Project Materials

POLITICAL INSTABILITY AS A THREAT TO INVESTORS IN THE BANKING INDUSTRY

ABSTRACT

The study provides insight into the dynamics of the relationship between political instability and the banking sector in the context of emerging markets. The importance of assessing the political instability of companies investing in emerging markets has increased significantly with the increasing rate of investors.

It is used to manage political instability and decision-making processes during the internationalization of businesses and has been identified as one of the determining factors in the profitability of the banking sector. However, only a few empirical studies on PIAs have been conducted in emerging markets.

Previous studies have shown that political instability has evolved and has had a series of consequences that have influenced the type of strategies adopted by banks. Aware of this, this study in Nigeria aims to identify the specific factors of a country’s political instability and its consequences for the banking sector.

Despite the changing political environment of the country and its population divided into several cultural, ethnic, linguistic and religious divisions, Nigeria has experienced a continuous flow of investors.

This research contributes to the assessment of political instability by critically analyzing the determinants and indicators in order to examine the impact of the consequences of political instability on the banking sector, in order to understand the administrative practices associated with management of political instability in Nigeria. .

Six objectives have been identified: to study the determinants of political instability; examine its impacts; study the variables and indicators used to predict political instability; investigate the consequences of political instability; explore

PIA practices in banks and identify strategies used to manage and mitigate political instability in Nigeria. Similarly, four assumptions in support of these objectives have been formulated to understand the dynamics of the relationship between political instability and the banking sector.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Political instability is becoming an increasingly important issue for emerging market investor growth. According to the report on world investment and political instability in 2013, “there has been explosive growth in investment since the turn of the century, but

political instability has been a major concern for banks operating in the world. developing countries “(WorldBank (2014, p.5)). This is because political instability increases the transaction costs of investing in these markets, so this is one of the determining factors for banks.

Recent studies have shown that political instability has evolved in recent decades and that these different types have emerged during this period. At one point, the main concerns were nationalization and expropriation. Subsequently, problems such as the cancellation of licenses, tax restrictions and investment agreement amendments, repatriation of deferred benefits, terrorism and protectionism have arisen.

The evolution of political instability has made analysis and understanding increasingly difficult. This has had a series of consequences that have influenced the type of strategies adopted by the banking sector for different countries.

However, banks have different types of business ownership, ownership structures and modes of entry. This suggests that banks perceive political instability differently according to their type of commercial participation and their mode of entry.

Most research on business participation has focused on investment because different forms of political instability have more impact than in other types of firms. As a result, the problems of political instability will continue to play an important role in determining the type of business activity, as well as their modes of entry, and will be one of the determining factors in business entry. emerging markets.

The investment index offers more investment opportunities and some developing countries are increasingly being considered as emerging market destinations because of the high return on investment that can be found there.

However, most developing countries tend to have a changing political climate, with unstable governments and more frequent policy changes than developed countries.

This means that countries have specific factors of political instability that must be taken into account. For this reason, investors use various means to assess each host country’s political environment in order to manage and mitigate the consequences of political instability.

The consequences of political instability for investors differ from one country to another, as well as in certain regions of some developing countries (Brink, 2004). The cost of doing business increases with the increasing likelihood of the consequences of political instability, creating different scenarios that multinational corporations need to critically study.

1.2 PROBLEM OF STUDY

The political instability of today can be analyzed from different points of view because of the evolution and the dynamics of the companies in the contemporary world. This is the result of several events that have taken place in different parts of the world and whose consequences have changed the business environment.

Some of these events, such as national terrorism, the “Arab Spring” and other forms of conflict, have resulted in growing political insecurity in some parts of the world.

Especially in Africa, even after five decades of independence, Africa’s economic and political systems remained largely stalled during this period (Tordoff, 2002). There are still a significant number of challenges ranging from political problems to economic problems, as well as problems of insecurity (Asiedu, 2002).

