IMPACT OF COMMERCIAL BANK ON ECONOMIC GROWTH
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IMPACT OF COMMERCIAL BANK ON ECONOMIC GROWTH
Chapter one
INTRODUCTION
1.2. Background of the Study
Commercial banks contribute significantly to the economic growth of underdeveloped countries. Economic development entails investing in many sectors of the economy. Banks collect and mobilise people’s savings to invest in industrial projects. To fund the projects, investors take out bank loans.
Special monies are granted to investors to help them complete their projects. The bank offers a guarantee for industrial loans from international agencies. Foreign capital pours into emerging countries to invest in projects.
Commercial banks play an important role in developing the economy’s wealth, particularly the capital goods required to boost productivity. The banking system’s service is required by industrialised economies to achieve economic growth, whilst emerging economies require it for sectoral development.
Thus, financial institutions have the ability to influence large saving propensities and opportunities. The demand for sustainable economic growth in every economy can be met through strong financial institutions, specifically the presence of a robust banking sector. Their actions must be designed to work in tandem with government policies and programmes in order to achieve the nation’s desired macroeconomic goals.
Schumpeter remarked in 1934 that the commercial banking system was an important agent in the overall growth process. In general, commercial banks not only enable but also accelerate the economic development process by making more cash available from mobilised resources.
THE ROLE OF COMMERCIAL BANKS IN ECONOMY
Growth in Nigeria
The banking system serves as a growth catalyst and engine, providing lifelines to all sectors of the economy. It is clear that no sector of the economy can thrive or grow without the support and services of the banking sector; the agricultural, manufacturing, mining, and even service sectors cannot function without banks.
Commercial banks offer and encourage savings. The introduction of commercial banks, particularly in rural regions, facilitates savings and hence accelerates economic development.
Commercial banks supply the capital required for development. Deficit spending units seek medium and short-term loans, as well as overdrafts, from commercial banks in order to launch a new industry or engage in other development activities.
They conduct business by using cheques and other forms of payment. They support investment by making direct loans to the government and people for investment objectives. They provide managerial assistance to small-scale industrialists who do not use the services of specialists.
Commercial banks also provide financial advise to their consumers, including investment opportunities. Commercial banks create money to serve as an instrument for the central bank’s activities.
Commercial banks contribute to the development of international trade by acting as referees for importers, giving travellers cheques to persons travelling abroad, creating letters of credit, and providing credit for export.
All of this promotes international trade and relationships between nations while also providing backup liquidity to the economy. They transmit monetary policy and provide some “value added” by transferring cash from savers to borrowers and creating liquidity.
The current credit crisis and transatlantic mortgage financial instability have called into question the efficiency of bank consolidation programmes as a means of restoring financial stability and monetary policy in fixing financial sector flaws for long-term development.
The consolidation of banks has been the primary policy instrument used to address shortcomings in the financial sector. The economic logic for domestic consolidation is undeniable; an early view of consolidation was that it makes banking more cost efficient by allowing larger banks to minimise surplus capacity in areas such as data processing, human marketing, and network overlap. Cost efficiency may also improve if more efficient banks bought less efficient ones.
Consolidation is defined as a decrease in the number of banks and other deposit-taking institutions while simultaneously increasing the size and concentration of the consolidation organisations in the industry.
Bank consolidation is driven by greater risk control through the formation of critical mass and economies of scale, the advancement of marketing and product initiatives, improvements in total credit risk, and the exploitation of technology. These factors have resulted in increased operating efficiencies and larger, better capitalised institutions.
1.2 Statement of the Problem
Given the commercial banking industry’s economic trend, one might wonder what has hampered economic growth, despite the fact that banks play an important role in boosting economic growth through efficient and effective saving investment processes (financial intermediation) that stimulate investment and productive activities.
For the previous three decades, the Nigerian economy has not showed any signs of improvement. For example, the real GNP growth rate was 2.8% in 1995, with negative statistics in years such as 1982 (0.3%), as seen in the CBN quarterly bulletin of 1986.
This demonstrates that the Nigerian economy cannot inspire confidence until financial institutions make significant improvements, particularly in the new millennium.
1.To what extent do commercial banks, as financial intermediaries, contribute to the mobilisation of funds for the country’s economic growth and development.
2.What role do commercial banks play in the Nigerian economy in terms of raising funds for economic growth and development?
3.What are the challenges that commercial banks face when it comes to mobilising capital for economic development?
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