THE ROLE OF BANKS IN THE NIGERIAN ECONOMY
ABSTRACT
The main aim of this research is to examine the role of banks in the Nigeria economy. Four objectives were raised to ascertain the role of bank in the Nigeria economy. The first examine the contribution of bank deposits, the second examine the contribution of bank loans while the third and the last examine the roles of bank revenue and inclusion rate respectively. This study employ secondary data and descriptive research design. Also, multiple regression analysis was used to test the hypothesis in this study. The results revealed a significant relationship between total bank loan and revenue between 1995 and 2012 while there is no significant relationship between bank deposits and inclusion rate within the period under review. This study relies purely on secondary data, and using multiple regression models, the study find outthat banks accounts for about 95.1% variation in economic growth in Nigeria for the period under study.The study concludes that there is a statistically significant role of bank in the Nigeria economy.This, suggest that the performance of the Nigerian economy is greatly influence by bank services. The studyrecommends that the federal government of Nigeria through the central bank of Nigeria (CBN) shouldstrengthened the banking sector to encourage deposits to ensure an improve credit flow to the activity sectors because of its strategicimportance in creating and generating growth of the economy.
CHAPTER ONE
INTRODUCTION
A bank is a financial institution that creates credit by lending money to a borrower, thereby creating a corresponding deposit on the bank's balance sheet. Lending activities can be performed either directly or indirectly through capital markets. Due to their importance in the financial system and influence on national economies, banks are highly regulated in most countries. Most nations have institutionalized a system known as fractional reserve banking under which banks hold liquid assets equal to only a portion of their current liabilities (Scholtens& Van, 2000). In addition to other regulations intended to ensure liquidity, banks are generally subject to minimum capital requirements based on an international set of capital standards, known as the Basel Accords.
According to Azege (2009), there are different types of banks. Commercial bank is the term used for a normal bank to distinguish it from an investment bank. Community banks are locally operated financial institutions that empower employees to make local decisions to serve their customers and the partners. Community development banks are regulated banks that provide financial services and credit to under-served markets or populations. Land development banks are special banks providing long-term loans are called land development banks (LDB). The main objective of the land development banks is to promote the development of land, agriculture and increase the agricultural production. The land development banks provide long-term finance to members directly through their branches. Credit unions or co-operative banks are not-for-profit cooperatives owned by the depositors and often offering rates more favorable than for-profit banks. Typically, membership is restricted to employees of a particular company, residents of a defined area, members of a certain union or religious organizations, and their immediate families.
The importance of banks in generating growth within the economy has been widely discussed in literature. There seems to be a consensus in literature among scholars of banks’ role in facilitating technological innovation through their intermediation roles. The belief is that efficient allocation of savings through identification and funding of entrepreneurs offers the best chances of successfully implementing innovative products and production processes that add value to the macro-economy. It is on this note that the researcher is analyzing the role of banks in the Nigeria economy.
1.1 BACKGROUND TO THE STUDY
The development of the economy has been a major objective of successive Nigerian governments (Soludo, 2004). During the colonial period, the focus was on the provision of physical infrastructure in the belief, in line with the prevailing economic ideas, that the facilities would induce the private investments that would produce the desired state of the economy. After independence the government became more directly involved in promoting economic growth. The thinking this time was to nurture private entrepreneurs and mobilize needed domestic resources for investment in some preferred sectors. This brought banks and their intermediation function into prominence in the history of Nigeria economy (Badun, 2009).
Banks as financial intermediaries are expected to provide avenue for people to save incomes not expendedon consumption. It is from the savings they so accumulate that they are expected to extend credit facilitiesto entrepreneurs and other industrialists. Many of the banks that were in existence in the period beforeindependence were foreign owned and did not therefore share in the vision of banks financing localenterprise. This exclusion of Nigerian entrepreneurs was instrumental to the establishment of indigenousbanks. The initial indigenous banks were established to address this perceived discrimination againstNigerian borrowers by foreign banks. Their main objectives were to encourage local investors, supportbudding entrepreneurs and hence foster economic growth. Unfortunately many of them failed, hinderingtheir contribution to the economy (Onoh, 2002).
Several reasons accounted for the high rate of failure of these early indigenous banks. One of the majorreasons was that they operated in an unregulated banking environment. In order to check the incidence offailure among the banks and strengthen them to perform the growth function alluded to earlier the CentralBank of Nigeria (CBN) was established with the principal mandate of regulating the banking industry(Onoh, 2002).
