The Role Of Insurance Company In Nigeria As Non-Banking Financial Institution; Problems And Prospects
Banks are so prominent in the Nigerian economy that non-bank financial institutions (NBFIs) are hardly noticed. It is against this background that this study sets out to investigate the role of insurance company in Nigeria as a non-financial institution; problems and prospect. It discovered that NBFIs play a fundamental and complementary developmental role in the economy. To assess the impact of NBFIs on the economy the study used data obtained from primary sources and the Statistical Directory of the National Insurance Commission.
1.1 Background of the Study
A close examination of financial literature exposes the lopsided attention paid to banks. While it is awash with information on the scope and intensity of banks’ contribution to the economy, little is said about the input of non-bank financial institutions (NBFIs) to development. It is true that banks in a developing economy outclass the NBFIs in volume of transaction, versatility of operations, diversity of products and degree of market penetration (Acha, 2005:1). This does not in any way diminish the contributions of NBFIs as they perform similar functions with the banks and complement the efforts of the banks in the financial intermediation process. Despite their complementary role to banks in the areas mentioned above, NBFIs are known to possess potential advantages in the performance of economic development functions. For instance, certain NBFIs are rural in nature, like the community banks (now microfinance banks), and are therefore able to access greater population of Nigerians and their latent savings potentials. Nigeria is a country in dire need of development and cannot overlook the development potentials of NBFIs. There is therefore the need for close examination of NBFIs to identify the various types operating in Nigeria. Nigerian financial institution are regarded as the part of financial industries that deals with exploitation, exploration and sourcing funds, investment and sharing of funds to individuals. However, the Nigerian financial system can be said to consist of the following subsystems:
- The banking system
- The non-banking financial institution
- The regulatory financial institution
- The traditional financial institution.
In practice, the growth of most of these financial institution has become that of “Survival of the fittest” due to the lukewarm attitude of the Nigerian citizens in exposing their business interest to organizations incorporated under this system.Banks are financial institutions that engage in the acceptance of deposits and safe keeping of valuables (Jhingan,2005). On the other hand, Non-Bank financial institutions (NBFIs) are financial institutions that do not have full banking license and are not fully supervised by national or international banking regulatory agencies. NBFIs facilitate bank related financial services such as investments, risk pooling, contractual savings etc. These financial institutions (bank and non-bank) complement the activities of each other in the intermediation process in an economy. This intermediation process involves fund initialization from the surplus to the deficit units, which in turn facilitates the process of economic development. An economy is said to be growing or developing when increases in its productive capacity later yield to more production of goods and services. It has been posited that the expected increase in economic output and a sustained increase in national income per head may not be realized if the financial sector is not sound, healthy, and virile (Nwankwo and Ejikeme, 2007). This is because a well-developed financial sector performs a very critical function such as enhancing the efficiency of financial intermediation. A well-developed financial sector also enhances investment by identifying and funding good business opportunities, mobilizing savings etc.According to Oluyemi (1995) financial institutions are seen as the engine room for growth and development. Schumpeter (1934) affirmed this position where he identified the importance of bank and non-banking institutions in facilitating technological innovation. Several other scholars such as (Fry, 1988, King and Levine, 1993, McKinnon, 1973, Shaw, 1973) have also supported the above postulation about the significance of banks and non-banks to the growth of an economy. In Nigeria, studies especially those of Adekunle et al (2013), Acha (2012), Okeh (2012), Adelakun (2010) have shown that the financial system is not fully developed and as such the bank and non bank institutions have not attained the standards expected from them in the process of economic development. Bank and non-bank institutions have not really met with the high demand for loans and advances. It has been argued that bank and non-bank financial institutions have contributed less than expected due to lack of access to funds. The primary channel through which NBFIs assist in economic development is the intermediation process. They mobilize funds by various means open to them and make same available for investment. Finance companies for instance make available funds raised through owner’s equity contribution and borrowings from other financial institutions, individuals and companies, to investors. Community banks like commercial banks, mobilize deposits from customers in form of savings, current and fixed deposits, insurance companies on the other hand aggregate the premiums paid by policy-holders. Apart from mobilizing their own funds, some NBFIs obtain significant grants and loans from the government and international financial