THE ROLE OF FINANCIAL INSTITUTION IN ENHANCING BUSINESS ACTIVITIES

 

CHAPTER TWO

LITERATURE REVIEW

2.1       INTRODUCTION

Financial Institution may be defined as an institution charged with the day to day management and control of the nation’s monetary affairs, the supervision and co-ordination of banking and financial activities of the country. It helps in carrying out the major financial operation of the government.

The Role Of Financial Institutions In Business Are As Follows:

Ø  Debt Management Role

It is the responsibly of financial institution of Nigeria to manage the national debt. The institution has to source funds from the various avenues both internally and externally. In sourcing funds in the form of borrowing, the institution has to consider the cost of the fund, the convenience of repayment, maturity of the debt and availability of the fund.

Ø  Development Roles

The financial institution promotes economic development in the country by performing the following roles:

a.       The institution provides direct loans for the government for the purpose of financing economic development projects.

b.      It helped in the establishment of the Nigerian capital and money markets. These markets provide link for fund seekers and fund owners.

Ø            Monetary Role

The most important and difficult role of the financial institution is the control of money and credit in the economy. The institution has to control money and credit in order to check inflationary and deflationary pressures within the economy.

The objectives of monetary control may include the following:

a.       The stabilize internal price level

b.      To stabilize the rate of  foreign exchange

c.       To protect the outflow of foreign reserve.

d.      To promote stable growth in the economy.

e.       To control business cycle

f.       To meet the monetary requirements of the business sector.

Financial Institution is involved in business development in Nigeria in many areas. The need of financial institution cannot be over emphasized. The government for some specific functions sets some of these financial institutions up, while others are set up by private organization. Their main functions are to provide funding relief from financial consequences of uncertainty and advisory services for business enterprises, both for the public and private individual businesses.

Business firm may fairly be regarded as investment agencies or intermediaries. In other words, their role is to raise fund from members of the public and from other investors and to invest those fund. Usually, fund can be obtained from legal owners of the firm (share holders), banks and other financial institution.

In chapter one of this research work, origin of financial institution (commercial bank particular reference to First Bank Nig plc) was discussed, therefore it will not be repeated here. We shall go straight to the functions of financial institutions.

One of the objectives of financial institution is to extract deposit and maximized lending to meet the needs of the economy, also to maximize and diversifies customers’ services. Ituwe E.C. (1983). From this angle we shall be considering the needs for financial institutions (commercial bank with special reference to First Bank Plc)

1.         Agency Services: The banks effect funds transfers on behalf of their customer, in return the bank charge commission for rendering such service to its customer. They also act as agent to their customers by assisting them to collect proceeds of payment from the customer’s account.

2.         Sales and purchases of share for customers: The bank can act as an issuing house for sales of share on behalf of their customers, also they can buy share for their customers.

3.         Cashing credit facilities:- This involve an arrangement between a bank and its customers which enable the customers to cash his cheque at any branch of his bank. The facility saves the customers the risk of being rubbed of his fund and also it saves him the inconveniences of carry large sum of money from one business center to another.

4.         Deposit Acceptance: Accepts deposits from household business sector, and the government. These deposits can be kept either in saving accounts, fixed deposit account and current accounts and can be withdrawn at the time the customer needs it.

5.         Foreign Exchange Facilities: The bank offers travelers cheques and foreign currencies for travelers and international businessmen. By this facilities rendered, the bank has helped to promote foreign trade.

6.         Loans and overdraft facilities: For some business that lack enough fund to handle their projects, they can obtain loans and overdraft to finance those projects.

The banks charge some interests on the loans and overdraft based on the duration and risk associated with such facilities.

7.         Investment Advice:- Some customers who have capital but are not knowledgeable about how to invest the fund, probably may approach their banks for investment advice. The banks advice their customers on the most appropriate investment opportunities bearing in mind risk and return trade off.

2.2       THEORETICAL BASES FOR THE STUDY

The theoretical bases of the study lie in the fact that there is a mediating relationship between financial institution and business activities (Ekpe, Mat and Razak (2010).  Accordingly, organizations that have opportunity for financing projects from financial institutions are able to generate business and entrepreneurial activities and subsequently become economically empowered.  Financial institutions provide opportunities for business activities and the ability to exploit such opportunities will definitely lead to business growth. According to financial management theorists, funds could only be sourced from financial institution to finance a predetermined project, business or contract (Van Home, 1980).    

Financial institutions therefore provide the needed opportunity for business owners/entrepreneurs for their businesses, thereby leading to an improvement in their activities (Shane, 2003). 

Ekpe et al (2010) opines that credit, savings along with the non-financial services of financial institutions could have positive impact on opportunity for business activity which could lead to boom. 

