Full Project – Commercial banks internationalization and business outcomes in the Nigerian banking industry

Full Project – Commercial banks internationalization and business outcomes in the Nigerian banking industry

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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.


1.2 Statement of the Problem

Globally, many companies that are facing slow domestic growth are attracted to internationalization to enhance business fortunes (Duysters, 2009). Greater competitive pressures force firms to internationalize, and consequently firms need to respond to new levels of complexity surrounding the diverse cultural, institutional and competitive environment. In the manufacturing sector two companies, Haier Group and Tata Group, provide ready examples. In 1984, a renowned manufacturer of comprehensive household appliances in China, the Haier Group, was close to bankruptcy as evidenced in declining turnover and high debt profile. The trend of globalization and the rising interdependence of the world economy since the late 1980s marked a turning point in the history of Haier (Duysters, 2009). The company envisaged keen competition from foreign firms in a hitherto (largely) protected domestic market. Haier thus restrategized changing its focus from the domestic market to foreign markets.


Tata Group is India’s largest business group deriving half of its earnings from export and offshore production. The reason or motive for internationalization was the desire to diversify and reduce dependence on a declining and stagnant domestic market. Goldberg and Johanson,1990; Buch and Lipponer, 2004; Magri, Mori, and Rossi (2005) postulated that commercial banks as service providers, establish in foreign countries to increase market share, maximize profit  and maintain existing clients who are expanding to foreign markets. Furthermore, they also expand to exploit ownership advantages that include technology, organizational skills, managerial competence, and credit and marketing skills. It has been mentioned that the first mistake companies make is in choosing the wrong motives to expand internationally (Wenbo, 2007). Going abroad because the domestic market has little or no growth is a bad reason. It has been suggested that failure in internationalization initiatives could be as a result of adopting improper internationalization strategy and process due to knowledge gap of the specific features and developments in the extremely competitive global market.

Walmart, the most successful retail operation in USA failed in Germany due to poor management and total absence of analysis of the local market or culture of the host country (Andreas & Andreas, 2003). Another object of concern is mode of entry into foreign markets. There are different entry modes, the most common are alliances and joint ventures, franchising, importing and exporting, licensing agreements, wholly–owned subsidiaries, mergers and acquisitions (Luthans & Doh, 2009). Why do Nigerian banks prefer subsidiary mode and not any other entry mode, especially given the inherent risk and higher cost in terms of resources and commitment of finance? The Central bank of Nigeria in 2012 discouraged Nigerian banks from shoring up the capital base of their foreign subsidiaries due to the pressure it places on the balance sheet of parent banks. The apex bank had insisted that the parent (Nigerian) banks should either raise capital to recapitalize their foreign subsidiaries in the host countries or exit such foreign subsidiaries in the event of failure to raise capital.


Due to slow recovery of the capital market, Access bank has to divest from its Cote d’ivore subsidiary. Aside the substantial investment in internationalization by companies globally, there has been a limited acceptable ways to determine business outcomes and methods of measurement and this limitation could lead to defects. As a result many researches use financial metrics such as sales, profit, and balance sheet size as a form of measuring firm business outcomes. Nevertheless, non- accounting and qualitative methods can replace accounting methods as objective measures of outcome (Brothers and Hennart, 2007). It is suggested in this study that other than the usual measures of internationalization outcome, motives behind the internationalization would be used to measure business outcome.




1.3   Objective of the Study

The general objective of this study is to examine the relationship between commercial banks Internationalization and business outcomes in the Nigerian banking industry in the context of domestic economic reform and liberalization of trade. The specific objectives are to:

  1. examine the effect of location choices in internationalization of Nigerian commercial banks have  on business  outcome;
  2. identify how government policies on internationalization in the banking sector affect business outcome;
  3. determine the relationship between motives behind decision of Nigerian commercial banks to internationalize and business outcome and
  4. evaluate the relationship between entry mode into foreign markets and business outcome.


1.4      Research Questions

  1. How does location choice on internationalization of Nigerian commercial banks affect business outcome?
  2. How does government policies on the internationalization of commercial banks affect business outcome?
  3. What is the relationship between the underlying motives and reasoning behind internationalization of commercial Banks in Nigeria and business outcome?
  4. What is the relationship between entry modes adopted by Nigerian commercial banks in internationalization and business outcome?

1.5       Hypotheses

The hypotheses of this study were tested at P < 0.05 level of significance

H01          Location choices of internationalized Nigerian commercial banks does not have significant effect on business outcome.

H02          Government policies on internationalization do not have significant effect on the business outcome of an internationalized commercial bank.

