The Role Of Commercial Banks In The Development Of Money And Capital Market In Nigeria
The study examined the role of commercial banks towards the development of money and capital market in Nigeria. A total for five management staff from seven (7) banks making about thirty (30) respondents were sampled and published data were collected from central bank of Nigeria (C.B.N) and the Stock Exchange in Lagos. The result revealed that a positive and significant relationship existed between growth in commercial banking and the activities in the money market in Nigeria.
It was also revealed that the level of liquidity of commercial banks do determine their investments in the money and capital markets.
Hence, commercial banks were advised to be thorough in their service delivery while government should create the enabling environment for successful banking operations.
1.1. Background of the Study
The financial sector provides positive avenues in several fields which indirectly increase people’s standards of living and reduce the poverty level; a well-developed financial sector may increase investments, which can promote money market. (Boyd and Prescott 1986) According to Boyd and Prescott (1986), these principles identified two important roles performed by financial intermediaries. Firstly, the financial intermediaries identify the best production technologies and reduce the costs of acquiring and processing information which improves resource allocation. Secondly, they boost the rate of technological innovation by identifying those entrepreneurs with the best chances of successfully initiating new goods and production processes.
The definition of the financial sector includes mainly formal financial intermediaries in Nigeria financial system, specifically commercial banks that meet the definition of financial depository institutions. The financial system is a channel through which financial development influences growth and sound financial system is characterized by healthy financial institutions and smooth, well-functioning financial markets which jointly allow for robustness and resilience in the face of adverse shocks (OECD, 2010; Estrada, Park, and Ramayandi, 2010). Access to financial services is another dimension of financial development, although it is not widely covered in this study. The lack of access to finance can be a serious barrier to investment and business growth and impedes the setting up of businesses essential for the growth of a dynamic economy. In an inefficiently functioning banking system, it is hard for savings to be mobilized and normally accumulated outside of the banking system, where they are not effectively used for capital formation and growth of the economy.
Commercial banks as part of a legal financial structure play a significant role in the transmission process. Therefore, financial market development needs to bridge the gap between the formal financial institutions and rural households’ financial needs (Levine, 2003). In general, commercial banks in Nigeria follow these principles by both extending credit to the private sector and identifying the most successful entrepreneurs whose initial activities support growth. By identifying the effects of these channels through which finance affects growth, this research will review on the contribution of commercial banks in financial and money market development.
The Capital market which had exhibited 9.8 percent average annual growth during 2010/112015/16, registered 8 percent growth in 2015/16 despite challenging macroeconomic and weather conditions. (NBE 2015/16) The 8 percent real GDP growth was 3.2 percentage point lower than 1.6 percent average growth estimated for Sub – Saharan Africa (World Economic Outlook Update, July 2016). The growth in real GDP was mainly attributed to 8.7 percent growth in services, 2.3 percent in agriculture and 20.6 percent in industrial sectors (NBE) .Nominal GDP per capita raised to USD 794 from USD 725 a year earlier depicting 9.5 percent improvement. The Capital market is targeted to grow 11.1 percent in 2016/17 in contrast to 3.8 and 5.1 percent growth forecast of the IMF for the world and Sub-Saharan Africa (SSA), respectively (WEO, July 2016). In 2015/16, the agricultural sector exhibited slower growth rate of 2.3 percent compared with 8.2 percent target mainly due to contraction in grain crop production (mofed) largely on account of Elino effect. The total grain production reached 266.8 million quintals, of which cereal production accounted for 86.7 percent, pulses 10.4 percent and oil seeds 2.9 percent. Cereals production went down by 2 percentage point over the preceding year owing to 1.7 percent reduction in cultivated land area. In contrast, the production of pulses and oilseeds improved by3.6 and 3.3 percent while cultivated land area expanded by 6.1 and 0.4 percent, respectively