Financial intermediation is the process by which financial institution accept saving from house hold and lend this saving to business organizations.
Since high level of financial intermediation has been associated with high degree of economic development e.g Nigeria has allegedly been said to experience low level of financial intermediation.
The objective of this study
1. To establish the extent of financial intermediation in Nigeria and the likely effect on economic development.
2. To reveal the economic development position (as measures by Gross National/Domestic Income) of countries that have comparatively the same level of financial intermediation are relatively high.
This proper will also look into the following problem. In Nigeria there has been a comparatively low level of financial intermediation demonstrated by the grossly inadequate habits to all nooks and corners of the country. Lack of actual practical indegenisation of bank industry.
The ultimate effect is that the existing financial intermediation find it impossible to effectively mobilize available resources and allocate them enhance the rate of economic development
After examining these problems, recommendation will be made. It will be aimed at increasing the level of financial intermediation in Nigeria. Then conclusion will be drawn.
Table Of Content
Table Of Content
1.1 Background Of The Study
1.2 Statement Of Problem
1.3 Objectives Of Study
1.4 Significance Of The Study
1.5 Scope And Limitation Of The Study
1.6 Definition Of Terms
2.0 Review Of Literature
2.1 Bank And Non-Bank Financial Intermediaries
2.2 Financial Institutions And Economic Development
2.3 Financial Intermediation And Economic Development In Developed Countries.
2.4 Financial Intermediation And Economic Development In Less Developed Countries.
2.5 Financial Intermediaries And Monetary Control
2.6 Review In Increasing The Level Of Financial Intermediation In Nigeria And The Ldc’s
2.7 The Problems Of Financial Intermediation
3.0 Research Design And Methodology
3.1 Research Methods Used
3.2 Description Of Respondents
3.3 Sources Of Data
3.4 Method Of Investigation
4.0 Presentation And Analysis Of Data Introduction
4.1 Testing Of Hypothesis
5.0 Findings, Recommendation And Conclusion
1.1 BACKGROUND OF STUDY
The concept of financial intermediation and resources mobilization are not new in financial literature, their relationship with economic development has also been widely discussed. Relevant literatures on financial intermediations and resources mobilization have attempted to distinguish the concept of self-finance, direct finance and indirect finance.
Direct finance involves the use of marketing techniques in which primary securities (or the liabilities of ultimate borrowers). In such forms as bonds corporate securities mortgage etc. are distributed among those financial assets. This mode of finance through encourages high savings rate and alertness to new profitable investment opportunities, total reliance on self finance is not probably a desirable long run strategy.
The other form of finance the indirect finance on he other hand involves the existence of financial intermediaries with place themselves between ultimate lenders and ultimate borrowers by purchasing the primary securities of the latter and issuing claims against themselves. Indirect securities for the portfolio of ultimate lenders while self finance makes for a balanced budget the direct and indirect finance which are forms of external fiancé make for deficit financing in which intermediaries solicit for loan able funds from the simple limits and allocate these to the deficit units whose direct debt. They absorb
From the three methods of financing highlighted above writes on this issue identified the indirect finance as the only are that calls for the intermediation by the financial institution following the above conception, gurley and show (1960) attempted the definition of the concept of financial intermediation as intermediating or go between function of financial institutions in purchasing primary securities from ultimate borrowers and issuing indirect debt (secondary securities) of the portfolio of the ultimate lenders by so doing the financial intermediaries establish a link between the borrowers. The deficit units and the lenders the simple units with this linkage they transfer resources from the surplus to the deficit unit.
1.2 STATE OF THE STUDY
It is general acknowledged fact by economist that high level of financial intermediation is associated with high rate of economic development. This has been experience by the grossly inadequate number of financial intermediaries, inadequate spread of banking habits to all the nooks and corners of the country, lack of actual practical indegenisation of the banking industry. The ultimate effect is that the existing financial intermediaries find it impossible to effectively mobilizes available resources and allocate them to enhance the rate of economic development.
In the final analysis there is low level of financial intermediation in Nigeria which culminate in a disappointedly low level of economic growth and development. These are the problem this study is set to look into which a view to finding possible solutions and recommendations.
1.3 OBJECTIVES OF THE STUDY
The objectives of the study are
a. To establish extent of financial intermediation in Nigeria and the likely effect on economic development.
b. To reveal the economic development position (as measures by gross national/domestic income) of countries that have comparatively the same level of financial intermediation and those whose level of financial intermediation are relatively high.
1.4 SIGNIFICANCE OF THE STUDY
The financial intermediation in Nigeria like their counterparts else where in the world play a number of vital roles which are not only necessary for the smooth running of the economy. Among those roles the first that comes readily to mind is their dealing in finance in which they transfer spending money. Furthermore, some of them like central and commercial banks are involved in the provision at the legal tender for the economy and the money creation activity respectively while the central bank of Nigeria issues the legal tender currently which lubricates economic transaction as lither to experienced trade by barter the commercial banks create money (no form of credit) base on the level of their demand deposit after providing for this safety stock.
There are a lot of important roles played by the financial intermediaries but it will be discussed fully in chapter two.
1.5 SCOPE AND LIMITATION OF THE STUDY
The concept of financial intermediation has been generally acknowledge to have a strong relationship with economic development in both the development countries where modern and refined financial intermediation in practiced and the developing countries where crude and traditional financial intermediation was initially undertaken and later a fair combination of the traditional and the modern approach not only has such a relationship been accepted there is also a general consensus that the relationship in positive.
