THE EFFECTIVENESS OF FINANCIAL INTERMEDIATION ON NIGERIA ECONOMY GROWTH

THE IMPACT OF FINANCIAL INTERMEDIATION ON NIGERIA ECONOMY GROWTH

This research work tends to investigate the relationship between the activities of financial intermediation (intermediaries) in the financial system and the growth of the Nigerian economy laying emphasis on the activities of the banking, insurance, and pension funds in Nigeria. The specific objectives are stated below

1. To examine the relationship between bank financial intermediation ratio and Gross Domestic Product (GDP) in Nigeria
2. To evaluate the relationship between insurance financial intermediation ratio and Gross Domestic Product (GDP) in Nigeria.
3. To determine the relationship between pension fund financial intermediation ratio and Gross Domestic Product (GDP) in Nigeria.

CHAPTER ONE: INTRODUCTION

1.1 Background to the study

The importance of economic growth cannot be overemphasized. Economic growth is one of the macroeconomic objectives of every economy. Thus, nations annually measure their economic progress using the annual growth rate of the real gross domestic product as a barometer to gauge this economic objective. To this end, several studies have been carried out to identify the drivers of economic growth in Nigeria and abroad. The outcomes from these studies (both theoretical and empirical) have severally identified financial intermediation as one of the catalysts for growth. Financial intermediation is the process whereby financial service providers like banks pull funds from the public as deposits and transform them into loanable funds (Agbada & Osuji, 2013). This implies that the intermediation process help turns deposit liabilities from surplus economic units to bank’s major interest earner, loans, and advances to the deficit units of the economy. Specifically, the finance literature has shown that the availability of financial factors goes a long way in determining the sustainable development of a nation. That is, the availability and access to funds for investment are an integral element in stimulating growth in any economy (Sanusi, 2002). Consequently, the will of the progress of every economy is hinged on the financial system. The financial system help enhance the production capacity of a nation outwards. Thus, efficient mobilization of funds and access to credit are the sine qua non to kick-start the economic growth of a nation.

A larger percentage of the Nigerian citizen still leave a barbaric world of informal savings. These may be due to lack of orientation, illiteracy, and asymmetry information about how some bank customers lose their savings during bank distress and failure. This place a limitation on intermediation process as a large sum of the fund remains in the informal sector of the economy meanwhile, the financial sector of an economy comprises of institution, market and regulators that deal in financial instruments under the large framework within which the activities of the various participant are regulated. Put separately, the Nigerian financial system apart from the central bank of Nigeria and some other bodies who serve as regulators comprises of the “bank financial intermediaries, non-bank financial intermediaries and the financial market” (Monogbe, 2015). A whole lot of scholar has written on the topic of financial intermediation and how it affects the economy in their respective countries. The intermediation process involves mobilization of funds from surplus economic unit to the deficit economic unit who has the business ideas but lack financial capacity. This intermediating function is not only restricted to the banking financial institution only. However, non-banking financial institutions like insurance companies, pension and administrative institutions also intermediate. The term financial intermediation posed a lot of controversy in the literature as some authors/scholars argue that financial intermediation is a catalyst to economic growth while some opted that financial intermediation is demand following. This argument has degenerated into what we refer to “supply leading hypothesis and demand following hypothesis. The first theory of financial intermediation is seen in the work of goldsmith” (1969). Mackinnon and Shaw (1973), attributed the role of economic development to the financial market. To them, they argue that the effectiveness of the financial market through the quality and quantity of financial services render will serve as a stimulator of economic development. Hence, there argue that financial intermediation stimulates economic development. Levine (2010), beck, et al (2000) in their empirical research also support the view of MacKinnon and Shaw (1973) by stating that financial intermediation has a positive and significant impact on economic development. However, in the Nigerian context, Nwaeze (2014) also supports the fact that financial intermediation has a positive and significant impact on Nigeria’s economic development but did not specify the direction of causality flows. On the other hand, however, Robinson (1953) was of the contrary opinion, he led the supply leading hypothesis and argues that economic development is a catalyst to financial development”. His born of contention here is that increase in the economic development through an increase in the real national income of the economy and per capita income of households in the economy will stimulate the morale of the general public towards new investment ideals which will help in improving the financial market. To this end and given the active involvement of financial intermediaries on transactions ranging from payment, acceptance of deposits and selling of loans and advances among other services rendered to both the public and private sector and the volumes of empirical evidence in support of the finance economic growth nexus has made it imperative to thoroughly study the place of financial intermediaries on economic growth in a developing country like Nigeria.

