THE ROLE OF FINANCE HOUSES IN ECONOMIC DEVELOPMENT IN NIGERI 1

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO STUDY

Economic development has been defined as the

process whereby the level of national production

(that is national income) or per capita income,

increase over a period of time (Nwankwo and

Ejekeme, 2007: 34).

Specifically, economic development involves

on increase in the size of the secondary sector

of the economy and a corresponding decrease in

the realistic importance of the primary sector.

In a more conventional approach, economic

development is defined as economic growth plus

change. The changes here being interpreted as the

achievement of better living conditions and an

1

expanded rate of opportunities in work and

leisure for the poor people. It involves more

than just growth (Ogbonna, 2000: 23). This means

that a sustained increase in total national

income per head of population which involves

changes such as improved performance of factors

of production development of institution etc. The

role of capital in economic development can

therefore be appreciated as it provides the

impetus for the effective and efficient

combination of factors of production to ensure

sustainable economic growth (Babalola and

Adegbite, 2004:1). Finance companies as an agent

of financial intermediation have in recent times

been reorganized to serve the purpose of capital

formation and mobilization.

Finance companies are institutions whose

activities involve holding money balance and

2

borrowed money from individual and other

institutions with the aim of creating loans

(Ogbonna, 2000:1)

Finance companies also create room for

channeling funds from lenders to borrowers.

Generally, finance companies mobilize fund from

the surplus sector of the economy and channel it

to the deficit sector of the economy.

Commercial banks traditionally lend to medium

and large enterprises which are judged to be

credit worthy (Anyanwu, 2004: 4). They avoid

doing business with the poor and their micro-

enterprises because the associated cost and risks

are considered to be relatively high for this

purpose, finance companies were given recognition

by the Central Bank of Nigeria (Solomon, 2006:

231). Finance companies in other countries

generally focus on consumer lending, but the lack

3

of such a market in Nigeria and their inability

to compete in the “corporate” market had led them

to focus on lending to small and medium

enterprises (SMEs) (Isern et al, 2009: 20).

Finance companies appear to be mostly active in

short term working capital loans, discounting of

invoices (factoring), and some purchase order

financing. Equipment leasing, particularly of

small industrial equipment (especially

generators) is also on the increase (Isern et al,

2009: 20). Finance companies like the discount

house are licensed by the CBN and subject to the

provision of the Central Bank of Nigeria (CBN)

Decree No. 29, 1991 and the Banks and other

financial institutions (BOFID) Decree No. 25

1991. In the wake of the deregulation of the

economy many promoters applied to CBN for license

to operate as a finance company. Initially

4

provisional license to operate as finance

companies were granted by CBN to about 500

companies that applied to be so registered. The

minimum equity capital for starting a finance

company was fixed at N5, 000,000 (Onoh, 2002:

105).

According to Nwaobi, (2003: 1) capital

accumulation is a major factor governing the rate

of development. Thus accumulation of real

physical capital stock has been viewed as

permitting more roundabout methods of production

greater productivity, thereby providing an

additional future stream of income to society.

Finance companies thus through their activities

accumulate capital where are channeled to the

productive sectors for increased productivity and

output. Isern (2009: 21) observed that finance

companies have in recent years been relevant in

5

the financing of small and medium scale

enterprises. This has led the CBN along with the

Finance Houses Association of Nigeria (FHAN), to

look at ways to strengthen and reposition the

sub-sector.

This study therefore is furtherance on

existing literatures on the role of finance

companies and how they have contributed to the

development of the Nigeria economy.

1.2 STATEMENT OF PROBLEM

Before the CBN Decree No. 24, 1991 and BOFID

Decree No. 25, 1991 brought finance companies

under the supervision of CBN; no statutory body

supervised finance companies. Finance companies

only compiled with the Companies and Allied

Matters Decree of 1990, which demanded that all

operating companies must register with the

6

Corporate Affairs Commission as a Limited

Liability Company. Once they satisfied those

conditions they operated freely without

restrictions. Only those finance houses, which

operated at the capital market, were supervised

because they had to register with SEC. Because

finance companies generally were under no

specific regulatory and supervisory, body they

began to perform like banks but unlike banks they

were not regulated. They borrowed money from the

public by way of deposit placement, determined

the rate they paid for the deposit and lent out

beyond the lending limit imposed on banks by CBN,

some banks set up finance companies and began to

channel loans through those finance companies at

a very high lending rate. Since the lending rates

of finance companies were not controlled by CBN

or any other agency. The interest rate charged

7

for providing the service ranged between 40% to

60% and at time higher. Little or no collateral

securities were demanded. Consequently, the rate

of default was high; many finance companies

applied some of their funds for the import of

goods. In many cases they lost a lot of money

because they engaged in highly speculative

business, for which they have no competence and

no background experience.

Despite the new supervisory power conferred

on CBN over finance companies by the CBN Decree

No. 24 and BOFID No. 25, both of 1991 the over

618 number of finance companies the were earlier

licensed in 1992 fell to 98 in 2001. Many

customers lost their money while unemployed

citizens increased due to the closing down of

these companies (Onoh, 2002: 105). It has also

been observed that finance companies were

8

reluctant in financing most small scale business

as well as the provision of fund for the

development of the agricultural sectors. Rather

the funds mobilized were channeled to the oil and

gas sector and capital markets. (Isern, 2009:

21). It has also been observed that there is low

level of awareness of their existence and

activities in the Nigerian society which thus

questions their relevance in the development of

the economy. Although their assets have increased

over the years as reported by CBN, but the ratio

of loans and advances to their total assets stood

at 1 to 4, that is, only about 25 percent of

their total assets is made up of loans and

advances against an expected 50% of shareholders

fund by CBN policy.

It is on the basis of the above stated

problems that this study is been carried out to

9

assess the relevance of finance companies in the

development of the Nigeria economy and their

performance under the CBN supervision.

1.3 OBJECTIVES OF STUDY

This study is aimed at achieving the

following stated objectives:

i) To assess the extent to which the CBN

guidelines and regulations have impacted on

the growth of finance companies in Nigeria.

ii) To examine the operations and function of

finance companies in Nigeria.

iii)To evaluate the role finance companies have

played in the Nigerian economic development.

iv) To assess the efficiency and effectiveness of

the finance companies in financial

intermediation process.

10

v) To highlight the major challenges faced by

finance companies in Nigeria.

1.4 RESEARCH QUESTIONS

Based on the stated objectives and probing

issues raised in the problem statement the

following relevant questions have been

constructed to further guide the study:

i) To what extent has the CBN regulation and

guidelines impacted on the growth of finance

companies in Nigeria?

ii) What are the relevant functions of finance

companies which impact on Nigeria economy?

iii)What significant roles have the finance

companies played in Nigerian economy?

iv) How efficient and effective have the finance

companies been in financial intermediation

process in Nigeria?

11

v) What are the major challenges of finance

companies in Nigeria?

vi) What are the best strategies to overcoming

the challenges and making the companies

respective to the need of the Nigeria

economy?

1.5 RESEARCH HYPOTHESES

Assumptions are based on t he theory

underlying the subject matter of the study, thus

the following hypotheses have been formulated in

their null form.

Ho1: There is no significant relationship between

loans and advances created by finance

companies and their total assets.

Ho2: There is no significant relationship between

activities of finance companies and the

development of the Nigeria economy.

12

1.6 SIGNIFICANCE OF THE STUDY

Limited literature exist on finance companies

activities thus the researcher aims to contribute

to such limited literatures in order to bring the

interest of researchers to this important

financial institution.

The public have little knowledge on the

existence and operations of finance companies in

Nigeria. Therefore, the researcher aims at

enlightening the public and creates awareness on

other means of financing their business project

without recourse to the traditional banks. This

will help expand business operations and help

enrich self employment in the society.

An exposure on the activities of finance

companies will help government formulate

necessary policies to strengthen the institution.

13

The study is also aimed at revealing the

impact of past regulatory measures on the finance

companies and ways to further strengthen them.

This will help make them relevant in this project

dispensation of global financial challenges.

To the finance companies, the study will

further enlighten them on the best way to enhance

their efficiency as this will help them make

better returns and meet the demand of investors

for funds to finance their businesses.

A successful completion of study will serve

as a reference material to other researchers and

contribute the material at the school library for

future research purposes.

1.7 SCOPE AND LIMITATION OF THE STUDY

This research study focuses on reviewing the

role of finance companies in the development of

14

the Nigerian economy. It will be reviewed

empirically from 1992 to 2008 with the aid of the

regression method of analysis.

The secondary data will from the bulk of the

study. Secondary sources such as textbooks,

journals, magazines, CBN reports etc will be used

while variables such as finance companies

investment, loans and advances, total assets,

gross domestic product, financial deepening will

be used in the course of the study. The study

makes emphasis on finance companies operating

within Nigeria.

In the course of the study some limitations

were encountered which affected the vitality of

the work. These include:

i. Financial Constraint: Insufficient funding to

enable me assesses the various finance

15

companies in Nigeria reduced the empirical

and theoretical content of the work.

ii. Lack of Material: Only limited literature

exist on the activities of finance companies

in Nigeria. Thus, an indepth study could not

be easy.

iii.Scarce Date: Finance companies activities in

Nigeria have fluctuated over the years with

inconsistency, thus, the data readily

accessible was that from the CBN report and

statement of account. Therefore, the

researcher could not access sufficient data

from the companies in question and also due

to the secrecy in the nature of their

business.

1.8 HIGHLIGHT OF METHODOLOGY

16

Research methodology is the systematic

process in which the study will be carried out.

Thus, the empirical survey method will be used to

carryout the work. It involves the use of

regression analysis to test the relationship

between two variables X and Y, known as

independent and dependent variable respectively.

This is used because it is easy to understand and

calculate and also base on the assumptions of the

ordinary least square (OLS).

1.9 OPERATIONAL DEFINITION OF TERMS

ECONOMIC DEVELOPMENT: Is the process where by

the level of national production (that is

national income) or per capita income, increases

over a period of time.

FINANCE COMPANIES/HOUSES: Are institutions

whose activities involve holding money balances

17

and borrowed money from individual and other

institution with the aim of creating loans.

GROSS DOMESTIC PRODUCT: This is the total

value of goods and services produced in an

economic within a particular period.

LOANS AND ADVANCES: The sum of money given to

borrowers.

TOTAL ASSETS: Comprising the whole fixed and

current assets of a company.

1.10ORGANISATION OF STUDY

The study has structured into five chapters

and it consists of the following:

Chapter one which introduces the study with the

background of study, statement of problem,

research objectives, research questions, research

hypothesis, significance of study, scope and

18

limitation, operational definition of terms and

organization of study.

