THE ROLE OF COMMERCIAL BANKS IN ECONOMIC DEVELOPMENT

CHAPTER ONE

INTRODUCTION

1.1.  BACKGROUND OF 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 provide a gurantee 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 institution are therefore, capable of influencing the major saving propensities and opportunity. The need to achieve sustained economic growth within any economy can be possible admist 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 agent in the whole process of development. Generally commercial banks not only facilitates but speed up the process of economic development through making more funds available from resources mobilized.

THE ROLE OF COMMERCIAL BANKS IN ECONOMIC

GROWTH IN NIGERIA

The banking system is a catalyst and engine of growth that is responsible for being a lifewire 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 transfering funds from savers to borrowers and providing liquidity.

The current credit crisis and the transatlantic mortage financial turmoil have questioned effectiveness of banks consolidation programme as a remedy for financial stabilty 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 has lead 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 millenium.

1.In what extent does commercial bank as a financial intermediate contribute towards fund mobilization for economic growth and development of the country.

2.What is the essence of commercial banks in Nigerian economy towards fund mobilization for economic growth and development?

3.What are the problems commercial banks encounter in their performance towards mobilization of funds for economic growth and development?

1.3  OBJECTIVES OF THE STUDY

The objectives of this research work are tactily stated as follows.

-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.

-To determine and test the effects of some relevant economic variable and factors on the real gross domestic product(GDP) of Nigeria.

1.4  STATEMENT OF THE HYPOTHESIS

This research work will be guided by the following hypothesis.

Commercial banks do not contribute significantly towards fund mobilization for economic growth and development of the country.

The variables of commercial banks are lending deposits, real investment and interest rate etc do not have any impact in the Nigerian economic sector.

The constraints on the activities of the comercial bank do not 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 inorder to boost the economy.

1.6 LIMITATION OF THE STUDY

The main task of the study is to give in full detail the role of commercial banks in fund mobilization for industrial growth and development but due to insufficient time frame for the purpose of simple and articulate analysis, the study is restricted to commercial banks specifically. The study is limited to the period of 1975-2008 which saw the significant role played by the financial sector in the Nigerian economy.