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Full Project – A CRITICAL ANALYSIS OF THE CONTRIBUTIONS OF COMMERCIAL BANKS TO THE ECONOMIC GROWTH OF NIGERIA

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2.0 THEORITICAL LITERATURE

Reforms are predicted upon the need for reorientation and repositioning of an existing status inorder to attain an effective and efficient state. There could be fundamental bottle-neck that may inhibit the functioning of the institutions for growth and the achievement of core objectives in the drive towards inhancing and sustaining the economic and social imperatives of human endeavour carried out through either government institution or private enterprises.

Consequently, the banking sector, as an important sector in the financial landscape, needs to be reformed inorder to enhance its competitiveness and capacity to play a fundamental role of financing investment. Many literature indicates that banking sector reforms are propelled by the need to deepen the financial sector and reposition it for growth, to become integrated into the global financial architecture, and involves a banking sector that is consulting with regional integration requirements and International best pratices.

The contention that the contributions of commercial banks should matter at all for growth and development has given rise to various opinions and theories among economists. Examining the current changes and advancement in more sophisticated growth models, which include financial intermediation, it was fairly obvious by the financial market have an important role to play in promoting industrial growth. Robinson(1952) maintained that it is economic development that demand financial services. A recent work done by Levine(1997) however argues that the preponderance of theoretical reasoning and empirical evidence suggets a positive first order relationship between financial insititutions and economic growth. Goldsmith(1969) asserted that banking sectorâ€™s role matter for real development because the banking super-structure inÂ the form of both primary and secondary securities accelerate economic growth and development, they also improve economic performance to the extent that they facilicitate the transfer of funds to the best users, ie to the economic system where the fund will yield the highest social return.

Deveraux and Smith(1994) maintained that commercial banks can only mobilize economic growth through its influence, or decrease the savings rate and therefore growth is an open question. Greenwood an Jovanic(1990) are of the opinion that for commercial banks to affect economic growth through fund mobilization, commercial bank can increase the marginal productivity of capital called interest rate which determines to a great extent the amount that is saved or invested. According to Udochi (1981:11), despite the obvious benefits derived from the commercial banks, most Nigerians are not well motivated to make adequate saving and investments in this hard period, due to the financial crunch prevailing in the banking and non-banking secor of our economy. The public donâ€™t hope to obtain enough funds from the banks neither could the bank afford to lend to an unpredictable project.

Barnger(1994:24) financial market development is very sensitive to the nature of macro-economic growth. It depends upon policies which promote the efficient allocation of resources in accordance with market forces rather than government directives. The development of financial market also depends on the provision of an adaptable regulatory and supervisory framework, which provides a balance between market freedom and investors protection. Specifically, she stated that the following conditions are necessary for a competitive and stable financial environment: conducive and stable macro-economic environment. Progressive monetary and fiscal policies, appropriate regulatory and enforcement medians. A major problem concerning commercial banks in Nigeriais that there is no much link between it and the outside. Brown, in his book, â€œThe Nigeria banking systemâ€ 1998 saw statistical difficulties as one of the chief handicap of commercial banks in the country. He indicated the inclination of all firms including the commercial banks to present as a favourable picture as possible when they draw up their balance-sheets, which meant nothing more than WINDOW-DRESSING. This is because a bankâ€™s balance sheet may represent a true and fair picture of the affair of the bank on the last day of its financial year, but have a little to do with bankâ€™s affairs other or subsequent days.

2.1 HISTORICAL BACKGROUND

The Evolution Of TheÂ Nigerian Banking Sector.

The banking operation began in Nigeria in 1982 under the control of the expatriates and by 1945, some Nigerians and Africans had established their own banks. The first era of consolidation ever recorded in Nigerian banking industry was between 1959-1969. This was occasioned by bank failures during 1953-1959 due to the liquidity of banks. Banks, then, do not have enough liquid assets to meet customer demands. There was no well organised financial system with enough financial instruments to invest in. Hence, banks merely invested in real assets which could not be easily realised to cash without loss of value in terms of need. This prompted the federal government then, backed by the World bank report to institute, of the loynes commission on September 1958.

The outcome was the promulgation of the ordinance of 1958, which established the Central bank of Nigeria(CBN). The year 1959 was remarkable in the Nigerian banking history not only because of the establishment of Central Bank of Nigeria(CBN) but that the treasury bill ordinance was enacted which led to the issuance of our first treasury bill in April, 1960.

The period (1959-1969) marked the establishment of former money, capital markets and portfolio management in Nigeria, in addition,Â the company acts of 1968 were established. This period could be said to be the genesis of serious banking regulation in Nigeria. With the CBN in operation, the banking industry restructing was motivated by the need to establish a healthy banking sector that will carry out its financial intermediation role at a minimal cost which effectively provides services consistent with world standards. The major aim of the consolidation program was to store up the capital base of banks consolidated through mergers and take-over to local banks. This allows foreign banks to participate in the banking industry by providing additional capitalisation through investment infrastructure in new banking products, operating technologies and buying shares of the existing banks.

The banking sector reforms, involve the reform of the regulatory and supervisory framework, the safety net arrangement as well as mechanisms to speed up attempts at resolution of banks non-performing loans. In an attempt to revitalize the banking system, a package were comprising among others.

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