Financial Intermediation on the Economic Development of Nigeria

Impact of Financial Intermediation on the Economic Development of Nigeria (1990-2014).

ABSTRACT

This study examined impact of financial intermediation on economic development in Nigeria from 1990-2014.The objective of the study are to determine the impact of credit to private sector on the development of Nigerian economy and to ascertain the impact of demand deposit on economic growth of Nigeria. The study employed the quantitative research design through the use of the Ordinary Least Square (OLS.).The regression result obtained shows that there is a positive and a significant impact between financial intermediation on economic development in Nigeria as revealed by the individual test of significance the T test at 5% level of significance. The study therefore recommends that monetary authorities should properly control and regulate the activities of the financial intermediations in order to achieve a sound financial system in the country. Also the government needs to ensure the existence of vibrant and efficient financial system that promotes financial intermediation in economy.

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

          Banks and other financial services are essential nucleus to economic development through the financial services they provide. Their intermediation role can be said to be a catalyst for economic growth and development. The efficient and effective performance of the banking industry over time is an index of financial stability in any nation. The extent to which a bank extends credit to the public for productive activities accelerates the pace of a nation’s economic growth and its long-term sustainability.

          Financial Intermediation, as a process involves the transformation of mobilized deposits liabilities by financial intermediaries such as banks into bank assets or credits such as loans and overdraft. The attainment of a steady, viable and speedy economic development in any nation is essentially a function of the availability of monetary assets in the economy. Sanusi (2002), opines that the ‘availability of investible funds is a key factor in the growth process of any economy. Although not a sufficient condition, resource availability is certainly a necessary condition for output and employment growth. Indeed, there is ample evidence to show that countries that have enjoyed or are enjoying economic prosperity have been linked with an efficient mechanism for mobilizing financial resources and allocating same for productive investment.’ Efficiently managed financial intermediation process contributes immensely to a vibrant financial system, higher levels of output, employment, and income and through that enhances the living standards of the citizenry. This no doubt explains why special attention is being focused on financial intermediation by economic players in recent times.

          An efficient financial system is one of the foundations for building sustained economic growth and an open, vibrant economic system. In the early neoclassical growth literature, financial services played a passive role of merely channeling household savings to investors. The success of the financial system throughout the world has been predicted on the initiation of financial sector policy and reforms such as the introduction of market-based procedures for monetary control, the promotion of competition in the financial sector, and the relaxation of restrictions on capital flows. Financial Intermediation is a process whereby a financial intermediary such as bank mobilizes bank deposits are transform deposit money into bank credits, usually loans and overdraft. It is simply the process of taking in money from depositors and then lending same out to borrowers for investment and other economic development purposes. The process allows financial institutions acting as intermediaries channel funds from surplus eco-nomic units (individuals and firms having surplus savings) to deficit economic units (firms and businesses in need of funds to carry out desired business activities). Relatively, it involves the conversion of bank largest liabilities (deposit liabilities) to bank largest interest earning assets (bank credits which includes majorly loans and overdrafts). Thus the efficiency of the financial system of every nation could be said to hinge largely on financial intermediation process because it plays very vital and proactive roles in ensuring capital accumulation necessary for productive investments and development As a matter of fact, the global financial system and the business of banking in particular flourishes on financial intermediaries’ abilities to receive deposit at low interest rate and lend them at a pretty higher rate of interest to businesses.

         Financial intermediaries are agents, or groups of agents, who are delegated by authority to invest in order to buy other securities. A first step in understanding intermediaries is to describe the features of the financial markets where they play an important role and highlight what allows them to provide beneficial services. It is important to understand the financial contracts written by intermediaries, how the contracts differ from those that do not involve an intermediary, and why these are optimal financial contracts. Debt contracts are central to the understanding of intermediaries. The cost of monitoring and enforcing debt contracts issued directly to investors (widely held debt) is a reason that raising funds through an intermediary can be superior. Debt contracts include contracts issued to intermediaries by the borrowers that they find (these are bank loans) and the contracts issued by intermediaries when they borrow from investors (these are bank deposits). Portfolio diversification within financial intermediaries is the financial-engineering technology that facilitates a bank’s transformation of loans that need costly monitoring and enforcement into bank deposits that do not (Diamond, 2006 and Uremadu, 2012).

If an intermediary provided no services, investors who buy the secondary securities issued by the intermediary might as well purchase the primary securities directly and save the intermediary’s costs. To explain the sorts of services that intermediaries offer, it is useful to categorize them in terms of a simplified balanced sheet. Asset services are those provided to the issuers of the assets held by an intermediary, e.g., to bank borrowers. An intermediary that provides asset services is distinguished by its typical asset portfolio. Relative to an intermediary that provides no asset services, it will concentrate its portfolio in assets that it has a comparative advantage in holding. The model presented below provides a foundation for understanding this aspect of intermediation, showing that reduced monitoring costs are a source of this comparative advantage. This is in line with Fama (1985) that banks issue large certificates of deposit which pay market rates of interest for their risk but are also subject to reserve requirements, implying that the reserve requirements are passed along to borrowers. This is also evidence in favor of the idea that banks provide asset services, There are other important aspects of intermediation that we can equally discuss here: liability services and transformation services as earlier indicated somewhere in this study. Liability services are those provided to the holder of intermediary liabilities in addition to the services provided by most other securities. Examples include the ability to use bank demand deposits as a means of payment and the personalization of contingent contracts available from life insurance companies. Some liability services, such as check clearing, are well understood, while others relate to difficult issues in microeconomic theory regarding the role of money.

