IMPACT OF FINANCIAL INTER-MEDIATION BY DEPOSIT MONEY BANKS ON THE REAL SECTOR OF THE NIGERIAN ECONOMY

Description

INTRODUCTION

The financial sector of any economy in the world plays a vital role in the development and growth of the economy. The development of this sector determines how it will be able to effectively and efficiently discharge its major role of mobilizing fund from the surplus sector to the deficit sector of the economy. This sector has helped in facilitating the business transactions and economic development Aderibigbe 2004. A well developed financial system performs several critical functions to enhance the efficiency of intermediation by reducing information, transaction and monitoring costs. If a financial system is well developed, it will enhance investment by identifying and funding good business opportunities, mobilizes savings, enables the trading, hedging and diversification of risk and facilitates the exchange of goods and services. All these result in a more efficient allocation of resources, rapid accumulation of physical and human capital, and faster technological progress, which in turn results in economic growth. Development in the real sector, as noted by Ajayi 1995, influences the speed of growth of the financial sector directly, while the growth of the finance, money and financial institutions influence the real economy.
The economic growth is a gradual and steady change in the longrun which comes about by a general increase in the rate of savings and population Jhingan 2005. It has also been described as a positive change in the level of production of goods and services by a country over a certain period of time. Economic growth is measured by the increase in the amount of goods and services produced in a country. An economy is said to be growing when it increases its productive capacity which later yield more in production of more goods and services Jhingan 2003. Economic growth is usually brought about by technological innovation and positive external forces. It is the yardstick for raising the standard of living of the people. It also implies reduction of inequalities of income distribution. Oluyemi 1995 regards the financial sector of any economy as an engine of growth that could greatly assist in the promotion of rapid economic transformation. It can be concluded that no economy can ever develop without an appreciable growth in the financial sector. An efficient financial system is essential for building a sustained economic growth and an open vibrant economic system. Countries with well developed financial institutions tend to grow faster; especially the size of the banking system and the liquidity of the stock markets tend to have strong positive impact on economic growth Beck and Levine, 2002 in Nnanna, 2004.

Statement of Problem

The Nigerian financial sector, like those of many other less developed countries, was highly regulated leading to financial disintermediation which retarded the growth of the economy. The link between the financial sector and the growth of the economy has been weak. The real sector of the economy, most especially the high priority sectors which are also said to be economic growth drivers are not effectively and efficiently serviced by the financial sector. The banks are declaring billions of profit but yet the real sector continues to weak thereby reducing the productivity level of the economy. Most of the operators in the productive sector are folding up due to the inability to get loan from the financial institutions or the cost of borrowing was too outrageous. The Nigerian banks have concentrated on short term lending as against the long term investment which should have formed the bedrock of a virile economic transformation.
Since the adoption of the Structural Adjustment Programme SAP in 1986, in an attempt to quicken the recovery of the economy from its deteriorating conditions, a great deal of interest has been shown in the activities and development in the financial sector. This is so because the restructuring of this sector was a central component of the SAP reform.
Objectives of the Study

The broad objective of this study is to empirically investigate the impacts of the Nigerian financial sector on the growth of the economy. The specific objectives are to 1 determine the relationship that exists between economic growth and the Nigerian financial sector 2 examine the impact of the financial sector on the Nigerian economic growth 3 proffer recommendation to enhance the performance of the financial sector.
The hypothesis of this study is; Financial sector development does not have any impact on Nigerian economic growth.
The role of finance in economic development is widely acknowledged in the literature. In particular, Schumpeter 1911 put the role of financial intermediation at the center of economic development. He argued that financial intermediation through the banking system played a pivotal role in economic development by affecting the allocation of savings, thereby improving productivity, technical change and the rate of economic growth. The adoption of the Structural Adjustment Programme SAP in 1986 has made many economies of the world to focus on the financial sector being the lubricant engine of growth that drives the economy. Due to this, the study thus tends to address the following questions; what are the contributions of the financial sector in the Nigerian economy has the financial sector been able to achieve its main objective of intermediation Will the achievements of the financial sector continue to increase the development of the economy Does the financial sector positively affect the economic growth in Nigeria Why has the Nigerian financial sector not been able to achieve the expected results for the development of the economy
Many past studies on Mckinnon and Shaw have suggested that a well functioning financial system will eventually lead to increase economic growth. This is why financial system has been described as the heart of any vital economy. As a result of these, there is the need for the reform of this sector to be embarked upon, most especially when the sector is unable to perform its functions. The aim of taking financial sector reforms in Nigeria could be traced to the MckinnonShaw hypothesis of financial repression which suggests that a low or negative real rate of interest discourages savings and thereby reduces the funds available to the deficit sectors, which invariably affect investment and at end, retards the growth rate of the economy.
This study is divided into four sections, with section one dealing with the introduction, statement of problem, objectives and research hypothesis. Section II deals with the literature review while section III deals with the methodology, analysis and discussion of result. Section IV deals with the conclusion and recommendations