Financial Intermediation and Economic Development in Nigeria

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Financial intermediation is an important activity in the economy because it allows funds to be channeled from people who might otherwise not put them to productive use to people who will ultimately put the funds to productive uses. In line with the assumption that banking sector plays an important role in financing the investment projects, successive governments in Nigeria have carried out reforms and institutional innovations in the banking sector. The overall intention of these reforms has been to ensure financial stability so as to influence the growth of the economy and also enhance banks to play a critical role of financial intermediation in Nigeria. However, despite the fact that Nigerian banks have undergone series of restructuring/reforms aimed at strengthening the banks’ ability to efficient service delivery and fund the real sector, problems such as; inefficiency in allocating funds to the real sector, lack of long-dated funding, neglect of the core private sector in terms of credit extension, weak capacity of the banks to fund the real sector, low-level activities of banks, and illiquidity still lingers. This study therefore, examines empirically the impact of financial intermediation on the development of the Nigerian economy with the aim of determining the importance of financial intermediaries and its influence. This study found out that the financial intermediaries (banks) in Nigeria exhibit inefficiency and weak capacity in the allocation of funds to finance the some sectors. On the overall therefore, the study found that the economy Nigeria rely heavily on the banking sector to finance its activities even though the desired expectation is not met by the banks. The study therefore, concluded that financial intermediaries (banks) are important in attaining financial development. The study therefore recommend that banks should ensure greater domestic savings mobilization for investment and growth, using market-determined interest rates, and government should ensure that the Asset Management Company of Nigeria (AMCON) established by the CBN to take over toxic loans of banks. Financial intermediaries for the purpose of this study refers to financial institutions especially banks (deposit money banks, [DMBs]) that mobilize savings for investment purposes. They act as intermediaries between ultimate savers and ultimate borrowers. The justification for using banks as our financial intermediaries is based on the fact that banking system plays a crucial role in economic growth. For example, in Nigeria, banks represent 87.4% of the financial system assets and 63.6% of the total credit extended to the private sector (King, 2003). Furthermore, banks are the oldest, biggest, and fastest growing financial intermediaries in Nigeria. They are also the most important depositories of public saving and the most important disbursers of finance.

Financial systems, all over the world, play fundamental roles in the development and growth of the economy. The effectiveness and efficiency inperforming these roles, particularly the intermediation between the surplus anddeficit units of the economy, depend largely on the level of development of the financial system. It is to ensure its soundness that the financial sector appears to be the most regulated and controlled by the government and its agencies. The surveillance role of the regulatory/supervisory authorities is critical to ensuring the soundness and efficiency of financial institutions in order to build up confidence and stability of the system. The components of these bodies are the Central Bank of Nigeria (CBN), Nigeria Deposit Insurance Corporation (NDIC), the Securities and Exchange Commission (SEC), the Federal Ministry of Finance (FMF), the National Insurance Commission (NAICOM), the Federal Mortgage Bank of Nigeria (FMBN), the Financial Services Regulatory...
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