The Developmental Roles of Financial Institution in Economic Development in Abia State
(A Study of Ministry of Economic Development Umuahia)
The paper examines interaction between financial development and economic growth in Abia State. The study highlighted to analyze practically the developmental roles of financial institution in economic development of Abia with Ministry of economic development, Umuahia as the case study. It was organized into five chapters to ensure systematic approach to the issue. Chapter one presents background of the study, statement of the problems, objectives of the study, research hypothesis, significance of the study, limitation and scope of the study and definition of terms used. Chapter two presents literature review based on the contributions of other authors in issues related to the subject matter. Chapter three presents the study design and procedures which include: sources and tools for data collection and analysis, population and sample size, questionnaire design and interpretation of data while chapter four presents analysis and interpretation. Chapter five present summary, conclusion and recommendations. Finally, the study present the financial institutions have been regarded to be the core area of economic development.
TABLE OF CONTENTS
Certification – – – – – – – – i
Dedication – – – – – – – ii
Acknowledgement – – – – – – – iii
Abstract – – – – – – – – – iv
Table of contents – – – – – – v
CHAPTER ONE: INTRODUCTION
1.1 Background of the Study – – – – – 1
1.2 Statement of the Problems – – – – – 4
1.3 Objective of the Study – – – – – 4
1.4 Research Hypothesis – – – – – – 5
1.5 Significant of the Study – – – – – 6
1.6 Scope of the Study – – – – – – 7
1.7 Limitation of the Study – – – – 7
1.8 Definition of Terms – – – – – – 7
CHAPTER TWO: LITERATURE REVIEW
2.0 Introduction – – – – – – – 9
2.1 Financial Institution – – – – – – 11
2.2 Theory of Economic Growth and Financial Development- – – – – – – 11
2.3 Financial Regulation – – – – – – 12
2.4 Traditional Financial Institutions – – – 15
2.5 Advantages and Disadvantages of traditional financial Institutions – – – – – – 16
2.6 Finance Market – – – – – – – 18
2.7 The structure of Nigerian financial System – – 19
2.8 The money market and its institutions – – 24
2.9 Instruments used in the money market – – 27
2.10 The capital market – – – – – – 29
2.11 Types of capital market – – – – – 30
2.12 Major participant in the Nigerian capital market – 32
2.13 How to access the Nigerian capital market – – 33
2.14 Development financial institution (DFIs) – 34
2.15 Other financial institutions and funds – – – 36
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Introduction – – – – – – – 40
3.2 Design of the Study – – – – – – 41
3.3 Area of the Study – – – – – – 42
3.4 Population of the Study – – – – – 42
3.5 Sample and sampling techniques – – – 42
3.6 Instrument for Data Collection – – – – 43
3.7 Development or Validation of the Instrument – 44
3.8 Administration of the instrument – – – 45
3.9 Method of Data Analysis – – – – – 45
DATA PRESENTATION, ANALYSIS AND INTERPRETATION
4.0 Introduction – – – – – – – 47
4.1 Data Presentation – – – – – – 47
4.2 Analysis of the Data – – – – – – 50
4.3 Interpretation of Data – – – – – 56
SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.0 Introduction – – – – – – – 59
5.1 Summary of Findings – – – – – 59
5.2 Conclusion – – – – – – 61
5.3 Recommendations – – – – – – 62
1.1 Background of the Study
Economic growth for developing countries has important indications for poverty elimination and world economic development. This has been the goals of world financial institutions such as World Bank and International Monetary Fund (IMF) to study economic development of Abia State and how to quicken the country’s development.
The financial institution plays this importance in the development of the economy through granting of loans and advances thereby providing short-term and medium term capital for investors. The loans and advance may be in the form of direct loans, overdraft or by the discounting of bills with amount borrowed; investors could finance various projects in the area of industry, agriculture and commerce. This therefore helps to speed up economic development (Ebuka 2001). The apex bank helps to develop the financial markets by training indigenous personnel in the art of monetary management and by encouraging the growth of financial institution which operate in these markets. The development of the financial system helps to provide investment outlets in securities such as treasury bills, shares, stock etc. through money and capital markets that provide capital (Pandy, 2004).
So, the developmental roles of financial institutions on economic development of Abia but across the following sectors to includes, traditional financial institution, financial market, financial regulations, theory of economic growth and financial development and other financial institutions. Financial institution include, commercial banks (Joint stock banks), discount houses acceptance houses (Merchant banks), finance houses, the central banks, saving banks, development bank, insurance companies, hire purchase companies, the national provident fund, the stock exchange, building societies etc.
The banking decree (1961) in Nigeria specialized types of financial institutions which carryout banking business. A common feature of such banking financial institutions is that they accept deposits, but the use of which they put such deposits differs in detail. The four institutions specifically mentioned were commercial bank, discount house, acceptance houses and finance houses.
