EFFECT OF AUTOMATED CLEARING SYSTEM ON FINANCIAL PERFORMANCE IN NIGERIA BANKING SECTOR

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 CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

The technological innovation that is being witnessed currently in the Nigerian banking sector is possible of impacting on the banks’ mode of transactions especially in their payment systems (Adeyemi, 2006). The payment systems are made feasible by ICT gadgets such as Automated Teller Machine (ATM), Electronic Fund Transfer (EFT), Clearing House Automated Payments (CHAPs), Electronic Purse (E-PURSE), Automated Cheque Sorter (ACS) and Electronic and Transfer at Point of Sale (EFTPOS), which have made transactions easy and convenient. This phenomenon is capable of bringing about speedy operations and enhanced productivity (Adeoti, 2005). The increasing use of Automated Clearing System has allowed for integration of different economic units in a spectacular way. This phenomenon is not only applicable to Nigeria but other economies of the world, though the level of their usage may differ. In Nigeria, Automated Clearing System usage especially in the banking sector, has considerably improved, even though it may not been as high as those observed for advanced countries (Adeoti, 2005). One of tasks of the Central Bank of any nation is to establish and maintain a secure and effective payment system in its country. The payment system plays an important role in the development of the country’s financial sector by ensuring non-cash settlement between banks. It is only through effective payment that the central bank can perform its main task of implementation of monetary policy (Soludo, 2004).

In Nigeria, the financial market  especially the money market has been under undue pressure and heat in the recent times, no thanks to rumours, claims and  counters of claims of distress, misappropriation of funds, un-performing loan  and shandy forex (foreign exchange) deals in the banking sector of the economy (Ovia, 2005). The fears and uncertainties in the market have therefore necessitate the apex body and watch dog of the sector i.e the central bank of Nigeria (CBN) and all stake holders to continue to dissuade the fears of the investing public,  personal and corporate bodies in restoring sanity and confidence in the Banking sector. It is not worthy to opine that the banking sector attracts investment more than other sectors of the economy  despite the negative trail exhibited in this sector’s of the economy this can be attributed to the introduction of sophisticated and  latest information communication and technology  (ICT) equipment to derive the various services and products (CBN, 2006).

The use of Automated Clearing System in the banking sector became of interest to this study due to the significant role it plays in the economy. It helps in stimulating economic growth by directing funds to economic agents that need them for productive activities. This function is very vital for any economy that intends to experience meaningful growth because it makes arrangements that bring borrowers and lenders of financial resource together and more efficiently too than if they had to relate directly with one another (Adam, 1998). The Nigeria automated clearing system (NACS) which took off on October 21^st, 2002, as a result of time factor that affect cheque clearing system i.e before cheque is cleared prior to 2002,  it involves much problem in which cheque is not cleared as at when due.

As a movement forward on the execution on the mandate, the CBN issue the Nigeria banker’s clearing house rule on January 2^nd 1995. In November 1995 CBN governor announced a plan for a drastic overall of the clearing system that monetary transaction  in Nigeria were largely based on the cash and as such had inherent problems such as security volume of paper, it’s transportation, currency sort charging (Ndukwe, 2005).

Technological advancement facilitates payments and creates convenient alternatives to cash and cheque for making transactions. Such new practices have led to the development of a truly global, seamless and Internet enabled 24-hour business of banking. Technological advance in payments are important due to the fact that it will be feasible to outsource quite a number of the banks’ role in the payments system. Also banks’ regulation can be more technologically dependent and better focused rather than focusing on conceptual guidelines. ICT revolution both in terms of innovation rate, speedy operation, and cost per unit (portraying reduction in average total and marginal costs) has made a good number of banks embrace the use of ICT infrastructure in their operations (Akinuli, 1999).

1.2       PURPOSE OF THE STUDY

The broad objective of the research is to examine the effect of Automated Clearing System in Nigeria Banking Sector. The other purpose of this includes are:

1. To examine the effect of automated clearing system on the economic activities of Nigeria.
2. To analyze how automated clearing system aids the stability of banking system.
3. To find out the outcome of automated clearing system on the payment system in Nigeria banking sector.
4. To suggest the effect of automated clearing system on the financial performance of the banking industry.
5. To find out if the cost of setting up NACS will influence the performance of the banking system.
6. To find the effect of automated clearing system on customers satisfaction.

 1.3       SCOPE OF THE STUDY

The scope of this study is on the effect of Automated Clearing System on financial performance in Nigeria Banking Sector with a view to explore United Bank for Africa Plc, Marina, Lagos.

1.4       STATEMENT OF RESEARCH PROBLEM

Considering the enormous impact experience in automated clearing system there are some obstacle hinder the effective and efficient operation of the system.

Among the obstacle are cost of establishment and operating  is relatively high when compare with manual system, the operation of Nigeria automated clearing system  is not standard when compare with international automated clearing system, it has no effect on the monetary value of our currency, it is prone to cyber fraud  and error, excess of cash in circulation which encourage customer on the use of the cash as the main means of payment.