during the same period (mofed). The total land cultivated for crop production slightly declined by 0.6 percent to 12.5 million hectares, of which cereals production covered 79.9 percent, pulses 13.2 percent and oil seeds6.9 percent (NBE 2015/16). The share of agriculture in GDP in 2015/16 went down to 36.7 percent from 38.7 percent a year earlier; In 2015/16, the agricultural sector exhibited slower growth rate of 2.3 percent compared with 8.2 percent target mainly due to contraction in grain crop production (mofed) largely on account of Elion effect. The total grain production reached 266.8 million quintals, of which cereal production accounted for 86.7 percent, pulses 10.4 percent and oil seeds 2.9 percent. Cereals production went down by 2 percentage point over the preceding year owing to 1.7 percent reduction in cultivated land area. In contrast, the production of pulses and oilseeds improved by 3.6 and 3.3 percent while cultivated land area expanded by 6.1 and 0.4 percent, respectively during the same period The total land cultivated for crop production slightly declined by 0.6 percent to 12.5 million hectares, of which cereals production covered 79.9 percent, pulses 13.2 percent and oil seeds 6.9 percent. The lion’s share of agricultural sector was crop production, comprising 71.9 percent, followed by animal farming & hunting (19.5 percent) and forestry (8.4 percent). In terms of growth rate, crop and forestry increased by 3.4 and 2.2 percent, respectively; while animal farming & hunting went down by 1.5 percent (NBE 2016).
Industrial sector showed a 20.6 percent annual growth and accounted for 16.7 percent of GDP. The sector contributed 38.8 percent to the economy Manufacturing sector increased by 18.4 percent and constituted about 32.4 percent of industrial output. Construction industry, on the other hand, contributed more than half (56.8 percent) to industrial sector and expanded by 25 percent signifying the leading role the construction sector plays in terms growing expansion of roads, railways, dams and residential houses.
Electricity & water and mining & quarrying had 6.3 and 4.5 percent contribution to industrial production, respectively. Service sector continued to dominant the economy as its share in GDP rose to about 47.3 percent and its contribution to GDP growth was about 50 percent meaning, half of the country’s money market was attributed to service sector (). This was largely owing to the expansion of wholesale & retail trade (8.2 percent), real estate, renting & business activities (3.7 percent) and hotels & restaurant (15.6 percent)
In the meantime, the number of insurance companies stood at 17 (1 public and 16 private) with their branches rising to 426 following the opening of 49 new branches. About 53.5 percent of insurance branches were in Abuja and 83.6 percent of the total branches were private. At the same time, the total capital of insurance companies grew 25.3 percent to Birr 3.6 billion of which the share of private insurance companies was 76.7 percent.
Total resources mobilized by the banking system (deposit, loan collection and borrowing) rose by 8.0 percent and reached Birr 149.6 billion by end 2015/16. As commercial banks expanded their branch network, their deposit liabilities increased to Birr 438.1 billion showing a 19.3 percent annual growth. Saving deposits grew by 24.2 percent followed by time deposits (18.6 percent), and demand deposits (13.7 percent). Saving deposits accounted for 49.5 percent of the total deposits distantly followed by demand deposits (39.0 percent) and time deposit (11.4
percent). The share of private banks in deposit mobilization increased to 33.6 percent from 32.2 percent last year due to the opening of 363 new branches. CBE alone mobilized 66.1 percent of the total deposits banking system owing to its large branch network.
Raising funds through borrowing by the banking system was not an important source of resource mobilization in Nigeria as virtually all banks deposit mobilization and collection of loans. Consequently, total outstanding borrowing of the banking system stood at Birr 32.9 billion slightly higher than Birr 31.2 billion a year ago Of the total borrowing, domestic sources accounted for 89.1 percent and foreign sources the remaining balance. Birr 77.2 billion collected during the review 56.3 percent was the share of private banks
Banks, including Development Bank of Nigeria (DBE) disbursed fresh loans to the tune of Birr 88.0 billion in 2015/16 which was a 16.6 percent higher than a year ago. Of the total new loans, about 43.6 percent was made by private banks, and the rest by public banks. About 29.0 percent of the loans went to industry followed by domestic trade (17.1 percent), housing and construction (15.5 percent), agriculture (15.2 percent) and international trade (10.8 percent) and others (12.4 percent).
