THE IMPACT OF THE GLOBAL FINANCIAL CRISIS ON HUMAN RESOURCE MANAGEMENT IN THE NIGERIAN BANKING SECTOR

THE IMPACT OF THE GLOBAL FINANCIAL CRISIS ON HUMAN

RESOURCE MANAGEMENT IN THE NIGERIAN BANKING SECTOR 

ANDAH, R.A.^[1], 

KWON-DUNG, LINDA^[2]  

& 

BATURE, NANA^[3]

Abstract

The current global financial crisis which has engulfed East Asia since July 1997 and subsequently spread to Russia, Brazil, Africa and indeed Nigeria is one of the most pressing challenges facing countries and businesses in today’s global business environment. This is the first true crisis.  Globalization represents the structural making of the world characterized by the free flow of technology and human resources across national boundaries. This paper examines the impact of this global financial crisis on the financial sector with specific reference to the banking sector. And the ability of the human resource managers to deal with the issue of staff layoffs which has been a major challenge to various organizations especially the banking sector of the economy. Pension payment has become a huge source of worry because of the dwindling finances to meet up with the financial obligations of recurrent expenditure, job cuts, layoffs and increased unemployment has become a great challenge of the crisis. Measures that help workers cope with the crisis in the sector would serve social and economic goals. These include adequate, well-designed unemployment benefits and social protection, activation policies and effective public employment services. 

Introduction

Economic crisis is a situation in which an economy witnesses slowdown of economic activities ,increased level of unemployment, decreased consumer spending, low level of investment, low level of trading activities , and the loss of value of assets by a segment of the financial institutions which persists over a period of time . Today’s disastrous financial and economic problems had its origin in a steep contradictions  in credit full effect of which started  to be felt in august 2007 (Aluko, 2000). During these periods of economic crises, workers put their future security and welfare over and above doing their jobs as prescribed by the organizations procedural handbooks. Therefore managers of human resources should have it at the back of their minds that they are dealing with employees that are confronted with high emotions, low morale, curiosity, anxiety, and possible loss of life savings, losing their houses, apprehension and near state of hopelessness because of the fear of the unknown over the sustainability of their gratuities and pension. All these leads to increased rumour mongering accentuated stressed levels, irritability, decreased productivity, cutting of corners and hidden health costs to the organization.

Further more the importance of human resource management in an organization cannot be over emphasized; this is because it plays a strategic role in the success of an organization.   Human resources management witnessed its major development as a profession at the end of world war 11 and the early 1990s (Alaibe, 2002).The world of work in which human resource might operate has changed dramatically in the last few years, this dynamics which exist in the market environment and the financial sector both locally and globally is what this paper will focus on. Human capital management in it's entirely is that of improving how organizations employ, deploy and evaluate their workforce. Similarly the focus of human resource manager is on the development of its human capital within the banking industry. 

Youndit (2000) opined that, since organizations are undergoing fundamental shifts in the ways they conduct business; effective organizations must however view the above thrust seriously. To survive in an environment where, all provide almost the same products and services, the quality of the human element is a major factor. Unfortunately, most organizations underrate and devalue the need to develop human capital. Some view the development of human capital as a loosely designed classroom training program. Others make use of training and development schemes as a means of settling scores between expectations and organizational values. Training and development programmes have been carried out in some quarters without the corporate strategically set objectives. Today’s banks operate in a keenly competitive arena. Knowledge and information fuel the engine. Today’s banks are knowledge-based. They are designed to process ideas, experiences and information. Similarly their methods must change to meet with this new strategy. 

Fajana (2002) puts it, inmost of today's organizations, the ability to learn and change faster than the competitor is the key to survival. According to him, the pace of product, technology and market changes will continue to accelerate with most Banks becoming nimble, flexible and responsive to their customers' needs  of the current crisis. Similarly, from 1996 to 2005, the United States and European insurance markets doubled in size; the corresponding growth in Asia was only 8%, mainly as a result of Japan’s financial stagnation over the period. The Chinese and Indian insurance sectors were also beginning to expand significantly; while Australia’s large financial groups were expected to improve their share of the region’s market. 

