Role Of Finance institutions FINANCE INSTITUTIONS In Economic Expansion Economics Essay

Achieving high and sustainable rates of financial growth is definitely the purpose of economic development in every countries. In an effort to promote progress several procedures have been initiated by government authorities to improve the living specifications of their people in order to rid poverty.

However, the advertising of development needs a sufficient amount of capital stock and profitable investment that promises a sustainable growth in the economy. In recent years, policies to boost personal savings mobilization has progressively more been recommended as appropriate since cost savings rate make a difference economic growth through financing successful investment. Therefore, the mobilization of cost savings is a necessary condition for obtaining high and sustainable rates of economical growth.

However, the argument regarding the necessity of cost savings for success is linked with another argument about the effectiveness of savings in financing capital accumulation and for that reason increasing investments (Pagano, 1993 and Beck et al, 2000). This contributes to the question of the value and role of financial sector in the complex relationship between savings, investment and development. The interplay between financial sector development and macro-economic working on the one palm and savings on the other, has been addressed in the economic development and development literature (Levine, 1997, Westley, 2001 and Beck et al, 2005).

The debate upon this concern remains relevant and controversial. The discussions occur in different dimensions, one of these being the partnership between savings and growth. The next dimensions of the controversy is the result of financial sector development in savings, which causes the important question of whether the interest rate has any effect on saving. A 3rd aspect of the question is the relationship between the banking sector and development, leading to the question: does the banking sector development cause financial growth or will growth cause or encourage bank sector development?

In identification that finance institutions play crucial roles in monetary development of countries, this study seeks to handle the above issues. First of all it examines the books on bank sector development, assessing the impact of stock liquidity, interest rates, lending, and savings on the GDP and the activation of economic expansion. Secondly, it evaluates the value of financial sector development by examining its impact on economic growth and investment, which is the main source of expansion.

Thirdly, it will study the Nigerian banks and the market, analysing its contribution to the development of the Nigerian overall economy and how the various bank sector reforms have impacted on its power and conversely to the financial development of Nigeria.

Research Aim

The research aspires to study the role of banking sector development and monetary growth in Nigeria, analysing its liquidity basic, lending policies and various reforms of the sector, with a view to finding a conclusion for the country's precarious, sluggish and chaotic expansion. In order to achieve this goal, this paper considers different quarrels and propositions in the literature and utilizes statistical and econometric tools to judge the trends that have on its own prevailed in key aspects of the bank sector.


The pursuing specific research aims were established to be able to attain the objective of the research

To determine the positioning and structure of the Nigerian bank sector.

To determine the type and the nature of used reforms and liberalisation regulations and aims associated with them.

To examine the impact of banking sector development on savings, financing and investment and thus economic development of Nigeria.



2. 1 Introduction

The financial sector performs a vital role in the monetary development of any country. It links savings and investment funds and for that reason, promotes economic growth, which is increased because a better and well-structured financial sector helps to mobilise more personal savings and increase effective investment that leads to economic development.

Finance also plays a crucial role in virtually any current economic climate as companies must take spent funds to aid the following production of goods and services. Also governments often acquire to fund short-term and long-term shortfalls between expenses and revenues. Homes equally borrow from the financial sector to invest in large acquisitions that go beyond their existing earnings.

While self-finance through cost savings is an option for companies and households, however, the assistance provided by these financial sector firms through the provision of vehicles and devices for these savings, investment, loaning and borrowing activities are generally more advanced than self-finance through gathered savings.

In producing countries, the functions of capital and the financial sector is even more critical. It is because the citizenry and government expectation that their economies will grow rapidly, to be able to generate significantly higher per capita earnings and standards of conduct. Ruler and Levine, (1993) records that an efficient financial sector i. e. the one that encourages savings, marshals those savings effectively, and allocates those to the investments that will produce larges rises in future products and services can be an pivotal part of strategy to achieve rapid economical growth.

To underscore the importance of the financial sector development the overall economy and partly address identified shortcomings of the sector in providing financial services, governments has internationally intervened thoroughly in the businesses of the financial services sector (World Standard bank, 1989).

Such interventions have included: authorities ownership of banks, insurance firms and other financial intermediaries; administration limits on the applicant by domestic and foreign enterprises into the financial services sector; government designation of industries to which banking companies should lend; federal regulation of interest levels; government strictures as to the varieties and types of financial musical instruments that can be offered and federal taxation of different musical instruments, deals and income moves related to financial services.

The financial sector of the wealth encompasses organizations such as banks, insurance firms, pension funds, stock brokerage companies that provide these and other financial services for all of those other market. However, this paper is exclusively worried about the banking sector.

2. 2 The role of the financial sector

An effective and efficient financial sector can increase the allocation of resources within an economy by enhancing the mobilization of resources from financial systems with surplus funds and facilitating the copy of these resources from real savers to people economic products with an investment or use demands that are in excess of their own personal savings thus, creating wealth throughout the market. The importance of this process can not be underestimated because through this process, the sources of an economy are better employed, leading to a better degree of real income. As observed by Zahid (1995) the effective functioning of the financial sector contributes to a higher average returns on investment resulting in higher savings rate, yielding more liquidity to the financial sector that they can donate to profitable opportunities, which ultimately will raise the success rate of the market.

