Financial Intermediation: Fueling Economic Growth

2.1.2 Financial Intermediation, Development and Economic Growth

A world without finance is difficult to imagine, hence finance stands as the soul of economic activities and institutions that mobilize funds to enhance productive activities and improve the welfare of citizens should be encouraged. Mobilization and channeling of credits between economic units by financial institutions to fund productive activities that will accelerate economic growth remain the bedrock of financial intermediaries. Schumpeter, a foremost economist identified the importance of financial institutions in stimulating economic growth through the provision of credit to the productive sector. Schumpeter, in 1934 recognized the role of banks in facilitating technological

A variable for measuring financial deepening is credit to the financial sector. There are burgeoning empirical evidence to support the positive relationship between financial deepening and economic growth. However, McKinnon-Shaw school of thought identified policy implications that may hamper financial development and by extension economic growth to include government restrictions in the banking system through interest rate ceilings, high reserve requirements and directed sectoral credit programme. Arguing in favour of an efficient allocation of capital within an economy to foster economic growth, Levine (1997) observed that since the early 1990s, there has been growing recognition for the positive impact of financial intermediation on the economy. In a study conducted on financial development and economic growth in 77 countries, King and Levine (1993) found that banking sector development can spur economic growth in the long run and there exists a positive and statistically significant impact of growth rate in per capita real money balances on real per capita gross domestic product growth. Discussing on the role of banks in promoting economic growth, Beck (2003) says that banks play diverse roles in fostering economic development and fulfill the crucial role of mobilization

Although this factor is not a sufficient condition but certainly a necessary condition for output and employment growth. Oluitan (2011) submits that the availability of credit function positively allows the fruition of this role and is also important for the growth of the economy. Undoubtedly, there are ample evidences to show that countries that have enjoyed or are enjoying economic prosperity have been linked with an efficient mechanism for mobilizing financial resources and allocating same for productive investment. Sanusi (2002) observed that efficient financial intermediation contributes to higher levels of output, employment, and income which invariably enhance the living standards of the population. This is one of the main reasons why the Nigerian financial system has from time to time undergoing several reforms. The reforms are meant to make the financial institutions responsive to an efficient fund mobilization and allocation to meet the fund needs of the economic units, hence accelerate economic growth. A strong and inclusive financial system; and availability of investable funds play vital roles in financing economic projects and activities that would promote economic growth and development. This is because access to credit enhances the productive capacity of firms and enhances their potential to grow, (Olowofeso, Adeleke and Udoji,