CHAPTER ONE
INTRODUCTION
1.1 GENERAL OVERVIEW OF THE STUDY
The insurance and banking industries, both of which are components of the Nigerian financial system, play very important role in the country. They jointly for the backbone of the economy without which all economic activities would come to a halt or collapse. There is no doubt that the insurance and banking industries contributed to economic growth and development but how and to what extent they do so is the prerogative of this study. In their joint roles as tools for economic development they converge and diverge at certain points of interest, which characterized the differences and similarities in their setup. It is against this background that I shall carry out a rear exhaustive comparison of the two industries.
Insurance has been in existence and practiced in many ways in our society ever before the colonialists in such co-operative and thrift with group as grades, town unions, Esusu etc with the sole aim of spreading the loss of few amongst many. Modern insurance, however, was introduced into Nigeria as late as 20th century by the British Merchants who had established trading parts on the west coast of Africa. The first insurance company to have full branch office in Nigeria was Royal exchange Assurance Company Limited, which opened it’s office in Lagos in 1921. Until the time of independence in 1960, there was virtually indigenous insurance company in the country. Prior to the incorporation of the first set of indigenous insurance companies insurance business in the country had been underwritten by offices, which were primarily branch office of European Insurance companies. Between the year 1960 and 1975 a large number of wholly indigenous Nigerian insurance companies commenced operation and these companies now under write a substantial volume of the total insurance business in the country.
The insurance industry or market in Nigeria has experienced a tremendous growth and development from what it was in the early days of it’s establishment by the British colonialists. The government and individuals have become more aware of the need for insurance in our society and now patronize the insurance industry. The present economic reconstruction programme of the government and it’s subsidiaries in the country. According to statistics carried out in 1989, there existed about 105 insurance companies in the country 81.9% of which were indigenous while, 18.1% is partly expatriate. There are also several insurance brokerage firms, Reinsurance companies, Agency officer, Mutual insurance societies, insurance loss adjusters and surveyors, pensions consultants etc in the country today.
The history of Banking in Nigeria dates back to early colonial period.
The activities of transactional corporation, the financial transaction of the colonial government, the decline of the barter system of trade and the increasing acceptance of British silver currency-all these required an institution in the form of commercial bank for the safety and transaction of funds and also for provision of credit to government and trading companies. It was for this purpose that the African banking cooperation based in South Africa was invited by the Elder Dempers & company to open a branch in Lagos followed by the Bank of British West Africa (now known as the first bank), which opened it’s first branch in Lagos 1894.
The bank of the British West Africa later superceded the African Banking cooperation and exercised virtual monopoly over banking in Nigeria within that period. From this early beginning, more expatriates Banks continued to open branches in Nigeria until in 1929 when the protocol was broken by the establishment in Lagos of the first indigenous commercial Bank. In addition, there exists the Central Bank (established in 1958) which main objectives is to issue legal tender (currency) in Nigeria, safeguard the international value of the currency, promote monetary stability and a sound financial structure in Nigeria and to act as a financial advicer and Banking industries in Nigeria operated in open and free markets whereby competition is reasonably fair, although government intervenes often to regulate their operations and ensure a fraud free business transaction.
1.2 STATEMENT OF PROBLEM
Our economy today is played with so many problem the most threatening of which is inflation. The Nigerian economy has been under a period of recession ever since unscrupulous individuals squandered the earnings from the oil boom. Government policy has been made to have as a prerogative, the revival and revitalization of the economy through economic reconstruction programmes and activities. This objectives is achieved with the assistance of the financial intermediaries. The insurance and banking industries play a joint role by the creation of capital, mobilization and distribution of scarce fund into the economy, regulation of money and capital market, assisting growth the provision of financial services. These institutions have been performing these duties in the economy for years now but the question that comes up is-how much have their efforts been aimed at ensuring an improved economy? This gives rise to a number of other questions Like:-
How do the insurance and banking industries help in economic development?
How do they finance their financial intermediation activities?
What impact do their activities make on the economy?
These questions are in themselves problems to which the researcher would find answers.
1.3 OBJECTIVE OF THE STUDY
The purpose of this study is summarized as follows:-
1. To study the activities of the insurance and Banking industries. Thereby determining their impact on the economy and the economy and ascertaining their roles.
2. To bring to light areas of similarities between the two industries and how they interdependent on each order in the fulfillment of their roles.
3. To differentiate and draw a line between the services and purposes the insurance and banking industries serve.
4. Finally, to bring to light the factors the hamper on or resist the activities of the industries and the areas of failure in their operations and reasons for this failure, which would e concluded with suggested solutions.
1.4 STATEMENT OF HYPOTHESIS
A Null Hypothesis
A null hypothesis is an assertion that the population parameter is not different from what it is supposed to be, or what it has been in the past. It represents a status quo situation or an existing belief. This is symbolized thus: Ho:
Alternative Hypothesis
It specifies a population parameter that is different from the status quo.