Chapter two reviews related literatures of

renowned authors or the subject matter of finance

companies and their roles in economic

development.

Chapter three brings to fore the research

methodology used in gathering the data used for

the study.

Chapter four presents the collected date while

chapter analysis and interpretation will also be

carried out.

Finally, chapter five summarizes the findings of

the study, as well as conclusion and

recommendations.

19

REFERENCES

Anyanwu, C. M. (2004): “Microfinance Institutions

in Nigeria Policy, Practice and Potentials”.

Paper presented at the G24 workshop on

“Constraints to growth in Sub-Saharan

Africa”. Pretoria, South Africa, November 29-

30, 2004.

20

Babalola, J. A. and Adegbite, M. A. (2002): “The

Performance of the Nigeria Capital Market

Since Deregulation in 1986”.

CBN Economic and Financial Review, Vol. 30,

No. 1, 1-19.

Isern, J., Agbakoba, A.; Flaming M; Mantilla, J;

Pellegrimi G. and Tarazi, M. (2009): “Access

to Finance in Nigeria: Microfinance,

Branchless Banking and SME Finance”

UNDP/UNICEF, January 2009.

Nwankwo, O; and Ejekeme, M. (2009): “Economic

Development and Financial Institutions”.

Journal of Economic and Management Issue

Ogbonna, C. C. (2000): “An Assessment of the Role

of Finance Houses in the Nigeria Economic

Development”.

Research paper submitted to Banking and

Finance, Abia State University, Uturu.

21

Onoh, J. K. (2002): Dynamics of Money, Banking

and Finance in Nigeria: An Emerging Market

Aba: Astral Meridian Publishers.

Solomon, O. (2006): The Future of Banks in

Nigeria

Ibadan: Kings Investment

22

CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.0 INTRODUCTION

This chapter is dedicated to reviewing

renowned authors’ published and unpublished works

on the issue of finance companies and economic

development. Sub-topics such as economic

development; the role and functions of finance

houses, the Nigeria financial system, finance

companies in Nigeria, challenges, and prospects

of finance companies in Nigeria among others

shall be considered.

2.1 THEORETICAL FRAMEWORK

23

The ground breaking studies by late professor

Mancur Olson, founder of Institutional Reform and

the Informal Sector (IRIS) identified a strong

relationship between institutions and economic

development. The conventional wisdom was that

economic development was a result of savings and

capital.

The big push theory also states that economic

development takes place within and not from the

without. That is, internal structure put in place

and policies stimulate economic activities which

transforms to capital accumulation and thus bring

about sustained economic growth and development

(Schumpeter, 1934:24).

Finance as a factor is considered to affect

economic growth, stagnation or even decline in

any economic system. Financial resources are

mobilized and channeled to economic activities by

24

financial institutions or financial

intermediaries who channel these resources from

surplus unit to deficit economic units. In doing

this, they evolve appropriate structures

necessary for the intermediation functions, which

they perform. Various studies have shown that

there is a strong and positive relationship

between the financial sector and economic

development (Nzotta and Okereke, 2009: 56).

Thus, financial institutions such as finance

companies are expected to play significant role

in economic development through their financial

intermediation activities. This study therefore,

is based on the above theories and assumptions

with the focus on finance companies in Nigeria

and its economic development.

25

2.2 ECONOMIC DEVELOPMENT

Economic development is the increase in the

standard of living in a nation’s population with

sustained growth from a simple low-income economy

to a modern, high-income economy (Myint and

Knieger, 2009). Its scope includes the process

and policies by which a nation improves the

economic, political and social well-being of its

people (Arthur and Sheffrin 2003: 471).

Goncalo L. Fonsese at the New School for

Social Research defines economic development as

“the analysis of the economy development of

nations”.

According to Conteras (2009:12) “Economic

development is a term that economists,

politicians and others have used frequently in

the 20th century. The concept, however, has been

in existence in the west for centuries.

26

Modernization, westernization and especially

industrialization are other terms people have

used when discussing economic development.

Although no one is sure when the concept

originated, most people agree that development is

closely bound up with, the evolution of

capitalism and the demise of feudalism”.

The study of economic development by social

scientists encompasses theories of the causes of

industrial – economic modernization, plus

organizational and related aspects of enterprise

development, in modern societies. It embraces

sociological research on business organization

and enterprise development from a historical and

comparative perspective, specific processes of

the evolution (growth, modernization) of markets

and management employee relations; and culturally

related cross-national similarities and

27

differences in patterns of industrial

organization in contemporary western societies

(Abort, 2003: 2).

Mansell and Weln (1998: 3) state that

development has been understood since the Second

World War to involve economic growth, increase in

per capita income and attainment of standard of

living equipment to that of industrialized

countries.

Economic development can also be considered

as a static theory that documents the state of

economy in a given time. According to Schumpeter

(2003:23), the changes in this equilibrium state

to document in economic theory can only be caused

by intervening factors coming from the outside.

2.2.1 MODELS OF ECONOMIC DEVELOPMENT

The three building-blocks of most growth

models according to Wikipedia are:

28

i) The production function

ii) The saving function

iii)The labour supply function (related to

population growth).

2.2.2 TYPES OF ECONOMIC DEVELOPMENT MODEL

Economic development is considered to be

stimulated by certain factors already mentioned

above. However, in the real sense economic

development can be as a result of other

significant factors which are prescribed as

follow:

i) EXOGENOUS GROWTH MODEL

The exogenous growth model (or neoclassical

growth model) of Robert Solow and other players

emphasize on the role of technological change.

Unlike the Harrod-Domar model, the saving rate

29

will only determine the level of income but not

the rate of growth. The sources of growth

measurement obtained from this model highlight

the relative important of capital accumulation

(as in the Harrod-Domar model) and technological

change (as in the neoclassical model) in economic

growth. The original Solow (1957) study showed

that technological change accounted for almost 90

percent of U.S economic growth in the late 19th

and early 20th centuries.

ii) ENDOGENOUS GROWTH MODEL

A complete explanation of economic

development requires a self-starting and self-

sustaining model of economic growth that is not

provided by Neoclassical and Keynesian growth.

The dynamic – strategy model, which is based on

30

an endogenous demand side theory, provides these

characteristics.

iii)INFORMATION-LED DEVELOPMENT

Information-led development (ILD) most

commonly refers to a development strategy whereby

a developing country makes as a primary economic

policy focus the creation and development of a

national information technology (IT) sector with

the express aim of relying on this sector is seen

as an engine of growth. Notable examples of such

countries are India and the Philippines.

2.3 FINANCE COMPANIES

Finance companies are referred to as time-

deposit taking institutions that contribute to

the deepening of the financial system. They

operate within the financial sector to provide

various services to their clients (Sanusi, 2002).

31

CBN (2002) revised guidelines for finance

companies defined a finance company, unless

otherwise stated, as a person or company licensed

to carry on finance company business. Finance

company business means the business of providing

financial services for consumers and to

industrial, commercial or agricultural

enterprises, such service include: funds

management; equipment leasing; hire purchase;

debts factoring and securitization; project

financing or consultancy; debt administration;

LPO financing; project financing; export

financing; financial consultancy; and issuing of

vouchers, coupons, credit cards and token stamps

and such other businesses as the CBN may, from

time to time designate.

Chowdury and Ahmed (2007: 1) assets that non-

bank financial institutions such as finance

32

companies play a significant role in meeting the

diverse financial needs of various sectors of an

economy and thus contribute to the economic

development of the country as well as to the

deepening of the country is financial system.

2.3.1 FUNCTIONS AND IMPORTANCE OF FINANCES

COMPANIES

According to Onoh (2002: 106), the functions

of finance house include the following:

i. Mobilization of Funds:

Finance companies are regarded as financial

intermediator as they mobilize funds or capital

from the surplus sector to the deficit sector.

They accept loan from the public or other forms

of deposits aside current account deposits and

transmit them for investments and onward loans to

borrowers.

ii. Placement of Funds/Fund Management:

33

Finance companies act as agents in accepting

funds from investors and managing such funds in

various investment outlets in order to maximize

the returns of such investors.

iii.Project Financing:

Finance companies through their intermediary

function provide funds for LPO financing, estate

development, leasing, lending of short and long

term loans and consultancy services. Other

financing functions include export financing,

equipment leasing etc.

The importance of finance companies can be

emphasized from the structure of the financial

system; In the financial system in most

countries, commercial banks have emerged in a

dominant role in mobilizing funds and using these

resources for investment. Due to their structural

limitations and rigidity of different

34

regulations, banks could not expand their

operations in all expected areas and were

confined to a relatively limited sphere of

financial services. Moreover, their efforts to

meet long term financing with short-term

resources may result in asset-liability mismatch

which can create pressure on their financial

lease. These drawbacks led to the emergence of

non-bank financial institutions for supporting

industrialization and economic growth of the

country (Chowdury and Ahmed 2007:1)

Finance companies play a key role in

fulfilling the gap of financial services that are

not generally provided by the banking sector.

The competition among non-bank financial

institutions such as development finance

institutions, insurance companies, pension funds,

mortgage institutions, specialized banks, finance

35

companies etc, is increasing over the years,

which is forcing them to diversify to a wider

range of products and services and to provide

innovative investment solutions.

Finance companies appear to offer flexible

options and highly competitive products to help

customers meet their operational and financial

goals.

2.3.2 SOURCES OF FUNDS

Finance companies collect funds from a wide

range of sources including financial instrument,

loans from banks, financial institutions,

insurance companies and international agencies as

well as deposits from institutions and the

public.

36

Line of credit from banks constitutes the

major portion of total funds for finance

companies.

Deposit from public is another important

source of fund for finance companies which has

been increasing over the years. Finance companies

are allowed to take deposits directly from the

public as well as institutions. In some

countries, finance companies are regulated by the

Central Bank, has the restriction to collect

public deposits for less than one year, which

creates uneven competition with banks as banks

are also exploring the business opportunities

created by finance companies with their lower

cost of fund. Finance companies can develop

attractive term deposit products of different

maturities to have access to public deposits as

37

these are one significant source of their funds

(Chowdury and Ahmed, 2007: 9).

2.4 THE NIGERIAN ECONOMY

Nigeria, being the most populous country in

Africa and the eight most densely populated

country in the world (United States Library of

Congress – Nigeria: 2006) with a population of

over 150 million following the 2006 census that

was conducted.

