The Role of the Banking Sector in Economic Growth of Nigeria

INTRODUCTION: THE BANKING SECTOR. In this post, we shall evaluate the role of the banking sector in the economic growth of Nigeria.

Somebody might ask me if the Nigerian economy is still growing amidst all these economic crisis.

The truth is that I don’t know. Since growth, stagnation or retardation of any economy is decided over a period of time.

The role of the banking sector in the economic growth of any country cannot be overemphasized.

Money is the lifeblood that sustains any modern economy. And this blood flows through the banking sector which serves as the vein through which the blood (money) circulates through out the body (the economy).

Thus, if the circulatory system (the banking sector) is not functioning well, blood supply (money supply) to the body (the economy) would be hampered. The result will definitely be disastrous.

That is why, any policy that affects the banking sector directly or indirectly affects the entire economy. And the Nigerian economy is no exception.

Hence, a well functioning banking sector is a necessary condition for economic growth. To this end, we shall be looking at the role of the banking sector in economic growth in Nigeria.

Generally, the Nigerian financial system is divided into 2 sectors:

(1) The informal sector
(2) The formal sector

The informal sector consists of all financial agents whose activities are outside the control of financial regulatory bodies. This is to say that their activities are loosely regulated. And not under the direct watch of regulatory authorities. They include thrift and savings societies(isusu), cooperative societies, local money lebders.direction

The formal sector consists of all financial institutions whose activities are directly under the control of financial regulatory bodies. This include all the institutions under the money and capital market. such as the banking sector, insurance sector, investment management companies and so on.

To give this study a direction, we shall only focus on the banking sector as a key driver of the economy.

The Nigerian banking policy permits universal banking system. This means that our banks are allowed to perform both core banking services. such as acceptance of deposits, granting of loans and advances, trade finance, financial advisory services and so on. As well as render other non-core banking services like loan syndication, bonds, mutual funds, company floatation, project finance, capital restructuring, trustee services and so on.

For the banking sector to perform optimally and contribute positively to economic growth, there must be suitable financial policies upon which the sector will thrive. In order to accomplish this, the Nigerian banking sector has embarked on series of financial reforms over the years.

However, the recent and most successful is the banking sector consolidation in 2004. The reform was geared towards making the banks strong and reliable financial institutions. So as to ensure the safety of depositorels fund. As well as ensure that the banks are well placed to play their role of financial intermediation in the country.

To achieve this stability in the banking system, the CBN raised the minimum shareolders’ fund for commercial banks from #2 billion to #25 billion through the recapitalization process. This led to mergers and acquisitions amongst banks in Nigeria. While some others raised the required capital through private placement, public offers and right issues.

Read Also: 7 Roles of Central Bank of Nigeria in Nigerian Economic Development

The result of this process is the closure of many weak banks as a result of their inability to raise the required capital. And then, the emergence of 25 standard commercial banks in the country.

This process made Nigerian banks stable, reliable, competent and globally competitive.

THE LINK BETWEEN THE BANKING SECTOR AND THE NIGERIAN ECONOMY.

According to the modern growth theory, the banking system through their function of financial intermediation plays a vital role in economic growth of both developed and developing economies.

Financial intermediation is the process in which financial institutions particularly commercial banks mobilize money from surplus economic units in the form of savings and channel such funds to the deficit units or sectors of the economy who are in need of funds to carryout useful economic activities through loans or mortgages.

Through this process and other vital functions that commercial banks perform, they positively influence economic growth in the following ways:

♦ Mobilization of Savings: Acceptance of deposits remains the primary function of commercial banks. This particular function places them in a good position as fund mobilizers. As it allows them to collect surplus funds from the public. Funds deposited with banks are considered safe by the depisiting public. Also such money generate varying rates of interest depending on the bank and the type of account. This serves as an incentive to savings.

This generally increase capital formation in the country. Thus, forming the bases for investment and economic growth.

Read: How to Open Bank Account in Nigeria

♦ Grant Loans and Advances for Investment: This is the second most important function of commercial banks. Funds accumulated through the savings process is channeled to the public, agriculture and industries for carrying out economic activities. This can be in the form of short term, medium or long term loans. Repayable at a higher rate of interest.

Banks also finance government projects or loan to the government in form of bonds. This is utilized on infrastructural development. As well as recurrent expenditures.

Read: How to Get a Loan in Nigeria

♦ Facilitate the Exchange of Goods and Services: Banking transactions make the buying and selling of goods and services possible and easy notwithstanding the distance. Banks also create demand by giving loans to consumers so as to enable them purchase consumer items.

♦ Invesment Advice and Portfolio Management for Customers: Portfolio Management is a rigorous exercise that requires time and investment expertise.

Nigerian banks undertake such exercise on behalf of their customers so as to ensure that their customers invest their funds in viable ventures. They also gather information and channel such to investors so as to enable them make informed investment decisions.

♦ Encourages Entrepreneurship: Commercial banks through their function of underwriting the shares of new and existing businesses encourages entrepreneurship in Nigeria.

♦ Carry out Monetary Policies: Commercial banks also perform the all important function of carrying out the monetary policies of the government. Regulation of money supply and the implementation of vital monetary policies cannot be possible with out the total cooperation of the commercial banks. since they are the major links through which money circulates in the economy. They also control the monetary behaviour of the general public.

