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CHAPTER ONE

INTRODUCTION

1.1  Background to the Study 

Deposit Banks Money (DMBs) plays an important role in the economy by performing the basic functions of accepting deposits, lending and providing money transfer services. This enables the supervisory banks to efficiently allocate economic resources or intermediate funds from the units to the less efficient units. The banking-deposit activities have great Department of Finance, Ekiti State University, Ado – Ekiti Page 101 Nigerian Journal of Banking and Financial Issues (NJBFI) - Vol. 9 No. 1, March 2023. effects on the financial sector and on the economy in general; this is a matter of major concern for all players in the banking industry. Although financial innovations (FI) are becoming a topic on the global political agenda for sustainable development, financial inclusion is still in its infancy. Custodian banks must be able to integrate their services through financial inclusion, which means that financial services are available and accessible to everyone. Therefore, the bank attracts more savings and increases its profits to the point where profits can be used to cover unexpected future losses.

Financial inclusion is considered a key factor in reducing poverty, improving living standards and creating jobs. The World Bank's goal of achieving financial inclusion by 2022 is the foundation for economic growth and poverty reduction. Access to financial services enables the poor to save and borrow, allows the acquisition of real estate and investments in education, and enables small and medium enterprises to promote opportunities for growth. However, the ability to access financial services, especially credit, is very important to promote economic growth and wellbeing. Financial inclusion is increasingly recognized around the world by policy makers, research and development agencies due to its importance as a tool for economic development, particularly in reducing extreme poverty, creating jobs, creating wealth and livelihoods. World progress in general. Financial inclusion is a process that ensures easy access, availability and use of financial services by the entire economy. According to a study done in Nigeria (2018) by the development finance company, it shows that about 53.0% of adults withdraw from business. The global pursuit of investment as a driver of economic growth is having a positive impact on Nigeria as the rate of withdrawal from 53.0% in 2008 to 46.3% in 2015, as reported in CBN 2019. Being encouraged by this positive development, Central.

The Bank of Nigeria, in collaboration with partners, launched the National Financial Inclusion Strategy on October 23, 2012 which aims to reduce the exclusion rate to 20% by 2020. In particular, older Nigerians who have access to financial services fees will increase from 21.6. % in 2015 to the age of 70. % in 2022, while those with access to security are expected to increase from 24.0% to 60%; and credit from 2% to 40%, Insurance from 1% to 40% and pensions from 5% to 40%, at the same time. Many banks continue to innovate and create in an effort to meet changing customer needs. Bank customers benefit from investment by reducing transaction costs, easy access to services and a high level of efficiency. Money affects banking services (Nthambi, 2019). A more complicated form of banking is to accept deposits and use them to make loans. From a global point of view, according to the Government Certified Auditing Professional CGAP (2018), statistics show that 2 billion working-age adults, more than half of the total elderly population, do not have regular accounts in the company's finances. Investment efforts aim to ensure that all businesses and households have access to and use financial services, regardless of income level. Digital payments are an important part of investment around the world. The Central Bank of Nigeria (CBN)'s investment reform in 2012 in partnership with various others plans to reduce the withdrawal rate to 20% by 2020.

Most Nigerian banks have adopted the Representative Banking, Tiered Know-Your - Customer Requirements. (KYC), Customer Protection, Credit Enhancement Program (Nigerian Lending Risk Sharing System (NIRSAL). The general objective of this study is to determine the impact of financial inclusion on banks‘ performance in Nigeria. The specific objectives are to: i Assess the effect of bank embranchment on financial performance of banks. ii Investigate the effect of bank accounts on financial performance of banks. iii. Evaluate the effect of number of ATMs on financial performance. iv. Determine the number of active POS terminals on financial performance of banks.

Department of Finance, Ekiti State Univeristy, Ado – Ekiti Page 102 Nigerian Journal of Banking and Financial Issues (NJBFI) - Vol. 9 No. 1, March 2023. Households' access to financial services has long been a topic of policy debate in emerging and developing economies such as Nigeria (World Bank, 2018). A developing economy like Nigeria is basically aided by investments and the like to raise the standard of living of its people. In addition, financial services provided by banks can help promote the growth of any economy. These projects help people escape poverty by supporting investments in their health, education and business. Most of the poor in the world, including Nigeria, do not have financial services that can access these services, such as bank accounts, branch numbers, ATMs and electronic cards, but the value of the bank depends on the entry of banks (FI ), ATM and POS terminals, etc., which will attract people to invest. Since the banking sector of any country is one of the main determinants of economic development, neglecting such a study as banking would be as bad as neglecting the economy itself. Gross domestic product as an indicator of standard of living in any developing economy.

The impact of community banks on the economy of Nigeria is profound, shaping the financial landscape at the grassroots level and fostering inclusive economic growth. These financial institutions, designed to serve local communities and small businesses, play a pivotal role in enhancing financial inclusion. By providing accessible and tailored banking services to individuals who are often underserved by traditional banks, community banks empower a significant portion of the population to participate actively in the formal financial sector.

One of the primary contributions of community banks is their support for entrepreneurship and small businesses. Through targeted loans and financial services, these banks act as catalysts for local economic activities. Entrepreneurs and small business owners, who may face challenges accessing credit from larger financial institutions, find a lifeline in community banks. This support stimulates business expansion, innovation, and job creation within communities, contributing directly to the economic vibrancy of the nation.

Furthermore, community banks serve as engines for local economic development. By providing financial resources for investments in various sectors, these banks contribute to the establishment and growth of businesses, ranging from agriculture to micro-enterprises. This localized focus ensures that economic activities align with the specific needs and potential of the communities they serve, fostering sustainable development.