2.3       EMPIRICAL STUDIES

In a study conducted by Emonena (2004), it was discovered that financial institutions enhanced business activities in form of access to funds and as well as financing projects.  It also contributed to improved and expanded businesses and income, improved family welfare, reduced domestic violence, involvement in household and community decision making. In Ghana, a study was undertaken by Johnson (2012) on the effect of financial institution intervention on enhancing business activities.  The study used a casual survey research design and questionnaire on 90 staff members of a bank in the study area.  With the use of linear multiple regression, the result showed that financial institution interventions of credit and project financing have a significant positive relationship with business activities.  The study was localized in one area and that is rural Ghana and also the sample size used was small and from only one bank which makes generalization difficult.

In Nigeria, studies on the relationship between financial institutions and business activities were also undertaken.  Idodume (2002), studied the effect of financial institutions on business activities. 

With the use of descriptive statistics, he found that financial institutions affect business activities positively.  However, in view of time passage of more than a whole decade, replication of that study for Nigeria has become necessary.  The study at the same time was limited as the result was not subject to sophisticated statistical techniques in order to separate the effects from other factors.

Of more recent, Alabi (2012) did analysis of financial institution on a similar topic in Ogun State in Nigeria using questionnaires and descriptive statistics of tables, frequencies, percentages and chi square. The study found no significant relationship due to high interest rate and short repayment periods.   The study was however weak in its use of only descriptive statistics and at the same time the study had poor states coverage as it was titled towards one state in Nigeria.  Still in Nigeria, Olugbenga (2013), using descriptive statistics, conducted a study on the impact of financial institution on business activities.  Findings from the study showed significant relationship between business activities and financial institution as a result of their immense participating in financing program. 

The study was weak in its small sample size of forty localized in Lagos state as well as in its weak methodology.  No strong statistical tool was used even in testing the hypothesis.

2.4                                                              THE INFLUENCE OF FINANCIAL INSTITUTION

Financial institution has really influenced the rate and level of development of our present day Nigeria. The rate of industrialization, commercialization and global nature of the world is enough reason for everyone to know that financial institution has been of immense help to the Nigerian economy.

According to a publication by Bimbo Adewuyi, industrialization is of tremendous appeal to both the developed and developing nations such that in many countries, industrialization has become synonymous with development. As a result of importance of industrialization, many countries have adopted various strategies aimed at economic growth.

In Nigeria, the Federal Government decided on small and medium enterprises (SME) as a strategy for industrialization because of the realization of the advantages of this business over large ventures. Some of these advantages include:

(a)                Providing good training ground for entrepreneur. This would lead to the development of skills and the direct development of the economy of the country concerned.

(b)        Being labour intensive so as to create Job opportunities for the citizens.

(c)        Being less complex in terms of technology, management becomes easier for the entrepreneurs including those still in their infant stage.

(d)       Greater utilization of local raw materials

(e)                Providing linkages between large enterprises and local producers of basic raw material through the production of semi finished raw materials. The realization of the important role that small and medium enterprises have to play in the industrial development of the country has continued to pre-occupy successive governments of this nation. For example, in the various development plans, it was clearly stated that small and medium enterprise (SME) would;

-                      Generate substantial employment opportunities for school leavers.

-                      Stimulate increase in the growth of local industries.

-                      Reduce state disparities by encouraging even development.

-           Facilitate effective mobilization of local resources capital.

Furthermore, the past administration of President GoodLuck Ebele Jonathan gave boost to the development and growth of small and medium enterprise (SME) in Nigeria when the president in his 2012 budget speech stated that emphasis would be on provision of infrastructure to support private sector manufacturers. Similarly, promotion of export oriented industries; acquisition of industrial know-how through the design, adaptation and modification of industrial machinery components and spare parts would be vigorously pursued.

Promoting an Industrial Culture:

There is no doubt that industrialization as a strategy of economic development is of tremendous appeal to Nigeria and indeed all developing countries.

It is noteworthy that the most formidable challenge, which was imposed on developing countries, Nigeria inclusive, at the time of independent, was that of development particularly socio-economic and infrastructural problems. As at the time of their struggle for political independence, they were caught in the vicious circle of poverty as exemplified by low standard of living, growing unemployment, low incomes and negligible saving. Because of the absence of a sound industrial base, most of their material resources were largely untapped. Hence, there was the urgent need to release the productivity forces for meaningful development and industrialization and was therefore a handy and viable strategy for achieving this goal. Naturally, having acquired an independent status, efforts were made to alter this exploitative traditional economic pattern through genuine, concrete, deliberate and conscious efforts at industrialization.

Having gone through a long period of dependence on Agriculture compared with the returns that accrued to them from their industry, the developed countries have found that agriculture has played diminishing role in their economy while at the same time, providing less contribution of agriculture to export earnings too was on the decline.

Conversely, industry readily absorbs those rendered jobless in the agricultural sector while at the same time contributing to the Gross National Product of the economic. It is evident from the foregoing that industrialization is a compelling necessity for the developing countries in contemporary times. Therefore, promoting an industrial culture that would provide an auspicious climate for industrialization is also an equal compelling necessity.

Industrial Policy and Government Intervention:

In formulating a policy for industrial expansion and growth, the government has to take into account factors, which are militating against growth in the sector. From Nigerian experience, various industrial policies have been adopted.

