The Role of Financial Institutions in the Development of an Economy

The Role of Financial Institutions in the Development of an Economy

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Abstract on The Role of Financial Institutions in the Development of an Economy

The banking system and financial institutions is one of the fastest growing and developing sectors of paramount importance in the Nigeria economy.  The role of the various banking and non-banking financial institutions in the provision of different types of industrial and agricultural finance are fully appraised. In examining the role of financial institutions in economic developments, the following theoretical concepts usually constitute the focus of attention, namely; The domestic mobilization of financial resources is essential for capital formation and accelerated growth. An efficient allocation of available resources is of importance in the development process. Financial institutions offer an efficient institutional mechanism through which resources can be mobilized and directed from less essential uses to more productive investment. The role of financial institutions in Nigeria is so crucial in the economic emancipation, as such roles help the economy of developing nation find its real position in the world economy and improves the standard of living of such nation. The researcher tried to examine the adequacy and relevance of the institutions and the structure of the financial system of meet the needs of the economy for rapid development and also to know whether they play the role for which they were established. In order to write the project, research was done on some of these banks and financial institutions like central bank of Nigeria, commercial banks, merchant banks and development banks. Finally, the researcher also carried out thorough investigations to show all the claims of some financial institutions and hence recommendations were made.

Chapter one on The Role of Financial Institutions in the Development of an Economy

INTRODUCTION

 BACKGROUND OF THE STUDY

The idea of establishing financing institutions was mooted soon after the establishment of the central bank of Nigeria on first July, 1959 after the bank failures of the early 1950’s.  At this stage, it became obvious that there was an urgent need to establish financial institutions capable of providing medium and long-term capital to full up the serious gaps in the financial system of the economy.  In view of the dwindling position of the economy the government has at various times tried to correct through monetary and fiscal policies the downward movements of the economy as well as to place the economy on a path of meaningful development. Owing to the important roles agriculture and manufacturing sectors are expected to play in the economic development the government introduced a lot of policies to encourage production in these sector for example, the stipulated sectoral distribution of loans to agriculture and manufacturing sector (preferred sectors) has been increasing over the years.  The government executes the monetary policies through the banks of which commercial banks are the key players. Generally, we know that the financial system of any society (of which the banking system is undoubtedly the most dominate), is the frame work within which capital formation takes place through intermediation of the institution.

The participants in the banking system mobilize resources from the surplus units and channel some to the deficit economic units of any country for industrialization. The banking and financial system is also required to stimulate investment, and channel such to the priority areas of the economy, thus, it acts as a transmitter of government economic policies for growth and development through its social responsibility.  This industry is a force to reckon with in the area of employment.  Banks set apart handsome portion of their annual profits to finance worthy ventures that have spill over effects on the development efforts of the government or their local communities. With the support and encouragement of the international bank for reconstruction and development (world bank) the first indigenous development financial institution was established in January, 1964 in the name of the Nigeria industrial development bank (NIDB). The establishment of this bank in January 1964 was foreshadowed by the incorporation in 1959 of a private investment company, the investment company of Nigeria (ICON) as an industrial financial company with the aim of providing long and medium term finance for industry.   

 STATEMENT OF THE PROBLEM

This research entitled “the role of financial institution in the development of an economy” attempted to determine the role of financial institutions in enhancing the economic development Nigeria, with particular reference to some premier financial institutions like the Nigerian Bank for Commerce and Industry (NBCI) and the Nigeria Agricultural and Co-operative Bank (NACB) and banks.  These two financial institutions were chosen as representatives of the development in financial institutions because their role is envisage to be a representative of role played by other financial institutions in economic development for Nigeria.   

OBJECTIVES OF THE STUDY 

The main objective here is to examine the functions of the financial institutions and assess their impact on the economic growth and development of Nigeria.  To be able to appreciate properly these developments, however, we need to examine the ownership distribution of the institution in the system, the structure of the system and the legal and regulatory framework within which the institutions operates. This study also tried to ascertain how much of the objectives, the financial institutions and banks have been able to achieve their standing relationship with the Nigerian Public and the Central Bank of Nigeria (CBN). The research will almost inevitably chose with a look into the future of the financial system its responsibilities and its role in the Nigerian economy of tomorrow and therefore suggest likely ways of solving the problem. 

RESEARCH QUESTIONS 

1.       Does your institution play any role in the economic development of Nigeria? 
2.       If yes what are the role(s)? 
3.       Have your institution some area(s) of priority? 
4.       If yes is increased rural banking among your priority? 
5.       What are the roles of the insurance sector in the economy?
6.       Do you think that the overall objective of establishing the institution tends towards meeting the political and economic needs of the country?  

SIGNIFICANCE OF THE STUDY 

The study of the role of banking and financial institutions in Nigeria is indispensable and equally significant because this role will not only enhance the economic growth of the Nigeria nation but will also improve the standard of living of the people as it directly and indirectly creates job opportunities for the teaming populating of the army of unemployed in the country.  The role of financial institutions is equally worth studying because of its unique position as being solely responsible in determining and launching the nation into a vibrant economy. The study is equally significant to the generality of Nigerians since this research reviewed the role of the financial institutions in meeting their primary objective as well as other objective with a view to improving the economic position of Nigeria. 
This study also reviewed the primary role of these institutions which included among other numerous functions “providing equity capital and funds by way of loans to indigenous persons, institutions and organizations for medium and long term investments in industry and commerce at such rates and upon such terms as many determined by way the broad in accordance with the policy directed by the federal executive council”. This study is equally significant in that it has reviewed the activities of the Nigeria. Financial institutions in trying to close those gaps created by the operations of the financial institutions and speed up economic development of Nigeria. This research will hopefully be of importance to any developing nation hoping to establish financial institutions to help speed her economic development since it has highlighted the role and functions such institutions play in economic development.   

SCOPE OF THE STUDY 

The research is centered on the periods between 1990 and 1993.  This range has been adopted because of availability of data. This researcher entitled “the role of financial institutions in the development of an economy” is very vast but for purpose of financial constraints, availability of material and time. It has therefore restricted or limited itself to some premier financial institutions like the Nigerian bank for commerce and industry (NBCI) and the Nigerian Agricultural and Co-operative Bank (NACB) and banks.  These two financial institutions were chosen as representations of the development financial institutions because their role is envisage to be a representative of role played by other financial institutions in economic development of Nigeria.   

DEFINITION OF TERMS 

1.   Role: ‘Role’ should mean and all parts played and exhibited by financial institutions in the development of Nigeria economically. 
2.   Financial Institutions:  This means and includes bank and non-bank financial institutions that are involved in the economic development of this nation solely.   
3.   Economy:  In this research, economy refers to the control and management of the money, goods and other resources of the Nigerian society with regards to the improvement of the standard of living of the people.       
4.   Population: This can be referred to as the number of elements in  a research study that the researcher has access to for the purpose of gathering data.  It is gotten out of a universe.   

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