Total outstanding credit of the banking system expanded by 20.4 percent and reached Birr 280.3 outstanding claims on private sector rose by 23.8 percent, on public enterprises 21.2 percent and on the central government 6.2 percent. Outstanding credit to industry accounted for 37.8 percent followed by international trade (18.5 percent), domestic trade (10.2 percent), housing and construction (10 percent) and agriculture (7.3 percent). The share of private sector (including cooperatives) in outstanding credit was 179.2 billion (or 63.9 percent) depicting a 21.5 percent annual growth. (NBE)
1.2. Statement of the Problem
A more efficient financial sector is more likely to direct a country’s scarce resources to their most productive use. As this occurs, money market could reach its full potential. Besides, since the primary task of financial intermediaries is to channel funds to the most profitable investments they identify, then efficient financial markets improve the quality of investments which eventually enhances money market. Generally speaking, a well-developed financial system could improve the efficiency of financing decisions and favoring a better allocation of resources and accelerate money market.
Alex (2012) noted that banks play several vital roles in any economy. And these roles are aimed at ensuring sound financial system and economic stability. It is incontrovertible that the banking system is the engine of growth in any economy, given its function of financial intermediation. Through this function, banks facilitate capital formation, lubricate the production engine turbines and promote money market. However, banks’ ability to engender money market and development depends on the health, soundness and stability of the banking system itself (Alex 2012). Similarly, Abdul Salam (2013) noted that financial intermediation is the process through which financial institutions transfer financial resources from surplus units of the economy to deficit ones. However, for financial institutions to discharge this role effectively, they have to be developed in terms of their resource mobilization, variety of financial assets and efficient in credit allocation.
Currently, the financial sector in Nigeria is composed of the banking industry, insurance companies, microfinance institutions, saving and credit cooperatives and the informal financial sector. But the Nigeria financial system is rudimentary and dominated by banks. Zerayehu et al (2013) noted that the banking industry accounts for about 95% of the total financial sector assets. But, he also noted that Nigeria is still remains a highly under-banked country in the world even though supply of the banking service is growing from year to year but it has not led to an increased outreach of the banking system at large (Roman, 2012). Therefore, it is possible to say that Nigeria’s commercial bank development, as measured by its development indicators such as deposits of commercial banks, loan and advances and asset with respect to GDP needs empirically investigation in the context of Nigeria just to know whether those indicators are contribute the growth of Capital market . the objective of this study is to empirically examine the contribution commercial banks’ to money market in the context of Nigeria by using the variables that are considered in this study Therefore this study will aim as to provide further evidence by examining the contribution of commercial banks on money market of Nigeria for the 2001-2017 periods. And focus on formal financial development matter for money market of Nigeria With the vast collection of documented literature supporting the positive contribution of finance to growth in general, the impact of financial development in terms of commercial banks development on the overall growth and major economic sectors of Nigeria, to identify challenges associated with financial development of the country.
1.4. Research Question
In line with the broad purpose statement highlighted above, the following specific research questions were formulated as follows.
- Does Commercial Banks in Nigeria profitability contribute to the Nigeria money market?
- Does Commercial Banks in Nigeria Loan and advances contribute to the Nigeria money market?
- Does Commercial Banks in Nigeria asset contribute to Nigeria money market?
- Does Commercial Banks in Nigeria deposit contribute to the Nigeria money market?
1.6. Research Objectives
The general objective of this study is to analyze the contribution of Commercial Banks in Nigeria towards the development of Nigeria capital market.
To study the contribution of Commercial Banks in Nigeria profitability, asset, loan and advancement, deposit, investment, on the Capital market.
- To determine the contribution of Commercial Banks in Nigeria’s profitability towards the growth of capital market.