The impact of community banks extends beyond financial transactions; it is deeply intertwined with community empowerment. By offering savings and credit facilities, these banks empower individuals to manage their finances effectively and invest in income-generating activities. This financial empowerment translates into improved living standards, reduced poverty levels, and an overall enhanced quality of life for community members.

The risk mitigation role of community banks is also noteworthy. With a keen understanding of the local economic landscape, these institutions are better positioned to assess and manage risks associated with lending. This localized approach contributes to financial stability within communities, reducing the likelihood of financial crises and enhancing resilience against economic shocks.

In addition to their financial contributions, community banks foster financial literacy and education. By providing information and guidance on financial management, savings, and investment, they play a pivotal role in enhancing the financial literacy of community members. This, in turn, equips individuals with the knowledge needed to make informed financial decisions, ensuring the responsible use of financial resources.

In conclusion, the impact of community banks on the economy of Nigeria goes beyond the realm of banking services. It is a catalyst for inclusive economic growth, entrepreneurship, community empowerment, and financial literacy. The localized focus and community-centric approach of these banks make them instrumental in driving sustainable economic development and improving the overall well-being of Nigerian communities.

1.2       Statement of the Problem

The impact of community banks on the economy of Nigeria is a topic of significant interest and importance, yet it is not without its challenges and complexities. Understanding and addressing the problems associated with the functioning of community banks are crucial steps in maximizing their positive impact on the Nigerian economy.

One prominent issue is the limited outreach and accessibility of community banks in certain regions. Despite their mandate to serve local communities, some areas may still lack the presence of these financial institutions. This geographical disparity can result in uneven economic development, leaving certain communities underserved and hindering the potential for inclusive growth. The problem of outreach is compounded by infrastructure challenges, including inadequate transportation and communication networks, which can impede the efficient operation of community banks in remote areas.

Another pressing problem is the issue of financial sustainability for community banks. While their focus on local empowerment is commendable, many community banks face financial constraints that affect their ability to provide adequate services and support to entrepreneurs and small businesses. This problem is often exacerbated by a lack of adequate capitalization, leading to limited lending capacity. Inadequate financial resources may hinder the banks' ability to stimulate economic activities and create a ripple effect in the broader economy.

The efficiency and effectiveness of community banks are also areas of concern. Operational challenges, including outdated technology, inefficient processes, and limited human capital, can impede their ability to deliver timely and quality services. Inefficiencies may result in delays in loan processing, reduced responsiveness to customer needs, and, ultimately, a diminished impact on the economic development of the communities they serve.

Additionally, regulatory and policy frameworks may pose challenges to the operation of community banks. Ambiguities in regulatory guidelines, stringent compliance requirements, and a lack of tailored policies for community banks may create hurdles in their functioning. This can lead to a stifling of innovation and agility, limiting the banks' ability to adapt to evolving economic landscapes and effectively address the unique needs of their communities.

Moreover, the issue of risk management in community banks deserves attention. Given their localized focus, community banks may face specific risks associated with the economic conditions of the areas they serve. Challenges such as agricultural risks, local market dynamics, and vulnerability to environmental factors can impact the banks' loan portfolios and overall financial health. Developing robust risk management strategies tailored to the specific contexts of community banks is crucial for ensuring their resilience and sustainability.

The issue of financial literacy within communities is a cross-cutting concern that affects the overall impact of community banks. Inadequate financial education and awareness among community members may limit their ability to leverage the services provided by community banks fully. This lack of financial literacy can hinder the adoption of banking products, limit savings, and result in suboptimal utilization of credit facilities, ultimately constraining the transformative potential of community banks.

In addressing these multifaceted problems, it is essential to adopt a comprehensive and collaborative approach. Strengthening the regulatory framework, improving infrastructure, enhancing financial literacy initiatives, and promoting innovations in technology and operational efficiency are critical steps. Additionally, strategic partnerships between community banks, government agencies, and non-governmental organizations can foster collective efforts to overcome these challenges and unlock the full economic potential of community banks in Nigeria. Through targeted interventions and sustained commitment, the problems associated with the impact of community banks on the economy can be systematically addressed, paving the way for more inclusive and sustainable economic development across the nation.

1.3    Objectives of the Study

The primary aim of this study is to examined the impact of community bank on the economy of Nigeria The specifics objectives are to:

1.  Assess the Extent of Financial Inclusion Enabled by Community Banks.

2.  Evaluate the Contribution of Community Banks to Entrepreneurship and Small Business Growth.

3.  Analyze the Socioeconomic Development Indicators Influenced by Community Banks.

4.  To Identify Challenges and Opportunities for Improving Community Banks' Impact.

1.4   Research Questions:

1.  To what extent do community banks contribute to financial inclusion in Nigeria, particularly in underserved or rural areas?

2.  How do community banks impact entrepreneurship and the growth of small businesses within the communities they serve?

3.  What are the broader socioeconomic development indicators influenced by the presence and activities of community banks in Nigeria?

4.  What challenges do community banks in Nigeria face, and what opportunities exist for enhancing their impact on the economy?

1.5      Research Hypotheses:

Hypothesis 1: The presence of community banks is positively associated with increased financial inclusion, particularly in underserved or rural areas.

Hypothesis 2: Community banks positively contribute to entrepreneurship and small business growth, fostering job creation and economic activities.

Hypothesis 3: The presence of community banks is positively correlated with improvements in poverty levels, income distribution, education, and healthcare outcomes within their operational areas.

Hypothesis 4 Overcoming the identified challenges and leveraging opportunities can enhance the effectiveness and sustainability of community banks, positively influencing their impact on the Nigerian economy.

1.6    Significance of the Study

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