Banks helps in developing countries in a number of ways which includes providing finance directly to the organization and individual for the marketing of their produce and meeting the credit requirement of all types of rural and urban people. Some impact played by banks includes
1. Accepting of saving from individual and corporate bodies
2. Granting of loans and
3. Serving as a financial adviser to their customers.
1.2 STATEMENT OF THE PROBLEM
Despite several policies that have been used to regulate Nigeria banks, the contribution of Nigeria banks to the economy has not been significant and their contribution needs proper examination.The relationship between Nigerias’ banks and growth of the economy has been a subject of great scholarly research over the years with several of these studies trying to empirically unravel this relationship and the level of its influence. Regrettably however, all the researches have not yet agreed on the level of relationship if any, on the role of banks in the Nigeria economy. This has prompted this research on the role of banks in the Nigeria economy. The researcher is curious about some specific variables that may possibly influence the economy such as bank deposits, bank loans, bank revenue, bank inclusion rate, bank density etc. Some study has been carried out on the relationship between factors such as bank deposits, loans, revenue and the growth of the nation’s economy.FDC (2016) also stated that considering a time when Nigeria’s economic growth is slowing down, bank’s financial inclusion is very important. Bank inclusion ensures that irrespective of income level, all individuals, households and businesses have access to appropriate financial services products
Furthermore, researches that has been conducted in order to address the challenges of under-development and chronic poverty in Nigeria, has identified banks deposit as key elements in the development process and poverty alleviation. However, this study is examining the role of these specific factors (deposits, loans, revenue, and inclusion rate) on the Nigerian economy. Then, the role of banks in the Nigerian economy would have been properly clarified.
1.3 OBJECTIVES OF THE STUDY
The general objective of this study is to analyze the role of banks in the Nigeria economy while the following are the specific objectives:
1. To examine bank deposit contribution to Nigeria economy.
2. To examine bank loan contribution to Nigeria economy.
3. To examine bank revenue contribution to Nigeria economy.
4. To examine bank inclusion rate contribution to Nigeria economy
1.4 RESEARCH QUESTIONS
The research will address the following specific questions:
1. What is the contribution of bank deposit to Nigeria economy?
2. What is the contribution of bank loan to Nigeria economy?
3. What is the contribution of bank revenue to Nigeria economy?
4. What is the contribution ofbank inclusion rate to Nigeria economy?
1.5 RESEARCH METHODOLOGY
The methodology to be adopted in this research is Quantitative method. The research will use the deductive approach and conduct a pilot study followed by the actual survey. Primary data will be collected through a survey conducted on the respondents which are the bank staffs or others financial institution clients. Secondary data will be collected from existing literature such as the Department of Statistics, research papers, journals articles, and financial management books.
1.6 EXPECTED CONTRIBUTIONS
The expected contributions of this research will evident in the enlightenment of the stakeholders in the banking sector and the general public on the role of banks in the Nigeria economy, or at least encourage the government of Nigeria in enacting and implementing policies that will be favorable to banks in fulfilling their role in developing various sectors of the economy. Moreover, reposition the banks will enhance the small businesses and get them connected to the better decision that will lead to high profit and low financial risk.
1.7 POSSIBLE LIMITATION
This research is limited to the role of banks in the Nigeria economy. This research will not be discourse and exceed or goes beyond the role of banks in the Nigeria economy unless we trying to prove a point on a case related to this topic.
1.8 ORGANIZATION OF THE THESIS
The study is presented in five chapters. The first chapter which is the introduction covers theBackground of the study, problem statement, research objectives, research questions, conceptual model, hypothesis, research method, expected contribution, possible limitation. This is followed by chapter two which reviewed extensive related empirical literature on the subject matter. Among the various topics to be covered include concepts of bank, evolution of banks, contribution of banks to the real sector of the economy, regulatory policies, factor limiting the contribution of banks to the Nigeria economy, review of recent literature, and identification of research gap.
Chapter three looked at the methodology of the research which comprises the research design, population of the study and method of population determination, sampling procedure and sample size determination, method of data collection and data sources, instrument development, pilot study, and method of data analysis and statistical tool. Chapter four is dedicated to introduction, respondent background, descriptive statistics, and discussion of findings. Finally, chapter five deals with a summary of the finding, recommendation, and conclusion.
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