- To investigate the contribution of Commercial Banks in Nigeria’s Loan and advances towards the growth of capital market.
- To determine the contribution of Commercial banks Nigeria’s asset towards the growth of the Capital market.
- To investigate the contribution of Commercial Banks Nigeria’s deposit towards the growth of the Capital market.
Summary of Findings, Conclusion and Recommendations
5.1 Summary of Findings
Findings emanating from this study are as follows:
- Bank Credit exerts positive and significant impact on capital market in Nigeria.
- Growth in Liquid Liabilities of Banks exerts positive and significant impact on capital market in Nigeria.
- Net Interest Margin of Banks exerts positive and significant impact on capital market in Nigeria.
From the summary of the work it is evident that the banking sector occupies a vital position in the economy and thus its activities must remain under constant review and analytical spotlight. The modest achievement of the banking sector noted in the work could be attributed to collaboration and commitment of purpose among key stakeholders. The study observed that the fundamental objective of every government policy should be the repositioning of the banks to perform better in their core functions in order to impact positively on capital market in the country. It could therefore be concluded that banking activities in Nigeria have impacted positively on the country’s capital market as measured by gross domestic product for the period of study 1999 to 2012.
The following are the recommendations of the study.
1. Credits to the private sector should be directed at priority sectors(manufacturing and agriculture) for its impact to be felt in the economy. Government regulation should be tilted towards encouraging private sector lending, with greater incentives for these sectors. Government should also endeavor to provide a stable macroeconomic environment. A stable macroeconomic environment is crucial for the development of the financial markets and provision of efficient services needed to support the real sector for economic development. Domestic and foreign investors will be most unwilling to invest in an economy where there are instability in macroeconomic measures of uncertainty namely, interest rate, exchange rate and inflation. Sound macroeconomic environment and sufficiently high income levels-GDP per capita, domestic savings, and domestic investments-are determinants of financial system development in emerging markets. Infrastructural developments are also crucial to ensure that borrowed funds are channeled to production activities and not providing basic amenities like access roads and power generation.
2. Effort should be made to reduce interest rates on deposits, which invariably is making investible funds more expensive and fuelling inflation. Policies geared at stifling investible cash of banks should be relaxed in order to encourage expanded lending activities to the private sector. On the other hand, Banks should consciously engage in developmental lending, with a view of promoting capital market and not just profit. Lending to priority sectors may not be as profitable as lending to commercial / trading entities, however lending to the latter at such exorbitant interest rates will fuel inflation and weakens the positive impact on capital market. Government should also ensure that Banks interest expenses are reduced, as this will also cause a reduction in interest rates charged borrowers. Operational expenses are often high due to infrastructural and technological underdevelopment in the country. Banks often justify the huge margin between lending and deposit rates (above 15% p.a.) with operational and insurance related expenses. However, effort should be made to streamline and harmonise interest rates on deposit to curb the current practice of offering very high rates to attract depositors funds.
3. Growth in Liquid Liabilities of Banks is an indicator of size and capacity. Our study shows that the growth in Liquid Liabilities of Banks has impacted positively and significantly on capital market in Nigeria, for the period under study. There is also a shared responsibility between Government and Banks to ensure that these recorded growth in absolute figures are also reflected in real terms. Government is expected to also come up with policies that encourage expanded lending based on new capacities. There is urgent need for government to ensure financial stability and ultimately, protection of depositors funds and investors asset. The need for regulation and supervision of the financial system arises because financial intermediaries and markets, like firms, are subject to asymmetric information. A key objective for financial regulation and supervision is to increase the effective functioning of the financial system in order to enhance the ability to absorb shocks and maintain financial stability. Financial instability occurs when shocks to the financial system interfere with the payment system and impact on the ability for normal business and trade to occur. It may be caused by the collapse of a systematically important financial intermediary or other shocks. Any disruption in the financial system can potentially have severe real economic effects.
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