The EU27 financial services sector employed 5.6 million people in 2006, with banking and insurance accounting for 75% and 20% respectively. Five per cent of financial services workers are employed with other financial intermediaries. The sector represented 2.7% of total employment in the EU27, a much smaller employment share than that of the US, where the share was 4.7% of total employment, representing 4.1 million workers, 44% of whom were in banking and the rest in insurance and associated services. Financial services employment expansion has been slow, with overall EU27 growth at only 0.5% between 1996 and 2006. To put this into perspective, the increase of total employment of other services sectors during the period was 3%.

The reason for this disparity in growth is explained in large measure by extensive mergers and acquisitions leading to consolidation and restructuring of the financial services sector as firms sought economies of scale and scope to increase their productivity and ability to compete on regional and global markets. The share of financial services in overall employment varies among countries. In the United Kingdom the sector enjoys a pre-eminent status, with 4.8% of national employment. The Netherlands is second with 3.9%, while Germany’s and France’s finance sectors each have a 3.4% share. Luxembourg is a special case, with a very large financial services sector relative to national employment (11.9%). 

Together the financial services jobs of France, Germany, Italy, the Netherlands, Spain and the United Kingdom account for about 75% of the EU27 financial services workforce. The United States financial services sector comprises banking; insurance; and securities, commodities and other investments. In 2006 the sector employed approximately 8.363 million workers, distributed as follows: about 1.825 million in banking; roughly 2.3 million in insurance and 0.816 million in securities, commodities and other investments, and the balance in real-estate-related activities. Office and administrative support workers constitute 2 out of 3 banking jobs. In this paper, the challenges of the crisis to human resources management are qualitatively examined. 

Globalization and the Financial Crisis

The financial industry used to be highly regulated and compartmentalized even within countries. Following changes made possible by advances in IT and spectacular trade expansion resulting from commitments on market access and national treatment for non-national businesses under the World Trade Organization’s General Agreement on Trade in Services (GATS), a large and rapidly growing proportion of financial companies now operate globally. Even those operating solely at the national level are confronted with international competition on a daily basis. Indeed, financial markets can now be defined as arrangements of closely interlinked subsystems in which a wide range of assets based on such things as loans, inter-bank credit, real estate, exchange rates, shares and commodities are created in one country but can be traded anywhere around the world. Such trading has experienced explosive growth and profits over recent years.      

The United Kingdom – and the City of London in particular – has benefited greatly from the growth. However, the globalization of the financial services sector means that decisions made in distant headquarters of major financial institutions have substantial employment repercussions in their far-flung subsidiaries. Job reductions by Nomura of Japan, Deutsche Bank of Germany, UBS and Credit Suisse of Switzerland will impact workers in their American and British operations, as decisions by American Express, Citigroup, Bank of America, Morgan Stanley and the UK’s Lloyds TSB Group, RBS, and Barclays will affect jobs not only in those countries but also in Europe, Asia, Africa, Latin America, Eastern Europe, etc. It is thus no longer possible to limit the examination of the employment impact of the crisis on financial sector workers at a single-country level, as the business and employment outcomes of managerial decisions extend well beyond the confines of a company’s home countries.

The Impact of the Crisis on Financial Services Employment

Not surprisingly, given that the sector has been at the epicentre of the financial and economic crisis, jobs in financial services around the world have been strongly affected, with announced layoffs totaling 325,000 between August 2007 and 12 February 2009. These figures almost certainly understate the real situation, as announcements of job cuts are not always forthcoming. They are also unlikely to include layoffs from independent mortgage brokers, other independent contractors who provide subcontracting services to financial institutions, or the multitude of small financial firms who would not have had the resources to weather the crisis and may have gone out of business entirely.  

Indeed, press reports indicate that as of mid-2008, major British banks began to offer their top rates only to customers who approached them directly, restricting the number and type of mortgages on sale through brokers. In the United Kingdom, the banks’ decision to deprive brokers of their best rates has dealt a serious blow to the mortgage broking industry, which lost 15% of its members between the start of the credit crunch in August 2007 and mid-2008. The number of mortgage advisers had fallen about 30,000 to 26,000 during the same period. Almost three-quarters of the £15 billion in UK mortgages were previously sold through brokers, according to the UK Council of Mortgage Lenders. There is a similar trend in the United States, where mortgage brokers are concerned at attempts by banks to marginalize them, as some of the country’s largest lenders move to block them from offering loans. Brokers have long served as an important loan source, typically offering a wider range of mortgage products from a variety of lending institutions. 

