CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

A financial system can be said to be a system that allows the exchange of funds between lenders, investors, and borrowers in a system. Financial systems can be said to operate at national, global, and organization-specific levels. Money, credit, and finance are used as media of exchange in financial systems. They serve as a medium of value for which goods and services can be exchanged efficiently. A modern financial system should include banks both commercial and central, financial markets, financial instruments, and financial services. 

The Nigerian financial system cannot be said to be different as it comprises of the financial markets and financial institutions amongst others. Financial market refers to a system within the financial system for the buying and selling of short and long term funds and financial tenders. Financial markets are mechanism for facilitating the issuance of securities and bonds. They provide the system for issuing stocks, bonds, and other securities. Financial markets can therefore be said to mean an arrangement or structure for exchange of financial instruments intermediately.

The financial sector of any economy in the world plays a crucial role in the development and growth of the economy. The development of this sector, to a very large extent determines how it will be able to effectively and efficiently discharge its cardinal role of mobilizing fund from the surplus sector to the deficit sector of the economy. This sector has aided in facilitating the business transactions thereby ensuring economic development (Aderibigbe 2004). A well developed financial system performs several critical functions to improve the efficiency of intermediation by reducing information, transaction and monitoring costs in the system. If a financial system is well developed, it will enhance investment by identifying and funding viable business opportunities, enhance savings, enable the trading, hedging and diversification of risk and facilitate the exchange of goods and services. All these result in a more efficient allocation of resources, rapid accumulation of physical and human capital, and faster technological progress, which in turn results in economic growth.

This role of finance in the process of economic growth and development cannot be over emphasized as it was brought to lime light by the works of Bagehot (1873) and Schumpeter (1911). They pointed out the productivity and growth enhancing effects of services provided by a developed financial sector. They opined that the industrial revolution in England was the result of a functioning financial system that was instrumental in mobilizing and allocating long-term capital to the productive enterprises of the country. They argued that financial intermediaries play a crucial role in fostering technological innovation and economic growth by providing basic services such as mobilizing savings, monitoring managers, evaluating investment projects, managing and pooling risks, and facilitating transactions.

STATEMENT OF THE GENERAL PROBLEM

The Nigerian financial system, like those of many other less developed countries, was highly regulated resulting to financial disintermediation which retarded the level of investment and by extension the economy. The link between the financial sector and the level of investment has been weak. The banks are declaring billions of profit but yet the level of investment into this system continues to dwindle. The Nigerian banks have concentrated on short term lending as against the long term investment which should have formed the bedrock of a virile financial transformation. Since the adoption of the Structural Adjustment Programme (SAP) in 1986, in an attempt to quicken the recovery of the economy from its deteriorating conditions, a great deal of interest has been shown in the activities and development in the financial sector.

AIMS AND OBJECTIVES OF THE STUDY

The major aim of the study is to examine the determinants of investment in the Nigerian financial system. Other specific objectives of the study include;

1.  To examine the importance of the financial sector on the economy.
2. To determine the factors that determines investment in the financial system of Nigeria.
3. To assess the level of investment in the financial system of Nigeria.
4. To recommend ways of improving investment in the Nigerian financial system.

RESEARCH QUESTIONS

1. What are the determinants of investment in the nigerian financial system?
2. What is the importance of the financial sector on the economy?
3. What are the factors that determine investment in the financial system of Nigeria?
4. What is the level of investment in the financial system of Nigeria?
5. What are the ways of improving investment in the Nigerian financial system?

RESEARCH HYPOTHESIS

H0: There are no factors that determine investment in the financial system of Nigeria.

H1: There are factors that determine investment in the financial system of Nigeria.

SIGNIFICANCE OF THE STUDY

The study would greatly benefit the financial policy makers and the financial sector of Nigeria at large as it would examine the determination of investment on the financial system. The study would also benefit students, researchers and scholars as it would reveal the factor that determine investment in the Nigerian financial system.

SCOPE AND LIMITATION OF THE STUDY

The study is restricted to the determination of investment in Nigeria’s financial system from 2010-2015. Furthermore, the various institutions involved in the financial system such as issuing houses, deposit money banks, stock exchanges, investment banks, insurance companies will be given adequate attention. Notwithstanding, whatever level of viability attributed this work, caution should be taken as the data used in this study were sourced from secondary sources whose authenticity cannot be guaranteed by the research.