CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

 Investment is an essential component of aggregate demand and fluctuations in investment have considerable effect on economic activities and long-term economic growth.

Investment as key to economic growth as it stimulates activities which lead to increased capital formation needed for economic growth. Investment in key sectors such as manufacturing has the ability of transforming economies to a higher level of capacity utilization and productivity. Most macroeconomic objectives have been achieved through programmers and policies promoting investments in the various sectors (Kalu and James, 2019).

One of the principal functions of a bank includes investing directly or indirectly (giving credits). Thus, a bank is defined as “a place of business that lends, issues, exchanges and takes care of money extends credits and provides ways of sending funds quickly from place to place (Webster’s dictionary, 1995). According to Abaenewe, Ogbulu and Ndugbu (2019), the banking sector stands out in the financial sector as of prime importance because in many developing countries of the world the sector is virtually the only financial means of attracting private savings on a large scale.

The main three categories of bank scope of operations include accepting deposits, investing such deposits and the provision of credits to customers. By these ways, banks assist in mobilizing funds at their disposal for economic development in a nation. Through credits (loans and advances) and investment, business transactions are hitherto being financed for and on behalf of individuals and private enterprise, and of course, sometimes government agencies. In return, the bank charges interest on the loans or make returns from the investment. The interests constitute major source of their income. Such investment usually comes in form of partnership with companies or by buying shares in the companies. Thus, the principal objectives of banks in providing this service are to promote economic growth, banks profitability and liquidity to the economy (Solomon, 2019).

Commercial banks in Nigeria are generally all purpose retail banks. They mobilize funds at their disposal from various surplus economic units and lend to borrowers in deficit economic units for productive purpose. This is a major function of the commercial banks and it distinguishes them from other banks.

According to Pandey (2003) the main sources of working capital for commercial banks remain customer deposits and the major outlet is loans and advances. In order to make profit, commercial banks invest customer deposits in various short term and long term investment outlet, however core of such deposits are used for loans. Hence, the more loans and advances they extend to borrowers, the more the profit they make. On the other hand, investment is seen as the expenditure of funds lending to the creation of net addition to the stock of physical capital (Nnebedum, 2008). Banks as financial intermediaries are expected to provide avenue for people to save incomes not expended on consumption. It is from the savings they so accumulate that they are expected to extend credit facilities to entrepreneurs and other industrialists (Ekpenyong and Acha, 2019).

Thus, adequate savings ensure investment activities takes place without savings there can be no investment hence no increase in output to meet with increase in demand. It is therefore pertinent to state that the development of any nation’s economy is dependent on the value of savings and hence investment by citizens or foreigners reside in the country (Solomon, 2019).

Nnebedum (2008) asserted that increase in savings was result in a general curtailment in the expenditure.  If savings increase, investment will increase and economic development will be stimulated.  Also, with increase investment, employment is bound to increase which will in turn increase demand, prices, profit and more production to economic growth of a country.  Investment results as a consequence of capital accumulation which in turn depends upon savings, thus the relevance of the informal financial institutions as intermediaries for savings mobilization for investment purposes.

Okpara (2009) added that banks in most economies are the principal depositories of the public's financial savings, the nerve centre of the payment system, the vessel endowed with the ability of money creation and allocation of financial resources and conduit through which monetary and credit policies are implemented.

In Nigeria, over the years the regulatory authorities have embarked on reforms and restructuring programs aimed at making the banking sector more efficient and effective in its service delivery and investment for economic development. In 1986, the banking sector was deregulated allowing marketing forces to determine their activities such as interest rate. The banks were made to recapitalize in 1986, 2001 and 2005 all at repositioning them into delivering customer satisfaction services. According to Ezeaku (2009), the reforms in the Nigerian banking sector were aimed at enhancing the performance of banks by forcing them to be creative, reaching the underserved market segments, expand their operations beyond the Nigerian market and to improve customer satisfaction which is lacking due to past perception about the banks especially owing to incessant distress and insolvency.

CBN report (2019) shows that commercial banks investment rose from ₦800.7 million in 1986 to ₦7,948.7 million in 2000 and then increase to ₦890,332.6 and ₦1,785,745.6 million in 2009 and 2010 respectively. 