The economy of Nigeria is made up of both the

oil and non-oil producing sector with the middle

income, oil producing economy of perhaps five

million people having a per capita income of

about 2,200 and the rest of the population part

of a poor, non-oil producing economy (World Bank,

2003: 2). Although recent development in the

telecommunication sector has increased the level

38

of prosperity nevertheless the oil sector remains

the dominant sector. The agricultural sector

stands out to be the country’s biggest employer,

the oil and gas production sector still accounts

for 89% of the foreign exchange earnings (CBN,

2008) and 84% of budgetary revenues and majority

of Nigerians derive their income from a

combination of agricultural activity and

operation of a small and medium enterprise

(USAID, 2003: 40).

The Nigeria financial system is made up of

the money and capital market which collapse in to

bank and non-bank financial institutions. The

regulatory authorities are Central Bank of

Nigeria supervising the banking industry which

now consists of commercial banks microfinance

banks and development banks. Others include the

security and exchange commission for the capital

39

market sector, National Insurance Commission for

the Insurance Industry, Federal Mortgage Bank of

Nigeria for primary mortgage institutions and

Nigeria Deposit Insurance Corporation.

The commercial banking industry is the

largest and major driving force of the Nigerian

economy and thus serves as conduct for monetary

and fiscal policy in Nigeria.

The education sector has been on the downward

trend in terms of quality occasioned by frequent

closedown due to agitation for improved funding

and welfare for the sector.

The economy also has an average mortality

rate of 42.3% (FRCN, 2010) and birth mortality

rate of 39.6% (World Bank Report, 2009).

The telecommunication was revived through

privatization and has thus become the fastest

40

growing sector in Africa with an estimated 40

million subscribers making it the 1st in Africa.

The power supply sector is however poor in

service delivery with constant power outage. It

also has poor road networks and poor water

supply. Thus the economy is said to have

inadequate basic infrastructures and amenities.

The exchange rate of the Nigeria currency

“Naira” has fluctuated at an average of N148 to

$1 US in the last one year while the country’s

inflation rate fluctuates between 8% to 14%

between 2005 and 2008, currently inflation rate

is set at 7.6% (CBN Report, 2008).

The capital market is mainly dominated by

private securities with the banking shares been

the most traded. It presently has a market

capitalization of over N1.68 trillion (CBN,

2008).

41

The country’s domestic debt stands at N2.941

billion and an external debt outstanding of

N428.1 billion by end December 2008 (CBN 2008).

The GDP of Nigeria by 2008 was N23.8 trillion

while the economy’s money supply is N9.12

trillion.

The government fiscal expenditure has been on

the deficit side in the most part of 1980 to 2008

due to over reliance on oil revenue.

Major crisis includes Niger-Delta militants

strike on oil facilities, boko-haram activities

in the North, Fulani/Jos settlers clash among

others.

2.5 THE PLACE OF FINANCE COMPANY IN NIGERIAN

FINANCIAL SYSTEM

The significance of finance and a virile

financial system in the drive for economic growth

42

and development is fairly well established and

generally accepted. For instance, availability of

adequate financial resources and regular

acquisition in proper mix of the needed funds

from alternative sources for investment purposes

are part of derivable benefits from an efficient

financial system (Olorunshola, 2003: 18).

A financial system is a conglomerate of

various institutions, markets, instruments and

operators that interact within an economy to

provide financial services. These services, among

others, include resource mobilization and

allocation; financial intermediation; and

facilitation of foreign exchange transactions to

boost international trade.

In Nigeria, the financial system comprises

the regulatory/supervisory authorities’ bank and

non-bank financial institutions. Over the years,

43

the country’s financial system has undergone

remarkable change in terms of ownership

structure, the depth and breadth of instrument

employed, the number of institutions established

and the regulatory framework within which the

system operates (Olorunshola, 2003: 18).

Onoh (2002: 67) classified the Nigerian

financial system as:

i. Regulatory and supervisory authorities;

ii. The money market institutions.

iii.The capital market institutions

iv. The Non-bank financial institution; and

v. The Development Banks (Specialized Banks)

2.5.1 THE REGULATORY AND SUPERVISORY

AUTHORITIES

The regulatory and supervisory authorities of

Nigerian financial system are:

44

i. CENTRAL BANK OF NIGERIA (CBN)

This is the apex regulatory/supervisory

financial institution empowered to promote

monetary stability (through the control of money

supply) and a sound and healthy financial system)

(Onoh, 2002: 67).

The Bank and Other Financial Institution

Decree (BOFID) brought the activities of a myriad

of financial institutions under the CBN, for

instance, the Decree empowers the banks to issue

guideline to any person and any institution that

engages in the provision of financial services as

well as having the last say in formulating

operating rules and codes of conduct. Also, the

bank is empowered under (BOFID) to undertake

special investigations of these institutions if

the Governor of CBN considers it necessary. These

provision of the BOFID and CBN Decrees,

45

therefore, give the banker clear and substantial

powers to regulate the activities of all

financial institutions operating in the country

(Olorunshola, 2003: 22).

ii. NIGERIA DEPOSIT INSURANCE CORPORATION (NDIC)

Decree No. 22 of 1988 of deposit insurance

and related services to banks in order to promote

confidence in the banking industry established

NDIC. To this end, the NDIC is empowered to

examine the banks and affairs of insured banks

and other deposit-taking financial institutions

(Olorunshola, 2003: 22).

iii.SECURITIES AND EXCHANGE COMMISSION (SEC)

SEC was setup in 1979, by an Act as the apex

regulatory organ of the country’s capital market.

The companies and allied Decree of 1990 further

empowers SEC to approve and regulate mergers and

46

acquisitions and authorize the establishment of

unit trust (Olorunshola, 2003: 22).

iv. NATIONAL INSURANCE COMMISSION (NAICOM)

The National Insurance Commission (NAICOM)

established in 1997, is the regulatory authority

in the insurance industry. It replaced the

National Insurance Supervisory Board (NISB),

which was established by the insurance special

supervision fund (Amendment) Decree No. 62 of

1992 to take over the regulation and supervision

of insurance business from the FMF (Olorunshola,

2003: 22).

v. FEDERAL MORTGAGE BANK OF NIGERIA (FMBN)

Federal Mortgage Bank of Nigeria was setup of

Decree 7 of 1977. The adoption of National

Housing Policy in 1990 and subsequently

promulgation of Decree No. of 1991 empowered bank

47

to license and regulate primary mortgage

institutions in Nigeria (Olorunshola, 2003: 22).

vi. FINANCIAL SERVICES REGULATION COORDINATION

COMMITTEE (FSRCC)

FSRCC was inaugurated in 1994 due to the

emergence of many regulatory bodies in the

nation’s financial sector. The objective of FSRCC

is to coordinate and standardize the regulatory

policies of all financial institutions in the

system under the chairmanship of the Governor of

the CBN, with a view to evolving some cooperation

among regulatory agencies (Olorunshola, 2003:

23).

2.5.2 THE MONEY MARKET INSTITUTIONS

The money market institutions comprises as

follows:

i. DISCOUNT HOUSES

48

Discount houses operate as principals in the

primary market for treasury bills. CBN’s

Guidelines for Discount Houses defined, Discount

Houses as “any financial institution in Nigeria

who transact a discount business which in the

main, consists of trading in and holding of

treasury bills, commercial bills and other

securities and whose operations are in the

opinion of the CBN those of a discount house;

(Olorunshola, 2003: 76).

ii. COMMERCIAL BANKS

These are institutions which accept any from

of deposit with varying maturity periods and pay

cheques on such accounts.

iii.MERCHANT BANKS

Merchant banks, unlike commercial bank which

engage in retail banking are wholesale bankers.

49

Merchant bank principally engage in medium and

long-term operation (Onoh, 2002: 93).

iv. MICROFINANCE BANKS

Microfinance banks are institutions

principally established to bring credits to rural

entrepreneurs at affordable conditions. The

functions of the bank are not different in

principle from those of commercial banks, except

those function are exercised within the area the

bank covers (Onoh, 2002: 99).

2.5.3 CAPITAL MARKET INSTITUTION

The capital market institution are regulated

by SEC. the institutions includes registrars,

stock brokers and the issuing houses. (Onoh,

2002: 100). It can also be classified as primary,

secondary and commodity/derivative market.

i. REGISTRARS

50

These are the board institutions that over

see the day-to-day transactions and have the

enormous responsibility of ensuring that the

application forms, for marketing the new issue

reach to potential subscribers.

ii. STOCK BROKERS

The stock brokers have the responsibility to

introduce securities on the trading floor of the

stock exchange, where securities are traded.

iii.ISSUING HOUSE

The issuing house is normally a merchant bank

or a finance house. They are registered with the

SEC and function are providing the basis for

introducing new issues such as preparation of

time table for the all-parties meetings, to

evaluate the activities of the professionals and

51

that of the company seeking quotation to ensure

that the program to bring the new issue to the

market was on course.

2.5.4 NON-BANK FINANCIAL INSTITUTION

Non-bank financial institutions are

identified as financial intermediaries in

specialist sectors but who are not allowed to

combine the traditional retail banking function,

insurance marketing services and capital market

transaction as their lines of businesses (Lemuel,

2009: 36). They include:

i. FINANCE COMPANIES

These companies focus on short-term, non-bank

financial intermediation by mobilizing monetary

resources from the investing public in form of

borrowing and provide, among others, facilities

for local purchase order (LPO) and project

52

financing equipment leasing and debt factoring.

They are under the direct control and supervision

of the CBN. (Lemuel, 2009: 37).

ii. BUREAU DE CHANGE

These are institutions that perform the vital

functions of broaden the foreign exchange market

and improve access to foreign exchange,

especially for small users.

iii.INSURANCE COMPANIES

It is made up of insurance companies that

offer both life and non-life insurance and also

reinsurance firms. Their investments are mainly

in government securities and mortgage industry

and they mobilize relatively long-term funds and

act as financial intermediaries (Lemuel, 2009:

37).

iv. DEVELOPMENT FINANCE INSTITUTIONS (DFIs)

53

Specialized banks or development finance

institution (DFIs) were established to contribute

to the development of specific sectors of the

economy. They are subsector institution

statutorily created to solve finance problems and

gaps in their respective sub-sectors (Ezezobor,

2003: 75).

v. PRIMARY MORTGAGE INSTITUTIONS

PMIs mobilize savings for the development of

the housing sector. Primary mortgage institutions

operate within the framework of Act. No. 53 of

1989 (Lemuel, 2009: 38).

vi. MUTUAL FUNDS AND VENTURE CAPITAL COMPANIES

These two types of institutions are the

latest additions to non-bank financial

institutions due to the current growth of pension

54

funds and other contractual savings institution,

the importance of these institutions in that

venture capital companies (VCCs) offer both

equity and debt finance and take a more active

and specialist interest in the management of the

ventures they support while mutual funds

investing in equities or bonds exist as means of

conferring to small individual investors the

benefits of professional fund management and

efficient risk diversification (Lemuel, 2009:

39).