1.2 Statement of Problem

          The financial intermediaries of the Nigeria economy are expected to be responsible for financial resource mobilization and intermediation between the various sectors of the economy. They are to redirect funds from the surplus sectors of the economy. The financial intermediaries are supposed to provide the funds used as capital inputs by producers in other sectors of the economy as well as the final consumers. The impact of delivery of these financial services in these financial services in the form of capital to the producers and individuals is felt both in the short run and in the long run, therefore, the financial sector, especially the banking sector is very important in effective functioning of the real sector of the economy. The real sector of the economy forms the main driving force of the economy. It is the engine of economic growth and development. Largely, the real sector depends on the banking sector for the provision of the required funds for investment purposes.

          Based on the assumption that banking sector plays an important role in financing the real sector, successive government in Nigeria have carried out reforms and institutional innovations in the banking sector with the aim of ensuring financial stability of the sector so as to influence the growth of the economy and also to ensure that banks plays the critical roles of financial intermediation in Nigeria.

          However, despite the series of reforms and restricting aimed at strengthening the bank`s  ability to efficient service delivery and branch networking and fund the  real sector problems still persists such as decline in domestic credit by the banking sector to the private sector, there is also considerable liquid mismatch in the Nigeria economy ( CBN 2007). Another problem is that of high concentration of loans to few sectors of the Nigeria economy to the detriment of other sectors. According to CBN, (2007) there is a high concentration of loans to oil and gas and communication sector with credit exposure within the banking remaining predominantly short date (at less than 12 months) highlighting the bank relative lack of long dated funding, similarly, there is a significant mismatch between where credit is supplied by sector and the main contributors to the GDP  by sector for example although agriculture is the largest contribution to the Nigeria`s GDP (34% of the total GDP in 2012) only 3% of bank credit exposure is to the agricultural sector in 2007 when compared to the  communication sector which accounts for 4.4% of total real GDP in 2012  and 5.6% in 2014 was supplied with 31% of total real GDP in 2014 was supplied with 27% of total credit to the private sector in 2014 (CBN , 2014 vol 24). Therefore, the problem remains that the real sector is yet to be effectively linked to the financial intermediaries in the country.

1.3 Objectives of Study 

          The main objective of this study is to examine the impact of financial intermediation on economic development in Nigeria. Other specific objectives include the following.

  1. To ascertain the impact of demand deposit on economic growth of Nigeria.
  2. To determine the impact of credit to private sector on the development of the Nigeria economy.

1.4 Research Question

This study seeks to examine the impact of financial intermediation on economic development in Nigeria.

  1. What is the impact of demand deposit on Nigeria economic growth?
  2. How far has credit to private sector significantly impacted on the development of the Nigeria economy?

1.5 Research Hypotheses 

The study will be guided by the following statement of hypotheses formulated based on the objectives of the study:

Hypotheses One

  1. HO: There is no significant relationship between demand deposit and economic development in Nigeria.
  2. HI: There is a significant relationship between demand deposit and economic development in Nigeria.

Hypotheses Two

  1. Ho: There is no significant relationship between credit to private sector and economic development in Nigeria.
  2. Hi: There is a significant relationship between credit to private sector and economic development in Nigeria.

1.6 Significance of the study

 The study will be significant as it`s finding will serve as an intellectual source or data bank for researchers, policy makers, government as well as stakeholders in the financial sector on possible ways of uplifting bank service in the financial sector. The study will be of benefit to Government and her monetary authorities such as the Central bank of Nigeria, National insurance deposit commission and the rest towards monitoring and regulating the financial institution with inputs from this study. All policy makers and stakeholders in the financial sector will find the work valuable as it will help to redirect policy towards financial intermediation especially in the banking sub sector of the economy.

This research work will be of great intellectual value to students of banking and finance and other discipline who would want to make further research on the impact of financial intermediation on economic development in Nigeria.

Finally, it will add to already existing body of knowledge on this topic as it will provides a new window for further research.

1.7 Scope of the Study

This study will focus on economic development and financial intermediation in Nigeria as from (1990 – 2014). The choice of the period is as a result of data availability and thus, helps to capture financial intermediation in Nigeria from various grounds. Hence, these is been informed by the variables to the study. Annual time series data will be employed by this study to conduct the investigation.

1.8 Limitations of the study

          There were some factors that militated against this study. The major limitations are time constraints as combining academic work with project writing; I encountered some difficulties in deriving data needed to carry out this research. However the researcher was able to overcome them and as much this was properly carried out.

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