 1.5   STATEMENT OF RESEARCH QUESTIONS

The study will be guided by the following research questions:

1. Does automated clearing system has effect on the economic activities of Nigeria? ˜
2. How does automated clearing system help to stabilize the banking system?
3. How does automated clearing system improve the payment system in Nigeria banking sector?
4. Does adoption of Nigeria automated clearing system has impact on the financial performance of the banking industry?
5. Does the cost involve in setting up NACS influence the performance of the banking system?
6. Does automated clearing system have effect on customers’ satisfaction?

 STATEMENT OF HYPOTHESES

A hypothesis is a knowledgeable guess or speculation. It is also a statement of declaration which serves as answer to research question. For the purpose of this research work the following hypothesis is formulated.

Hypothesis 1

H_o: Automated clearing system has no effect on the economic activities of Nigeria.

H₁: Automated clearing system has effect on the economic activities of Nigeria.

 Hypothesis 2

H_o: Automated clearing system does not help to stabilize the banking system

H₁: Automated clearing system helps to stabilize the banking system

Hypothesis 3

H_o: Automated clearing system does not improve the payment system in Nigeria banking sector.

H₁: Automated clearing system improves the payment system in Nigeria banking sector.

Hypothesis 4

H_o: Nigeria automated clearing system has no impact on the financial performance of the banking industry.

H₁: Nigeria automated clearing system has impact on the financial performance of the banking industry.

Hypothesis 5

H_o: The cost involve in setting up NACS will not influence the performance of the banking system.

H₁: The cost involve in setting up NACS will influence the performance of the banking system.

Hypothesis 6

H_o: Automated clearing system does not have any effect on customers’ satisfaction.

H₁: Automated clearing systems have effect on customers’ satisfaction.

 1.7       SIGNIFICANCE OF THE STUDY

The significance of the study is buttressed below:

The knowledge gathered from the study will enlighten bank customers on the usage of electronic transfer of funds from one bank account to another account. The study will aids the banking sector to effectively and efficiently control the clearing items (cheques) based on electronic data presented which will reduce clearing float for local cheques from 4 to 2 days. The information gathered from the study will help the banking sector to reduce the time and cost involved in administering bulk payments “ even if the transaction takes three days to clear the fact that it is automated means less hours in starting the payment process, which is significant for bulk payments. The study will serve as an eye opener to customers by making it easier for cash flow management “ in the sense that everything is accounted for electronically by the banks and included in the bank statement(s) for tracking and cross-referencing is easy.  The study will also serve as a medium through which the members of the public can reduce risk of loss, late payments and theft and it will save them the time of going to the bank.

1.8       RESEARCH METHODOLOGY

The methodology to be used for this study is descriptive survey. In this method, representative samples are obtained from sample population and structured copies of questionnaire are then administered to the respondents. The responses would be analyzed with descriptive statistics like percentages and hypothesis is then tested with Chi-Square. Eventually the findings from respondents would form the basis of conclusion and resulting in recommendation for the study.

1.9       SCOPE AND LIMITATION OF THE STUDY

The research study is limited to the Nigerian automated cheque clearing system and other electronic payment instrument and its impact on the Nigeria banking sector. It also deals with the objective of the NACS as well as challenges ahead of the NACS operations.

1.10    HISTORICAL BACKGROUND OF THE STUDY

United Bank for Africa (UBA) Plc, is a Nigerian multinational financial institution.  It is one of Africa’s best and most resilient banking Groups with operations in 19 African countries and offices in three global financial centers: London, Paris and New York.

United Bank for Africa (UBA) Plc is one of Africa’s largest financial institutions with operations in 19 African countries and 3 global financial centers; New York, London and Paris. UBA has more than eight million customers and 700 business offices globally.

UBA has been operating in Africa since 1949, referred to then as the British and French Bank Limited (BFB). It took over the assets and liabilities of BFB and was incorporated as a limited liability company on 23 February 1961 under the Compliance Ordinance (Cap 37) 1922.

In 2005, it completed one of the biggest mergers in the history of Nigeria’s capital markets with the business combination with Standard Trust Bank (STB) Plc. From then, it continued to expand to Ghana, Benin Republic, Côte d’Ivoire, Burkina Faso, Guinea, Chad, Cameroon, Kenya, Gabon, Tanzania, Zambia, Uganda, Liberia, Sierra-Leone, Mozambique, Senegal, Congo DR and Congo Brazzaville. UBA is listed on the Nigeria Stock Exchange where it is publicly traded under the symbol “UBA”.

1.11    OPERATIONAL DEFINITION OF TERMS

Nigeria Automated Clearing System (NACS): NACS is used to describe the automated clearing system of the entire banking and financial industry for both electronic instruments (NEFT) and derivatives/images paper-based instruments (cheques).

 Automated Teller Machine (ATM): Automated Teller Machine refers to a machine that acts as a bank teller by receiving and issuing money to and from the Automated Teller Machine account holders/ users.

Bank: A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets.

Machine: A machine is a tool containing one or more parts that uses energy to perform an intended action.

Banking Sector: The banking sector is the section of the economy devoted to the holding of financial assets for others, investing those financial assets as leverage to create more wealth, and the regulation of those activities by government agencies.

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