2.6 CBN GUIDELINES FOR FINANCE COMPANIESOPERATION IN NIGERIAThe new revised guidelines issued in

September 2002 are meant to regulate the

establishment, operations and other activities of

finance companies.

55

The guidelines stipulates that every company

desiring to be licensed as a finance company

shall be a stand alone basis and thus be strictly

limited to solely engaging in finance company

business as defined above.

1. APPLICATION LICENSE

Any person seeking a license for a finance

company business in Nigeria shall apply in

writing to the governor of the Central Bank of

Nigeria; such application shall be accompanied

with the following:

i. A non-refundable application fee of N10,

000.00 in bank draft payable to CBN.

ii. Deposit of the minimum capital of N20 million

(twenty million naira only) in bank draft

made payable to the CBN.

iii.Satisfactory verifiable and acceptable

evidence of payment by the proposed

56

shareholders of the minimum capital of N20

million.

iv. A copy of detailed feasibility report

disclosing information as prescribed by CBN.

v. A copy of the draft memorandum and articles

of association.

vi. A letter of intent to subscribe to the

finance company signed by each subscriber.

vii.A copy of the list of proposed shareholders

in tabular form, showing their business and

residential addresses (not post office

addresses) and the names and addresses of

their bankers.

viii. Names and curriculum vitae (CV) of the

proposed members of the board of direction.

2. FINANCIAL REQUIREMENT

57

The financial requirement which may be varied

whenever the CBN considers them necessary, are as

follows:

i. Minimum paid-up capital - N20, 000,000

ii. Non-refundable application fee N10,

000,000

iii.Non-refundable licensing fee - N50,

000.00

3. SOURCES OF FUNDS

The sources of finds of a finance company

shall consist of: share holders funds, paid-up-

capital and reserves (ii) Borrowings while a

finance company may borrow funds, it shall not

take or accept deposits as defined in section 61

of (BOFIA) 25 1991 (as amended).

4. RENDITION OF RETURNS

In compliance with the provision of section

58(2)b of BOFIA 25, 1991 (as amended) the

58

following quarterly returns are to be submitted

by every finance company which include:

i. Statement of assets and liabilities

ii. Schedule of other assets and liabilities

iii.Profit and loss account

iv. Schedule of investment and balances held with

banks

v. Returns on borrowing from other finance

companies, other financial institutions,

individuals and non-financial institutions,

credits to other finance companies, credits

to other financial institutions, credits to

individuals/non-financial institutions among

others.

5. PUBLICATION OF AUDITED ACCOUNTS

Every finance company shall submit its

audited financial statements and the a bridged

version of the accounts to the Director of other

59

financial institutions for approval not later

than four months after the end of the company’s

financial year.

6. PENALTIES FOR LATE OR FALSE/INACCURATE

RETURNS OR OTHER INFORMATION

For lateness in submitting a

return/furnishing any information required, the

penalty shall be a fine of N2,500.00 for each day

during which such failure occurs. Persistent

failure and refusal to render returns in the

prescribed form may be a ground for the

revocation of a finance company’s license. The

CBN may also appoint a firm of qualified

accountants to prepare proper books of account or

render accurate returns, as the case may be for

the finance company concerned and the cost of

60

preparing the account or rendering the returns

shall be borne by the finance company.

7. PRUDENTIAL REQUIREMENT

i. The minimum capital/risk weighed assets ratio

shall be 12.5% while a finance company is

expected to maintain a ratio of not less than

1:10 between its capital funds and net

credits.

ii. Transfer to statutory reserve from profit

after tax shall be at a minimum of 15% until

the reserve fund equals the paid-up capital

and a minimum of 10% thereafter.

iii.The maximum loan by a finance company to any

person or maximum investment in any venture

by a finance company shall be 20% of the

finance company shareholders fund unimpaired

by losses.

61

iv. The minimum amount which a finance company

can borrow from any one person or corporate

organization is N50,000.00 subject to a total

maximum limit for all outstanding borrowings

which should not be more than 10 times the

shareholders funds unimpaired by losses.

v. The maximum amount which a finance company

can invest in fixed assets is 50% of its

shareholders funds unimpaired by losses.

Other guidelines include

i. All increases in share capital in any form

must be approved by the CBN.

ii. Every finance company shall display on a

daily basis in a conspicuous place at its

head office and branches its rate of

interest.

iii.Every finance company shall have an internal

audit which should ensure that the operations

62

of the company conform with the law as well

as to its internal rules and regulations.

iv. The appointment or replacement of the chief

executive officer or any of the principal

officers of any finance company must be

cleared with the CBN, before such

appointments are made.

v. Every finance company shall appoint an

auditor to be approved by the bank whose

duties shall be to make the shareholders a

report on the annual financial statements of

the company and every such report shall

contain true and fair statements as to the

matters and such other information as may be

prescribed from time to time by the CBN.

2.7 FINANCE COMPANIES AND ECONOMIC DEVELOPMENT IN

NIGERIA: AN OVERVIEW

63

Finance companies in Nigeria are non-bank

financial intermediaries involved in funds

mobilization particularly short-term fund,

placement and funds management project financing,

equipment leasing, debt factoring and granting

credit. (CBN Briefs 2006/7).

Finance companies are statutorily barred from

accepting deposits and undertaking foreign

exchange transactions as stipulated in the

guidelines for their operations. The CBN is

responsible for monitoring finance companies

operation to ensure that they conform to

specified regulation to avoid financial distress

in the sub-sector.

Finance house emerged in Nigeria in 1959 with

the formation of bent worth finance limited

(Ogbonna, 2000: 18). The main business being the

provision of finance by way of hire purchase and

64

equipment leasing facilities, principally to

those engaged to the transport and allied

industries. Since then, the number of finance

houses increased tremendously.

According to Onoh (2002: 106), because

finance houses generally were under no specific

regulatory and supervisory body they began to

perform like banks but unlike banks they were not

regulated. By 1973, there were at least 23

companies that provided consumer credit

facilities. Even though they did not function in

any consistent and formal manner, they were

nevertheless in existence to give assistance to

companies which were unable to finance the

purchases of leasing arrangements (Ojo, 1982:

46).

But between 1986 and 1990, NDIC Annual Report

shows that 100 finance houses were in existence

65

of which 63 had fully complied with the

registration requirement. During 1991, the place

of finance companies in Nigeria financial system

was the main-focus especially when the banks

lending rate was pegged at 21 percent since

finance houses were not subjected to similar

ceiling.

The role and developmental activities of

finance companies were not put on record until

1991 when they come under the regulation of the

CBN. Few literatures were available on the

activities and financing transactions of finance

companies in Nigeria before 1991.

However, literatures have soon that the

limited nature of the traditional banking system

and high lending rate charged by banks during the

structural adjustment programme (SAP) era borough

the finance companies into the lime-light and as

66

an important institution in the Nigerian

financial system (Onoh, 2002; Lemuel, 2009).

Finance companies through their act as

suppliers of loans and credit facilities ensures

financial deepening in Nigeria which implies the

ability of financial institutions in general to

effectively mobilize financial resources for

development (Solomon, 2010: 4), CBN (2007) report

shows that loans and advances of finance

companies increased by 12.0 percent to N25.7

billion from the previous year of N23,345.8

billion. In 1992, finance companies loans and

advance was N1,132.10 million and have over the

last eighteen years increased significantly

showing the level of increased activities in

developing the Nigeria economy, CBN (2008) report

also shows that finance companies domestic credit

increased from N1,512.8 million in 1992 to

67

N6,291.40 million in 2002. By 2008, finance

companies have played an encouraging role in

economic development through domestic credit

valued at N102,020.80 million. Although within

these periods the number of finance companies

operating in Nigeria fluctuated. CBN (2008)

report further shows that out of 618, finance

companies that were registered in 1992, only 102

were re-registered in 2002 following the revised

guideline of the CBN in 2002 while 75 finance

companies were in existence by 2008.

TABLE 2.7 ACTIVITIES OF FINANCE COMPANIES (N’MILLION)

Year Loans and

Advances

Domestic

Credit

Total

Assets

1992 1132.1 1,512.8 2,445.9

1993 4335.5 5634.0 13,385.8

1994 3453.9 4787.7 11,660.9

1995 3846.5 5079.1 11,265.9

68

1996 2447.8 3967.5 8,940.3

1997 4000.4 5517.1 12,059.6

1998 3471.6 4114.9 8,213.6

1999 2739.3 4347.5 8,941.7

2000 4664.4 5270.9 7,871.3

2001 6915.6 8608.6 12,903.5

2002 4101.5 6291.4 11,684.9

2003 14798.4 19111.7 29606.0

2004 14561.5 20050.4 24504.7

2005 16251.3 22007.7 37460.6

2006 23845,8 32601.9 54339.1

2007 26779.1 39535.1 65804.7

2008 47,092.1 102,029.8 205,501.6

Source: CBN Statistical Bulletin and Annual Report 2008

Finance companies in Nigeria have contributed

to economic development through their investment

functions. Finance companies provide investment

activities such as leasing, trade in money market

instruments, property development, stock and

69

securities instrument trading etc. The money and

capital market are significant for Nigeria’s

economic growth and development as they provide

the platform and instruments needed for trading.

The presence of finance companies in these

markets provides the markets with investible

funds. Leasing which provides the means for firms

to obtain the use of a certain fixed assets for

which it must pay a series of contractual,

periodic, tax deductible payments are made

possible by finance companies for interested

companies. This allows firms’ access to capital

intensive equipment with little amount on hand

such ensures the growth of the firms which can

use the remaining capital for other expansion

activities. Over the years, finance companies

have collaborated with estate developers and

banks in property development such as land

70

acquisition, housing building projects, property

acquisition and others. CBN (2008) report shows

that finance companies investments increase from

N380.7 million in 1992 to N2, 189.90 million in

2002 with a further increase to N37,852.5 million

in 2008. The report shows that there was a steady

increase in their investment over the years.

Placement with other finance companies have

increased over the years as in 1993, it was

N2,737.00 million and by 2002 it has fell to

N1,142.70 million but rose significantly to

N18,878.30 million in 2008. The report provides

the fact that finance companies mobilization of

funds in Nigeria witness significant increase.

