CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The Nigerian banking industry is majorly
composed of Deposit money banks, development banks and the Central Bank
of Nigeria (CBN), which is the apex bank. The apex bank exercises
supervisory and regulatory authority over the banking industry. The
Central Bank of Nigeria was established by the Central Bank of Nigeria
Ordinance 1958. The bank commenced operations on 1st July, 1959 (CBN
Ordinance). Banks have always been perceived as engine room of a
nation’s economy because they perform a resources allocation function,
by mobilizing and channelling resources from surplus economic units to
deficit units. They provide help by assuming the level of economic
activities in various sectors of the economy, thus increasing the level
of utility and want to the individual and the community at large.
The contributions and the importance of
banks in the economy of any nation cannot be overemphasized. They are
the cornerstones, the foundation of the economy of a country. Economic
activity cannot be moving be smoothly without the continuous flow of
money and credit. The economic activities of all market-oriented nations
depend largely on the efficient operation of complex and delicately
balance systems of money and credit. Banks are essential elements in
these systems. They provide the bulk of the money supply as well as the
primary means of facilitating the flow of credit. Consequently, it is
submitted that the economic well being of a nation is a function of
progression and growth of her banking sector.
The financial deregulation in Nigeria
that started in 1987 and the associated financial innovations have
generated an unprecedented degree of competition in the banking
industry. The deregulation at the beginning provided powerful rewards
for the expansion of both size and number of banking and non-banking
institutions. The consequent phenomenal increase in the number of
banking and non-banking institutions providing financial services led to
increased competition amongst various banking institutions, and between
banks and non-banking financial intermediaries.
Apart from the keen competition with the
range of financial activities, banks have also faced problems
associated with a persistent slowdown in economic activities, severe
political instability, virulent inflation, worsening economic financial
conditions of their corporate borrowers and increasing incidence of
fraud and embezzlement of funds. Another major problem banks have had to
content with is the inconsistency in monetary and regulatory policies.
The surveillance and regulatory measures of the Central Bank of Nigeria
(CBN) have unfortunately been unable to keep the pace with the rapidity
of the charges in the financial system. All these factors such as:
deregulation, competition, innovation, economic recession, political
instability, escalating inflation, and frequent reversal in monetary
policy have combined to create a challenging and precarious financial
environment for banks.
Result of the new financial environment
has been rapidly declining profitability of the traditional banking
activities. Thus, in a bid to survive and maintain adequate profit level
in this highly competitive environment, banks have tended to take
excessive risks. But, then the growing tendency for greater risk taking
has resulted in failure of a large number of the banks. The continuing
deterioration in the financial health of the banks and increasing
incidence of bank failure since deregulation have raised question about
the nature and state of the Nigerian banking sector.
Therefore, economic development is about
aiding the productive capacity of an economy by using available
resources to reduce risks, remove obstructions which otherwise pose a
risk to cost and lower investment. The banking sector plays the
important role of promoting economic growth and development through the
process of financial link between the people and the government. Many
economists have acknowledged that the financial system, with banks as
its major component, provide linkages for the different sectors of the
economy and encourage high level of specialization, expertise, economies
of scale and a conducive environment for the implementation of various
economic policies of government aimed at achieving non-inflationary
growth, exchange rate stability, balance of payments equilibrium and
high levels of employment.
1.2 Statement of the Problem
It is obvious that banks
play vital roles in the economic development of a country. These roles
are aimed at ensuring sound financial system and economic stability. It
is indisputable that the banking system is the engine room of growth in
any economy, given its function of financial intermediation. As a result
of this function, banks facilitate capital formation, lubricate the
production engine turbines and promote economic growth. However, banks’
ability to cause economic growth and development depends on the health,
soundness and stability of the banking system itself. The need for a
strong, reliable and viable banking system is underscored by the fact
that the industry is one of the few sectors in which the shareholders’
fund is only a small proportion of the liabilities of the enterprise. It
is, therefore, not surprising that the banking industry is one of the
most regulated sectors in any economy.
However, the relationship
between banking and economic growth is that banking through its
activities such as savings and deposit mobilization, credit creation,
etc increases the accumulation of capital formation which in turn is
expected to enhance economic development of the country. Therefore,
whether there is this relationship in Nigeria is the reason of this
study.
1.3 Research Questions
The following are some of the questions which this study intends to answer:
i) what are the impacts of commercial banks on the economic development in Nigeria?
ii) what are the contributions of commercial banks to the economic development in Nigeria?
iii) what are the factors that influence commercial banks to the economic development in Nigeria?
1.4 Objectives of the Study
The objective of the study is to
empirically investigate the role of commercial banks on the economic
development in Nigeria. The specific objectives are to:
i) analyse the impacts of commercial banks on the economic development in Nigeria
ii) to examine the contributions of commercial banks to the economic development in Nigeria
iii) to investigate the factors that influence commercial banks to the economic development in Nigeria
1.5 Research Hypothesis
The research hypotheses to be tested include:
Ho: Commercial banks do not have any significant impact on the economy
Hi: Commercial banks have significant impacts on the Nigerian economy
1.6 Significance of the Study
Findings from the study will
be of a great benefit to the managers of the economy. By identifying
strengths and weaknesses of commercial banks, policy formation can be
made in future by drawing from the research outcome. Bankers and the
Central Bank of Nigeria will find it useful to make reference to
whenever they want to policies in terms of banking, monetisation and
capital. It will also be useful in the area of accounting, economics and
public administration in the academic field.
1.7 Scope of the Study
The research comprehensively analysed
the major role played by the banking industry to the Nigeria economy the
researcher attempted to examine the role of commercial bank to the
economy, though there are several financial and banking industries
nationwide, sources in which all the commercial banks nationwide get its
fund for the development of the country shall be discussed in chapter
two.
1.8 Limitation of the study
The researcher was only faced with the
problem of reluctance to giving out information by the banks staff. This
could be due to the high level of secrecy being observed by these
organisations as a result of their not being too familiar with the
researcher.
1.9 Definitions of Terms
The following terms were used in the course of this study:
Commercial bank: This is a financial institution that provides various financial services, such as accepting deposits and issuing loans. Commercial bank customers can take advantage of a range of investment products that commercial banks offer like savings accounts and certificates of deposit.
Economic development: This
refers to as efforts that seek to improve the economic well-being and
quality of life for a community by creating and/or retaining jobs and
supporting or growing incomes and the tax base.
REFERENCES
Alex Ehimare Omankhanlen, (2012). The Role of Banks in Capital Formation and
Economic Growth: The Case of Nigeria
Sanusi Lamido Sanus, (2011). Banks in Nigeria and national economic development – a
critical review.