Ideally, the banking sector builds up to provide as a competent intermediary between depositors and investors, creating market-clearing prices and passions rates. Such a situation has useful implications for keeping and growth. Matching to Bencivenga and Smith (1991) the beneficial activities of lenders are accepting deposits, lending thus reducing the need for self funding.

Bank activities include two significant implications for personal savings and investment providing liquidity; lenders allow risk-averse savers to hold bank deposits rather than pure (but unproductive) possessions. Of particular importance is the fact lenders can economise on liquid reserve holdings that not contribute to capital accumulation. Also by eliminating self-financed capital investment, lenders prevent the unnecessary liquidation of such investment by internet marketers who think that they want liquidity.

2. 3 Bank sector development and financial growth

There is a significant theoretical and empirical research that establishes a connection between bank sector development and economic growth. This is because the type of the bank operating system is infinite and greatly spread where there are recent changes in bank regulations, services and instruments. The impact of the changes spread over the borders of one small regional current economic climate to international and global current economic climate.

In actuality, many growing countries have not developed their financial systems and these have never been a priority and therefore not placed at the top of their development and growth agendas, unlike in developed economies it is recognized to be of significant importance with their economies and therefore regards the economic climate as the heart and soul of the machine since it harmonises economic activities and the useful allocation of resources.

A wide selection of empirical evidence helps the view that banking development can immediately affect economic development and expansion and lower income inequality (Jallian and Kirkpatrick, 2001; Westley, 2001). That is in agreement with the observation of the World Lender (2001) that there surely is a possibility of your casual marriage between an effectively- operating bank operating system, macro-economic stability, poverty lowering and economic expansion.

Comparative research on the hyperlink between the banking system and economic progress shows that businesses located in economies with well-developed banking sector and stock market segments, have become faster than those in economies with similar systems but that are less developed (Demirguc-Kunt and Maksimovic, 1996; Levine and Zervous, 1996 and Rajan and Zingales, 1996).

It can be said that financial development has a dual effect on economic expansion. On the main one hand, the introduction of domestic financial marketplaces may enhance the effectiveness of capital deposition and on the other hand, financial intermediation can contribute to rise in the cost savings rates investment. This approach was emphasized by Goldsmith (1969), who also sees some positive relationship between financial development and the level of real per capital GNP. He attributes this romantic relationship to the positive impact that financial development has in stimulating better use of the capital stock.

This was further corroborated by Greenwood and Jovanovic (1990) who exhibited that there is an optimistic two-way causal marriage between economic growth and financial development, pointing out that the procedure of expansion stimulates higher involvement in financial marketplaces in doing so facilitating the creation and development of finance institutions. While on the other palm financial institutions, by collecting and inspecting data from various potential shareholders, allow investment jobs to be performed more successfully hence stimulates investment and growth.

Banking sector development can even be assessed by the margin between financing and deposit interest levels and by the ratio of non-performing lending options throughout the market. This is because both are significantly and negatively related to economical expansion as non-performing lending options describe the quantity and quality of information that the banking sector has accumulated and analysed which in turn affects its lending to buyers.

Financial sector development may be an important prerequisite for monetary progress, since well-functioning marketplaces and financial institutions may decrease the business deal costs and asymmetric information problems. At the same time, finance institutions play an increasingly pivotal role in figuring out investment opportunities, selecting the most profitable tasks, mobilizing personal savings, facilitating trading and the diversification of risk, as well as bettering commercial governance mechanisms.

Also Becsi and Wang (1997), discovered that the underdevelopment of the banking sector negatively effects upon people and expansion, whereas efficient banking sectors positively have an effect on economic growth through the effective allocation of resources to the most profitable users. Additionally they unveiled that restricting the first deposit rate and increasing reserve requirements, reduce expansion rates. Likewise, Levine (1997) helps the argument of any positive association between financial sector development and economic growth, arguing that the introduction of finance institutions and markets is an essential part of the growth process rather than "an inconsequential aspect show responding passively to monetary growth and industrialisation (p. 689).

The World Bank (2001) cited empirical studies, which strongly suggested that improvements in financial arrangements precede and donate to economic performance. For instance, King and Levine (1993a) revealed that the level of financial development in 1960 was a significant determinant of economic expansion. Other recent studies have tried out to determine whether financial development causes improved economic progress and performance. For example, Beck et al, (2000) examined the long-term impact of the exogenous element of financial intermediary development on the resources of economic development by using cross-country test with data averaged over an interval 1960-1995. They discovered that financial intermediaries have a big, positive influence on total factor production progress and that the log-term links between financial development and both physical investment expansion and private saving rates are poor.

Equally, Nidkumana (2001) investigated the links between financial development and monetary development, discovering that empirical research on the partnership between financial development and financial growth in Africa remains limited. However, the existing evidence shows that financial development is positively related to the expansion rate of real income and additional indicates that financial systems are still relatively under-developed in the majority of African countries.