Thus, filling the investment and mobilization of

savings gap by traditional banks and other

financial institutions.

71

CBN (2008) report further shows high level of

liquidity in the industry as cash at hand was

N40.04 million in 1992 which rose to N207.15

million in 2002 and fell to N29.70 million in

2008. Also balances with bank rose from N245.96

million in 1992 to N1, 458.65 million in 2002 and

increase to N6, 797.90 million in 2008. The high

liquidity in the industry is an evident of their

effective rose in savings mobilization for

national economic development in general.

Financial institutions do not only mobilize

funds, they also tend to prosper the owners thus

increasing the level of welfare and contributing

to reduction in poverty. CBN (2007) annual report

states that shareholders fund rose by 30.3

percent to N14.9 billion in 2007 from N11, 371.40

million in 2007. From an initial shareholders

fund recorded by CBN in 1992 of N576.60 million

72

for finance companies, their wealth has increased

as record has shown.

Funds used by finance companies according to

CBN (2007) were sourced exclusively from

borrowings, other liabilities, reserves amongst

others. But it stated further that 45% of the

total funds available to finance companies is

from borrowings. Their relative investment and

loan and advances points to their efficiency over

the year in mobilizing funds from borrowers to

users. This can also be affirmed by the increase

in their total assets and total liabilities.

Borrowings by finance companies increase from

N1, 302.00 million in 1992 to N7, 403.40 million

in 2002. This increase to N39, 948.48 million in

2007. Total borrowings fell to N19, 878.78 due to

the financial crisis experience globally.

However, FCs assets increased over the years from

73

N2, 445.00 million in 1992 to N11,684.0 million

in 2002. By 2008, its total assets have increased

to N265, 501.60.

Finance companies contribution to the

nation’s economic growth cannot be over-

emphasized. From their relatively small

beginning, they have growth into a larger

integral part of the Nigeria financial system.

The services rendered cannot be quantity as they

remain an important source of finance for small

and medium scale enterprises (Lemuel, 2009: 36).

Isern et al (2009: 20) assets that finance

companies in other countries generally focus on

consumer lending, but the lack of such as market

in Nigeria and their inability to compete in the

“corporate” market has led them to focus on

lending to Small and Medium Entrepreneurs (SMEs).

He stated further that equipment (especially

74

generators) is also on the increase while they

appear to be mostly active in short term working

capital loans, discounting of invoices

(factoring) and some purchase order finance. This

particular has help in developing SMEs industry

in Nigeria.

It is therefore pertinent to conclude that

relevance of finance companies in the development

of the economy of Nigeria cannot be under

estimated and in recognition of the important

services they have rendered over the years, the

CBN in 2009 along with the Finance Houses

Association of Nigeria (FHAN), to look at ways to

strengthen and reposition the sub-sector (Isern

et al, 2009: 20).

2.8 PROBLEMS OF FINANCE COMPANIES IN NIGERIA

75

The challenges of finance companies in

Nigeria are numerous; however, the most important

ones have been listed as follows:

i. SOURCES OF FUND

Finance companies collect funds from a wide

range of sources including financial instruments,

loans from banks, financial institution,

insurance companies and international agencies.

Unlike their international counter-parts that are

allowed receive special deposit with more than

one year tenure, finance companies are not

allowed to collect deposit and as such limited to

borrowings, shareholders fund and other form of

liabilities. This tends to limit their financing

operations. Isern et al (2007: 20) observed that

finance companies are not allowed to take

deposits, but can accept “borrowings” from

individuals to a minimum of N100, 000.00.

76

ii. COST OF FUNDS

The structure of cost of fund for finance

companies does not follow any unique trend.

Banerjee and Mamun (2003) showed that weighted

average cost of fund for the leasing companies is

always positioned much higher than that of banks.

As stated earlier, the principal sources of fund

for finance companies are loan from banks and

borrowings from other institutions, thus they

face comparative disadvantage in collecting funds

compared to the banks and in loan creation.

Again, excessive dependence on bank loan and

borrowings from other institutions has had an

adverse impact on the overall industry. Due to

the liquidity crisis, when interest rate goes up,

the average rate of interest on bank credit lines

also increase, which causes significant rise in

the cost of fund for finance companies. The high

77

cost of fund for finance companies compels them

to operate on a relatively low profit margin

(Chowdhury and Ahmed, 2007: 11).

iii.ASSET-LIABILITY MISMATCH

Asset-liability mismatch is another cause of

concern for finance companies. Demand for funds

to meet the increasing lending requirement has

increase many times. But the availability of

funds has become inadequate as finance companies

are mostly dependent on loan from commercial

banks. International finance corporation (1996)

observed that leasing from companies such as

finance companies are in a great disadvantage as

the companies are in a great dilemma while

managing the mismatch between their asset and

liability. According to IFC, the average weighted

life of the company’s business portfolio should

be less than average weighted life of its

78

borrowings and deposits in its operating

guideline for the companies. Surveillance report

from CBN in 2003 observed that many of the

finance companies operated at the upper end of

risk taking especially in credit approvals and

merchandising and in the process, burnt their

fingers.

iv. INVESTMENT IN HIGH RISK PORTFOLIO

It is already mentioned that cost of funds

for finance companies are higher than that of

banks. In order to sustain the high cost of

borrowing, finance companies are inclined to

invest in the high return segments, which exposes

them to commensurately higher risks moreover,

fierce competition among competitors also force

many finance companies to reduce the margin at

the expense of quality of the asset portfolio.

This strategy eventually creates the possibility

79

of an increase in the non-performing accounts

(Chowdury and Ahmed 2006: 12). Onoh (2002: 106)

asserted that investment in risky ventures caused

the collapsed of many finance companies before

their operations were regulated in 1992.

v. PRODUCT DIVERSIFICATION

Finance companies emerged primarily to fill

in the gaps in the supply of financial services

where were not generally provided by the banking

sector and also to complement the banking sector

in meeting the financing requirements of the

evolving economy. Thus observation has been made

that finance companies concentrated on equipment

leasing, investment in oil market and stock

trading. New industrial units were hardly brought

under the purview of leasing facilities. Also

investments were not always made in the real

sector and non-conventional manufacturing sector,

80

this implies that the new customer base has not

been created and the growth of industrial

entrepreneurship could not be facilitated through

finance companies financial packages.

Diversifying the product range is a strategic

challenge for finance companies and thus limited

their competitive advantage in the rapidly

growing market of Nigeria.

vi. COMPETITION WITH BANKS AND OTHER FINANCIAL

INSTITUTIONS

With the advent of new non-bank financial

institutions, the market share is being spread

over the competing firms and the demand facing

each firm is becoming more elastic. Active

participation of commercial banks in the non-bank

financing activities has further increased the

level of competition in the industry. For banks,

public deposit is one major source of funds which

81

they can collect with relatively lower cost. Thus

the business environment for finance companies

has become more challenging as they have to face

uneven competition with banks in terms of

collecting funds.

vii.WEAK LEGAL SYSTEM

Default culture is high in Nigeria, thus like

other financial institutions, finance companies

face difficulties in recovering loan and lease

defaults. Moreover delays in court procedures

create another cause of concern.

viii. REGULATION AND GUIDELINES OF THE CBN

Although CBN regulations through its

guidelines are meant to bring efficiency and

lower the risk in the financial industry, some

prescriptions such as minimum borrowed funds and

maximum amount loanable limits the ability of the

82

finance components to create more credits.

Inability to accept deposits also affects

loanable funds and limits their source of funds.

2.9 PROSPECTS OF FINANCE COMPANIES IN NIGERIA

In order to strengthen the operations and

performance of finance companies, CBN has over

the years released guidelines in the operations

of the subsector. The increase in the minimum

capitalization of the industry has further

stimulated the growth of the sector and their

performance as revealed in their assets and

volume of loan and investment in the financial

reports of the sector. By circular letter to

BSD/Ofid/Vol.1/99 of April, 1999, all finance

companies were mandated to increase their minimum

capital from N5 million to N20 million, latest

30th August, 2001.

83

The CBN has also formulated policies and

reform programmes to strengthen and reposition

the sub-sector following the global financial

crisis of 2007/8 in order to make the sector more

relevant and recover from losses witnessed in the

overall financial sector.

Finance companies are being engaged by

international agencies in financing small and

medium enterprises in Nigeria.

There has also been an increased patronage by

bank in financing building and leasing projects

while borrowings from finance companies have also

increased.

In term of Nigeria’s economic development,

finance companies have increased their loans to

small and medium scale enterprises especially in

the provision of equipment for leasing.

84

Furthermore, their role in property development

have increased as well.

Their increase participation at the capital

market has made them a relevant force in the

market. Thus investors have increased their

patronage of finance companies in the areas of

fund management. Finance companies have also

increase their function to L.P.O financing

thereby assisting contractors in meeting the

demands of firms and organization requesting for

such supply.

The financial role in borrowing from banks

and accepting borrowings has further assisted in

savings mobilization. A continued increase in

this trend brings a better prospect for the

industry and Niger’s economic growth and

development.

85

2.10PROSPECT OF NIGERIA’S ECONOMIC DEVELOPMENT

The growth and development of the Nigerian

economy is considered as slow but steady.

The reform and restructuring programmes of

the CBN on the various financial institutions has

led to increased competition and better working

environment for the institutions especially the

banking. Since capital has been recognized as the

major push for any economic development

recapitalization in the bank and non-bank

financial institutions has led to availability of

fewer industries with high capital base. This was

witnessed in all the banking industry and non-

bank industry such as insurance, discount houses,

finance houses etc.

The incessant power supply which has affected

economic activities in the country has been the

major concern of the government. Thus, spending

86

on the sector has increased over the years from

the Obasanjo’s regime uptill the regime of Yar’

Adua/Goodluck era. More states are now

establishing independent power project to

increase power supply to their cities and

villages. States such as Lagos, Rivers and

Bayelsa are on the verge of competing the power

project.

There is also an increased funding of the

agriculture and manufacturing sector which were

once the main stay of the Nigeria economy but now

relegated behind the oil sector and contributing

less than 20 percent of Nigeria’s foreign

earnings and government revenue. Increased

funding of these two sectors is hope will bring a

better prospect for revenue generation. Results

have gradually been achieved with the country

becoming the largest cassava producer in the

87

world from 2007 till date (Daily Independent,

2009).