1.2 Statement of the Problem
In recent times, customers and business men who rely on financial institution for supply of funds are having difficulty because of high interest rates. The process if setting such facility is sometimes rigorous thus incapacitating a fast growth rate in business and economic development. The requirement of collateral security before a facility can be given to a customer is a problem because before one decides to go for a financial help it is obvious he doesn’t have anything or probably he is trying to rise up. In most cases some customers are not properly advised on what business to venture into.
1.3 Objectives of the Study
The main objectives of the research are:
To offer a detailed and realistic study of the ministry of economic over the recent decades.
To review partially the literature concerning growth theory, economic growth and financial institution.
To investigate the contribution of financial institutions to the economic growth using deposit/GDP ratio etc in a developing state setting in ministry of economic.
To study the development of the commercial banks in the ministry of economic in recent decades; and
To find out measures of curbing factors militating against financial institutions.
1.4 Research Hypothesis
H0: Financial institutions do not help the local entrepreneurs to set up their business.
H1: Financial institutions help local entrepreneurs to set up the business.
H0: Financial institutions do not play a major role in economic development.
H1: Financial institutions play a major role in economic development.
1.5 Significance of the Study
Obviously, the essence of academic research project is to promote intellectual advancement and academic excellences. This research will be of immense benefit to all interested readers, such as the student’s managers, business investors, debtors and creditors. The government, individuals, foreign investors, share holders, prospectus investors. It will also be of added advantage that in adding value to existing related literature and future researchers.
1.6 scope of the Study
This research project is based on the developmental roles of financial institution on economic development of Abia with a particular reference to ministry of economic development, Umuahia Abia State.
1.7 Limitation of the Study
It will be a non-challenge to state here clearly that the major constraints to this research study are the financial constraints, limited time due to academic calendar. It is with notice that due to the above constraints the research could not cover the area of interest and call for optimum support in the future research.
1.8 Definition of Terms
Financial Institution: Financial institution is an institution that provides financial services for its clients or members.
Development: Development is the act of bringing to a more advanced state, growth and progress.
Economic: Economic is a system of a country or other area, the labour, capital and land resources and the manufacturing, production trade, distribution and consumption of goods and services of that area.
Decision Rule: If the calculated value is greater than the critical value reject the null hypothesis, but if the critical value is greater than the calculated value accept the null hypothesis
Financial institutions are organization which deals primarily in money. They constitute the financial framework of an economy. Financial institutions help to pool saving and excess liquidity from millions of individual and firm within the country and make them available to those who require them for various purposes (Anyanwuocha, 2004). The financial institution includes the traditional institutions, financial market, money market and capital market, commercial banks, finance houses, central bank etc (Anyade, 2003).
The banking decree (1969) in Nigeria specified four types of financial institution which carryout banking business. A common feature of such banking financial institution is that they accept deposits, but the use to which they put such deposit differs in detail. Therefore, the commercial banks is a financial institution which deals in money and credit and which receives deposits from the public and organization some of which are repayable on demand by cheque. So the central bank is usually a government owned bank which help to control and supervise the entire monetary and financial system of a country. Being a financial organ of the government, it carries out the major financial operations of the government. It regulates, directs, assists and coordinates the operations of other financial institutions so as to make them comply with the monetary and economic policies of the government (Pandy, 2004).
2.1 Financial Institution
A financial institution is an institution that provides financial services for its clients or members. Probably, the most important financial service provides by financial institution is acting as financial intermediaries. Most financial institutions are regulated by the government.
2.2 Theory of Economic Growth and Financial development
This section is divided into four subsections which are:
The role of financial institution in economic growth
Factors affecting economic growth and the and the growth theory.
Analysis, contribution and effects to economic growth; and
Empirical evidence in the case of Abia.
The Role of Financial Institution in Economic Growth
The financial institution play a key role in development of a national economy because it functions as a medium of collecting and mobilizing resources to finance a business and development project that are essential for economic development (Erchengreen, 1997). A country without good financial system can be a major problem for the economy to function properly, to meditate sustainable private investment and promote entrepreneurship financial institutions ease market friction and influence the allocation of resource over different sectors of the country (Levine, 2004).
Factors Affecting Economic Growth and the Growth Theory
Unlike the traditional believe at technological innovation and physical investment that are main reason for productivity changes, new growth theory, and the increasing returns associated with knowledge that dawned in the late 1980s to 1990s have come to dominate the theoretical thinking, innovation in terms of organizational form and risk structure, have forced the economic theory to conform to the new development consequently, the growth theory emphasizes the importance of investing in new knowledge creation in order to sustain growth. The growth theories are equally applicable to the develop countries and developing countries. It concerns the stages of development rather than the methodology and theoretical underpinning. The economic growth of a country is determined by some most basic preconditions which are;
Property right and
Monetary exchange (Stiglitz and Driffith, economic, 1993).
Effects to Economic Growth
Economic liberalization is a term which describes the phenomenon that fewer government regulations and restrictions in the economy in the exchange for greater participation of private entities.
