One of the activities of financial institutions (banks) involves intermediating between the surplus and deficit units of the economy. Banks as financial intermediaries emerge to lower the cost of reaching potential investments, exerting corporate controls, managing risks, mobilizing savings and conducting exchanges. In Nigeria, banks dominate the financial sector and there is detailed information about Nigerian banking history but little information is available on the activities of the financial industry and how they affect the economy where they operate. Therefore, this study explored in the light of past trends, the extent to which financial intermediation impacted on the economic growth of Nigeria between the period 1994 – 2013. The study adopted the ex-post facto research design. Time series data for the twenty years period 1994 – 2013 were collated from secondary sources and the Ordinary Least Squares (OLS) regression technique was used to estimate the hypotheses formulated in line with the objectives of the study. Real Gross Domestic Product per capita, proxy for economic growth was adopted as the dependent variable while the independent variables included bank deposits, bank credits and bank liquid reserves. The empirical results of this study show that bank deposits, bank credits and bank liquid reserves exert a positive and significant impact on the economic growth of Nigeria for the period 1994 – 2013. This paper recommended amongst others that banks should adopt and engage in aggressive marketing of their services in order to help increase their deposit base and as well ensure that a major part of their credit is channeled to the productive sectors of the economy such as agriculture, industry and power to encourage growth of the economy. It further recommended that banks should shore up their liquid reserves to further enhance stability of their operations.

One of the activities of financial institutions (banks) involves intermediating between the surplus and deficit sectors of the economy. According to Bencivenga and Smith (1991), the basic activities of banks are acceptance of deposits and lending to a large number of agents, holding of liquid reserves against predictable withdrawal demand, issuing of liabilities that are more liquid than their primary assets and eliminating or reducing the need for self financing of investments. In particular, by providing liquidity, banks permit risk averse savers to hold bank deposits rather than liquid (but unproductive) assets. The funds obtained are then made available for investment in productive capital.

Moreover, by exploiting the fact that banks have large number of depositors and hence predictable withdrawal demand, they can economize on liquid reserves holdings that do not contribute to capital accumulation. Again, Bencivenga and Smith (1991), further argued that by eliminating self-financed capital investment, banks also prevent the unnecessary liquidation of such investment by entrepreneurs who find that they need liquidity. In short, an intermediation industry permits an economy to reduce the fraction of savings held in the form of unproductive liquid assets, and to prevent misallocation of invested capital due to liquidity needs (Bencivenga and Smith, 1991). Schumpeter in Kings and Levine (1991), argued that the services provided by financial intermediaries–mobilizing savings, evaluating projects, managing risks, monitoring managers and facilitating transactions, are essential for technological innovation and economic growth and development.

Levine et al (2000), posits that financial intermediaries emerge to lower the costs of reaching potential investments, exerting corporation, controls, managing risks, mobilizing savings and conducting exchanges. Financial intermediaries by providing these services to the economy, influence savings and allocation decisions in ways that may alter long-run growth rates. Banks play an effective role in the economic growth and development of a country. This role they perform excellently by helping to mobilize idle savings of the Surplus Unit (SUs) for onward lending to the Deficit Units (DUs), thus helping in the capital formation of a nation (Ujah and Amaechi, 2005). It is in realization of the importance of bank’s role in financial intermediation that successive governments in Nigeria have been allocating deliberate roles to them in various National Development Plans.

Afolabi (1998), states that with financial intermediation, the transfer of funds from the surplus sector to the deficit sector becomes very simple. The intermediary will act as a pool, collecting deposits of millions of savers and can create forums, e.g. interest-yielding accounts. The intermediary matches the deposit requirements of the saver with the investment requirements of the borrower. He acts as a pool, collecting savings of different sizes from different categories of savers and meeting the investment needs of the various types of investors. The surplus sector therefore gains by placing his money with the intermediary since the income to be earned does not depend on whether or not the intermediary has in fact lent the money out or whether or not the money was profitably lent. The overall economic effect according to Afolabi (1988) is that financial intermediation leads to a better aggregation of savings and therefore helps in capital formation and investment in the economy.

The banks are mainly involved in financial intermediation, which involves channeling funds from the surplus units to the deficit units of the economy, thus transforming bank deposits into loans or credits. The role of credit on economic.....

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Item Type: Postgraduate Material  |  Attribute: 95 pages  |  Chapters: 1-5
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