This research study therefore focuses on assessing this important aspect in the commercial banks as source for finance and investment in Nigeria.  

1.2    STATEMENT OF THE PROBLEM

According to the CBN (2019) report, level of savings and investment has remained inadequate and insufficient to fuel the growth needed to raise living standards and attain full capacity utilization of resources.  Furthermore, the Nigerian economy is mainly made up of income earners while poverty rate is high which thus makes the nation a consuming economy with little or nothing to save. In such an economy it is expected that savings accumulated by the banks will be low and thus cannot have any impact on the countries investment growth and capital formation stock (Donwa and Agbontaen, 2010).

Domestic saving which is a determinant of bank investment has remained poor and insufficient while banks have also been ineffective in their rural banking functions. CBN report shows that commercial banks savings mobilization from the rural areas is poor which has thus limited their level of investment in the Nigerian economy.

Moreover, the huge credit delivery to the public sector by the banks has continually reduced the level of banks investment in the economy as well as made it difficult for the private sector to raise funds to engage in new investment or expansion. CBN statistics shows that less than 11% of commercial banks total assets are made up of investment within 1986-2010 while their credit to the public sector hovers around 17% of their total assets within the same period which is an indication that banking investment in Nigeria remains poor.

It is therefore increasingly evident on the greater need and effort to mobilize domestic savings for onward investment to develop industries in Nigeria, if a desired economic development is to be achieved. Based on the problems indentified, this study attempts to explore the extent of investment activities of commercial banks in Nigeria.

1.3    OBJECTIVES OF THE STUDY

The main objective of this study is to provide an in-depth analysis of the impact of investment activities of commercial banks on the Nigerian economy with a focus on Union Bank Plc. Other specific objectives include:-

i.                To examine commercial banks investment activities in the Nigerian financial system?

ii.               To assess the impact of banking investment on the Nigerian economy?

iii.             To evaluate the relationship between banking investment and profitability in Nigeria.

iv.             To examine the influence of commercial banks lending functions on Nigeria’s economic growth.

v.              To assess the challenges of banking investment in Nigeria.

vi.             To determine the solutions to the identified challenges.

1.4 RESEARCH QUESTIONS

The following research questions have been constructed to guide and sharpen the study:

i.                What role do commercial banks play as financial intermediary in the Nigeria financial system?

ii.               What impact does banking investment activities has on the Nigerian economy?

iii.             Is the relationship between banking investment and profitability?

iv.             To what extent has banks credit influenced Nigeria’s economic growth?

v.              What are the challenges to banking investment in Nigeria?

vi.             What are the solutions to these challenges?

1.5    RESEARCH HYPOTHESES

          The following hypotheses will further help guide the work and have been stated in their null form.

H01: Commercial Banks investment activities has no significant impact on the Nigerian economy 

1.6    SIGNIFICANCE OF THE STUDY 

This study is aimed at assessing the traditional function of commercial banks in investment activities for economic growth in Nigeria.  Thus an exposition into how this investment is carried out will help to evaluate the significance of the commercial banks in Nigeria.

It will also help to enlighten the public on how banks create credit and the various channels through finance can be raised from them.

It will further help monetary authorities assess the impact of their polices on the performance of commercial banks financial intermediation.

The nature of banking business which is highly geared and conducted with great secrecy when compared with other real sector business has raised some eye-brow from the authorities and the public of late which thus makes this study of great importance.

         This study will also enlighten the public on the reform programmes and policies of the CBN to ensure the safety of the banking industry.

Past causes of failures and distress in Nigerian banks as identified will assist bank executives and board members take necessary steps and policies that will help avoid in the further such mistakes

A successful completion of the study will add to existing body of knowledge and serve as a reference material to other researches.

1.7    SCOPE OF THE STUDY

A critical evaluation of the impact of commercial banks investment activities in Nigeria is the focus of this study.  The work will be reviewed empirically using secondary data collected through regression from the commercial bank.

1.8    OPERATIONAL DEFINITION OF TERMS  

Bank: A bank is a financial intermediary that accepts deposits and channels those deposits into lending activities either directly or through capital markets.

Banking Industry: In general term, it is the business activity of accepting and safeguarding money owned by other individual and entities and then lending out these money in order to earn a profit.

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