The Role of Financial Institution in Economic Growth in Nigeria

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Date Submitted: 11/12/2013 12:51 PM

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1.1 Background of the study

There are a number of reasons why the financial sector and its activities may influence the rate of economic growth. Financial intermediaries channel resources to the most profitable sectors of any economy. According to Nzotta (2004), financial institutions channel resources from surplus economic units to deficit units for investment purposes. This consists of the provision of loans and advances to the private and public sectors for the purpose and for the growth of domestic output and promotion of the export trade, agricultural production and provision of infrastructure.

Similarly, Jhingan (2004) argues that banks in developing economies play an effective role in their economic development. He says there is acute shortage of capital. People lack the initiative and enterprise. Means of transport are undeveloped. Industry depressed. Financial institutions help in overcoming these obstacles and promote economic development. Financial intermediaries monitor managers and exert corporate control ameliorating moral hazard risk. In particular, by providing liquidity, financial institutions permit risk averse savers to hold deposits rather in liquid but unproductive assets. This mobilization of savings allows increase in the amount of resources available to entrepreneurs.

The role of financial institutions in economic growth has attracted the attention of researchers and policymakers in the last century. There is a large body of literature, both empirical and theoretical, which have examined this issue. The findings of these studies are not without controversy; while some studies find that financial institutions development has been instrumental in accelerating economic growth, others have suggested that it has not been very significant.

According to Beck et al (2000), (2005), a long list of scholars posit, a causal association between finance and economicgrowth. La Porta et al (2000) argues that well...