Read Also: How to Access Bank Account of Deceased Person In Nigeria

CONCLUSION

The role played by the banking sector in the economic growth of Nigeria is very vital. Through their function of financial intermediation banks ensure continued availability of fund for investment. Thus, increasing capital formation and promoting investment viz-a-viz economic growth.

Through other numerous functions performed by the banking sector, they influence customers investment decisions. And propel the country on the part of growth.

Thus, we may rightly conclude that the banking sector is a catalyst for economic growth. And if the quest to move our nation forward must be achieved, adequate attention must be given to the sector.

REFERENCES

Agung, F. and Ford, J. (1998). Financial Development, liberalization and Economic Development in Indonesia, 1966-1996: Cointegration and Causality, University of Birmingham, Department of Economics Discussion Paper, No. 98-12.

Arestis P., Demetriades P. and Luintel K. (2001). Financial Development and Economic Growth: The Role of Stock Markets. Journal of Money, Credit and Banking, 33 (1): 16-41.

Arestis, P. and Demetriades, P. (1997). Financial Development and Economic Growth: Assessing the Evidence. The Economic Journal, 107, 783-799.

Bagehot, W. (1873). A Description of the Money Market, Homewood, IL: Richard D. Irwin, (1992 Edition) Lombard Street.

Bagehot, W. (1873). Lombard Street. Homewood, Il: Richard D. Irwin, 1962 edition.

Beck T., Levine R. and Loayza N. (2002). Industry Growth and .Capital Allocation: Does Having a Market-or Bank System Matter?. Journal of Financial Economics, 64(2): 147-80.

Beck, T., Levine, R. and Loayza, N. (2000). Finance and the Sources of Growth. Journal of Financial Economics, 58,261-300.

Choe, C. and Moosa, I. (1999). Financial System and Economic Growth: The Korean Experience. World Development, 27, 1069-1082.

Demetriades, P. O. and Hussein, K.A. (1996). Does Financial Development Cause Economic Growth? Time-series Evidence from 16 Countries. Journal of Development Economics, 51, 387-411.

Demetriades, P. and Andrianova, S. (2004). Finance and Growth: What We Know and What We Need to Know. In Goodhart C. (ed) Financial Development and Economic Growth: Explaining the Links. Basingstoke: Palgrave Macmillan, 38

Demetriades, P.O. and Hussein, K.A. (1996). Does Financial Development Cause Economic Growth? Time-Series Evidence from 16 Countries. Journal of Development Economics, 51:387-411.

Demirguckunt, A and Maksimovic, V. 1998. Law, Finance and Firm Growth. Journal of Finance, 53, 2107-2137.

Dickey, D.A. and Fuller, W.A. (1979). Distribution of the Estimators for Autoregressive Time Series with a Unit Root. Journal of the American Statistical Association, 74:427-431.

Dickey, D.A. and Fuller, W.A. (1981). Likelihood Ratio Statistic for Autoregressive Time Series with Unit Root, Econometrica, 49.

Erdal G., Okan, V. S. and Behiye, T. (2007). Financial Development and Growth: Evidence from Northern Cyprus, International Research Journal of Finance and Economics, Issue 8.

Goldsmith, R. W. (1969). Financial Structure and Development. New Haven, Conn.: Yale University Press.

Greenwood, J. and Jovanovic B. 1990. Financial Development, growth, and the distribution of income. Journal of Political Economy 98 (3): 1076-1107.

Odedokun, M. O. (1998). Alternative Econometric approaches for Analyzing the Role of thee Financial Sector in Economic Growth: Time-Series Evidence from LDCs. Journal of Development Economics, 50, 119146.

Pagano, M. (1993). Financial Markets and Growth: An Overview. European Economic review, 37, 613-622.

Pagano, M. (1993). The Floatation of Companies on the Stock Market. European Economic Review,37: 121-135.

Ram, R. (1999). Financial Developing and Economic Growth: Additional Evidence. Journal of Development Studies, 35(4), 164-74.

Rousseau, P. L. and Wachtel, P. (2005). Economic Growth and Financial Depth: Is the Relationship Extinct Already? Discussion Paper 2005/ 10. United Nations University.

Roubini, N. and Sala-i-Martin, X. (1992). Financial Repression and Economic Growth. Journal of Development Economics, 39:5-30.

Schumpeter, J. A. (1911). The Theory of Economic Development. Cambridge, Mass: Harvard University Press.

Schumpeter, J. A. (1912). Theorie der WIrtschaftlichen Entwicklung. Leipzig: Dunker & Humblot, The Theory of Economic Development: An Inquiry into Profits, Capital, Interest and the Business Cycle, translated by Redvers Opie. Cambridge, MA: Harvard University Press, 1934.

Shaw, E. S. (1973). Financial Deepening in Economic Development. Oxford University Press, London and New York. Wachtel. P. (2003). How Much Do We Really Know About Growth and Finance?, Federal Reserve Bank of Atlanta Economic Review, 88, 34-47.

Wood, A. (1993). Financial Development and Economic Growth in Barbados: Causal Evidence. Savings and Development, 17(4), 379-390.

📢 We are hiring writers!