Non-Bank financial institutions and economic development in Nigeria

Non-Bank financial institutions and economic development in Nigeria

Chapter one

Introduction

1.1Background of the study

Non-bank financial institutions are financial institutions that do not have a full banking licence and thus cannot take deposits. However, they both compete with and complement traditional banking institutions by providing alternative financial services such as contractual savings (pension funds and insurance companies), investment intermediaries (finance companies, mutual funds and money market funds), microloan organisations and venture capitalists (Mishkin 2007; World Bank 2015c). The three main categories of NBFIs in Egypt (Egyptian Financial Supervisory Authority 2017), Nigeria (Ndugbu et al. 2015) and South Africa (Faure et al. 2006) are insurance companies, pension funds and investment institutions.

A close examination of financial literature exposes the lopsided attention paid to banks. While it is awash with information on the scope and intensity of banks’ contribution to the economy, little is said about the input of non-bank financial institutions (NBFIs) to development. It is true that banks in a developing economy outclass the NBFIs in volume of transaction, versatility of operations, diversity of products and degree of market penetration (Acha, 2005:1). This does not in any way diminish the contributions of NBFIs as they perform similar functions with the banks and complement the efforts of the banks in the financial intermediation process. Despite their complementary role to banks in the areas mentioned above, NBFIs are known to possess potential advantages in the performance of economic development functions. For instance, certain NBFIs are rural in nature, like the community banks (now microfinance banks), and are therefore able to access greater population of Nigerians and their latent savings potentials. Nigeria is a country in dire need of development and cannot overlook the development potentials of NBFIs.

The recent global financial crisis clearly demonstrates that if the development of NBFIs is too rapid and is not properly regulated and monitored, it may create conditions susceptible to a financial crisis. Specifically, Liang and Reichert (2012) warned that if NBFIs are not properly regulated, they allow excessive risk appetite, which may have disastrous consequences for both the financial sector and the real economy. This was further emphasised by the shadow banking monitoring report at the end of 2015 (Financial Stability Board 2015). The report argued that although NBFIs contribute to the financing of real economy, they can become a source of systemic risk when they perform ‘bank-like’ functions and also when their interconnectedness with banks is strong.

Furthermore, recent studies raise very profound questions about the finance-growth debate especially in Africa where both financial development (FD) and economic growth have remained subdued leaving the debate unresolved. Specifically, recent studies found that the relationship between FD and economic growth is weakening in both developed and developing countries and that ‘financial depth is no-longer a significant determinant of long-run economic growth’ (Demetriades & Rousseau 2015; Rousseau & Wachtel 2011). In Africa, Demetriades and James (2011:1) argued that ‘at worst’ the relationship between FD and long-run economic growth does not exist in Africa. Based on this background the researcher wants to investigate the Non-Bank financial institutions and economic development in Nigeria.

Statement of the problem

However, given the potential of NBFIs to fund long-term growth, and risks arising from the linkages between NBFIs and other financial institutions. It is also within the purview of this study to assess this contribution with a view to making recommendations that will enable the NBFIs play a more robust role in our development efforts. The study will assess problems NBFIs encounter in the performing their developmental roles in economy of the country

Objective of the study

The objectives of the study are;

1. To ascertain the role of NBFIs on economic growth of Nigeria
2. To ascertain highlights the problems NBFIs encounter in the performing their developmental roles
3. To determine the contribution of NBFIs to the economy
4. To ascertain the relationship between non-Bank financial institutions and economic development in Nigeria

Research hypotheses

For the successful completion of the study, the following research hypotheses were formulated by the researcher;

H₀: There are no problems NBFIs encounter in the performing their developmental roles.

H₁: There are problems NBFIs encounter in the performing their developmental roles.

H₀²: There is no the contribution of NBFIs to the economy

H₂: There is the contribution of NBFIs to the economy

Significance of the study

The study will be very significant to students, decision makers and government of Nigeria. The study will give a clear insight on the Non-Bank financial institutions and economic development in Nigeria. The study will also serve as reference to others researchers that will embark on the related topic

Scope and limitation of the study

The scope of the covers Non-Bank financial institutions and economic development in Nigeria. The researcher encounters some constrain which limited the scope of the study;

1. a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study
2. b) TIME: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

1.7 DEFINITION OF TERMS

Non–bank financial institution : The term non-bank financial institution refers to companies that offer financial services, but do not hold banking licenses and cannot accept deposits. Insurance companies, brokerage firms, and companies offering microloans are examples of non-bank financial institutions.

Economic development: economic development is usually the focus of federal, state, and local governments to improve our standard of living through the creation of jobs, the support of innovation and new ideas, the creation of higher wealth, and the creation of an overall better quality of life

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