Modeling Financial Intermediation Functions of Banks: Theory and Empirical Evidence from Nigeria

Abstract

The study model the relationship between financial intermediation functions of banks and economic growth in Nigeria using data spanning (1970-2014). Secondary data was collected from the CBN statistical bulletin and national bureau of Statistics. Credit to private sector (CPS), banks deposit liabilities (DLS), and money supply (MOS) were used as proxy for bank financial intermediation functions while gross domestic product represents economic growth. The augmented Dickey-Fuller unit root test results indicated that the data series achieved stationarity after first differencing at the order 1(1). The relative statistics of the estimated model shows that credit to the private sector (CPS) negatively and insignificantly correlate with GDP in the short run, bank deposit liabilities shows a positive relationship with GDP though statistical insignificant at 5% level. While money supply positively and significantly correlate with GDP at short run.  The analysis revealed the existence of a long run relationship between bank financial intermediation indicators and gross domestic product in Nigeria. The granger causality test results reveal that there exist unidirectional causality flowing from Gross domesticproduct to Credit to Private Sector (CPS). Bi-directional causality runs between Deposit Liabilities (DLS), Money Supply (MOS)and GDP. These suggest that growth in the volume of deposit liabilities could boost banks financial intermediation functions in the economy and exert a positive impact on level of productivity hence having a contagion effect on the output level of goods and services in the economy.  This study recommends that the managers of the Nigeria economy should fashion out appropriate policies that will enhance the bi-directional flow of influence between the banking sector where investable funds are sourced and the real sector of the economy where goods and services are produced, and there should be efficient and effective financial intermediation process in order to achieve the nominated objective of investment, productivity and economic growth.

Keywords: Modeling, Banks Financial Intermediation, Gross Domestic Product, Nigeria