The Global Financial Crisis

B.LITERATURE REVIEW AND DISCUSSIONS

The subprime global financial crisis unleashed a series of severe effects from stock market collapsing, financial institutions failing, and economic pushed in recession. Based on our research through the journals, we have identified various impact of financial crisis. The impacts are as follows:

1) Impact on financial institutions

The slowdown of the country’s economic growth and the high interest rate charge in the country will cause the economic sector of the country to experience a low economic growth. For instance, the slowdown of the economic growth at 4.5% during the last 5 years at the average of 8.9% and till the end of year 1998, the inflation rate was between 7% and 8%. The debt servicing burden

Central Bank of Nigeria (CBN) initiated the first phase of the bank consolidation in 2005, to provide a strong and reliable banking sector that would guarantee the safety of depositor’s money. Unfortunately, the current global financial crisis, which has its roots in the United State of America and Europe, has spread to other part of the world. The crisis has eroded the confidence of the general public in the Nigerian banking industry, despite their consolidation. The financial crisis caused credit lines recall and also financial institutions’ revenue contraction. When financial institution could not approach the stock exchange for fresh capital and the need for capital adequacy in their balance sheet became necessary, the banks and institutions began the process of recalling their credit lines which they had extended to other banks and institutions. Credit lines are facilities given to banks to boost their foreign exchange transactions. In the past, credit lines were usually not recalled immediately but gradually. But this time, because of the present global financial crisis, and its effects on the balance of banks, they had to recall these credits lines immediately (Soludo, 2008). Besides that, bank liquidity is characterized by a high level of trading, and therefore the amount of liquid assets held by a bank determines its capacity to meet customers’ demands (Iganiga, 1998). One major outcome

Malaysia ringgit (RM) reached a low point of 4.88 on 7 January 1998.After a short time, it appeared possible that the 5.00 level would be breached. This drastic drop was caused by speculation, because the speculators sold the ringgit “short”. The speculator sold the Malaysia ringgit (RM) in the forward market at the current exchange rate with a view to turn over the ringgit at a date in future. Another situation is the speculator borrowed Malaysia ringgit (RM) in order to sell it now and hold US dollars. These two actions contributed to the weakening of the Malaysia ringgit (RM) as the increase of demand for the US dollar. The speculation on the Malaysia ringgit (RM) not only happen in the local markets but also abroad as the ringgit was being traded in foreign markets, such as Singapore. For example, local citizens were channelling their savings abroad, attracted by higher deposit rates offered by banks in neighbouring Singapore for bank accounts denominated in Malaysia ringgit