IMPACT OF FINANCIAL INTERMEDIATION ON ECONOMIC GROWTH IN NIGERIA 1994 – 2013

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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.

TABLE OF CONTENTS

Title page – – – – – – – – – i

Certification/Approval – – – – – – – ii

Dedication – – – – – – – – – iii

Acknowledgements – – – – – – – – iv

Abstract – – – – – – – – – v

Table of Contents – – – – – – – – vi

CHAPTER ONE: INTRODUCTION

1.1 Background of the Study – – – – – – 1

1.2 Statement of the Problem – – – – – – 6

1.3 Objectives of the Study – – – – – – 8

1.4 Research Questions – – – – – – 8

1.5 Research Hypotheses – – – – – – 8

1.6 Scope of the Study – – – – – – 9

1.7 Significance of the Study – – – – – – 9

References – – – – – – 11

CHAPTER TWO: REVIEW OF RELATED LITERATURE

2.1 Introduction – – – – – – – – 13

2.2 Conceptual Framework – – – – – – 13

2.2.1 Financial Intermediation – – – – – – 13

2.2.2 Requirements of Financial Intermediation – – – 16

2.2.2.1 Cost – – – – – – – – – 16

2.2.2.2 Convenience – – – – – 16

2.2.2.3 Confidence – – – – – – – – 17

2.2.3 Roles and Functions of Deposit Money Banks in Financial Intermediation – – 19

2.2.3.1 Acceptance of Deposits – – – – – 19

2.2.3.2 Lending to Customers – – – – – 19

2.2.3.3 Agency Services – – – – – – 19

2.2.3.4 Safe-Guarding of Valuables – – – – – 20

2.2.3.5 Foreign Exchange Services – – – – 20

2.2.3.6 Buying and Selling of Shares – – – – 20

2.2.3.7 Use of Cheques and Bank Drafts — – – – 20

2.2.3.8 Business and Investment Advisory Services – 21

2.2.3.9 Provision of Status Reports – – – 21

2.2.3.10 Sale of Examination and Admission Forms – – – 21

2.2.4 Concept of Economic Growth – – – – – 22

2.2.5 Sources of Funds and Types of Bank Accounts – – – 23

2.2.5.1 Current (Demand Deposit) Account – – 24

2.2.5.2 Savings Deposit Account – – – – – 25

2.2.5.3 Time (Fixed) Deposit Account – – – – 25

2.2.6 The Concept of Bank Credit – – – – – 27

2.3 Theoretical Framework – – – – – – 29

2.3.1 Theories of Economic Growth – – – – – 29

2.3.1.1 Neo-Classical Growth Model – – – – 29

2.3.1.2 Endogenous Growth Model – – – – 30

2.3.2 Impact of Banks on the Growth of the Economy – – 31

2.3.2.1 Information Acquisition and Resource Allocation – 32

2.3.2.2 Savings Mobilization – – – – – 33

2.3.2.3 Facilitating Exchange and Trade – – – – – 34

2.3.2.4 Management Monitoring and Corporate Control – 34

2.3.2.5 Facilitating Risk Management – – – 36

2.3.3 Challenges and hindrances to Effective Financial Intermediation by Banks – – – – – – 37

2.3.3.1 Poor Banking Habit in Nigeria – – – – 37

2.3.3.2 Attitude of Bank Staff – – – – – 38

2.3.3.3 Fraud in Banks – – – – – 38

2.3.3.4 Adverse Banking Regulations – – – 39

2.3.3.5 Inadequate Rural Banking Practice – – 39

2.3.3.6 Low Interest Deposit Rate – – – – – 40

2.4 Empirical Review – – – – – – 40

2.4.1 The Nigerian Financial System – An Overview – – – 40

2.4.1.1 Financial Development Drives Growth in the Economy 43

2.4.1.2 Growth in the Economy Motivates Financial Development 44

2.4.1.3 Bi-Directional Relationship between Financial Development and Economic Growth – – – – – – 44

2.5 Summary of Reviewed Literature – – – – 45

2.5.1 Cross Section Studies – – – – – – 46

2.5.2 Individual-country Studies – – – – – – 47

2.5.3 Firm-Industry Level Studies – – – – – 48

References – – – – – – – – 51

CHAPTER THREE – RESEARCH METHOLOGY

3.1 Research Design – – – – – – – 55

3.2 Population and Sample Size – – – – – 55

3.3 Nature and Source of Data – – – – – – 56

3.4 Description of Research Variables – – – – 56

3.5 Techniques for Analysis – – – – – – 58

3.6 Specifications of Models – – – – – – 59

References – – – – – – – – 61

CHAPTER FOUR – DATA PRESENTATION AND ANALYSIS

4.1 Data Presentation – – – – – – – 62

4.1.1 Real GDP Per Capita – – – – – – 63

4.1.2 Deposit Money Bank. Deposit – – – – – 63

4.1.3 Deposit Money Banks Credit – – – – – 63

4.1.4 Deposit Money Banks Liquid Reserve – – – – 64

4.2 Data Analysis – – – – – – – 64

4.3 Empirical Results – – – – – – – 68

4.4 Test of Hypothesis – – – – – – – 75

4.4.1 Hypothesis 1 – – – – – – – 75

4.4.2 Hypothesis 2 – – – – – – – 75

4.4.3 Hypothesis 3 – – – – – – – 76

4.5 Implications of the Findings – – – – – &

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