Global economic melt‐down and the role of financial institutions

Abstract

PurposeThe purpose of this paper is to explore the role of financial institutions in the escalation of the global economic melt‐down (GEM) in America and how policy‐makers in Nigeria can learn from South Africa to safe‐guard the nation's financial institutions from economic shocks that could be propelled by banks' financial recklessness and poor corporate governance ethics.Design/methodology/approachThe paper combines qualitative and quantitative data to establish that Nigeria has a lot to learn from America and South Africa. America is the heartland of the global financial system, and whatever happens to its economy and currency, often cause ripple effects on the rest of the world, except for a nation like South Africa that had an in‐built mechanism to forestall shock. The paper has six sections. First section presents a brief introduction on GEM and its ripple effects. Second section outlines the retrospective causes of GEM. Third section provides justification for regulation of the economy in the economic literature. Fourth section focuses on the thrust of bank regulation and control with reference to South Africa. Fifth section explores the financial institutions, regulation and supervision in Nigeria. Sixth section concludes with policy recommendations.FindingsThe findings in this paper are the potency of financial regulation and supervision to forestall economic melt‐down; the potency of financial regulation and supervision to safe‐guard a nation's financial institutions from financial recklessness and promote good corporate governance.Practical implicationsThe major practical implication of this paper is that the problems of major banks in Nigeria are traceable to liquidity constraints, poor corporate governance compliance, poor credit risk management policy and ineffective allocation of capital to businesses.Originality/valueThis paper supports the Keynesian argument for effective regulation, supervision and control of the economy in general and financial institutions specifically (as opposed to the blind adoption of mainstream neo‐liberal economics).