These challenges are more often the product of circumstances that exist in a specific country or sub region because of their political, social, economic and cultural systems. These challenges include economic, political and religious crises,

as well as other forms of conflict that are still being fought in African countries and still prevalent in Nigeria (Ayoob, 1995, du Toit, 2013, Tordoff, 2002). As a result, the impact and consequences of these different types of challenges on the business environment in Nigeria affect investors.

Studies have been conducted on the assessment of instability in Nigeria and other African countries, which have reported associated problems or political instability. They contained generic information on political instability analysis reports, lacking substantial or devoid of due diligence, and were mostly subjective, superficial, and unsystematic (Brink, 2004, Fitzpatrick, 1983).

Most of these reports are generalized, based on a single event occurring in the country and are based on theoretical or hypothetical evidence from conceptual research rather than empirical or pragmatic research processes. The inability of some

multinational corporations to fully understand the various political environments has led to general policies, making some developing countries dichotomous as safe or precarious (Fitzpatrick 1983: 251). It is in this context of challenges that this research aims to investigate the banks operating in Nigeria.

1.3 OBJECTIVES OF THE RESEARC

1. To investigate the determinants of political instability in Nigeria.
2. To investigate the threats of political instability to the banking sector in Nigeria.
3. To identify strategies used to manage and mitigate political instability in Nigeria.

1. 1. RESEARCH QUESTIONS

1. What are the determinants of political instability in Nigeria?
2. What are threats of political instability to the banking sector in Nigeria?
3. What are the strategies used to manage and mitigate political instability in Nigeria?

1. 1. RESEARCH HYPOTHESES

Hypothesis 1: An increase in political instability will result in a negative impact on bank’s revenue

Hypothesis 2: The consequences of political instability will result in a negative impact on bank’s assets

1.6 Significance of study

This study contributes to the literature on political instability in emerging markets, especially as Nigeria is considered one of the fastest growing emerging market destinations in the world. The need to understand political developments and other factors of instability in the country can not be overstated.

Since then, the political and economic state of any country is interdependent, in that decisions made by governments and levels of political stability are parameters with economic and commercial consequences.

However, it is relevant to say that knowledge can only have meaning if it is applied consciously to the resolution of political, economic, social and other complex problems that compromise the development of any nation.

It is in this context that an attempt is made to obtain a global view of banks’ practices in Nigeria in the management of political conflicts. To this end, results results can be systematically evaluated to optimize decision making for successful investment in the country, as well as to stimulate research in this area.

Similarly, the knowledge of governments in most developing countries and bank managers would be greatly improved. They would better understand the political instabilities that affect investors, which would encourage governments to develop appropriate policies to create a more conducive business environment.

In addition, other companies wishing to operate in the country will understand the management techniques, the consequences of political instability in their organization and how they can plan their mitigation strategies to combat instability.

In addition, it will help to understand how the factors of political instability and the specific characteristics of each country influence the process of internationalization, the type of international trade and the basic strategies that multinational companies adopt to make a profitable investment.

1.7 DEFINITION OF TERMS

1. Political instability; the propensity of a government collapse either because of conflicts or rampant competition between various political parties. Also the occurrence of a government change increases the likelihood of subsequent changes. Political instability tends to be persistent.

2. banking sector; the section of the economy devoted to the holding of financial assets for others, those financial assets as leverage to create more wealth and the regulation of those activities by government agencies.

3. threat; to be in an unpleasant situation as being caused by an external factor.

1.8 ORGANIZATION OF THE STUDY

The work has been divided into five chapters. Chapter one which is an introductory chapter also considers the methodology of the study, while chapter two reviews related literature. In chapter three, the method of data collection and analysis is discussed.

Chapter four which presents and analyses the secondary and primary data also discusses research findings. Chapter five which is a concluding one focuses on the summary of findings, conclusions and recommendations.

POLITICAL INSTABILITY AS A THREAT TO INVESTORS IN THE BANKING INDUSTRY