This is symbolized thus Hi:
Ho: Insurance and banking industries have a very significant impact to the development of economy.
Hi: Insurance and bank industries do not have a very significant impact to the development of the economy.
1.5 SIGNIFICANT OF THE STUDY
By the end of this research work, a strong step would have been taken in bringing to the notice of the public the various roles and importance of the insurance and banking industries in our society and their contribution to growth and development of the economy. There is also an urgent need to correct the erroneous impression the society has adopted on insurance and banking activities. This study shall go a long way in clearing this cloudy conception.
The passive communication network between the industries and the public has further helped the situation and embodied problem is that when people talk of insurance, the image is difficult to visualize even if the type of insurance is specified. Simplification in communication must therefore be an absolute priority in abating this situation. This study aims at strengthening the relationship between the banking and insurance industries by bringing to light the area in which they can depend on each other and exchange services on furtherance of their economic development. At the end of this study, the problems facing the insurance and banking industries shall have been tackled eg. The bad public image, restrictions and financial constraints. A good reputation for services, reliability and efficiency will be required. Suggestions made in this study will focus on areas where intensive marketing research would be done in order to solve the problems facing them. Prudent utilization of available funds by way of investment into progressive ventures is necessary and important
1.6 SCOPE OF STUDY
The study is on the investigation of a comparative analysis of the performance of the two sectors in Nigeria. However, for the purpose of this study, the study, the study will be restricted to NICON INSURANCE PLC and FIRST BANK OF NIGERIA PLC. These organizations are selected to represent the entire insurance and banking industries operating in Nigeria. Furthermore, its important to state here, that the data required for the computation and analysis of this study would be obtained from these industries websites and branches within.
1.7 LIMITATION OF THE STUDY
The subjects – the insurance and banking industries are studied in the wider context of their roles. There is no concentration of either of the industries in one area; rather they are made up of various companies/firms operations in difference parts of the country. They all serve a common role thus the writer shall adapt a general approach in presenting the study and limit himself to few insurance companies and banks in the data presentation and analysis.
It is the researcher’s bank wish to state that this study was out with in limits imposed by practical considerations of financial costs and limited time. To fully investigate the responses of the Nigerian insurance and banking industries to the multifarious economic and social needs of more than 100 million people, the researcher has to reflect the vastness of the nation. The combined factor of time, cost and uneven distribution o insurance companies and banks across the vast expenses of the country has restricted the research to cover Imo and States within its environs.
1.8 DEFINITION OF TERMS
Some o the definitions used in this work will be defined and explained in simple language for easy understanding by the reader.
1. Insurance: this is an agreement between two parties namely the insurer and the insured, whereby on payment of a sum of money called premium by the insured, to the insurer, the insurer promises to indemnity in cases of loss or accident occurrence.
2. Banking: is the practice of financial intermediation and the mobilization of funds by the savings type institutions operating in the financial market.
3. Economic Growth: this is the increase over time in a country’s real output of goods and services or more specifically real output per capital.
4. Money Market: is a market for short-term credit. Those in need of funds borrow for short-term purpose from the money market and also invest on short-term basis in the money market.
5. The Capital Market: the capital market is the long-term and of the financial system just as the money market is it’s short-term end. Those who are short of funds and are desirous of borrowing for long term go to the capital market.
6. Loans and Advances: a bank loan/advance is an agreement by which a customer is offered period, repayable in an agreed manner fixed installment or lump sum. They come in the form of term loans, overdrafts etc.
7. Central Bank of Nigeria: CBN is the nation’s apex bank (financial institution) that regulates the value, supply and cost of fund. It also regulates other financial institutions in Nigeria.
8. Nigerian Deposit Insurance Commission (NDIC): this is one of the regulatory and supervisory authorities within the financial sector of Nigeria’s economy.
9. Capital Adequacy: it is the cushion of equity and other accounts that function to absorb any shock the bank may experience as a result of losses or diminution of it’s assets.
10. Deregulation: the process of allowing the market forces of demand and supply to determine the rate of interest.
11. Claim: this is a demand by the insured for compensation under his policy of insurance. This is the consideration for the payment of premium by the policyholder, which must be provided by the insurer when a loss occurs.
12. Insurance Policy: this is an evidence of the insurance contract containing all the wordings and conditions of the contract between the insured and the insurer. An owner of the insurance policy who is the insured person known as a policy holder.
13. Bank Deposit Account: this includes the current, savings and time or term deposit account in which a bank customer can deposit his surplus funds for a long period and have interest accrue on them. There funds are withdraw able on demand or with notice of interest to withdraw. These deposits form the majority of the banks funds.
14. Economic development: economic development implies the structural changes in the society; both technological advancement and resource discovery Economic development is however the growth accomplished by the changes in the economic and political structure.
15. Insurance premium: this is the monetary consideration for the risk the insurer undertakers to bear. It is however, the price the insurer or policy holder has to pay for transferring his risk to another person who then bears the burden of losses as a result of the risk occurring. This is the major sources of insurance companies’ funds.