2.3 Financial Regulation
Financial regulation is a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the integrity of the financial system. This may be handled by either a government or non-government organization.
Aims of Financial Regulation
To prevent cases of market manipulation, such as insider trading.
To ensure competence of providers of financial services
To protect clients and investigate complaints
To maintain confidence in the financial system; and
To reduce violations under laws
2.4 Traditional Financial Institutions
EBUKA (2001), the tradition financial institution which originated long before the establishment of modern banking system still exists in many parts of West African. They take the form of associations of people in the same place of work who mutually agree to come together in order to encourage one another to save, lend and manage money. These financial institutions which take the forms of cooperative societies called the credit and thrift cooperative society as given different places. In Nigeria, these financial institutions as popularly called ESUSU.
In these tradition financial institutions members are encouraged to save their money together, which all or part of it may be lent to any members that is in need. In some of these institutions, members collect their total saving weekly or monthly in a rotary form. If part or all the money collected is given to a member in from a loan, the interest changeable on the loan is very low, if any at all (Ayo, 2000).
2.5 Advantages of Traditional Financial Institution
These traditional financial institutions encourage their members to form the habit of saving money.
They encourage their members to invest the big sum of money they have saved.
The lend money to their members.
They save their members the pains of going to banks to borrow money with the embarrassing collateral securities.
They discourage their members from being extravagant in their spending so that they can save money.
Disadvantages of Traditional Financial Institution
These traditional financial institutions experience high embezzlement rate.
They have weak management because they are managed by those who lack administrative and management acumen.
The institution lack effective means of recovering loan granted to their members if they default in repayment.
They have low financial resources of their disposal as a result inability of some of their members to make their contributions.
They use arbitrary means in fixing interest on loans.
2.6 Finance Market
According to Eyo (2002), a financial market is a market where money and near money instrument exchanges hand between lenders and borrowers, that is, the market deals in money. Financial markets provides opportunities for financial institutions to make facilities available for borrowers and lenders. Therefore, financial institutions trade in money and money’s worth (Ekpo, 1999). According to Bamisite (2007), financial markets are commercial environments where financial securities are bought and sold, such financial securities include bonds, stock etc financial market are segmental into two major markets, the money market and the capital market. Financial market is comprises of many financial market, each offering different type of financial service serving different sets of customers and operating in a particular geographical area.
Types of Financial Market
Financial market can be categorizes into six types:
Foreign exchange market
2.7 The Structure of Nigerian Financial System
The Nigerian financial system comprises of bank and non-banks financial institutions which are regulated by the Federal Ministry of finance (FMF), Central Bank of Nigeria (CBN), Nigeria Deposit Insurance Corporation (NDIC), Securities and Exchange Commission (SEC), National Insurance Commission (Naicom), Federal Mortgage bank of Nigeria (FMBN) and the National Board for Community Bank.
The Federal Ministry of Finance (FMF)
The Federal Ministries of finance advise the federal government on its fiscal operation and co-operates with CBN on monetary matters.
The Central Bank of Nigeria (CBN)
The CBN is the apex regulatory authority of the financial system. It established by the central bank of Nigeria Act of 1958 and commenced operations on the 1st July, 1959. Among its primary functions, the Bank promotes monetary stability and a sound financial system, and acts as banker and financial adviser to the federal government, as well as banker of last resort to the banks. The bank also encourages the growth and development of financial institutions. Enabling laws made in 1991 gave the bank more flexibility in regulating and overseeing the banking sector and licensing finance companies which hitherto operated outside any regulatory framework.
The Nigerian Deposit Insurance Corporation (NDIC)
The NDIC complements the regulatory and supervisory role of the CBN. It is however autonomous of the CBN and reports to federal ministry of finance. NDIC effectively took off in 1989 and was set up to provide deposit insurance and related service for banks in order to promote confidence in the banking industry. The NDIC is empowered to examine the books and affairs of insured banks and other deposit talking financial institutions. Licensed banks are mandated to pay 15/16 of 1 percent of their total deposit liabilities as insurance premium to the NDTC. A depositor’s claim is limited to a maximum of N50,000.00 in the event of a bank failure. The Nigerian deposit insurance corporation (NDIC) has concluded plans to like the insured deposit of banks to N200, 000.00.
The Securities and Exchange Commission (SEC)
This is formerly called the capital issues commission. The SEC was established by SEC Act of 27th September 1979, which was further strengthened by the SEC Decree of 1988. It is the apex regulatory organ of the capital market the commission approves and regulates mergers and acquisitions and authorities the establishments of the unit trusts. In the course of degradation of the capital markets the function of price determination has been transferred to the issuing houses.
National Insurance Commission (NAICOM)
The NAICOM replaced the Nigeria Insurance Supervisory Board (NISB). The NAICOM is charged with effective administration, supervision, regulation and control of the