Various road construction projects are on

hand while housing projects are on the increase

to meet better conditions for business friendly

environment as well as basic infrastructures for

citizens. The problem of water shortage is been

looked into while privatization of government

public enterprise has been on and was intensified

especially from 2001 to bring better efficient

and effective service delivery to citizens as

well as improve their welfare.

The Nigerian telecommunication industry is

now regarded as the fastest growing industry in

Africa and among the top seven in the world

following its privatization in 2001. Thus, the

Nigeria economy holds bright prospect for all in

development.

88

REFERENCES

89

Abort, L. F. (2003): Theories of Industrial

Modernization and Enterprise Development: A

Review.

ISR/Google Book, Revised 2nd edition. ISBN

978-0-906321-26-3

Arthur, O. S. and Sheffrin, M. S. (2003):

Economics: Principles in Action

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in Nigeria”.

CBN Training Centre, No. 3

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Central Bank of Nigeria (2007): “CBN Brief 2006 –

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and Statement of Accounts for the year Ended

31st December 2007.

Central Bank of Nigeria (2008): CBN Annual Report

and Statistical Bulletin for the year Ended

31st December 2008.

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Bank Financial Institutions in Bangladesh: An

Analytical Review”.

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Development Got Started”.

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Highest Supply of Cassava”.

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Challenges for the Surveillance of Non-Bank

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in seminar or issues in Financial

Institutions Surveillance in Nigeria. No. 3.

P. 56-63.

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J.; Pellegrimi, G. and Tarazi, M. (2009):

“Access to Finance in Nigeria: Microfinance;

Branchless, Banking, and SME Finance”

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and Medium Enterprises (SMEs): Exploring Non-

Bank Financial Institutions as an Alterative

Means of Financing – The Case of Nigeria”.

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Blekings Institute of Technology, Spring

2009.

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IFC (1996): “Leasing in Emerging Markets”.

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Development Encyclopedia Britannica.

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Societies: Information Technology for

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“Financial Deepening and Economic Development

of Nigeria: An Empirical Investigation”.

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Finance and Banking Research, Vol. 5, No. 5,

pp. 52-66.

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95

CHAPTER THREE

RESEARCH METHODOLOGY

3.0 INTRODUCTION

This chapter deals with the methodology used

in carrying out the study in order to answer some

questions raised in the research work. In this

chapter, sub-topics like research design, sources

of data, techniques used in data analysis are

considered.

96

3.1 RESEARCH DESIGN

Research design is the question of how the

study subject will be brought into the scope of

the research and then will be employed within the

research setting to yield the required data

(Koutsoyannis, 1977: 4). According to Baridam

(1990: 11), there are two major steps in carrying

out research study which are classified as

exploratory and the descriptive research. The

exploratory study involves the collection of data

from published and unpublished works, a review of

identified problems clearly defined and in the

process possible assumptions could be developed

and used as an acid test on the research

findings. Descriptive research is used to

describe the main features of data and aims to

summarize a data set without employing a

probabilistic formulation.

97

In this study, the exploratory survey

research will be used because the research study

involves collection of data from published work

such as financial report with some level of

assumption of theory underlying the subject

matter of the study.

3.2 SOURCES OF DATA

This study made use of mainly data collected

from the secondary source. Secondary source of

data refers to those type of data obtained from

materials that content an accounting, an event or

phenomenon (Okpara 1998: 9). It is also

information that have been documented or form an

already published or unpublished work.

The secondary source used in this study

includes text books, journals, statement of

account, statistical bulletins and CBN reports.

98

3.3 SAMPLE SIZE

Convenience sampling was used in selecting a

sample for the study which is on non-probability

method of selection. It was chosen on the basis

of convenience, accessibility and as a matter of

fact of particular interest in a specific

subgroup within the target population. The

Nigeria economy was therefore selected for the

study.

Sample size is of significance as it helps in

planning the survey. The main objective of sample

size is to obtain both a desirable accuracy and a

desirable confidence level with minimum cost.

This study aims at investigating the impact

of finance companies on economy in Nigeria, and

as such consideration would normally be given

99

from the period of 1992 which coincidentally

forms the time when record of finance companies

in Nigeria started however for more convenience

the study report will start from 1992 to 2008

making it a sample size of 17 (1992 – 2008).

Therefore, the sample size “N” for the study is

given as 17.

3.4 DATA ANALYSIS TECHNIQUES

The study involves the use of exploratory

survey, hence the empirical method which adopts

regression analysis will be used to test the

stated hypothesis.

3.4.1 REGRESSION ANALYSIS

Regression analysis includes any techniques

for modeling and analyzing several variables,

when the focus is on the relationship between a

100

dependent variable and one or more independent

variables. More specifically, regression analysis

helps to understand how the typical value of the

dependent variable changes when any one of the

independent variables is varied, while the other

independent variables are held fixed (Freidman

2005: 1).

REASONS FOR THE USE OF REGRESSION

i) It estimates the conditional expectation of

the dependent variable given the independent

variable that is, the average value of the

dependent variable when the independent

variables are held fixed.

ii) It is widely used for prediction and

forecasting, where its use has substantial

overlap with the field of machine learning.

101

ii) It is also used to understand which among the

independent variables are related to the

dependent variable and to explore the forms

of these relationships.

iii)In restricted circumstances, regression

analysis can be used to infer causal

relationships between the independent and

dependent variables (Wikipedia.org).

UNDERLYING ASSUMPTION

1. The error is a random variable with a mean of

zero conditional on the explanatory

variables.

2. The sample is representative of the

population for the inference prediction.

3. The variables are error free.

4. The predictors are linearly independent.

102

5. The errors are uncorrected, that is, the

variance-covariance matrix of the error is

diagonal and non-zero element is the variable

of the other.

6. The variance of the error is constant across

observation (homoscedesticity).

7. The parameter estimates will be unbiased.

(Wikipedia.org).

3.5 SPECIFICATION OF MODEL

The regression analysis makes use of a major

tool which is the linear regression. In linear

regression, the model specification is that the

independent variable (Y) is a linear combination

of the parameters (but need not be linear in the

independent variable) Freedman, 2005: 2). The

linear regression is categorized into two namely:

i) Simple linear regression

103

ii) Multiple linear regression

In simple linear regression for modeling ‘n’

data point there is one independent variable: x,

and two parameters bo and b1: straight line: Y

= bo + b1x1 + ei, i = 1,- - -, n.

In multiple linear regression, there are

several independent variables or functions of

independent variables: Y = bo + b1x1 + b2x2 …. +

bnxn + ei, i = 1 - - -, n.

In both cases, ei is an error term and the

subscript “i” indexes a particular observation.

Given a random sample from the population, we

estimate the population parameters and obtain,

the sample linear regression model:

Y = bo + b1x. for simple linear regression.

y = bo + b1x1 + b2x2 + b3x3 … + bnxn for

multiple regression

104

For the purpose of this study, the simple linear

regression will be used with the variables

proxied as follows.

HYPOTHESIS I

Ho: There is no significant relationship between

loans and advances created by finance

companies and their total assets.

That is: Y = f(x)

Where Y = Total Assets (Dependent

variable)

X = Loans and Advances (Independent

variable)

Then estimated model will be total assets = bo +

b1 loans and advances.

HYPOTHESIS 2

105

Ho: There is no significant relationship between

activities of finance companies and the

development of the Nigerian economy.

That is: Y = f(x)

Where:

Y = Economy growth proxied by GDP (Dependent)

X = Activities of Finance companies proxied by

domestic credit.

The model will be estimated as GDP = bo + b1 DC

The estimate of the regression can be calculated

using the formula

bo = y = b1 x

and b1 = xy∑ x∑ 2

Where

X = x – x

X = x∑ n (By definition)

106

and

y = y – y

y = y∑ n (By definition)

(Okpara, 1998).

3.6 MODEL EVALUATION

To evaluate the relationship between the

model estimates, the use of correlation

coefficient, coefficient of determination and

adjusted are considered.

3.6.1 CORRELATION COEFFICIENT (R)

The correlation coefficient denoted by ‘r’ is

defined as the measure of the degree of or extent

of linear relationship between two or more

variables in one study. The correlation

coefficient takes value ranging from -1 to +1.

Point closer to -1 means absence of correlation

107

between the variables while point tending towards

+1 shows the presence of correlation between the

variables.

The r is calculated as

r = xy∑ x∑ 2 x∑ 2

Where

X = Deviation of x from its means

Y = Deviation of y from its mean

(Okpara, G. C. 1998).

3.6.2 COEFFICIENT OF DETERMINATION (R2)

This evaluate the goodness of fit with

respect to the sample observation x and y. This

is measured to determine the proportion of the

variation in which is explained by variation in

x. It is given as:

R2 = b1 xy∑ y∑ 2 (Koutsoyannis, 1997).

108

3.7 TEST OF SIGNIFICANCE OF PARAMETER ESTIMATES

In order to confirm the validity of the

results obtained using the formulated method of

analysis discussed so far, the results will be

subjected to the following test of significance:

i) The Standard Error Test

ii) The Student’s T-test

iii)The F-test

STANDARD ERROR TEST

This test enables us to determine whether or

not of parameter estimates of the econometric

model is significantly different from zero,

whether the sample from which they are estimated

might have come from a population whose

parameters are zero (such that bo = 0, b1 = 0).

The test is computed using the following data.

109

S(bo) = y∑ 2 (1 + r 2 ) x∑ 2 (n – 2) (n x∑ 2)

Where n = sample size

R = coefficient of determination

And

S(b1) = (1 - R 2 ) ( y∑ 2 ) (n – 2) (n x∑ 2)

(Koutsoyannis,

1977).

DECISION RULE

If the standard error of the parameter

estimates is smaller than half: The numerical

value of the parameter estimate (i.e.) if S(bn) <

bn½, it is statistically significant.

STUDENT’S T-TEST

This T-tests function is to test the

reliability of the parameter estimates. This is

110

done by comparing the theoretical value of i.e.

(0.025) n – k with the calculated value of tc.

The test is calculated as

bn: tc = bn

S(bn)

and b1: tc = b1

S(b1)

While

tt = 0.025 (n – k)

Where

n = sample size and k – number of variables

(Okpara, G. C. 1998).

DECISION RULE

If the tc < tt (0.025) n – k, we accept the

null hypothesis that b1 is statistically

insignificant. But if tc > tt (0.025) n – k, then

we reject the null hypothesis that b1 is

significantly different from zero.

111

F-TEST

The Fisher’s ratio or F-ratio is used to test

for joint or overall significance of the

parameter estimates. In other words, the F-test

tries to ascertain the level of change in the

dependent variable that can be explained by the

joint change in the independent variables.