The banks argue that their action reflects a move toward more conservative business practices, but brokers complain that they are being made scapegoats for the credit crisis, and that consumers will suffer as a result. Some legislators and consumer advocates have criticized brokers specializing in subprime mortgages loans typically offered to borrowers with poor credit-ratings. They charge that some brokers persuaded borrowers to apply for loans that were beyond their ability to repay. But mortgage brokers say they have been unfairly blamed for the industry’s failures in recent years. They point out that it is the lenders, not brokers, who ultimately approve a borrower’s application.

Human Resource Management: The Nigerian Case 

Decreased oil revenue in the first week of July 2008 Nigeria’s bonny light crude sold for $76.24 and $57 per barrel at the middle of October and November 2008 respectively and light sweet crude oil. $47.78 on 3^rd December 2008. This represents a dip of about 69.83 percent. Dwindling revenue affects budgetary performance and allocations to sub sectors because of the country’s monoculture economy.

Pension payment might become a huge source o worry because of the dwindling finances to meet up with the financial obligations of recurrent expenditure. Job cuts, layoffs and increased unemployment have become the greatest challenge. Associated with this is increased restiveness of labour unions. Industrial actions, human resource practitioners have a huge challenge and an opportunity to reinvent Human Resource Management (HRM), engender increased developmental processes to improve  human behaviours, attitudes and staff relations that will bring  about improved productivity, which at the end put them to be on top of corporate policies for a key to turn around.         

The global economic crisis is leading to significant job losses in the financial sector. From the policy perspective, three different challenges can be identified, a permanent decline in overall activity and employment after years of expansion; stagnation and even deceleration in income growth; and iii)   restructuring within the financial sector as many financial institutions, including whole sectors of the industry, have disappeared due to mergers and acquisitions, gone out of business, or changed their operating models. 

More fundamentally, the crisis has hit the sector unevenly, affecting employment in some activities more than in others. In particular, employment in investment banking has shrunk strongly, while traditional depository and credit bank activities’ employment has slightly decreased and employment in funds and trusts has continued to grow. It is likely that further labour reallocation among financial sub-sectors will occur in the near future.

Two different scenarios are considered: one showing a more positive picture regarding employment in the sector for the next two years and the other a more worrying one. However, both scenarios coincide on a slump in employment expected to take place during the following years. How long these destructive effects will last is difficult to predict. But whether employment in the sector approaches the more positive or negative scenario will depend heavily on the timing and type of policies that governments put in place to mitigate the effects of the crisis. The following policy recommendations aim at preparing the ground for a faster recovery of the sector, and bringing it a positive scenario of employment growth.

Adopting a Comprehensive Strategy to Respond to the Crisis

The current financial crisis has now become global and therefore requires a global policy approach. Bail-out plans of the financial sector, crucial as they are, are insufficient. The world economy is being affected by a vicious circle of rapidly declining confidence that leads to lower demand, output and employment, which in turn further depresses confidence. What is needed is a global, coordinated stimulus package that breaks this vicious circle and responds to the current problems of failing capital markets, drying-up of credit and massive job losses.  Such a policy package would to be based on the following broad principles:

An immediate policy objective is to stabilize the financial sector and restore confidence to capital markets. In addition, a macroeconomic stimulus package is needed to boost overall demand, thereby supporting the economy and job creation. To mitigate the adverse effects of the crisis on disposable incomes and income inequality, social welfare systems need to be strengthened and workers’ rights protected. Experience shows that social dialogue, as part of the Decent Work Agenda, can be instrumental in designing an effective package of measures.

The massive impact of the crisis for the financial sector needs to be mitigated by social policies that cushion the adverse effects on employment and disposable income and help those who lose their jobs in the Such a policy package would to be based on the following broad principles:

An immediate policy objective is to stabilize the financial sector and restore confidence to capital markets. In addition, a macroeconomic stimulus package is needed to boost overall demand, thereby supporting the economy and job creation. To mitigate the adverse effects of the crisis on disposable incomes and income inequality, social welfare systems need to be strengthened and workers’ rights protected. Experience shows that social dialogue, as part of the Decent Work Agenda, can be instrumental in designing an effective package of measures. The massive impact of the crisis for the financial sector needs to be mitigated by social policies that cushion the adverse effects on employment and disposable income and help those who lose their jobs in the sector to return quickly to employment.

