The Role Of Commercial Banks In The Economic Development Of Nigeria

Project and Seminar Material for Economics

The Role Of Commercial Banks In The Economic Development Of Nigeria


Abstract


The main objective of this study is to critically examine and analyze the role of commercial banks on economic growth in Nigeria. The study portrays how loans and credit affect the GDP and consequently the level of economic growth of Nigeria. Using a population of 133 employees of the United Bank for Africa Plc. Essentially, a field survey research design was employed for the research. At the end of this study, it was revealed that Commercial banks have a positive impact on the Economic growth in Nigeria. It was also realized that Domestic credits from commercial banks have a directly proportional relationship. The recommendations were posted on the fact that, government should encourage the saving culture of Nigerians by increased the level of deregulation in the banking sector and also reduce the tax burden on commercial banks;


Chapter One


Introduction

1.1 Background of the Study

Commercial banks play an important role in economic development of developing countries. Economic development involves investment in various sectors of the economy. The banks collect savings from the people and mobilize savings for investment in industrial project. The investors borrow from banks to finance the projects.
Special funds are provided to the investors for the completion of projects. The bank provides a guarantee for industrial loan from international agencies. The foreign capital, flows to developing countries for investment in projects.

Commercial banks are involved in the process of increasing the wealth of the economy, particularly the capital goods needed for raising productivity. The developed economies need the service of the banking system to enable the economy attain economic growth, while the developing economies need the service of banking system for sectorial development.

The financial institutions are therefore, capable of influencing the major saving propensities and opportunity. The need to achieve sustained economic growth within any economy can be possible amidst strong financial institution and precisely within the existence of a virile banking system. Their activities must be such that are tailored to work in the congruence with government policies and programmes in a bid to attaining the desired macro-economic objectives as a nation.

Schumpeter in 1934 observed that the commercial banking system was one of the key agents in the whole process of development. Generally commercial banks not only facilitate but speed up the process of economic development through making more funds available from resources mobilized.The banking system is a catalyst and engine of growth that is responsible for being a livewire to every sector of the economy. It is evident that no sector in the economy can flourish or prosper without the support and services of the banking sector, agricultural sector, manufacturing sector, mining or even services sector can’t do without banks. Commercial banks provide and encourage savings. The establishment of commercial bank especially in the rural areas makes savings possible, hence economic development is accelerated.

Commercial banks provide capital needed for development. Deficit spender unit obtain medium and short term loans and overdraft from commercial banks to start a new industry or to engage in other development efforts. They engage in trade activities through making use of cheques and other financial instrument possible. They encourage investment; provide direct loans to the government and individuals for investment purposes. They provide managerial advices to small-scale industrialists who do not engage in the service of specialist. Commercial banks also render financial advice to their customers including to invest in. Commercial banks create money as an instrument to the apex bank for all its activities. Commercial banks help to enhance development of international trade, these include acting as referees to importers, providing travellers cheque to those going abroad, opening letters of credit as well as providing credit for export. All these helps to promote international trade and relationship between nations, they provide backup liquidity to the economy. They are transmitters of monetary policy and they provide some “value added” from transferring funds from savers to borrowers and providing liquidity.

The current credit crisis and the transatlantic mortgage financial turmoil have questioned effectiveness of banks consolidation programme as a remedy for financial stability and monetary policy in correcting the defects in the financial sector for sustainable development. The consolidation of banks has been the major policy instrument being adopted in correcting deficiencies in the financial sector. The economic rationale for the domestic consolidation is indisputable; an early view of consolidation was that it makes banking more cost efficient because larger banks can eliminate excess capacity in areas like data processing, personnel marketing or overlapping networks. Cost efficiency also could increase if more efficient banks acquired less efficient ones. Consolidation is viewed as the reduction in the number of banks and other deposit taking institutions with a simultaneous increase in size and concentration of the consolidation entities in the sector. The driving forces in bank consolidation include better risk control through the creation of critical mass and economies of scale, advancement of marketing and product initiative improvements in the overall credit risk and technology exploitation. These drivers have led to improved operational efficiencies and larger and better capitalized institutions.


1.2 Statement of the Problem

Given that the economic trend of the commercial banking industry, one wondered what has hindered economic growth, though an important avenue for banks to boost the growth of the economy through efficient and effective saving investment process(financial intermediation) to stimulate investment and productive activities.

For the past three decades, the Nigerian economy has not shown any favourable sign of growth. For example, the real GNP growth rate figure was 2.8% in 1995 with negative figures in years like 1982, 0.3% etc as depicted in the CBN periodic bulletin in 1986. This shows that the Nigerian economy is not one that can inspire confidence, if no drastic improvement is shown by financial institutions with its economy especially in the new millennium.


1.3 Objective of the Study

The objectives of this research work are stated as follows.