institutions for onward lending. The NBFIs that fall under this last category are development finance institutions and primary mortgage institutions. The foregoing aptly articulates the investment funds generating abilities of NBFIs (Onoh, 2004:106). In addition to their contribution to economic development through investment funding, NBFIs like bureaux de change encourage capital inflow. By offering higher rates than the official rate of exchange, citizens working abroad are thus encouraged to remit monies home. Since transactions in bureaux de change are carried out anonymously, citizens resident abroad who wish to bring foreign exchange without passing through official channels are given avenues to do so. The increased inflow of foreign currency which this engenders improves the country’s Gross National Product (GNP) and by extension general economic well-being is enhanced (Aghoghovbia, 2006:73). Housing is one of man’s basic needs and its availability is a measure of his economic well-being. In the light of this, the role of primary mortgage institutions in housing development is of significant economic importance. Whether they are disbursing funds they generated or those from the National Housing Fund, their underlying developmental impact is in making houses available and affordable to Nigerians (Sanusi, 2003:4). Equipment financing and industrial infrastructural development is in the domain of development finance institutions. From funds which they obtain as grants from governments or loans from international financial institutions such as World Bank, these development finance institutions fund long-term real investments. They further contribute to economic progress by providing advisory services, technical and managerial expertise to such projects. The role insurance companies play in economic development is strikingly outstanding. Apart from being a veritable source of long-term funds, it also possesses an unquantifiable psychological assurance, allaying the risk and loss anxieties of investors. This assurance kindles local entrepreneurial spirit and encourages foreign direct investment. By indemnifying policyholders in case of actual loss, insurance companies ensure production continuity and the maintenance of established consumption patterns and hence improvement of existing living standard (Pritchett, et al, 1996: Isimoya, 2003:1). Another area where NBFIs have played a vital developmental role is in the reduction of money stock outside the banking system. Akpan 1998:30 rightly pointed out that due to the existence of a grossly under banked rural economy, monetary policy measures instituted by CBN are ineffective. The advent of community banks and their rural focus has gone a long way in correcting this anomaly. The community banks and recently microfinance banks have been able to mop up substantial rural deposits, monies which hitherto remained outside the banking system and hence outside the control of monetary authorities. Monetary policy which is geared towards varying money supply to check inflation and enhance rapid economic development has through the instrumentality of these banks become more effective (Ojo, 1994:10). Provision of a secondary market for trading in government securities by discount houses through their discount activities has also immensely contributed to the effectiveness of monetary policy especially Open Market Operations (OMO). The presence of an avenue to discount these securities encourages banks and other investors to buy them, by so doing government is provided with development funds on one hand and open market operations became more effective as a monetary policy instrument on the other. Increased activity has been recorded in the market since the advent of the discount houses in 1993; this has improved financial structures and further deepened the financialsystem (Oke, 1993:15; Oresotu, 1993:158). NBFIs contribute to the amelioration of the massive unemployment experienced in the country. Apart from those directly employed to work for them, there is a teeming number of unemployed graduates, artisans, farmers, etc who establish businesses from credit made available by NBFIs. Their funding of small and medium scale enterprises is also a boost to employment as these enterprises are known to be the highest employers of labour in our economy.
This is very bad for the economy considering the role non-banking financial institutions (NBFIS) play in supporting and sustaining the welfare of the small scale business and thrifty motivation given to low any high incomers in our present economy still developing.
1.2 Statement of the Problem
The primary channel through which NBFIs assist in economic development is the intermediation process. They mobilize funds by various means open to them and make same available for investment. Finance companies for instance make available funds raised through owner’s equity contribution and borrowings from other financial institutions, individuals and companies, to investors. Community banks like commercial banks, mobilize deposits from customers in form of savings, current and fixed deposits, insurance companies on the other hand aggregate the premiums paid by policy-holders. Apart from mobilizing their own funds, some NBFIs obtain significant grants and loans from the government and international financial institutions for onward lending. It is against this backdrop that the researcher decide to investigate the role of insurance company in Nigeria as a non-financial institution; problems and prospect.
1.3 Purpose of the Study:
The purpose of the study as concerned in this topic is undertaken with the following objectives in mind.