These measures are essential to stabilize the economy and thereby also help improve the outlook for the financial sector. In addition, specific policies targeted towards stabilizing job-creation (Quiggin, 2008), International Institute for Labour Studies (2008a).

There is widespread recognition that the crisis is partly due to a variety of practices and instruments in use in recent years and to irresponsible risktaking in the financial sector. Yet the majority of the sector’s workers had no role in causing the crisis and need support to find new jobs, adapt their skills and sometimes embark on a new career. It is therefore important to adopt measures that: 

i)     provide adequate, well-designed unemployment benefits and social protection;

ii)   support job-search and placement into new jobs, which may sometimes necessitate new skill development measures –all the more important, because, as noted earlier, the sector is likely to shrink, leading to a permanent reduction in employment; many job losers will therefore need to obtain jobs in other sectors;

iii) strengthen social dialogue within financial institutions to mitigate the adverse social effects of the crisis and pave the way for a healthier sector;

iv)  guarantee that contractual commitments made vis-à-vis workers are honoured, especially for those financial enterprises that are forced to leave the market (employees may have to take legal action to protect their rights at work). In addition, as discussed later, compensation packages for executive and trading staff will need to be modified so as to limit rewards for excessive risk-taking.

Policies are needed to ensure that financial sector workers laid off during the crisis are properly protected against substantial losses of income. In particular, lower-level employees are unlikely to receive generous severance payments and will have to rely on unemployment benefits. In some countries, policies are currently being introduced to extend the maximum duration of unemployment benefit. As the crisis unfolds, policymakers are urged to ensure that finance sector employees continue to be appropriately covered and supported in new job search.

Even those employees – often highly-skilled specialists – that have contractual guarantees for severance payments are at risk as the crisis brings down entire financial institutions.

In addition, governments should ensure that finance sector employees continue to benefit from relevant social services such as health. Currently, in countries like the United States, health-care insurance is tightly linked to employment, so there is a higher risk of losing proper health coverage as well as jobs. In Japan, too, the growing ranks of newly unemployed temporary or part-time workers have no company-based unemployment benefits to rely on and there are mounting signs of incidences of extreme poverty. Unemployment benefits, social protection and employment protection are embedded in ILO Conventions that many member States have ratified. It is especially important to apply these conventions in the current context. This will reinforce automatic stabilizers, thereby supporting economic recovery.

Effective activation policies could play a crucial role in promoting the reemployment prospects of job losers from the financial sector. The main elements of these programmes include employment services (such as job matching, career guidance and job-search support; adequate management of unemployment benefits; and referral of jobseekers to reintegration programmes after a period of unsuccessful job search). In certain cases, employment programmes like direct job creation or subsidized jobs can also play a useful role –especially to avoid demotivation among job seekers. These programmes, if well designed, have proved to be very beneficial, helping cushion economic shocks without jeopardizing growth when the upswing sets in. For example, universal social policies such as those used by Nordic countries (e.g. Denmark, Sweden) have encouraged economic development by maintaining high  employment and strong labour force participation while at the same time leading to favourable social outcomes (see World of Work Report 200822, Chapter 6).

There is a strong case for designing specific training programmes for unemployed workers from the financial sector who have been without work for a long period. As already noted, many of these job losers will have to find a job outside the sector, which may involve acquiring new skills.

Whether government support to the financial sector should be made conditional on job guarantees or not is a complex issue, which needs to be addressed taking into account national institutions and practices. However, supporting some of the existing jobs, at least for a limited period of time, may be an effective policy. This of course needs to be coordinated with the policy approach adopted for other sectors –where many innocent victims of the crisis are also losing their jobs.

Social dialogue is crucial to balance conflicting interests and is especially important in the context of the crisis. Finance sector workers may be willing to accept the inevitability of downsizing and restructuring, and even layoffs. But workers also call for management to inform and consult their staff or their representatives before drastic decisions are taken. Moreover, social dialogue can help design training and other programmes that support job losers and facilitate later recovery of the sector.

