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IMPACT OF FINANCIAL INTER-MEDIATION BY DEPOSIT MONEY BANKS ON THE REAL SECTOR OF THE NIGERIAN ECONOMY (1980 – 2010)

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Financial intermediation is the process of transferring sums of money from economic agents with surplus funds to economic agents that would like to utilize those funds. The key to understanding the process and the range of financial instruments available lies in recognizing that economic agents are a heterogeneous bunch having very different financial positions, investment, business and financial needs.

For this reason, there are a wide range of financial intermediaries and financial instruments servicing these needs. Financial intermediation is an act of collecting funds from depositors by financial lenders/institutions and then lending them to borrowers. That is, it is a process where the people with excess funds give to banks or any other financial institution, and the bank offers credit to those individuals who require the funds for personal or business reasons. It often involves mobilizing the financial savings and channeling them to borrowers through specialized institutions known as banks.

These specialized institutions are also called financial markets licensed to accept those deposits and lend them to the business and households at given interest rates over a specified period.

Financial intermediation also cuts across making payments, receivables, transfers and guarantees by the banks on behalf of their customers. Examples of organizations that carry out financial intermediation are banks, insurance firms, leasing companies, microcredit, private equity, venture capital, pension funds, amongst others. Some of these organizations enjoy a cost advantage in providing these intermediation services in such a way that they cannot only pay their bills but also make profits, thereby bringing about efficiency in the general economy.

The function of deposit money banks is the mobilization of savings for investment. The importance of banks in influencing economic growth within an economy is widely acknowledged.

1.2 STATEMENT OF THE PROBLEM

"The Nigerian economy has witnessed significant changes in its financial sector over the period from 1980 to 2010, particularly in the activities of deposit money banks. However, the extent to which these changes in financial intermediation have influenced the performance and development of the real sector remains unclear. Therefore, the primary problem addressed by this study is to assess the impact of financial intermediation by deposit money banks on the real sector of the Nigerian economy during the specified time period. Specifically, the study aims to examine the relationship between deposit money bank activities, such as credit allocation and lending practices, and key indicators of real sector performance, including production output, employment generation, investment levels, and overall economic productivity."

1.3 OBJECTIVES OF THE STUDY

The main objective of this study is to determine impact of financial intermediation by deposit money banks on the real sector of the nigerian economy (1980 – 2010). Specific objectives include;

1. To evaluate the extent of financial intermediation activities carried out by deposit money banks in Nigeria between 1980 and 2010.

2. To analyze the trends and patterns in the performance of the real sector of the Nigerian economy during the specified time period.

3. To assess the relationship between financial intermediation by deposit money banks and key indicators of the real sector, such as production output, employment levels, and investment activities.

1.4 RESEARCH QUESTIONS

1. What were the key financial intermediation activities conducted by deposit money banks in Nigeria from 1980 to 2010?

2. How did the real sector of the Nigerian economy perform in terms of production output, employment generation, and investment trends during the specified time period?

3. What is the nature and strength of the relationship between financial intermediation activities carried out by deposit money banks and the performance of the real sector in Nigeria?

1.5 RESEARCH HYPOTHESES

1. H0: There is no significant relationship between financial intermediation by deposit money banks and the performance of the real sector in the Nigerian economy during 1980-2010.

   H1: There is a significant relationship between financial intermediation by deposit money banks and the performance of the real sector in the Nigerian economy during 1980-2010.

2. H0: The activities of deposit money banks have not influenced the production output, employment levels, and investment trends in the real sector of the Nigerian economy during 1980-2010.

   H1: The activities of deposit money banks have influenced the production output, employment levels, and investment trends in the real sector of the Nigerian economy during 1980-2010.

3. H0: The impact of financial intermediation by deposit money banks on the real sector of the Nigerian economy is consistent across different sub-periods within the 1980-2010 timeframe.

   H1: The impact of financial intermediation by deposit money banks on the real sector of the Nigerian economy varies across different sub-periods within the 1980-2010 timeframe.

1.6 SIGNIFICANCE OF THE STUDY

The significance of the study Impact of Financial Intermediation by Deposit Money Banks on the Real Sector of the Nigerian Economy (1980 – 2010)" lies in its potential contributions to both academic understanding and practical policymaking in Nigeria. Some of the key significance points include:

1. Contribution to Academic Knowledge: The study will contribute to the existing body of literature on the relationship between financial intermediation and the real sector in emerging economies like Nigeria. It can provide valuable insights into how deposit money banks impact real sector performance over time.

2. Policy Implications: Findings from the study can inform policymakers, regulators, and stakeholders in the financial and economic sectors about the effectiveness of financial intermediation policies and practices. This can lead to more targeted interventions aimed at promoting real sector growth and development.

3. Economic Development: Understanding the dynamics of financial intermediation and its impact on the real sector is crucial for fostering sustainable economic development. By identifying the factors that influence real sector performance, the study can guide efforts to enhance productivity, employment, and investment in Nigeria.

4. Investment Decisions: Investors, both domestic and foreign, can benefit from insights gained from the study when making investment decisions in Nigeria. Understanding how deposit money banks influence the real sector can help investors assess the potential risks and opportunities in different sectors of the economy.

5. Empirical Validation: The study will provide empirical evidence on the relationship between financial intermediation and the real sector in Nigeria, thereby validating or challenging existing theories and hypotheses. This empirical validation is essential for building a robust understanding of economic phenomena.

6. Capacity Building: Through data collection, analysis, and interpretation, the study can contribute to capacity building among researchers, scholars, and practitioners in Nigeria's financial and economic sectors. This can lead to the development of local expertise and resources for conducting similar studies in the future.

Overall, the significance of the study lies in its potential to inform policy decisions, advance academic knowledge, and contribute to the sustainable development of the Nigerian economy.

1.7 SCOPE OF THE STUDY

This study focuses on examining the impact of financial intermediation by deposit money banks on the real sector of the Nigerian economy from 1980 to 2010. It includes an analysis of key financial intermediation activities conducted by deposit money banks, trends in real sector performance indicators such as production output and employment levels, and the relationship between financial intermediation and real sector development. The scope encompasses quantitative analysis of historical data and may involve qualitative insights from relevant literature to provide a comprehensive understanding of the topic within the specified time frame.

1.8 LIMITATIONS OF THE STUDY

The study's scope is limited by several factors, including data availability, reliability, and accessibility for the specified time period in Nigeria. Additionally, the study may face limitations related to the completeness and accuracy of historical records, potential biases in data collection methods, and the generalizability of findings beyond the study period and geographic context. Furthermore, the study may be constrained by the complexity of the relationship between financial intermediation and real sector dynamics, which could require more in-depth analysis and consideration of external factors influencing economic trends in Nigeria.

1.9 DEFINITION OF TERMS

1. Financial Intermediation: The process through which financial institutions such as deposit money banks facilitate the flow of funds from savers to borrowers in the economy.

2. Deposit Money Banks: Financial institutions licensed to accept deposits from individuals and entities and provide various banking services such as loans, mortgages, and investment services.

3. Real Sector: The part of the economy that produces goods and services, including industries such as manufacturing, agriculture, mining, and construction.

4. Nigerian Economy: The aggregate of all economic activities within Nigeria, including production, consumption, investment, and trade.

5. Financial Depth: The size and scope of financial markets and institutions within an economy, reflecting the level of financial intermediation and development.

6. Economic Impact: The effect or influence of financial intermediation by deposit money banks on the real sector of the Nigerian economy, encompassing factors such as output, employment, investment, and productivity.

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