The Role of Commercial Banks in the Development of Money and Capital Market a Case Study of Stock Exchange and CBN
CHAPTER ONE
Research Objectives
The general objective of this study is to analyze the contribution of Commercial Banks in Nigeria towards the development of Nigeria capital market.
To study the contribution of Commercial Banks in Nigeria profitability, asset, loan and advancement, deposit, investment, on the Capital market.
- To determine the contribution of Commercial Banks in Nigeria’s profitability towards the growth of capital market.
- To investigate the contribution of Commercial Banks in Nigeria’s Loan and advances towards the growth of capital market.
- To determine the contribution of Commercial banks Nigeria’s asset towards the growth of the Capital market.
- To investigate the contribution of Commercial Banks Nigeria’s deposit towards the growth of the Capital market.
CHAPTER TWO
REVIEW OF RELATED LITERATURE
Theoretical Review
The Banking System
In his work on financial intermediation by banks and economic growth, Badun (2009) notes that there might be some confusion with the terms used in existing research on financial intermediation and growth. He noted that different terms like financial intermediation, finance, financial development, financial system, financial markets and so on, have been used by different authors. However, in almost all papers same indicators are used and all refer to financial intermediation by banks.
According to Otto et al. (2012), there are four vital components of a financial system. These include; financial institutions, financial markets, the regulatory authorities and financial instruments. The study also noted that the system in Nigeria has undergone remarkable changes in terms of ownership structure, the depth and breadth of instruments employed, the number of institutions established, the economic environment and the regulatory framework within which the system operates currently. The Nigerian financial system include banks, capital markets, insurance, pension asset managers and other financial institutions with the Central Bank as the apex institution. The banking industry in Nigeria is dominated by the commercial banks. The commercial banks dominate in both size and profitability.
In Nigeria, the financial system is the hub of productive activity, as it performs the vital roles of financial intermediation and effecting good payments system, as well as assisting in monetary policy implementation. Ofanson et al. (2010) note that the process of financial intermediation involves the mobilization and allocation of financial resources, through the financial (money and capital) markets by financial institutions (banks and non-banks) and by the use of financial instruments (savings, securities and loans). They also suggest that the efficiency and effectiveness of financial intermediation in any economy depend critically on the level of development of the country’s financial system. In effect, the underdeveloped nature of the financial system in most developing countries accounts largely for the relative inefficiency of financial intermediation in those economies. In these countries the financial system is dominated by banks, which are typically oligopolistic in structure and tend to concentrate on short-term lending as against investments with long-term gestation period. The alternative/complementary source for financing development projects is the development of debt or equity markets which at best, is at the rudimentary stage of development. It is in this regard that specialized financial institutions, including government owned development banks have been established in Nigeria to bridge the gap.
An efficient and reliable payments system is important for promoting economic efficiency and the proper functioning and integration of financial markets. The payments system acts as a conduit through which financial and non- financial firms and other economic agents can impact the overall financial stability, as well as accelerate the pace of financial deepening and efficiency of financial intermediation. Over the course of history the payments system has evolved from trade by barter to the use of commodity money, cheques to electronic money. As the repository of the economy’s immediate liquidity, the financial system, especially banks, constitute the backbone of the payments system.
Efforts to improve the efficiency and soundness of the financial system are often geared towards supporting macroeconomic and monetary performance. That is because a reasonably sound, competitive and responsive financial system is critical to the effective conduct of monetary policy and efficiency of the transmission mechanism. In this regard, the maintenance of financial sector stability is complementary to monetary and price stability. Both go hand in hand and are key ingredients for economic confidence upon which investment, growth and prosperity depend.
CHAPTER THREE
RESEARCH METHODOLOGY
Research Design
This study shall adopt the ex post facto research design. According to Asika (2006), ex post facto research is a systematic empirical study in which the researcher does not in any way control or manipulates the independent variables because the situation for the study already exists or has taken place. The study collates historical data for the period 1999 – 2012. By implication, the study is a time series analysis. Most works along this line use time-series analysis of annual observations and even quarterly data to maximize the information included in their analyses. According to Bandiera et al (2004), time series analysis adjust the standard errors accordingly and conduct an array of sensitivity checks, and this procedure formally deal with simultaneity bias. Levine and Zervos (1998) and Bandiera et al (2004) show that time serial analysis improves information and sensitivity of data by detecting the direction of movement within the period under study.
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
In this chapter, the relevant data for the study were presented and analyzed. The relevant data include; net interest margin (revenue), total bank assets, liquid liabilities (M ); commercial bank loan / credit to the private sector; commercial bank credit to the public sector, real gross domestic product; and total population.
The Nigerian Banking sector has undergone serious challenges in recent times and these challenges are fuelled majorly by weak structure and policies that manifested in the form of illiquidity, undercapitalization, weak corporate governance, insolvency, fraud and misrepresentations amongst others.
However, in July 2004, the then CBN Governor, Prof. Charles Soludo proposed an increase in capitalization which is believed will lead to more efficient and healthier banks with better professional and ethical values. The banking industry was also fraught with unhealthy competition between very big banks and marginally playing banks. However, with the then proposed N25B minimum capital requirement (up from N2B which represent a 1,150% increase), all complying banks are expected to be big enough to survive.
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
Summary Of Findings
Findings emanating from this study are as follows:
- Bank Credit exerts positive and significant impact on capital market in Nigeria.
- Growth in Liquid Liabilities of Banks exerts positive and significant impact on capital market in Nigeria.
- Net Interest Margin of Banks exerts positive and significant impact on capital market in Nigeria.
Conclusion
From the summary of the work it is evident that the banking sector occupies a vital position in the economy and thus its activities must remain under constant review and analytical spotlight. The modest achievement of the banking sector noted in the work could be attributed to collaboration and commitment of purpose among key stakeholders. The study observed that the fundamental objective of every government policy should be the repositioning of the banks to perform better in their core functions in order to impact positively on capital market in the country. It could therefore be concluded that banking activities in Nigeria have impacted positively on the country’s capital market as measured by gross domestic product for the period of study 1999 to 2012.
Recommendations
The following are the recommendations of the study.
- Credits to the private sector should be directed at priority sectors(manufacturing and agriculture) for its impact to be felt in the economy. Government regulation should be tilted towards encouraging private sector lending, with greater incentives for these sectors. Government should also endeavor to provide a stable macroeconomic environment. A stable macroeconomic environment is crucial for the development of the financial markets and provision of efficient services needed to support the real sector for economic development. Domestic and foreign investors will be most unwilling to invest in an economy where there are instability in macroeconomic measures of uncertainty namely, interest rate, exchange rate and inflation. Sound macroeconomic environment and sufficiently high income levels-GDP per capita, domestic savings, and domestic investments-are determinants of financial system development in emerging markets. Infrastructural developments are also crucial to ensure that borrowed funds are channeled to production activities and not providing basic amenities like access roads and power generation.
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