The Conclusions of the Tripartite Meeting on the Employment Impact of Mergers and Acquisitions in the Banking and Financial Services Sector of February 2001 remain valid in the current crisis. These specified, among other things, that all possible measures short of terminations, such as international transfers, restriction of overtime work and reduction of normal hours of work, should first be considered in case of the need for staff rationalization.

During crises, when job redundancies become the chosen measure to contain costs in enterprises to allow them to stay in the market, several alternatives to lay-offs (early retirement, outsourcing, flexible staffing and work methods, etc.) exist, with more or less adverse consequences for the long-term performance of the labour market. In particular, early retirement programmes that have bee n widespread in the past have proved to be damaging for both fiscal sustainability and employment prospects among the elderly. Evidence suggests that gradual retirement policies and measures that help workers acquire a new career are to be preferred in this respect, as they help employees to keep in touch with the labour market. Of course, governments may need to ensure that such measures do not substantially damage the capacity for these employees to find a more stable form of employment. During the Asian crisis in Thailand, for example, KTB Securities Company initially retained all staff, including those from acquired banks, but eventually restructured its combined operation, introducing incentives to encourage early retirement which resulted in the departure of 2,372 employees at the taxpayers’ expense, with long-term adverse consequences for the labour market. 

Spain provides another example of the dangers of forced early retirement. According to the finance sector trade union, jobs in the banking sector declined from 180,000 to 129,000 between 1980 and December 1999, mainly due to merger-linked early retirements, sometimes thinly disguised as voluntary. Under these circumstances, it is recommended that policy measures be implemented to ensure that banks and financial institutions bear the full costs of their restructuring activities and are not allowed to increase the taxpayers’ burden. In particular, measures that cause longterm damage to the proper functioning of the labour market – such as forced early retirement – should be avoided

Policies for a more Effective Finance Sector Serving the Real Economy

Challenges also lie ahead for those employees that continue to work in the financial services industry. Apart from major restructuring efforts, existing banks and financial institutions need to concentrate on their core business. This will require incentives to move towards less risky activities and avoid

excessive risk taking. This calls for changing corporate governance of the banking sector, including a fresh look at remuneration packages of executive and trading staff. In particular, compensation packages and earnings growth of these employees could better reflect their ability to fulfill the lending role of the institutions that employ them.

Rewarding risk-taking rather than sustainable growth in economic value is considered as one of the factors behind the financial crisis. Indeed the reward system for executives and bank managers needs to be adapted to prevent excessive risk-taking. The existing remuneration model leads to misallocation of risk and places burdens on those least capable of taking on large gambles. In defining appropriate executive compensation packages, experts recommend that reward must depend on high performance attained through the right mix between risk-taking and risk management. As part of this approach, individual incentives would be realigned with the long-term performance of the enterprise. In this respect, some have argued that such a realignment of incentives would require abolishing shareholder value as an indicator of success for the compensation schemes of managers. 

They contend that financial institutions, by their very nature as businesses, are legally obliged to maximize profits for shareholders and it was up to the government to provide the regulations within which they operated. There can be no disagreement on this obligation. As is now clear, however, excessive risk-taking does not necessarily lead to profit maximization; it may rather lead to total destruction of shareholder value. In any case, some countries, such as the United Kingdom, have moved in the direction of requiring that government capital injections come with restrictions on executive pay and dividend policies. This could be used as a possible reform approach in other countries. Another policy recommendation is to redirect executive payments away from short-term cash toward longer term payments. Withholding a portion of annual compensation depending on performance goals allows their subsequent adaptation to eventual adverse conditions that can be clearly linked to previous executive action.

Multi-stakeholder coordination in financial institutions may be improved to ensure better coordination and implementation of agreed international corporate governance standards. Remuneration and incentive systems are supposed to align the interests of corporate officials with the long-term interest of the enterprise and shareholders. Developments in corporate governance mechanisms have led to an increasing use of performancerelated pay systems for executive managers and directors, but empirical studies show that such systems have little effect, if any, on the performance of financial institutions. Moreover, wide variations exist, with examples in some countries displaying virtually no relationship between performance-related pay and company profits. On the contrary, evidence suggests that managers are in a dominant wage-bargaining position with respect to owners, partly as a result of institutional flaws. Distortions in these structures are dangerous, since they may lead to a short-term bias towards additional risk-taking, a particular concern for the financial industry. 

