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THE ROLE OF DEVELOPMENT BANKING IN NIGERIA ECONOMY

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

A very important and integral part of a country's financial system is the banking sector and constitutes a key provider of finance to business. A well functioning banking system facilitates the exchange of goods and services, provides incentives for savings and efficiently channels them to productive investments. Banks as financial intermediaries are expected to provide avenues for people to save income not expended on consumption. It is from the savings they accumulate that they are expected to extend credit facilities to entrepreneurs and other industrialists. As such it supports and promotes a more efficient allocation of resources in the economy. In general, a healthy, robust and stable banking sector plays a crucial role in supporting economic activity, promoting economic growth and ensuring financial stability.

A large body of empirical research on the relationship between finance and growth focuses on banking, the traditional intermediation channel. It is interesting to note that. Although financial markets now play an enhanced role, the process of saving and investment still remains largely in the hands of the banking system, thus giving it one of the most important roles in the economy. Indeed, banks dominate financing in several developing countries and even in most developed countries.

The relationship between banks and economic growth has been one of the most debated issues in financial economies. Beginning with the studies of Bagehot (1873) and Schumpeter (1911), which stress the critical role of the banking system in economic growth, there have been numerous studies investigating the relationship between financial system developments, in particular banking system development, on economic growth. Some economists see the role as minor or negligible while others see it as significant. Robinson (1952), for example, argues that the financial system does not spur economic growth; rather the financial system simply responds to development in the real sector. In contrast, Goldsmith (1969), Mekinnon (1973), and others emphasize the positive role of financial systems in economic growth. In particular, King and Levine (1993a) and DeGregorio and Guidotti (1995) show convincingly that measures of banking development are strongly correlated with economic growth. Levine (1997), Levine and Zervos (1998), Beck, Demirgue and Levine (2000) and Levine, Loayza and Beck (2000) have confirmed this finding. In addition, there remain divergent views on the issue of causality. While some studies opined that financial intermediation drives economic growth (Odedokun; 1998, Nieh, et al.; 2009, Islam and Osman; 2011), others have argued that economic growth drives financial intermediation. However, there are studies, which have argued that a bi-directional causality exists between financial intermediation and economic growth (Odhiambo, 2011).

In the light of these different views and aspects of this issue, this study seeks to revisit the empirical role of banking sector development on economic growth in Nigeria. The rest of this paper is organized as follows. Section two contains a review of related literature, while section three focuses on methodology and data description. Section four deals with the presentation and analysis of empirical results, while the summary and conclusions are presented in section five.

1.2 STATEMENT OF THE PROBLEM

Following the increase in economic activities in Nigeria, commercial banks which have been established to provide their customers  with short term loans can no longer meet up with duties of providing medium. At this point in time the monetary authority and the federal government saw the need to create a bank that would cater for the needs of people living in rural and urban areas and those who want to invest in capital projects.

The aim of establishing this bank was to grant medium and long term loans to Nigeria investors. The aim of establishing this bank was defeated due to the economic depression pampering the Nigeria economy which had led to the Nigeria economy which had led to the folding up or winding up of many industries which had slowed-down the business activities in our industries which affect the development of banking in Nigeria.

Development banks have not performed satisfactorily in the area of capital projects and promotional activities to stimulate interests among their customers on new projects which the bank considers necessary and profitable. This can be attributed to an equate capital base, the high rate of interest charged on loans borrowed and high cost of building houses. New initiatives are therefore needed to tackle these problems.

1.3 OBJECTIVES OF THE STUDY

The main objectives of this study is to determine the role of development banking in nigeria economy

Other objectives include:

1. To finalize the role played by development banking in the development of Agriculture, commerce and industrial sectors.

2. To highlight the impact of development banking in the Nigeria Economy.

3. To examine the extent of mobilization of funds to finance capital projects.

4. To examine the sources of funds to the development banking in Nigeria.

5. To determine whether there is any difference in functions of banks that makeup development banking.

6. Finally to make general and specific recommendations worthwhile for development banking in Nigeria.

1.4 RESEARCH QUESTIONS

The following research questions have been formulated for the study

1. What is the role played by development banking in the development of Agriculture, commerce and industrial sectors?

2. What is the impact of development banking in the Nigeria economy?

3. What is the extent of mobilization of funds to finance capital projects?

4. What are the sources of funds to develop banking in Nigeria?

5. What are the differences in functions in banks that make-up development banking?

1.5 RESEARCH HYPOTHESES

1. Development banking significantly contributes to the growth and development of agriculture, commerce, and industrial sectors through targeted financial support and investment mechanisms.

2. The presence of development banking in the Nigerian economy positively influences economic growth indicators such as GDP growth, employment rates, and industrial output.

3. Development banking facilitates substantial mobilization of funds to finance capital projects in Nigeria, thereby stimulating infrastructure development and economic expansion.

4. The primary sources of funds for development banking in Nigeria include government allocations, international financial institutions, private investors, and deposits from the public sector.

5. Differences in functions among banks comprising development banking are characterized by specialized financing activities tailored to specific sectors, such as agricultural loans, industrial project financing, and trade finance, aimed at fostering targeted economic development goals.

1.6 SIGNIFICANCE OF THE STUDY

The results of the study will be beneficial to different people in different ways. It will be beneficial to stakeholders in the development banking industry, management and staff of the development-banking sector where achievement has been minimal.

The study will benefit the public who will understand the role played by development banking and use it to apply for micro credit loans. It will be equally beneficial to investors who applied for medium and long-term loans on how development banking finances capital projects. It will also stimulate new thoughts and ideas on how development banking in Nigeria carry out its activities.

Finally, the study forms the basis upon which further research can be actuated.

1.7 SCOPE OF THE STUDY

The study was limited to development banking in Nigeria. Because of the time frame and finance constraint on the side of the researcher, the scope of the study was limited to developing banking in Nasarawa metropolis, Nigeria.

1.8 LIMITATIONS OF THE STUDY

However, the researcher encountered problems in area of gathering materials/data for the research work due to the dearth of research materials on the topic. This however, does not distort the researcher from getting relevant documents that aided her in carrying out research work of this nature.

1.9 DEFINITION OF TERMS

1. Growth: An increase in size and capacity of the bank.

2. Banker: Section 41(1) of the SBanking Acts of 1969 defines a bank to mean “any person who carries on banking business and includes a commercial bank, and acceptance house.

3. Development: The gradual improvement in the economy in order to become advanced and stronger.

4. Merger: It is the combination of two or more separate firms into a single firm.

5. Bank Recapitalization: It is the act of supplying long-term funds of the owners of the bank to meet the requirement of monetary authority.

6. Consolidation: It is the reduction in the number of banks and other deposit taking institutions with a simultaneous increase in the size and concentration of the combined entities in the sector.

7. Acquisition: It is where a company takes over the controlling shareholding interest of another company

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