Chapter
two
Literature Review
2.1.
INTRODUCTION
The
banking industry of any economy in the world plays a vital role in the
development and growth of the economy. The development of this industry determines
how it will be able to effectively and efficiently discharge its major role of
mobilizing fund from the surplus sector to the deficit sector of the economy. Banking
industry has helped in facilitating business transactions and economic
development (Aderibigbe 2004). A well developed banking industry performs
several critical functions to enhance the efficiency of intermediation by
reducing information, transaction and monitoring costs. If a financial system
is well developed, it will enhance investment by identifying and funding good
business opportunities, mobilizes savings, enables the trading, hedging and
diversification of risk and facilitates the exchange of goods and services. All
these result in a more efficient allocation of resources, rapid accumulation of
physical and human capital, and faster technological progress, which in turn
results in economic growth.
The
role of a banking industry in economic development is widely acknowledged in
the literature. In particular, Schumpeter put the role of banking industry at
the center of economic development. He argued that banking industry plays a
pivotal role in economic development by affecting the allocation of savings,
thereby improving productivity, technical change and the rate of economic
growth. The adoption of the Structural Adjustment Programme (SAP) in 1986 has
made many economies of the world to focus on the banking industry being the
lubricant engine of growth that drives economy.
Many
past studies on Mckinnon and Shaw have suggested that a well functioning banking
industry will eventually lead to increase economic growth. This is why banking
industry has been described as the heart of any vital economy. As a result of
these, there is the need for the reform of this sector to be embarked upon,
most especially when the sector is unable to perform its functions. The aim of
taking banking industry reforms in Nigeria could be traced to the Mckinnon-Shaw
hypothesis of financial repression which suggests that a low or negative real
rate of interest discourages savings and thereby reduces the funds available to
the deficit sectors, which invariably affect investment and at end, retards the
growth rate of the economy.
Banks are essential for
each country’s economy, since no growth can be achieved unless savings are
efficiently channeled into investment. In this respect, the lack of a
full-fledged banking system has often been identified as a major weakness of
the centrally planned economies.
Therefore, reforming the
banking industry in a country and creating a new culture of trust and
confidence has been a crucial task in the process of transition to a market
economy. Because of the vital importance
of the banking reforms in the economy, a considerable amount of literature has
focused on the issue of designing an optimal financial system as a critical
element of structural reforms.
2.2.
THEORETICAL FRAMEWORK
There
have been both theoretical and empirical evidence that suggest that a strong banking
industry promotes economic growth. Oluyemi (1995) stressed the impact of
banking industry as the key agent in the process of development. The banking
sector increases the productivity of investment, reduces transaction costs and
affects savings; therefore the banking sector will enhance economic growth. The
banking industry of any economy plays a determining role by ensuring that
savings are invested in an efficient and optimal way. Economic growth has been
described as sustained increase in per capita national output or net national
product over a long period of time. It also implies that the rate of increase
in total output must be greater than the rate of population growth (Dwivedi
2006).
The
Robert Solow neo-classical growth model posits that growth depends on capital
accumulation – increasing the stock of capital goods to expand productive
capacity, and the need for sufficient saving to finance increased allocation of
resources towards investment.
Bencivenga
and Smith (1991) asserted that economic growth will increase if more savings
are channeled into the activity with high productivity while reducing the risk
associated with liquidity needs. This will show that banking industry provide
the benefits of eliminating unnecessary liquidations. Studies have shown that
countries with well developed banking system or banking industry tend to grow
faster, particularly the size of the banking system and the liquidity tend to
have strong positive impact on economic growth. The financial services provided
by these industry are essential drivers for innovation and economic growth.
Nnanna
(2004) stated that the rate of output growth is determined by the accumulation
of capital, the efficiency of resource utilization and the ability to acquire
and adopt modern technology. He concluded that the degree of banking industry
development is crucial for attracting and sustaining capital flows, savings
mobilization and utilization.
2.2.1.
BANKING INDUSTRY FUNCTION
Commercial banks perform many functions.
They satisfy the financial needs of all sectors such as agriculture, industry,
trade, communication etc..
So they play very significant role in a
process of economic social needs. The functions performed by banking Industry,
since recently, are becoming customer-centered and are widening their
functions. Generally, the functions of commercial banks are divided into two
categories: primary functions and the secondary functions.
Commercial banks perform various primary
functions; commercial banks accept various types of deposits from public
especially from its clients, including saving account deposits, recurring
account deposits, and fixed deposits. These deposits are payable after a
certain time period. Commercial banks provide loans and advances of various
forms, including an overdraft facility, cash credit, bill discounting, money at
call etc. They also give demand and term loans to all types of clients against
proper security. Credit creation is most significant function of commercial
banks. While sanctioning a loan to a customer, they do not provide cash to the
borrower. Instead, they open a deposit account from which the borrower can
withdraw. In other words, while sanctioning a loan, they automatically create
deposits known as a credit creation from commercial banks. Along with primary
functions, commercial banks perform several secondary functions, including many
agency functions or general utility functions. The secondary functions of
commercial banks can be divided into agency functions and utility functions.
for complete project materials, visit www.researchshelf.com
No comments:
Post a Comment