Financial Intermediation and Economic Development in Nigeria

9795 Words Jun 11th, 2013 40 Pages
Abstract
Financial intermediation is an important activity in the economy because it allows funds to be channeled from people who might otherwise not put them to productive use to people who will ultimately put the funds to productive uses. In line with the assumption that banking sector plays an important role in financing the investment projects, successive governments in Nigeria have carried out reforms and institutional innovations in the banking sector. The overall intention of these reforms has been to ensure financial stability so as to influence the growth of the economy and also enhance banks to play a critical role of financial intermediation in Nigeria. However, despite the fact that Nigerian banks have undergone series of
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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.
The principal function of deposit money banks is the mobilization of savings for investment. The importance of banks in generating growth within an economy has been widely acknowledged, for example Schumpeter (1932) cited in Blum, Federmair, Fink, and Haiss (2002) identified bank’s role in facilitating technological innovation through their intermediary role. Schumpeter
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