Neimke (2003) used a theoretical and empirical approach to explain the strong link between financial development and financial development in the transition countries. He found that both the theoretical explanations and the empirical results, point to finance institutions having significant results for investment and the introduction of factor output as the foundation for long-term positive development. This is especially true of Central and Eastern Europe as well as for the former Soviet Union economies that contain inherited widely outdated capital stock and are thus suffering from sharpened declines in their expansion rates.

Beck et al (2005) found that financial development boots the development of market sectors that are obviously composed of small firms, more than large-firm industries. Their work plays a part in the books on the system through which the financial development increases aggregate economic development. Besides confirming that financial development facilitates economical growth by improving the growth of firms that rely on external money, they show that financial development fosters economic growth by minimizing constraints on small firm growth.

Fase and Abma (2003) examined the empirical romance between financial development and economic progress in nine rising economies in South-East Asia discovering that financial development matters for economic development. The results reveal that improvement of the bank operating system in developing countries may gain monetary development and also that the financial infrastructure is of tremendous importance for financial welfare.

Analysing the relationship between banking sector development and expansion in the short and permanent, Fisman and Love (2004) found that over the long run, banking sector development supports and promotes economical growth through a deepening of markets and services that channel savings to beneficial investment; these strengths of banking development lead to higher economic development in the long-term.

Regarding the role of bank sector development in both essential oil and non-oil exporting countries, Nili and Rastad (2007) reported a lesser degree of financial development for the olive oil economies in comparison to the rest of the world. The analysis also shows that the weakness of financial institutions contributes to the indegent performances of monetary growth in oil economies and that weakness might be associated with the dominating role of government in total investment and under-developed private sector.

For a rapidly developing market like China, the introduction of the financial sector has significantly induced development in the real economy. Matching to Liang and Teng (2005) who looked into the relationship between financial development and financial growth over the time 1952-2001, discovered that financial development, physical capital stock, international trade and real interest rate are all economically and significantly related to economic growth. They also advised that in developing countries it is critical to create well-developed financial systems, particularly with acoustics financial intermediation and liberalised interest levels, all of which are essential for the effective allocation of credit, which can help maintain ecological high economic progress.

Calderon and Liu (2003) examined the course of causality between banking sector development and economic expansion on data from 109 growing countries and commercial countries from 1960 to 1994. They found that the bank sector development generally causes economic expansion and that there surely is a positive connections between financial and financial growth. They also reported that financial deepening contributes more to the casual marriage in the growing countries. Financial deepening propels monetary development through both a more rapid capital build up and productivity progress.

However, not absolutely all economists agree that the bank sector development takes on any amazing role in economic growth. For instance, the Miller-Modigliani theorem (1961) argued that "real monetary decisions are in addition to the methods of funding, thus going out of only a passive role for the financial sector" (cited in Wang, 1997:47). Also Chandavarker (1992) figured "not one of the pioneers of development economics even list funding as one factor in development, thus financing is viewed as handmaiden to enterprise by giving an answer to the demand for this types of financial services made by economic development" (p. 134).

Furthermore, Memory (1999) argues that the impact of bank development on economic development is theoretically ambiguous stating that there surely is a lack of significant positive relationship between financial development and economic growth.

Shan, et al (2001) take a different view about the website link between financial sector development and economical expansion arguing that recent encounters are comparatively inconsistent with the widely kept view. They observed that the swift growth of many Asian economies in the 70s and 80s has been completed with local financial areas that cannot be thought to be developed. Furthermore, they argued that many OECD countries embarked on financial reforms in the 1980s, yet cost savings, investment and progress in them have never accelerated. Even where cost savings has risen following financial deregulation, you can find yet little empirical proof related to a linkage between personal savings and local environment (Bodman, 1995).

It could be argued that the assignments of banking companies in economic expansion of countries are limited especially in expanding economies where imperfect information is accessible. The paradigm of asymmetric information between borrowers and lenders offers valuable insights into the forms that money is likely to take; as it'll determine who'll be able to obtain financing, from whom and under what conditions and conditions. This technique will significantly limit usage of funds for individuals who need it and thus slow the rate of economic activities. Thus, banking companies engage in credit rationing to compensate for this risk by imposing higher prices on borrowers which discourages borrowers with worthwhile investment funds from seeking loans, thereby worsens the speed economic activities in the united states. In place the role of finance institutions in economic development is greatly limited as credit rationing discourages a pool of borrowers which undermines the markets (Bhattacharya and Thakor, 1993).

Though, De Gregorio (1993) shows that the relationship between borrowing constraints and development will ultimately depend upon the importance of the effect of borrowing constraints on the marginal efficiency of capital in accordance with their effect on the quantity of cost savings. Guidotti and De Gregorio (1995) shows that a leisure of borrowing constraints escalates the incentives for human capital accumulation which will probably boost the marginal product of capital hence can lead to higher growth regardless of the reduction in personal savings.

Also We Can Offer!

Other services that we offer

If you don’t see the necessary subject, paper type, or topic in our list of available services and examples, don’t worry! We have a number of other academic disciplines to suit the needs of anyone who visits this website looking for help.

How to ...

We made your life easier with putting together a big number of articles and guidelines on how to plan and write different types of assignments (Essay, Research Paper, Dissertation etc)