There have been calls from some quarters for employee representation in corporate governance, which might help realign the interests of different stakeholders. Strengthening the role of the enterprise’s board and allowing other Heineman Jr. (2009). Stake holders to participate can counterbalance managerial power and may limit excessive risk-taking. This measure is especially relevant in the finance sector, given the abovementioned problems of excessive management compensation.

Theoretical Foundation of Human Resources Management

Several theoretical perspectives have been developed to organize knowledge of how HR practices are impacted by strategic considerations as briefly described below. Wright & McMahan (1992) have developed a comprehensive theoretical framework consisting of six theoretical influences. Four of these influences provide explanations for practices resulting from strategy considerations. These include, among others, the resources-based view of the firm and behavioral view. The two other theories provide explanations for HR practices that are not driven by strategy considerations: Resource Dependence and Institutional theory.

The resource-based theory of the firm blends concepts from organization economics and strategic management Barney (1991).This theory holds that a firm’s resources are key determinants of its competitive advantage. Firms can develop these competitive advantages only by creating value in a way that is difficult for competitors to imitate.

Traditional sources of competitive advantage such as financial and natural resources, technology and economics of scale can be used to create value. However, the resource-based argument is that these sources are increasingly accessible and easy to imitate. Thus they are less significant for competitive advantage especially in comparison to a complex social structure such as an employment system. If that is so human resource policies and practices may be an especially important source of sustained competitive advantage.

Specifically, four empirical indicators of the potential of firm resources to generate competitive advantage are: value, rareness, imitability, and substitutability. In other words, to gain competitive advantage, the resources available to competing firms must be available among competitors and these resources must be rare. The second theoretical influence is the behavourial view based on contingency theory. this view explains practices designed to control and influence attitudes and behaviours, and stresses the instrumentality of such practices in achieving strategic objectives. The cybernetic system explains the adoption or abandonment of HR practices resulting from feedback on contributions to strategy. For example, training programs may be adopted to help pursue a strategy and would be subsequently adopted or abandoned based on feedback. The fourth influence, based on transaction cost explains why organizations use control systems such as performance evaluation and reward systems. The argument is that in the absence of performance evaluation systems linked to reward systems, strategies might not be pursued. The other two theories provide explanations for HR practices that are not driven by strategy considerations but based on power and political influences, control of resources and expectations of responsibility.

Conclusion and Recommendations

The Banking sector is currently undergoing a deep and thorough restructuring, and the crisis has hit the sector unevenly, which may result in labour movement among financial sub-sectors. This will reinforce the impetus towards structural changes similar to those experienced until now.

This restructuring of the finance sector cannot take place without substantial consequences for both employment and income of current employees in this industry. In fact, the sector is already experiencing a permanent decline in overall activity after years of expansion, which is triggering significant job losses. . Measures that help workers cope with the crisis in the sector would serve social and economic goals. These include adequate, well-designed unemployment benefits and social protection, activation policies and effective public employment services. 

They would not only support the income of affected workers, but also facilitate transition to new jobs and reduce the risk of long-term unemployment and inactivity. There is also a strong case for launching retraining programmes targeted on finance sector workers, given the likely cut in total employment in the sector. 

This paper also considers measures that encourage moving towards a more effective finance sector that focuses on the needs of the real economy. One of the proposed options is to build incentives that encourage the sector to shift to less risky activities through an improved corporate governance structure. This could include rationalizing executive pay and dividend policies. Social dialogue among employers and trade unions in the sector can greatly support adoption of effective measures. Human resource experts are also crucial in ensuring that the measures specific to the sector are well designed.

        

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[1] Mrs. Andah is a Lecturer at the Department of Business Administration, Nasarawa State University, Keffi-Nigeria.

[2] Mrs. Kwon-Dung is a Lecturer at the Department of Business Administration, Nasarawa State University, Keffi-Nigeria.

[3] Mrs. Bature is a Lecturer at the Department of Business Administration, University of Abuja-Nigeria.