  1. To determine the contribution of commercial banks towards a positive economic growth and wealth creation.
  2. To examine ways in which the commercial banks in Nigeria can be made to play better roles towards fund mobilization for economic growth and development.
  3. To analyse the constraints and short comings facing commercial banks in Nigeria towards fund mobilization for economic growth and development.
  4. To determine and test the effects of some relevant economic variable and factors on the real gross domestic product(GDP) of Nigeria.

1.4 Research Hypotheses

Hypotheses one
  • Ho: Commercial banks do not contribute significantly towards fund mobilization for economic growth and development of the country.
  • Hi: Commercial banks do contribute significantly towards fund mobilization for economic growth and development of the country.
Hypotheses Two
  • Ho: The constraints on the activities of the commercial bank do not affect their economic role and activities.
  • Hi: The constraints on the activities of the commercial bank do affect their economic role and activities.

1.5 Significance of the Study

The study makes clear the actual contributions and operations of commercial banks in Nigeria. It will also sensitize the society on the importance of commercial banks in Nigeria.

The study will be important to the policy makers and the federal government inorder that to adapt and implement policy measures that will boost the economy through the financial institution.

It will also depict the negative and positive side of the activities of the general public and bankers, for some correction and changes in order to boost the economy.


1.6 Scope and Limitation of the Study

This study is primarily concerned with the role of commercial Banks in the economic development of Nigeria. This study covers UBA. The researcher encountered some constraints, which limited the scope of the study. These constraints include but are not limited to the following.

a) Availability of Research Material:

The research material available to the researcher is insufficient, thereby limiting the study

b) Time:

The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.


1.7 Definition of Terms

Economic Growth

According to Kael.E et al (1994), Economic growth refers to an increase in the output of an economy. According to them, economic growth occurs either when Society acquires more resources Society discovers ways of using the available resources more efficiently According to J.L Hanson (Economic and commercial Dictionary). Economic growth refers to an increase in the per capita income or increase in the GDP. In the recent literature, the term refers to sustained increase in the country’s output of goods and services to be more precise the product per capita output is generally measured in terms of GNP. Economic growth is primarily derive by improvement in the production which involves producing more goods and services with the same inputs of labor, capital, energy and materials.

Commercial Banks

According to the Economics and Commercial Dictionary by J.L Hanson commercial banks can be defined as an institution which accepts deposits, makes business loans and offers related services. They operate a variety of deposit accounts such as checking accounts, saving and time deposit accounts. This is an institution whose main objective is profit maximization. However Zhufanyi, commercial banks refers to profit making privately owned financial institution which receives deposits from the general public and safeguards them and makes loans Zhufanyi (2004, p 169). According to Zhufanyi, commercial banks perform three main functions which include, receiving deposits, lending and agents of payment. Receiving deposits, this is to the basic function of commercial banks deposits are divided into two accounts; current and deposit account money deposited in a current account can be withdrawn at any time by the use of a cheque. Money in a deposit account on the other hand cannot be withdrawn at anytime. Notification is required before withdrawal is made. Lending is the most profitable function of a commercial bank. Banks lend part of the deposits they receive to the public on interest. Lending is made in three ways, direct loan, and overdraft and discounting bills.


1.8 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

  • Chapter one is concerned with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study.
  • Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature.
  • Chapter three deals on the research design and methodology adopted in the study.
  • Chapter four concentrate on the data collection and analysis and presentation of finding.
  • Chapter five gives summary, conclusion, and recommendations made of the study

Chapter Five


Summary, Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was to have a critical analysis of the role of commercial banks in the economic development of Nigeria.

In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations are made, which in the opinion of the researcher will be of benefitin addressing the challenges of economic growth in Nigeria.


5.2 Summary

This study aimed at havinga critical analysis of the role of commercial banks in the economic development of Nigeria. Four objectives were raised. These objectives include:To determine the contribution of commercial banks towards a positive economic growth and wealth creation, to examine ways in which the commercial banks in Nigeria can be made to play better roles towards fund mobilization for economic growth and development, to analyse the constraints and short comings facing commercial banks in Nigeria towards fund mobilization for economic growth and development and to determine and test the effects of some relevant economic variable and factors on the real gross domestic product (GDP) of Nigeria.


5.3 Conclusion

Based on the above findings pertaining to the objectives of the study the following conclusions are drawn.
Based on the area and findings of the study, it is concluded that banks’ profitability has a significant effect on economic growth in Nigeria.


5.4 Recommendation

  1. Government policies should be channel towards adopting efficient policies that enhance the performance of banking sector in other to increase aggregate output as this enhances economic growth because banks are important in stimulating economic growth.
  2. The regulatory authority should focus attention to ensure that the gains of the banking reforms processes are sustained, the Central Bank should take more decisive measures aimed at tightening the risk management framework of the Nigerian banking sector as this will have a positive effect on the their profitability.
  3. Government should encourage the creation of more commercial banks since they have a positive effect on economic growth.
  4. Improvement to the asses to financial services especially loans (domestic credit).

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