In view of the perceived relationship. This study will set out to review the impression of other writers on the work in both developed and developing countries.
The writers shall then apply these view to Nigeria while using relevant information and data on financial claims and gross domestic products, the number of existing financial intermediaries especially banks in Nigeria. Their branching network and their distribution, their involvement in resources mobilization will be used vital instrument for the study.
These will help to establish
1. The extent for financial intermediation
2. Relationship between financial intermediation and economic development.
3. Contribution of the financial intermediaries in terms of this on the over all economic development in Nigeria.
Since it may not unexpected that financial intermediation in Nigeria may have been encountering some problems in control on operation unawareness of the benefits financial services etc. efforts will beg gearned towards identifying these constraints, their impact on the operations of the financial intermediations and based on findings appropriate recommendation critically viewed into improve financial intermediation in Nigeria especially in the light of the Nigeria’s intended accelerated economic development so as to enhance the realization of the benefits of the positive impact of financial intermediation on economic growth and growth and development in Nigeria.
1.6 DEFINITION OF TERMES
Although the concept of financial intermediation has been variously defined by different authors these definition tends towards the universally acceptable definition of Glvey and show that financial intermediation is the intermediation or go between function of the financial institution intermediaries in purchasing primary securities from the ultimate borrowers and issuing indirect debt or secondary securities for the portfolio of the ultimate lender simply put financial intermediation establishes a link between the surplus and the deficit unit.
This linkage is established through the machinery of the financial system made up to the financial intermediaries/institutions.
These financial intermediaries are broadly categorized as banks or non-monetary financial institution. While the bank purchase primary securities and create claims on themselves which are acceptable as money the non-back are primarily concerned with primary securities and the creation of non-monetary claims which are close substitutes for bank money eg Demand deposit
Although these financial institutions may differ as stated above they basically perform the following function in common.
a. Both create financial claims
b. Both engage in multiple creation to their particular liabilities in relation to one class of assets that they holds.
c. Both act as intermediaries in the transfer of unspent income from the surplus to the deficit units.
d. Both can be said to be capable of creating/reasonable fund bring an excess stock of money and producing an anti investment over ex-anti savings.
The role of financial institutions in the saving investment process in illustrated in figure I
FINANCIAL INSTITUTION IN THE SAVING INVESTMENT PROCESS
SOURCES: At ojo and Ackwumi: Banking and Finance in Nigeria.
As demonstrated in Figure I the financial institution take off through mobilization and subsequently allocation of funds mobilization for productive utilization. The manner in which fund mobilized are allocated influences the productive utilization of resources (UTR) and this is turn influence the volume of funds available for mobilization also the volume of funds mobilized determines volumes of invested funds and capital formation the impact of financial intermediaries on the utilization of resources is usually indirect through the allocation funds into the various sectors. In some cases their impact may also be direct. (route 6) where the intermediaries not only ensure that funds are efficiently allocated but also treat other necessary non-financial services are provided for productive utilization of allocated funds
1.6b RESOURCES MOBILIZATION
Resources mobilization is closely linked with financial intermediation the involves the process by which financial intermediaries transfer the tracted resources through the instrumentality of financial claims from the ultimate lenders to the ultimate borrowers, resources mobilization by financial intermediaries adopt the indirect method of finances. In this method the financial institution attracts surplus funds in the form of deposit from the surplus unit and channeling such funds to deficit unit needing these financial resources for the purpose of embarking a viable project. The creation of a reservoir of funds bys financial intermediaries serves as stimulate conceptualize viable project and undertake them without fear for being frustrated by non-availability of funds. The financial intermediaries then have the available resources at its disposal computing entrepreneurs and projects. It is nets worthy at this juncture that resources mobilization does not only involve the transfer funds from the surplus to deficit units. It also involves stimulation of entrepreneurship by way of identifying and developing viable project or virgin areas which may appear risky to the ordinary entrepreneur and later selling them out for onward execution. Though this form of dynamic approach to effective resources mobilization for the purpose of this research should been taken to imply mobilization of financial resources.
1.6C ECONOMIC DEVELOPMENT
One of the leading definition of economic development is that it involves the transformation of the present or traditional economy into an industrial one. To embark on this, there has to be planning and modern implementations will have to be introduced into the production system. This implies a change in the production function.
O = O(L1 R1 TK)
O = Output L= Labor
R = Natural Resources (Land)
T = Technological
K = Capital
To achieve a change in any or all of other three factors L,R,T requires accumulation of capital to facilitate the training of labor to handle the sophisticated technology that is introduced and the improvement of land and other natural resources. A number of factors have been identified as indicators of economics development. Prominent among these are the rate of transfer of labor from the traditional sector to the industrialized sector, income and income distribution, rate of unemployment while there is negative relationship with the other indicator is positive. To achieve a positive change in these factors that influence output, the financial intermediaries must be able to mobilize the required financial resources essentially then expected output implies enhanced capital accumulation and effective allocation of the resources. This implies positive relationship between financial intermediation and economic development.
Plakoft and others (1970) Financial institution Market: Houghton, mittahn company
Gurley and show (1960) Money in the theory of finance: Washington D.C the Brooking Institution