This is measured by

R 2 / k – 1 (1 – R2)/N – k

Where K = number of variables

N = sample size

The calculated value of F (Fc) is compared with

the theoretical F (as the chosen level of

significance) with v1 = k – 1 and v2 = n – k

degrees of freedom (Fisher, 1954).

112

DECISION RULE

If Fc > f-tabulated, reject null hypothesis

If fc < f-tabulated, reject alternative

hypothesis.

LEVEL OF SIGNIFICANCE

A 95 percent confidence interval i.e. 0.05

for a two-tailed test shall be adopted for this

study.

3.7 RELIABILITY AND VALIDITY OF DATA

Validity is often assessed along with

reliability and its defined as the extent to

which a measurement gives consistent results.

The data were collected were sourced from a

highly reputable organization which has the major

113

responsibility of keeping up-to-date records of

economic statistics, that is, the Central Bank of

Nigeria. Thus, this study is able to

scientifically answer the questions it is

intended to answer because of past researchers

document and records which had earlier made use

of the same source for data

The study is also reliable because it is free

from random error since random errors do not

correlate with one another.

114

REFERENCES

Baridam, D. (1990): Research Method in

Administration Science. Port Harcourt: Belk

Publisher Ltd.

Fisher, R. A. (1954) Statistical Methods for

Research Workers

Oliver and Boyd: 12th edition.

Freedman, D. A. (2005) Statistical Method: Theory

and Practice. Cambridge: Cambridge University

Press.

Koutsoyannis, A. (1977): Theory of Econometrics.

An Introductory Exposition of Econometrics

Method

Hampshire: Macmillan Press Ltd.

Okpara, G. C. (1998): Method of Data Analysis for

Researchers. A Statistical and Econometric

Approach

Abakaliki: Willy Rose Publishers.

115

“Regression Analysis” retrieved from

www.wikipedia.org on 8th October, 2010.

CHAPTER FOUR

PRESENTATION, ANALYSIS AND INTERPRETATION OF DATA

4.0 INTRODUCTION

The aim of this chapter is to verify the

research hypothesis postulated in chapter one

using various statistical tools of analysis such

as standard error test, student t-test and f-

test, according to the methodology shown in the

previous chapter on data collected for the study.

4.1 PRESENTATION OF DATA

116

The data used were collected from the

secondary source, that is, Central Bank of

Nigeria (CBN) Statistical Bulletin on the

financial report of finance companies in Nigeria.

The variables are presented as follows:

TABLE 4.1 FINANCE COMPANIES TRANSACTION AND

GDP (N’MILLION)

Year Loan andAdvances

TotalAssets

DomesticCredit

GrossDomesticProduct

1992 1132.1 2,445.9 1,512.8 532,613.8

1993 4335.5 13,385.8 5634.0 683,869.8

1994 3453.9 11,660.9 4787.7 899,863.2

1995 3846.5 11,265.9 5079.1 1,933,211.

6

1996 2447.8 8,940.3 3967.5 2,702,719.

1

117

1997 4000.4 12,059.6 5517.1 2,801,972.

6

1998 3471.6 8,213.6 4114.9 2,708,430.

9

1999 2739.3 8,941.7 4347.5 3,194,015.

0

2000 4664.4 7,871.3 5270.9 4,582,127.

2

2001 6915.6 12,903.5 8608.6 4,725,086.

0

2002 4101.5 11,684.9 6291.4 6,912,381.

3

2003 14798.4 29606.0 19111.7 8,487,031.

6

2004 14561.5 24504.7 20050.4 11,411,066

.9

2005 16251.3 37460.6 22007.7 14,572,239

.1

2006 23845,8 54339.1 32601.9 18,564,594

.7

2007 26779.1 65804.7 39535.1 20,657,325

118

.0

2008 47,092.1 205,501.6 102,029.8 23,842,126

.2

Source: CBN Statistical Bulletin and Annual

Report, 2008.

The figures in the table will be converted to

their “Natural Log” from during analysis to make

the work less voluminous.

4.2 ANALYSIS OF DATA

TEST OF HYPOTHESIS I

For the first hypothesis, it is stated as

follows:

Ho: There is no significant relationship between

loans and advances created by finance

companies and their total assets.

119

H1: There is significant relationship between

loans and advances created by finance

companies and their total assets.

That is, Total Assets = F (Loans and Advances)

Where Total Assets = Y (Dependent Variable)

Loans and Advances = X (Independent Variable)

TABLE 4.2.1 COMPUTATION OF DATA FOR HYPOTHESIS I

n X Y X2 x = x-X Y = y-Y x2 y2 xy

1 3.054 3.388 9.327 -0.765 -0.85 0.585 0.723 0.650

2 3.637 4.127 13.228 -0.182 -0.111 0.033 0.012 0.020

3 3.538 4.067 12.517 -0.281 -0.171 0.079 0.029 0.048

4 3.585 4.052 12.852 -0.234 -0.186 0.055 0.035 0.039

5 3.389 3.951 11.485 -0.213 -0.287 0.045 0.082 0.061

6 3.602 4.081 12.974 -0.217 0.157 0.047 0.025 0.034

120

7 3.540 3.914 12.532 -0.279 -0.324 0.078 0.105 0.090

8 3.438 3.951 11.820 -0.381 -0.287 0.145 0.082 0.109

9 3.669 3.896 13.462 -0.15 -0.342 0.022 0.117 0.051

10 3.840 4.111 14.746 0.021 -0.127 0.000 0.016 -0.003

11 3.613 4.068 13.054 -0.206 -0.17 0.042 0.029 0.035

12 4.170 4.471 17.389 0.351 0.233 0.123 0.054 0.082

13 4.163 4.538 17.331 0.344 0.3 0.118 0.09 0.103

14 4.211 4.574 17,732 0.392 0.336 0.154 0.113 0.132

15 4.377 4.735 19.158 0.558 0.497 0.311 0.247 0.277

16 4.428 4.818 19.607 0.609 0.58 0.371 0.336 0.353

17 4.673 5.313 21.837 0.854 1.075 0.729 1.156 0.918

64.927 72.055 251.05

1

2.937 3.251 2.999

X = x = ∑ 64.927 = 3.819n 17

y = y∑ = 72.055 = 4.238 n 17

x∑ 2 = 251.051

xy = 2.999∑

x∑ 2 = 2.937

y2 = 3.251∑

ESTIMATION OF THE MODEL

121

Using b1 = xy∑ x∑ 2

= 2.999 2.937

= 1.021

And bo = y – b1 x

= 4.238 – (1.021) 3.819

= 0.339

Therefore the estimated model constructed is

given as

TA = 0.399 + 1.021 LAdv

EVALUATION OF THE MODEL

1. Adopting the Correlation Coefficient

Technique of Analysis

r = xy∑ x∑ 2 x∑ 2

= 2.999 2.937 3. 251

= 2.999

122

1.714 x 1.803

= 0.971

The result shows that r = 0.971 which tends

towards ds + 1 thus the variables of total assets

and loans and advances are positively and

strongly correlated.

ii. Adopting the Coefficient of Determination

Technique of Analysis.

R2 = xy∑ 2

x∑ 2 y∑ 2

= 2.999 2.937 3.251

= (0.971)2

= 0.943 or 94.3%

The result shows that the companies total assets

and loans are perfectly fitted, thus their loans

have been efficiently managed.

123

TEST OF SIGNIFICANCE OF PARAMETER ESTIMATES

STANDARD ERROR TEST

S(bo) = y∑ 2 (1 + r 2 ) x∑ 2 (n – 2) (n x∑ 2)

= 3.251 (1 – 0.943) 251.051(17 – 2) (17 x 2.937)

= 46. 522748.935

= 0.062

= 0.249

S(b1) = y∑ 2 (1 – r 2 ) (n – 2) ( x∑ 2)

= 3.251 (1 – 0.943)(17 – 2) (2.937)

= 0. 18544.055

= 0.004

= 0.065

Recall that

b1 = 1.021

124

b1½ = 1.021 = 0.601 2

Since b1½ > S(b1), that is, 0.601 > 0.065 it

therefore shows that the variables are

statistically significant, going by the decision

rule that “If b1½ > S(b1), accept alternative

hypothesis that the variables are statistically

significant.

ii. Students T-test

bn: tc = bn

S(bn)

= 0.399 0.249

= 1.602

And b1: tc = b1

S(b1)

= 1.021 0.065

= 15.708

125

Also

tt (0.025) n – k where n = number of period /

years = 17

k = number of variables = 2

tt (0.025) from the t-table at 0.05 significant

is 2.132.

The result therefore shows that b1: tc > tt

(0.025) n – k, that is 15.708 > 2.132 from the

decision rule which states that “Accept

alternative hypothesis if tc > tt. This implies

that finance companies loans and advances and

their total assets are strongly related hence

accepting the alternative hypothesis.

iii.F-test

R 2 / k – 1 (1 – R2)/N – k

Where k = number of variables = 2

126

n = number of period/years = 17

0.943 1– 0.943 = 0.943 =248.1582 – 1 17 – 2 0.0038

Also

V1 = k – 1 = 2 – 1 = 1

V2 = n – k = 17 – 2 = 15. Degree of freedom (1,

15) = 3.733

The result shows that Fc > Ft, that is,

248.158 > 3.733, therefore, the overall

regression is statistically significant. This

implies that we accept the alternative hypothesis

(H1) that “There is significant relationship

between loans and advances created by finance

companies and their total assets”.

For the second hypothesis which states as

follows:

127

Ho: There is no significant relationship between

activities of finance companies and the

development of the Nigeria economy.

H1: There is significant relationship between

activities of finance companies and the

development of the Nigeria economy.