H03          The commercial banks motives for internationalization does not have significant relationship with the business outcome

H04      There is no significant relationship between entry mode and business outcome of an internationalized commercial bank.


1.6    Scope of the Study

In terms of geographical area, the five commercial banks chosen all have head offices in Lagos, Nigeria and the study will focus on internationalization activities within the African continent. In this study, the researcher did not focus on merchant banks or  foreign banks operating in Nigeria such as Citibank, StanbicIbtc, Standard Chartered bank but on indigenous banks with origin from Nigeria with subsidiaries outside Nigeria and listed on the local bourse. The banks selected are Access bank, First bank, Gtbank, Zenith Bank and UBA.


1.7   Significance of the Study

Society:   Banking is a crucial sector to the welfare of all business entities and the society at large. The society comprises of equity investors and the banking public who are consumers of banking services, equity investors would earn good returns on their investments owing to internationalization activities of commercial banks while consumers can conveniently access banking services no matter where they are.

Industry and Management Practice:   For industry players, the findings are very useful as it educates players on how to successfully internationalize to respond to competition from international banks for the developing economies of sub-saharan Africa.  Managers of commercial banks could through this study get an insight on how best to construct investment portfolio among other industry firms.

Academic Relevance:  The study would be useful in generating new knowledge and opening new frontiers as such academics would find a source of reference for future research.

For students, it will provide fresh insight into the phenomenon of international expansion by commercial banks. The study is original in view of the fact that it adds to the literature, the factors that determine foreign expansion by banks from an emerging economy, in this case, Nigeria. The findings shall constitute an important body of knowledge for students and also enhance their understanding of the subject.

Stakeholders and Government: Policy makers would find the result useful in policy formulation and implementation in ensuring that conducive environment that supports indigenous banks to internationalize is created.


1.8 Operationalization of Variables

The variables in this study are location, entry mode, motivation and government policies

Y         =          f(X)

Y         =          Dependant Variable – Business Outcomes

X         =          Independent Variable – Factors that influence Internationalization

X         =          (x1, x2, x3, x4)

Where Y         = Business Outcome

x1         = Location Choices

x2         = Government Policies (home and host country)

x3         = Motive for Internationalization

x4         = Entry mode

Y         = f(x1, x2, x3, x4)

Y         = f(x1)………………………………………….(1)

Y         = f(x2)………………………………………….(2)

Y         = f(x3)………………………………………….(3)

Y         = f(x4)………………………………………..  (4)


Model specification

The Specific models are

Y  = a0  + β1 x1+ e……………………………..H01

Y  = a0 + β2 x2 +e………………………………H02

Y  = f(x3)  ………………………………………H03

Y  = f( x4) ……………………………………..H04

Where Y  = Business Outcome

x1  = Location choice

x2 = Government Policy

x3 = Motive for Internationalization

x4 = Entry mode

e =   error term

a0 = intercept of the model

β1 – β are the coefficients of the respective component of Internationalization.


1.9 Operational Definition of Terms

Business Outcome: Business outcome which can also be referred to business performance indicates how well an enterprise performs as a result of internationalization of its operations and is an essential factor in measuring organization success. Business outcome will be measured in this study by quantitative and qualitative methods. Such quantitative methods will be accounting-based such as percentage contribution of foreign subsidiaries to turnover, profit, total assets and deposits. Qualitative methods will incorporate motives of the bank for foreign expansion and how well it was achieved.


Location choices: refers to the factors that influence choices that banks make in deciding in which market or country to invest in. It refers to all the key factors of production such as geographical location, transportation and traffic, culture and history, and political legal system.


Mode of Entry: is the formal arrangement that guarantees seamless establishment of a bank’s presence and the transfer of bank’s products, innovation and services, information technology platform, human resources, management and organizational skills into a foreign country. It is the implementation stage of a bank’s internationalization process in which the firm relying on its own resources, such as capital, techniques, brand or management experiences through various investment modes to penetrate target country or region.

Motive for Internationalization: Focuses on the reason behind the decision by a bank to internationalize. In general, the progresses of economic advancement and integration, technology innovation and intensified competition motivate the internationalization of banks.

Government Policies: The policies of home and host countries that act as incentive or disincentive for internationalization such as trade reforms, liberalization and political support of the government.

Commercial Banks: refers to banks licensed to accept deposit from customers, which may be individuals or corporates and provide a payment transmission service, savings and loan facilities. It is different from a merchant bank to the extent that a commercial  bank is retail for basic banking needs, whereas merchant banks is wholesale for high net worth individuals and large companies. Commercial banks operate several branches while merchant banks maintain a branch or very few branches in major cities.


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Full Project – Commercial banks internationalization and business outcomes in the Nigerian banking industry