CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Financial resources are basic ingredients for the growth of an economy provided they are not idle. These resources become active through financial intermediation. Financial intermediation is the process whereby financial resources are mobilized by banks in the form of savings and transformed into credit. It is the root institution in the savings-investment process (Gorton and Winton, 2002). Financial intermediation creates a pathway for financial resources to be channeled from savers to investors.

Banks act as conduit for financial intermediation and they are regarded as financial intermediaries.  Sulaiman, Migiro and Yeshihareg (2015) opine that financial intermediaries play a significant role within a nation’s financial system by mobilising funds from the surplus economic units and channeling them to the deficit economic units of the economy. In developing economies, banks have a greater propensity to influence the degree of financial intermediation because the financial system of these countries is bank-based. The pace of economic growth is a function of the efficiency of banks in the financial intermediation process. Banks’ efficiency is  determined by  their  ability to facilitate savings and allocate credit optimally for in- vestment purposes. Banks can only intermediate perfectly in an imperfect market. Scholtens and Van Wensveen (2003) note that if they operate in a perfect market, they become irrelevant because both savers and investors neglect the use of perfect information which is mandatory to directly access each other.

Financial intermediation efficiently managed contributes greatly to a vibrant financial system, increased output levels, employment, and income (Agbada and Osuji, 2013). Greenwood and Jovanovic (1990) recognize that financial intermediation allows capital to earn a higher rate of return thus enhancing economic growth. Mckinnon (1973) and Shaw (1973) acknowledge financial intermediation as a principal determi nant of economic growth. They both consider that the level of investment influenced by the level of savings determines the economic growth rate. An economy tends to grow when savings and investment move in an upward direction. Through increased savings, more investments are undertaken. This leads to an increase in the rate of capital formation consequently resulting in economic growth.

A high degree of financial intermediation indicates the existence of a well-functioning financial sector. How- ever, Hesse (2007) observes that a low degree of financial intermediation is a characteristic of the Nigerian financial sector. This is the outcome of low deposit rates and high lending rates, which are common among Nigerian banks. Against this background, the aim of which was to provide intrinsic evidence on the influence of financial intermediation in the Nigerian economy.

How financial intermediation links with economic growth remains equivocal. Studies have shown financial intermediation drive economic growth and vice- versa. Therefore, this study seeks to examine the relationship between financial intermediation and economic growth in Nigeria between (2002 to 2017). so as to fill the research gap.

1.2 Statement of Problems

          Larger percentage of the Nigeria citizen still leaves a barbaric world of informal savings. These may be due to lack of orientation, illiteracy, and asymmetry information about how some bank customer’s losses their savings during bank distress and failure. This place a limitation on intermediation services as the quantum of fund in the informal sector is on the increase.

However, MacKinnon and Shaw (1973) argues that one of the major challenges faced by the developing countries is the excess intervention and interference of the government in the financial system which is mitigating against the expected growth trend of the financial sector. He explained that irrespective of the saving and investment, the developing countries are experiencing poor performance due to financial repression, high level of regulation and financial control.

Mean while, there has been an argument that elimination of financial repression through financial liberalization, deregulation and privatization is essential so as to extirpate the ill-effect of financial repression and on the other hand stimulate saving and investment which is capable of promoting economic growth and encouraging foreign investors.

According to history, Nigeria banking system is faced with some challenges majorly lack of confidence on the side of the customers due to the bank failure recorded in the past decade mostly in the early 40’s. moreover, the recent instability and bank failure in the Nigeria financial institution has really deteriorate the confidence of the customers and hence depositors prefer to save their money in the corner of their bed than to save in the bank which is really affecting the intermediation processes as large quantum of money are still in the informal sector.

`        Despite the enormous rate of merger that took place in the Nigerian banking institutions recently due to increment capital base policy implemented by the CBN to solidified the Nigeria banks, can we practically say that the operation of the financial institution has really stimulate the economy or nor? Sequel to the above observation, this research work is determined to examine the relationship between financial intermediation and economic growth in Nigeria.

1.3 Objectives of the Study

The main objective of the study is to examine the relationship between financial intermediation and economic growth in Nigeria. The specific objectives are stated below:

1.       To empirically investigate the impact of deposit mobilization on economic growth in Nigeria.

2.       To determine how significant the mobilized fund has impacted on the Nigerian economy.

1.4 Research Question

In a tempt to actualize the objectives of this research work the following research question is noted.

1.       What is the impact of deposit mobilization on Nigerian economic growth?

2.       How far has mobilized fund impacted on the growth of the Nigerian economy?

1.5 Research Hypothesis

The study will be guided by the understated statement of hypothesis formulated based on the objectives of the study.

There seem to be no positive and significant relationship between deposit mobilization and Nigerian economic growth.

1.6 Significance of the Study

The most significant aspect of the study is the importance of both the commercial banks sectors and financial sector growth to the economic growth of Nigeria.

Hence, this research would provide an in-depth analysis, which would enable the populace to fully understand the nitty-gritty of the financial sector and ultimately enable them to be very much familiar with growth trends in the economy. Furthermore, the development of the financial sector has been given priority by the Nigerian government in the successive development plans.

A review of the problems facing the financial sector is quite indispensible. Such a review will enable the sector face the ever-increasing demand upon it; and with such amazing knowledge we can therefore foster economic growth by adopting suitable economic policies.

Finally, since the essence of every research work is to build upon and add to the existing bank of knowledge, this study promises to build upon as well as add substantially to the deposit of knowledge and relative to area of financial sector growth as well as growth in the economy.  It would also help us understand the strong bond between financial sector and economic growth.

1.7 Scope and Limitation of the Study

This research seeks to examine the relationship between financial intermediation and economic growth in Nigeria. The study will focus frontally on Nigeria and will cover the period 2002 to 2017.

The research of this magnitude can never be successfully completed with the researcher experiencing some difficulties which include the following:

In the courses of carrying out this research there was shortage of fund which restricted the researcher’s movement and made him or her not to be able to cover the expected areas of interest. The researcher experienced some difficulties in the area of getting information business organizations that are supposed to provide the researcher some vital information refuse as a result of fear of been victimized (in ability to disclose information). The time allocated for the researchers to carried out the researcher work was limited.

1.8 Organization of the Study

The first chapter which is the introduction to the study seeks bring to fore the antecedents that preceded the current state of financial intermediation. The section introduces the topic under study; financial intermediation and economic growth in Nigeria.  The objective as well as research questions of the study are outlined in this chapter. The limitations of financial intermediation are also captured in this chapter.  Chapter two reviews the publications and various literature treated by various authors that are relevant to this area of research. Chapter three presents the organized research methods that are generally used in such studies. The chapter also identifies the selected sampling method to be used. Chapter four will treat the analysis and interpretation of the data obtained from the field which will be fed into the scientific system process of analysis. At this stage the analysis of the

Data will be analysed by the used of the SPSS software that will organize the data and present graphical results of responses by the respondents.

The  last  chapter  of  the  study  will  conclude  the  analysis  of  the  data used in the study. Recommendations will also be made at this stage regarding to the research work findings.

1.9 Definition of Terms

          Financial Intermediation: It is the process performed by banks of taking in funds from a depositor and then lending them out to a borrower.

Economic Growth:  A positive change in the level of production of goods and services by a country over a certain period of time. Nominal growth is defined as economic growth including inflation, while real growth is nominal growth minus inflation.

          Economic Development: It is the process by which a nation improves the economic, political, and social well-being of its people.

          Banking Sector: It refers to Banks and other financial institutions which provide lending and investments.

          Bank: It is a financial institution that accepts deposits from the public and creates credit.