- To identify the types of non-banking financial organization in Nigeria;
- To find out whether or not this various non-banking institutions have any difference and similarities to the banking system.
- To also find out their various sources of fund and respective functions.
- To find out if there is any principles and loss guiding the firms and the parties that transact business with them.
1.4 Research Hypotheses
To aid the completion of the study, the following research hypotheses were formulated by the researcher;
- H0: there are no significant differences and similarities between banking and non-banking financial institution in Nigeria
H1: there are significant differences and similarities between banking and non-banking financial institution in Nigeria.
- H0: there are no principles guiding the firms and the parties that transact business with them in the event of loss arising from the transaction
H2: there are principles guiding the firms and the parties that transact business with them in the event of loss arising from the transaction
1.5 Significance of the Study:
The study is very important mostly now that our economy is gradually developing with the current government policies on corruption. We shall also see how non-banking financial institution helps in the upliftment of national economy thus:
- They offer grant assistance in borrowing of funds for the establishment of small and large-scale business enterprises.
- They provide intermediary services to facilitate prompt and safer transaction.
- They reduce the risk that is being faced in attempting to earn a return on their saving.
1.6 Scope and Limitation of the Study
The scope of the study covers the role of insurance company in Nigeria as non-banking financial institutions problems and prospect.
It is imperative that the study of this magnitude will on call visits to almost the 36 States in the country to bring information from numerous non-banking financial institutions. But this idea was not possible due to lack of time and enough money resources. As a result of these constraints, the study was limited to only five firms of non-banking financial institution in Enugu and Anambra State with the hope that conclusions gotten in the course of study world averagely apply to other States and non-banking financial sectors
1.7 Operational Definition of Terms
Non-Banking Financial Institution (NBFI)
A non-bank financial institution (NBFI) is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency.
A financial institution is an establishment that conducts financial transactions such as investments, loans and deposits. Almost everyone deals with financial institutions on a regular basis.
Insurance is a means of protection from financial loss. It is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss.
1.8 Organization of the Study
This research work is organized in five chapters, for easy understanding, as follows
- Chapter one is concern with the introduction, which consist of the (overview, of the study), 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
Summary, Conclusion and Recommendation
It is important to ascertain that the objective of this study was to ascertain the role of insurance company in Nigeria as a non-banking financial institutions; problem and prospect.
In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of insurance company as a non-banking financial institution.
This study identifies the various NBFIs operating in Nigeria. It went further to highlight the roles they play in economic development. In so doing the functions of various NBFIs were examined and their contributions to economic development. It was discovered that despite the enormous contribution of insurance company as a NBFIs to the economy that most of its potentials in this direction remains untapped.
This study started by identifying the various bank and non-bank financial institution operating in Nigeria. It went further to highlight the roles they play in economic development. Also the relationship between bank and non-bank financial institution and economic development in Nigeria was investigated. The empirical results showed that there is a substantial positive relationship between bank and non-bank financial institution and economic development in Nigeria, that is to say, that the activities of bank and non-bank financial institution promote economic growth and development in Nigeria. Based on our findings above, the study concludes as follows:
That the entire explanatory variables jointly met the a priori expectation, i.e. the activities of insurance company as non-bank financial institution substantially influence the growth and development of Nigerian economy. That the lending policies should be reviewed especially in the banking sector. This is because activities in the deposit money banks should expectedly exert more influence on the growth and development of an economy.
In view of the findings of this research work, the following recommendations are hereby offered:
The CBN should review its lending policies with a view to making them more pro-active. This means that more attention should be given to long-term loans and advances for developmental purposes. Again consumer loans should be de-emphasised.
The CBN should organise a clearing system for microfinance banks. This will enable them play more active role in the money market and not continue to operate at the mercy of their correspondent deposit money banks. Some of the correspondent banks are known to slow down the microfinance banks with harsh conditionality’s. The recent reforms in the financial sector should be encouraged and made more rewarding.
Finance companies should make efforts in enlightening the public on their financial activities and create awareness on their relevance. They should also endeavour to diversify their products and thus meet the demands of the present state of economy.
A closer examination of the operations of insurance companies is advocated. This will make them to be more responsive to their duties.
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