1.2 Statement of the problem

A great percentage of the Nigeria citizen still operates in the world of informal savings. These may be due to lack of orientation, illiteracy, and asymmetry information about how some bank customers losses their savings during bank distress and failure.

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 ’40s. moreover, the recent instability and bank failure in the Nigeria financial institution has really deteriorated 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. Sequel to the above observation, this research work tends to investigate the relationship between the activities of the financial sector and the growth of the Nigerian economy with the aim evaluating the contribution of the financial sector to the Nigerian economy.

1.3 Aim and objectives of the study

This research work tends to investigate the relationship between the activities of financial intermediaries in the financial system and the growth of the Nigerian economy laying emphasis on the activities of the banking, insurance, and pension funds in Nigeria. The specific objectives are stated below

1. To examine the relationship between bank financial intermediation ratio and Gross Domestic Product (GDP) in Nigeria
2. To evaluate the relationship between insurance financial intermediation ratio and Gross Domestic Product (GDP) in Nigeria.
3. To determine the relationship between pension fund financial intermediation ratio and Gross Domestic Product (GDP) in Nigeria.

1.4 Research Questions

The following research question will guide this study;

1. To what extent has the bank financial intermediation ratio impacted the Gross Domestic Product (GDP) in Nigeria?
2. To what extent has the insurance financial intermediation ratio impacted on the Gross Domestic Product (GDP) in Nigeria?
3. To what extent has changes in pension fund financial intermediation ratio brought about changes in Gross Domestic Product (GDP) in Nigeria?

1.5 Research Hypotheses

The following hypotheses are formulated to guide in analyzing the findings of this research:

Ho1: Bank financial intermediation ratio does not influence Gross Domestic Product (GDP).

Ho2: Insurance financial intermediation ratio does not bring about an increase in the Gross Domestic Product (GDP).

Ho3:  Pension fund financial intermediation ratios do not bring about changes in Gross Domestic Product (GDP).

1.6 Significance of the study

The study explored the impact of the effectiveness of financial intermediation on Nigeria economic growth. The significance of this study cannot be overstated as it is important to both scholars and practitioners.

• To Scholars:

This study is very important to scholars as it contributes to the existing literature on the subject matter by investigating especially the roles financial intermediaries play in the economy. It provides a base for scholars who intend to carry out further studies in the area of study. It will also be a referencing material to a related research study.

• To Practitioners:

This study will make recommendations and help practitioners in terms of policy and decision making in the Nigerian financial system.

1.7 Scope of the study

• Content scope

The focal point of this study is the Nigeria financial system, evaluating its performance over the years and highlighting its significant role in the economic growth and development of Nigeria

• Geographical scope

Financial intermediation is a global phenomenon; it cuts across all part of the world, however, this study shall focus only on the operations of financial intermediaries and its activities as it impacts on Nigerian economic growth.

1.8 Limitations of the study

This study is limited to the following variables; bank financial intermediation ratio (FIRB), insurance financial intermediation ratio (FIRIC), and pension fund financial intermediation ratio (FIRPFA), inclusion or exclusion of some variables can alter or produce a different result

1.9 Definition of Terms

• Pension funds: This refers to a fund from which pensions are paid, accumulated from contributions from employees, employers, or both.
• Insurance: This is a contract whereby one party agrees to pay a sum to another party for a fee (premium) in event that the later suffers a particular loss.
• Bank: A bank is a financial institution that accepts deposits from the public and creates credits.
• Financial Intermediation: This is the process of mobilizing funds from the surplus economic unit and channelling the same funds to deficit economic unit (banks, insurance companies, pension fund).
• Economy: The state of a region or country in terms of production and consumption of goods and services and the supply of money.
• Financial System: This refers to an environment that allows the exchange of funds between lenders, investors and borrowers.
• Financial Market: An organized institutional structure or mechanism for creating and exchanging financial assets or claims.

1.10 Organization of study

The study is divided into five chapters are; Chapter one, which includes the introduction, statement of the problem, aim, and objectives of the study, research questions, research hypotheses, significance of the study, definition of terms, and organization of the study. Chapter two deals with the literature review. Chapter three, which deals with the research methodology. Chapter four deals with data presentation and data analysis. Chapter five contains the discussion, conclusion, and recommendations.