The Role Of Commercial Banks In The Development Sector Of Nigeria Economy

Project and Seminar Material for Economics

Project and Seminar Material for Economics

Chapter One


1.1 Background to the Study

The Nigerian banking industry is majorly composed of Deposit money banks, development banks and the Central Bank of Nigeria (CBN), which is the apex bank. The apex bank exercises supervisory and regulatory authority over the banking industry. The Central Bank of Nigeria was established by the Central Bank of Nigeria Ordinance 1958. The bank commenced operations on 1st July, 1959 (CBN Ordinance). Banks have always been perceived as engine room of a nation’s economy because they perform a resources allocation function, by mobilizing and channelling resources from surplus economic units to deficit units. They provide help by assuming the level of economic activities in various sectors of the economy, thus increasing the level of utility and want to the individual and the community at large.

The contributions and the importance of banks in the economy of any nation cannot be overemphasized. They are the cornerstones, the foundation of the economy of a country. Economic activity cannot be moving be smoothly without the continuous flow of money and credit. The economic activities of all market-oriented nations depend largely on the efficient operation of complex and delicately balance systems of money and credit. Banks are essential elements in these systems. They provide the bulk of the money supply as well as the primary means of facilitating the flow of credit. Consequently, it is submitted that the economic well being of a nation is a function of progression and growth of her banking sector.

The financial deregulation in Nigeria that started in 1987 and the associated financial innovations have generated an unprecedented degree of competition in the banking industry. The deregulation at the beginning provided powerful rewards for the expansion of both size and number of banking and non-banking institutions. The consequent phenomenal increase in the number of banking and non-banking institutions providing financial services led to increased competition amongst various banking institutions, and between banks and non-banking financial intermediaries.

Apart from the keen competition with the range of financial activities, banks have also faced problems associated with a persistent slowdown in economic activities, severe political instability, virulent inflation, worsening economic financial conditions of their corporate borrowers and increasing incidence of fraud and embezzlement of funds. Another major problem banks have had to content with is the inconsistency in monetary and regulatory policies. The surveillance and regulatory measures of the Central Bank of Nigeria (CBN) have unfortunately been unable to keep the pace with the rapidity of the charges in the financial system. All these factors such as: deregulation, competition, innovation, economic recession, political instability, escalating inflation, and frequent reversal in monetary policy have combined to create a challenging and precarious financial environment for banks.

Result of the new financial environment has been rapidly declining profitability of the traditional banking activities. Thus, in a bid to survive and maintain adequate profit level in this highly competitive environment, banks have tended to take excessive risks. But, then the growing tendency for greater risk taking has resulted in failure of a large number of the banks. The continuing deterioration in the financial health of the banks and increasing incidence of bank failure since deregulation have raised question about the nature and state of the Nigerian banking sector.

Therefore, economic development is about aiding the productive capacity of an economy by using available resources to reduce risks, remove obstructions which otherwise pose a risk to cost and lower investment. The banking sector plays the important role of promoting economic growth and development through the process of financial link between the people and the government. Many economists have acknowledged that the financial system, with banks as its major component, provide linkages for the different sectors of the economy and encourage high level of specialization, expertise, economies of scale and a conducive environment for the implementation of various economic policies of government aimed at achieving non-inflationary growth, exchange rate stability, balance of payments equilibrium and high levels of employment.

1.2 Statement of the Problem

It is obvious that banks play vital roles in the economic development of a country. These roles are aimed at ensuring sound financial system and economic stability. It is indisputable that the banking system is the engine room of growth in any economy, given its function of financial intermediation. As a result of this function, banks facilitate capital formation, lubricate the production engine turbines and promote economic growth. However, banks’ ability to cause economic growth and development depends on the health, soundness and stability of the banking system itself. The need for a strong, reliable and viable banking system is underscored by the fact that the industry is one of the few sectors in which the shareholders’ fund is only a small proportion of the liabilities of the enterprise. It is, therefore, not surprising that the banking industry is one of the most regulated sectors in any economy.

However, the relationship between banking and economic growth is that banking through its activities such as savings and deposit mobilization, credit creation, etc increases the accumulation of capital formation which in turn is expected to enhance economic development of the country. Therefore, whether there is this relationship in Nigeria is the reason of this study.

1.3 Research Questions

The following are some of the questions which this study intends to answer:

  1. What are the impacts of commercial banks on the economic development in Nigeria?
  2. What are the contributions of commercial banks to the economic development in Nigeria?
  3. What are the factors that influence commercial banks to the economic development in Nigeria?

1.4 Objectives of the Study

The objective of the study is to empirically investigate the role of commercial banks on the economic development in Nigeria. The specific objectives are to:

  1. Analyse the impacts of commercial banks on the economic development in Nigeria
  2. To examine the contributions of commercial banks to the economic development in Nigeria
  3. To investigate the factors that influence commercial banks to the economic development in Nigeria

1.5 Research Hypothesis

The research hypotheses to be tested include:

Ho: Commercial banks do not have any significant impact on the economy

Hi: Commercial banks have significant impacts on the Nigerian economy

1.6 Significance of the Study

Findings from the study will be of a great benefit to the managers of the economy. By identifying strengths and weaknesses of commercial banks, policy formation can be made in future by drawing from the research outcome. Bankers and the Central Bank of Nigeria will find it useful to make reference to whenever they want to policies in terms of banking, monetisation and capital. It will also be useful in the area of accounting, economics and public administration in the academic field.

1.7 Scope of the Study

The research comprehensively analysed the major role played by the banking industry to the Nigeria economy the researcher attempted to examine the role of commercial bank to the economy, though there are several financial and banking industries nationwide, sources in which all the commercial banks nationwide get its fund for the development of the country shall be discussed in chapter two.

1.8 Limitation of the study

The researcher was only faced with the problem of reluctance to giving out information by the banks staff. This could be due to the high level of secrecy being observed by these organisations as a result of their not being too familiar with the researcher.

1.9 Definitions of Terms

The following terms were used in the course of this study:

Commercial Bank:

This is a financial institution that provides various financial services, such as accepting deposits and issuing loans. Commercial bank customers can take advantage of a range of investment products that commercial banks offer like savings accounts and certificates of deposit.

Economic Development:

This refers to as efforts that seek to improve the economic well-being and quality of life for a community by creating and/or retaining jobs and supporting or growing incomes and the tax base.

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