ABSTRACT
Against the backdrop of the role of banks as financial intermediaries and their function as the engine of growth of the economy, this paper examines the extent to which the banking industry has helped to stimulate economic activities in Nigeria and what the prognosis looks like in the post-consolidation era. The paper notes that the banking industry in Nigeria witnessed a remarkable growth in terms of deposit base, number of branches, total asset and volume of loans and advances, especially since the de-regulation of the financial services sector in the last quarter of 1986. However, given the potentials
of the market, banks need to do more, particularly in
financing the real sector of the economy .It is argued that the consolidation programme is expected to have a positive effect on employment in the long-run, and that has drastically altered and redefined the nature of competition in the banking industry. Furthermore, it argues that mere size would no longer be a critical factor in the customers’ choice of which bank to patronize. Rather, emphasis would shift to the ability to deliver superior value to customers.
INTRODUCTION
Banks facilitate economic growth in a variety of ways. In the first instance, they act as financial intermediaries between the surplus generating units and the deficit spending ones. This is a two-fold function involving the mobilization of savings from the former group which are then channeled to the latter to support productive economic activities. This intermediary role is important in two respects. First, by pooling together savings that would have otherwise been
fragmented, banks are able to achieve economies of scale with potential benefits for the users of such funds. Secondly, in the absence of banks, each person or business seeking credit facility would have had to individually look for those with such funds and negotiate with them directly. This is a cumbersome and time consuming process of double coincidence of wants. By matching the preferences of savers with those of borrowers therefore, banks help in overcoming such difficulties. It is pertinent to note that it is from this intermediation function that banks normally not only earn the bulk of their income by way of interest margin but also pay out returns to savers, compensating them for the opportunity cost of their money. It is important to bear this point in mind because, as we shall see later, if any bank is unable to recover the funds it lends out, its own existence as a going concern would be undermined rapidly and ultimately. This is to the extent that its ability to meet the withdrawal needs of depositors would be impaired. It is for this reason that the officials of any bank cannot afford to toy with the management of its risk assets. Towards ensuring that the funds they lend out are recovered, banks have found it expedient to provide business advisory services to their customers. The essence of availing their clients these services is to assure themselves that the beneficiaries adopt modern management policies and practices in running the affairs of their respective companies which benefit from borrowed funds. The ultimate goal is to guarantee that these customers are in a position of service their loan obligations as and when due. This, in turn, would enable banks meet their obligations to depositors while also earning a narrow margin to ensure business continuity and corporate growth.
Banks also play a pivotal role in an economy by providing a mechanism for producers/buyers and consumers/sellers to settle transactions between themselves. They do this not only within a country but also across national boundaries through a highly efficient and technologically enabled payments systems. In the process, banks encourage specialisation and division of labour, a major advantage of which is the enhanced production and economic growth of the country.
Furthermore, banks act as a conduit for the transmission of monetary policy. They provide a veritable platform when it comes to the implementation of monetary, credit, foreign exchange, and other financial sector policies of the government. Among other things, monetary policy is designed to influence the cost and availability of loanable funds with a view to promoting non-inflationary growth. The instruments available to the Central Bank to achieve this include open market operations (OMO), the cash reserve ratio (CRR), liquidity ratio (LR) and of course, moral suasion.
The capacity of the banking industry to perform these functions effectively is, to a large extent, determined by the financial health of the individual institutions themselves and soundness and viability of the industry as a whole. For instance, where the majority of banks are adjudged to be weak and unhealthy, that will impair the ability of the industry to lubricate economic growth and vice versa. Against this background, the objective of this presentation is to examine the extent to which the banking industry has helped to stimulate economic activities in Nigeria and what the prognosis looks like in the post-consolidation era, come January 2006. To achieve its objective, this paper is organized into five parts. Following this introduction, we review the performance of the Nigerian banking industry between 2000 and 2004 in section II. The challenges facing the banking industry, which the current reform programme was designed to address, are highlighted in section III. In section IV, we present the prognosis and outlook during the post-consolidation era while section V contains the concluding remarks.
BIBLIOGRAPHY
Central Bank of Nigeria, Annual Report and Statement of Accounts, (various issues.)
Nigeria Deposit Insurance Corporation, Annual Report and Statement of Accounts, (various issued)
Mckinnon, R. I. (1973), Money and Capital in Economic Development Washington, D.C.: The Brookings Institution.
Oboh, G. A. T. (2005), Selected Essays On Contemporary Issues In The Nigerian Banking System. Ibadan: University Press Plc.
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