THEORETICAL CONCEPT

The Three Factor Theory

The three-factor theory holds that product/service attributes exert asymmetric effects on overall customer satisfaction. According to the three-factor theory (Kano et al., 1984),bank attributes can be categorized into basic, performance and excitement factors, where basic and excitement factors denote dissatisfiers and satisfiers, respectively, and performance factors induce satisfaction and dissatisfaction in a linear and symmetric fashion.

In this scenario, providing high quality services and improving customer satisfaction are widely recognized as fundamental factors boosting the performances of banks (Barsky & Labagh, 1992; Le Blanc, 1992,; Le Blanc et al., 1996; Stevens et al., 1995, Opermann, 1998). Banks with good service quality will ultimately improve their profitability (Oh & Parks, 1997). In a competitive industry which offers homogeneous services, banks must be able to satisfy costumers better then their counterparts (Choi & Chou, 2001).

To obtain loyalty and to outweigh other competitors, banks must be able to obtain high levels of customer satisfaction for the service supplied. There are several studies that analyze the needs and the desires of tourists