One major strategy for industrialization was import substitution on a large scale. Although it fuddled industrialization to some extent especially manufacturing, but at a high price, it did not give adequate encouragement for export promotion as Nigeria products would not compete effectively in international markets.

Another critic of the import substitution strategy was the dormancy of the industrial sector by the expatriates.  However, through the policy of import substitution enhanced by the large market, growing urban population and acquired taste, a number of consumers, type industries have been established.

Investors put up industries to produce soft drinks, beer, batteries, carpets, house hold and office furniture etc.. In spite of these investments in many areas, we still import to supplement local supply.

2.5           HOW FINANCIAL INSTITUTION HAS HELPED IN ENHANCING BUSINESS ACTIVITIES

Financial institutions have in a great extent achieved its set goals and objectives of coming into existence in the business world.

Despite this achievement, they have also been problems and limitations.

Some of the achievement could be seen in the areas of SMES development, which according to Dr. Omolayole suffered neglect in time past but now great attention has been given to it and the rate of development witnessed since then has been tremendous. The loan given to them has really helped in enhancing their business activities.

Also they have equally helped the entrepreneurs in establishing their industries and carrying out their business function by granting them both long and short term loans.

These facilities has helped in the establishment of both small and medium scale industries, which has also resulted in job creation and opportunities for young school leavers.

2.6                                      THE CORPORATE FINANCE DIVISION (FBN PLC)

This division was created during the 1992 re-organization exercise, and is responsible for the wholesaler and specialized investment banking and focuses on large corporate organizations.

Among the products/services offered are long and short term loan facilities, capital and money market issues, commercial papers and specialized credit service, loan syndication, equipment leasing and financial advisory services.

The 1993 operating period witnessed the packaging of equipment leasing facilities for Mandilas Enterprises Limited, Nichemtex Nigeria limited and Nigerian Enamelware limited.

2.7                                      TRAINING AND DEVELOPMENT

First Bank of Nigeria Plc being the case study for this research work has continue to place greater premium on qualitative training and retraining of its work force to enhance efficient service delivery. About 350 graduates of diverse educational and geographical background were recruited recently. The training and development department successfully implemented its accelerated promotional course programmed in respect of clerks and supervisor. The bank regional banking units were actively involved in this exercise.

2.8                                      COMPUTERIZATION

As part of its strategies to improve its service, the bank has systematically computerized many of its operations. During the previous years, more branches were computerized.

2.9                                              ELECTRONIC BANKING/CARD PRODUCTS

This involves the management of all electronic banking and card based products including, Western Union Money transfer, FBN valucard, the master card and ATM.

Western Union Money Transfer

The bank continues to maintain its leadership position as number one in money transfer services both in the domestic variant as well as international.

The fastest way to receive money worldwide is through Western Union Money Transfer. The number of sub-agents partners’ increases yearly thereby widening their network for customer conveniences.

First Bank Nigeria Plc Valu Card

FBN valucard is visibly present in all commercial cities around the country. The bank has the highest number of merchant’s outlets.

The bank has deployed Bank Teller Terminal (BTT) to many branches and have been designed as cash redemption centers, equipped with point of sales terminal.

2.10     CORPORATE BANKING

The strategic business unit (SBU) market financial services is to structure organizations both local and international. Its mandates include financial institutions, energy and telecommunications. The directorates scored notable success in this service.  During the year (2000/2001), the management of the entire spectrum of the public sector was consolidated under the corporate banking group.

2.11 COMMERCIAL BANKING

Commercial banking manages banking relationship with semi-structured enterprises across sectors, with annual turnover of N100billion and it is the largest of the SBUs in terms of number of customers. The SBU also oversees the bank’s small and medium scale enterprises financing as well as agriculture.

2.12 SMALL AND MEDIUM ENTERPRISE FINANCING

Financial institution has played an important role in the support and development of small and medium scale enterprises. Report has it that First Bank Nig. Plc. provided total loans and advances of over N1.2billions to that sector thereby increasing their business activities.

2.13 AGRICULTURE FINANCING

Financial institution has contributed in no small way to the growth of Agricultural sector in this country-taking First Bank Nig. Plc. as an example.  It has maintained unwavering zeal in championing financial intermediation for agricultural development. Through its large branch network, innovative products, and a team of seasoned agricultural professional spread across the country, the bank has demonstrated its core competence in Agricultural financing.

In the 2010/2011 financial year, the bank’s Agricultural portfolio grew from N3.79 billion to N4.42 billion, an expansion of about 30.0% while a good number of shareholder agricultural operation were sponsored during the period.

Besides the growth in lending to the agricultural sector, the bank played a major role in crafting a pragmatic agricultures and rural development policy for the country by serving on the presidential advisory committee for financing of Agricultural and the National Standing committee on rural savings mobilization.

Furthermore, the bank pursued functional partnership with a number of organizations and micro finance agencies. Programmes covered under the partnership are micro credit scheme for Agricultural Development (MISCAD) promoted by Shell Petroleum Development Company (SPDC) and National group farmers’ programme of the society for shelter, education food and agricultural development. (ASSEFAD).