CHAPTER ONE

INTRODUCTION

1.1       Background to the Study

The banking sector in Nigeria witnessed phenomenal growth following the 2004 consolidation that increased minimum capital requirement from N2billion to N25billion. The opening up of the Nigerian economy through various structural reforms, and trade liberalization led to setting up of many banks in Nigeria. These banks had inadequate capital base and were unable to play the role expected of them in economic development. In 2003 there were 89 banks and in a period of 10 years, precisely 2013, the number has reduced to 23. Over the same period, Nigerian banks automated its operations to serve their customers more effectively and efficiently and to keep pace with global technological advancement. As part of the reforms, the Central Bank of Nigeria (CBN) grouped the banks into international, national and regional banks and cancelled the universal banking policy. The reason was for banks to operate according to their capacities (Alade, 2014). Prior to that categorization, most banks developed strategies for growth that included expanding local branch networks and opening offshore branches.

In the Nigerian banking industry, Citibank, Ecobank, Stanbic IBTC, Standard Chartered and Ned bank have their roots outside the shores of Nigeria. Citibank, Ecobank, Stanbic IBTC, Standard Chartered have been  in Nigeria  since 1989, Ned bank was granted license in 2013 and only started operations in 2014. Nigerian commercial banks started their foray outside the shores of the country in 2002 with United Bank for Africa (UBA) and Guaranty Trust Bank (GTB) opening branches in two countries in Africa. Six years later, 10 Nigerian banks that scaled the hurdle of consolidation followed the footsteps of UBA and GTB thereby creating a situation in the banking sector where the number of Nigerian banks with branches in other countries especially African countries outweighs that of international banks operating in Nigeria. Internationalization refers to the process of increasing involvement in international operations (Asika, 2006). The merits of internationalization accrue to both the expanding banks and the recipient banking system. The main benefits for the parent company would be risk diversification and greater profit opportunities for shareholders. The recipient banking systems, on the other hand, would benefit through increased intermediation and improved efficiency resulting from technological advancement, reduced interest rates and efficiency improvements due to increased competition.  Internationalization has been a reservoir of   skill, equipment, efficiency and technological transfers, mainly from advanced countries to emerging markets; this is based on the premise that local firms in emerging markets gain from the foreign direct investment externalities through improved efficiency, labour, exports and global integration (Brouthers & Hennart, 2007).

The banking sector is a catalyst and engine of growth in the Nigerian economy and growth in this sector is expected to continue at a faster rate given the growth prospects, and the various transformation policies of the Federal Government. As a result of the financial reform policy of the Central Bank of Nigeria, especially the consolidation policy, there has been a marked increase in the internationalization activities of Nigerian banks.  Four top commercial banks namely United Bank for Africa (UBA), Access Bank, GTBank and Zenith Bank combined are operating in more than 20 countries in the African continent as well as presence in UK, China, France and USA (Ebimo, 2014). Ebimo (2014), further observed that despite the economic crisis and increasing stringent controls and monitoring by regulators, Nigerian banks are determined in their foreign market entries with fresh decisions about offshore expansions made regularly by bank boards and management. The growing regional integration among developing economies is providing a veritable platform for firms in these economies to explore the inherent benefits of internationalization. Business outcome refers to accounting and non-accounting parametres employed to determine the success or otherwise of an enterprise that has internationalized its operations. Such accounting measures include return on capital employed, profit margin, sales margin, market share and incremental deposit mobilized.

The work of Hamzat and Ajila (2006) employed common indicators of performance measurement that are largely accounting-based. This study will extend this further by investigating the motive behind internationalization as a measure of the outcome. For example, one of the motives of banks internationalization is to follow their customers across various countries they operate in. This will involve value chain marketing of the customers’ retailers, suppliers, contractors wherever the customer establishes subsidiaries. In this case, bank internationalization is motivated by maintaining existing client base.   

Onafowora and Onoye, (2006), Ezeoha (2007) opined that internationalization in Nigeria dates back a few years ago when indigenous companies realized that the world is becoming a global village and that moving with the trend would offer them more opportunity and unlimited scope for growth. Nevertheless, there is no coordinated approach that may help practitioners have a deep understanding of the internationalization decisions of the productive and service sectors. Scholars like Brouthers and Brouthers, (2001) had developed a globalization model for manufacturing companies, these models were concentrated on western countries and were not thoroughly verified in less advanced countries (Onafowora & Onoye, 2006).

Contemporary studies of internationalization and firm economic performance outcomes are largely based on western countries. Studies explaining the relationship between internationalization and business outcome as it relates to emerging markets have been extremely few (Nachum, 2004). The work of scholars such as Fleury and Junior, (2007), Contractor, Kumar and Kundu (2007), are largely based on firms from emerging economies like Russia, India, China and Brazil

 Based on the foregoing, this study provides an insight on commercial banks internationalization and business outcomes in the context of a country in sub-saharan Africa, Nigeria.