ABSTRACT
One of the activities of financial institutions (banks) involves
intermediating between the surplus and deficit units of the economy. Banks as
financial intermediaries emerge to lower the cost of reaching potential
investments, exerting corporate controls, managing risks, mobilizing savings
and conducting exchanges. In Nigeria, banks dominate the financial sector and
there is detailed information about Nigerian banking history but little
information is available on the activities of the financial industry and how
they affect the economy where they operate. Therefore, this study explored in
the light of past trends, the extent to which financial intermediation impacted
on the economic growth of Nigeria between the period 1994 – 2013. The study
adopted the ex-post facto research design. Time series data for the twenty
years period 1994 – 2013 were collated from secondary sources and the Ordinary
Least Squares (OLS) regression technique was used to estimate the hypotheses
formulated in line with the objectives of the study. Real Gross Domestic
Product per capita, proxy for economic growth was adopted as the dependent
variable while the independent variables included bank deposits, bank credits
and bank liquid reserves. The empirical results of this study show that bank
deposits, bank credits and bank liquid reserves exert a positive and
significant impact on the economic growth of Nigeria for the period 1994 – 2013.
This paper recommended amongst others that banks should adopt and engage in
aggressive marketing of their services in order to help increase their deposit
base and as well ensure that a major part of their credit is channeled to the
productive sectors of the economy such as agriculture, industry and power to
encourage growth of the economy. It further recommended that banks should shore
up their liquid reserves to further enhance stability of their operations.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
One of the activities of financial
institutions (banks) involves intermediating between the surplus and deficit
sectors of the economy. According to Bencivenga and Smith (1991), the basic
activities of banks are acceptance of deposits and lending to a large number of
agents, holding of liquid reserves against predictable withdrawal demand,
issuing of liabilities that are more liquid than their primary assets and
eliminating or reducing the need for self financing of investments. In
particular, by providing liquidity, banks permit risk averse savers to hold
bank deposits rather than liquid (but unproductive) assets. The funds obtained
are then made available for investment in productive capital.
Moreover, by exploiting the fact
that banks have large number of depositors and hence predictable withdrawal
demand, they can economize on liquid reserves holdings that do not contribute
to capital accumulation. Again, Bencivenga and Smith (1991), further argued
that by eliminating self-financed capital investment, banks also prevent the
unnecessary liquidation of such investment by entrepreneurs who find that they
need liquidity. In short, an intermediation industry permits an economy to
reduce the fraction of savings held in the form of unproductive liquid assets,
and to prevent misallocation of invested capital due to liquidity needs
(Bencivenga and Smith, 1991). Schumpeter in Kings and Levine (1991), argued
that the services provided by financial intermediaries–mobilizing savings,
evaluating projects, managing risks, monitoring managers and facilitating
transactions, are essential for technological innovation and economic growth
and development.
Levine et al (2000), posits that
financial intermediaries emerge to lower the costs of reaching potential
investments, exerting corporation, controls, managing risks, mobilizing savings
and conducting exchanges. Financial intermediaries by providing these services
to the economy, influence savings and allocation decisions in ways that may
alter long-run growth rates. Banks play an effective role in the economic
growth and development of a country. This role they perform excellently by
helping to mobilize idle savings of the Surplus Unit (SUs) for onward lending
to the Deficit Units (DUs), thus helping in the capital formation of a nation
(Ujah and Amaechi, 2005). It is in realization of the importance of bank’s role
in financial intermediation that successive governments in Nigeria have been
allocating deliberate roles to them in various National Development Plans.
Afolabi (1998), states that with
financial intermediation, the transfer of funds from the surplus sector to the
deficit sector becomes very simple. The intermediary will act as a pool,
collecting deposits of millions of savers and can create forums, e.g.
interest-yielding accounts. The intermediary matches the deposit requirements
of the saver with the investment requirements of the borrower. He acts as a
pool, collecting savings of different sizes from different categories of savers
and meeting the investment needs of the various types of investors. The surplus
sector therefore gains by placing his money with the intermediary since the
income to be earned does not depend on whether or not the intermediary has in
fact lent the money out or whether or not the money was profitably lent. The
overall economic effect according to Afolabi (1988) is that financial
intermediation leads to a better aggregation of savings and therefore helps in
capital formation and investment in the economy.
The banks are mainly involved in
financial intermediation, which involves channeling funds from the surplus
units to the deficit units of the economy, thus transforming bank deposits into
loans or credits. The role of credit on economic.....
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Item Type: Postgraduate Material | Attribute: 95 pages | Chapters: 1-5
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