That is, Gross Domestic Product = F(Domestic

Credit)

Where:

Gross Domestic Product = Y (Dependent variable)

Finance Companies Domestic Credit = X

(independent variable)

TABLE 4.2.2 COMPUTATION OF DATA FOR HYPOTHESIS 2

n X Y X2 X = x-

x

Y = y-

y

X2 Y2 Xy

1 3.179 5.726 10.106 -0.786 -0.915 0.618 0.837 0.719

2 3.751 5.835 14.090 -0.214 -0.806 0.046 0.650 0.172

3 3.680 5.954 13.542 -0.285 -0.687 0.081 0.472 0.196

4 3.706 6.286 13.734 -0.259 -0.355 0.067 0.126 0.092

128

5 3.599 6.432 12.953 -0.366 -0.209 0.134 0.044 0.076

6 3.741 6.447 14.003 -0.223 -0.194 0.050 0.038 0.043

7 3.614 6.433 13.061 -0.351 -0.208 0.123 0.043 0.073

8 3.638 6.504 13.235 -0.327 -0.137 0.107 0.019 0.019

9 3.722 6.661 13.853 -0.243 0.02 0.059 0.0004 -0.005

10 3.935 6.674 15.484 -0.03 0.033 0.001 0.001 -0.001

11 3.799 6.840 14.432 -0.166 0.199 0.028 0.040 -0.033

12 4.281 6.929 18.327 0.316 0.288 0.099 0.083 0.091

13 4.302 7.057 18.507 0.337 0.416 0.114 0.173 0.140

14 4.343 7.163 18.861 0.378 0.522 0.143 0.272 0.197

15 4.513 7.269 20.367 0.548 0.628 0.300 0.394 0.344

16 4.597 7.315 21.132 0.632 0.674 0.399 0.454 0.426

17 5.009 7.377 25.090 1.044 0.736 1.090 0.542 0.768

67.41 112.90

2

270.75

7

3,459 4.188 3.317

X = x = ∑ 67.41 = 3.965n 17

y = y∑ = 112.902 = 6.641 n 17

ESTIMATION OF THE MODEL

Using b1 = xy∑

129

x∑ 2

= 3.317 3.459

= 0.959

And bo = y – b1 x

= 6.641 – (0.959) 3.965

= 2.838

Therefore the estimated model constructed is

given as

GDP = 2.838 + 0.959 DCr

EVALUATION OF THE MODEL

1. Adopting the Correlation Coefficient

Technique of Analysis

re = xy∑ x∑ 2 x∑ 2

= 3.317 3.459 4.188

= 3.317

130

1.860 x 2.046

= 0.872

The result shows that r = 0.872 which tends

towards +1 thus the variables and strongly

relationship exist between the variable.

ii. Adopting the Coefficient of Determination

Technique of Analysis.

R2 = xy∑ 2

x∑ 2 y∑ 2

= 3.317 3.459 4.188

= 0.759 or 75.9%

The result shows that the variables are strongly

fitted.

TEST OF SIGNIFICANCE OF PARAMETER ESTIMATES

STANDARD ERROR TEST

S(bo) = y∑ 2 (1 + r 2 ) x∑ 2

131

(n – 2) (n x∑ 2)

= 4.188 (1 – 0.759) 270.757(17 – 2) (17 x 3.459)

= 273. 277882.045

= 0.309.8

= 0.557

S(b1) = y∑ 2 (1 – r 2 ) (n – 2) ( x∑ 2)

= 4.188 (1 – 0.759)(17 – 2) (3.459)

= 1. 00951.885

= 0.0194

= 0.139

Recall that

b1 = 0.959

b1½ = 0.959 = 0.479 2

132

Since b1½ > S(b1), that is, 0.479 > 0.139 it

therefore shows that the variables are

statistically significant, going by the decision

rule that “If b1½ > S(b1), accept alternative

hypothesis that the variables are statistically

significant”.

ii. Students T-test

bn: tc = bn

S(bn)

= 2.838 0.557

= 5.095

And b1: tc = b1

S(b1)

= 0.959 0.139

= 6.899

Also

133

tt (0.025) n – k where n = number of period /

years = 17

k = number of variables = 2

tt (0.025) from the t-table at 0.05 significant

is 2.132.

The result therefore shows that b1: tc > tt

(0.025) n – k, that is 2.132 from the decision

rule which states that “Accept alternative

hypothesis if tc > tt. This implies that finance

companies do play important role in the Nigerian

financial system as a financial intermediation

hence we accept the alternative hypothesis which

states that “There is significant relationship

between activities of finance companies and the

development of the Nigeria economy”.

134

iii.F-test

R 2 / k – 1 (1 – R2)/N – k

Where k = number of variables = 2

n = number of period/years = 17

0.759 1– 0.759 = 0.759 =47.43752 – 1 17 – 2 0.016

Also

V1 = k – 1 = 2 – 1 = 1

V2 = n – k = 17 – 2 = 15. Degree of freedom (1,

15) = 3.733

Here, the Fc is greater than Ft, that is, 47.436 >

3.733, which means that the overall regression is

statistically significant. Thus we accept the

alternative hypothesis (H1) that “There is

significant relationship between activities of

finance companies and the development of the

Nigeria economy”.

135

4.3 INTERPRETATION OF DATA

Analysis for the first hypothesis shows that

finance companies assets and loans and advances

were positively and strongly correlated. This

means that an increase in their loans and

advances increases that asset while a decrease

results in the opposite. It also implies that

their loans and advances were efficiently managed

which was confirmed by the R2 obtained 94.3

percent. The standard error test result also show

that b1½ was greater than S(b1), that is 0.601 >

0.065 providing that the variable are

statistically significant. Further test through

the students t-test also shows calculated –t as

15.708 which is greater than tabulated or

theoretical –t at 2.132, in which we accept the

alternative hypothesis. The F-test result

136

therefore shows that the overall regression was

significant as its calculated value of 248.158 is

greater than its theoretical value of 3.733.

Hence we accept the alternative hypothesis (H1)

that “there is significant relationship between

loans and advances created by finance companies

and their total assets”.

The second analysis for the stated hypothesis

shows a correlation of 0.872, which means that an

increase finance companies domestic credit

increases the growth of GDP. The R2 result at

75.9 percent means that the variables are

strongly fitted.

The standard error test used to evaluate the

significance of the parameter estimates was found

to be S(b1) = 0.065. This value is less than half

the parameter of b1 estimated as 0.601. Since b1½

is greater than S(b1), then the variables are

137

statistically significant. The student’s t-test

calculated value was obtained as 6.899 which is

greater than the theoretical value of 2.132,

implying that the variable are significant, thus

we reject the null hypothesis. In the F-test, the

result obtained was 47.438, which is greater than

the theoretical value of 3.733 thus the overall

regression is statistically significant. From the

foregoing, it means that finance companies have

continued to play significant role in credit

creation in Nigeria impacting on its economic

growth. Therefore, we accept the alternative

hypothesis that “There is significant

relationship between activities of finance

companies and the development of the Nigeria

economy”.

POLICY IMPLICATION

138

Empirical results have shown that finance

companies loans and advances positively affected

the growth of their assets. This conforms with

apriori expectation that efficient management of

working capital which is inform of loans and

advances for financial institutions influences

their profitability and ability to procure more

assets, hence, business expansion. It therefore

requires that the financial regulations in

Nigeria to strengthen this important sector

through more policies and supervision to make

them more relevant in Nigeria.

The study result also shows that the credit

created by those finance companies correlate

strongly with the Nigeria GDP. This also conforms

to apriori expectation that efficient resources

mobilization by financial institutions improves

the growth of an economy. Finance companies as a

139

financial institution in Nigeria have contributed

its own quota to Nigeria’s economic development

through its domestic credit. There is therefore

the need for the apex regulatory authority and

the government to encourage the patronage of

these companies as an alternative means of

obtaining rather aside the traditional banks.

CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION

140

5.1 SUMMARY OF FINDINGS

This study examined the role of finance

companies as a financial intermediary in the

mobilization of capital for the development of

the Nigeria economy.

Finance companies although have been in

operation for long in Nigeria, they were brought

under the regulation and purview of the Central

Bank of Nigeria (CBN) in 1991 with the licensing

of over 300 companies. However, between 1991 and

2008, effort to strengthen the sector and make it

stand the present challenge of globalization by

the CBN has seen the number of finance companies

operating in Nigeria reduced to less than 100.

Despite the reduction, the volume of credit to

the economy has continued to witness an upward

trend especially since recapitalization in 2005.

141

Using the regression method of analysis on

data collected from the secondary source, that

is, CBN’s statistics on activities of finance

companies since 1992 till 2008 (reflecting the

current data variables), and findings reveals

that:

i. There is significant relationship between

loans and advances created by finance

companies and their total assets.

ii. There is significant relationship between

activities of finance companies and the

development of the Nigeria economy.

From the above findings, it shows that

finance companies are in important financial

institution in Nigeria and their role cannot be

overlooked by the authorities on charge. Thus,

efforts should be made to encourage the public to

patronize these institutions while the CBN should

142

give financial backup to them since they rely

more on borrowed funds. The study also revealed

that finance companies in Nigeria are faced with

numerous challenges among which includes cost of

funds, investment in high risk portfolio, lack of

innovative ideas on product diversification,

competition with banks and other financial

institutions, weak legal system and regulation

and guidelines of the CBN. Nevertheless, the

operations of finance companies in Nigeria looks

bright in the future following the attention the

CBN is paying to the sector and other reform

programs of the government aimed at developing

the sector.

5.2 CONCLUSION

From the findings through empirical analysis,

finance companies play a significant role in the

143

Nigeria financial system. With a correlation

result of 0.971, it tells how efficient they have

been in their financial intermediation activities

leading to their expansion as shown by their

assets. Furthermore, with a correlation result of

0.872, it also signifies that finance companies

domestic credit contributed to Nigeria’s economic

growth.

This study is therefore of the opinion that

finance companies should be effectively regulated

to improve their services and make them more

responsive to the Nigerian borrowing economy.

5.3 RECOMMENDATION

Based on the findings observed by the

researcher, the following recommendations have

been made.

144

i. The CBN should make credit readily accessible

by finance companies instead allowing them to

rely mainly on credits from commercial banks.

This will ensure more funds are available for

them to create as credit and also lower their

interest rate.

ii. CBN should ensure more efficiency and

effective through more reforms such as

further raising the capitalization of the

finance companies, as this will enhance

greater competition.

iii.Government should patronize finance companies

when raising funds or in the execution of

project and LPO financing, this will help

develop the finance company sector and make

funds available for them to transmit for

economic development.

145

iv. Commercial banks should be encouraged by the

CBN to lend funds to finance companies at a

cheaper interest rate to enable them carryout

their financial intermediation business

without challenges.

v. Finance companies should endeavour to

diversify their products to make them more

competitive and meeting demands of the

present state of economy.

vi. Finance companies should also make efforts in

enlightening the public on their financial

activities and create awareness on their

relevance, this will increase patronage.

vii.There is need for other financial

institutions to work together with finance

companies who are specialized in leasing, LPO

financing and other forms of financial

intermediation, this will ensure efficiency

146

and good financial system needed to stimulate

economic development.

viii. However, finance companies need to pay

more attention in financing medium and low

income earners business and projects as they

constitute over 60% of the Nigeria

population, as to increase their financial

activities and expand their reach and assets.

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