THEORY OF FINANCIAL INTERMEDIATION | THEORY OF ECONOMIC GROWTH

THEORY OF FINANCIAL INTERMEDIATION

Credit is an important aspect of financial intermediation that provides funds to those economic entities that can put them to the most productive use. Theoretical studies have established the relationship that exists between financial intermediation and economic growth. For instance, Schumpeter (1934), Goldsmith (1969), McKinnon (1973) and Shaw (1973) in their studies, strongly emphasized the role of financial intermediation in economic growth. In the same vein, Greenwood and Jovanovich (1990) observed that financial development can lead to rapid growth. In a related study, Bencivenga and
Smith (1991) explained the development of banks and efficient financial intermediation contributes to economic growth by channeling savings to high productive activities and reduction of liquidity risks. Credit channels saving into productive investment thereby encouraging economic growth.

Thus, the availability of credit allows the role of intermediation to be carried out, which is important for the growth of the economy. The total domestic bank credit can be divided into two credit to the private sector and credit to the public sector. They therefore concluded that financial intermediation leads to growth. Based on this assertion, this study examines the extent to which intermediation or credit to various sectors of the economy has influenced economic growth in Nigeria.

THEORY OF ECONOMIC GROWTH

Economic growth is viewed differently by different scholars. This is attributed to the condition prevailing at the time of these scholars. Majority accepts it as an increase in the level of national income and output of a country. According to Dewett (2005), it implies an increase in the net national product in a given period of time. He explained that economic growth is generally referred to as a quantitative change in economic variables, normally persisting over successive periods. He added that determinants of economic growth are availability of natural resources, the rate of capital formation, capital output ratio, technological progress, dynamic entrepreneurship and other factors.

Todara and Smith (2006), defined economic growth as a steady process by which the productive capacity of the economy is increased over time to bring about rising levels of national output and income. Jhingan (2006) viewed economic growth as a quantitative sustained increase in the country’s per capital income or output accompanied by expansion in its labour force, consumption, capital and volume of trade.

The main characteristics of economic growth are high rate of growth of per capita income or output, high rate of productivity, high rate of structural transformation, international flows of labour, goods and capital (ochejele, 2007). Economic growth can also be measured in terms of Gross Domestic Product (GDP) and Human Development Index (HDI), which is an index that measures national growth based on measures of life expentancy at birth, education attainment, literacy and adjusted real per capita income.

There are numerous growth models in literature. However, there is no concensus as to which strategy will achieve the best success.  The achievement of sustained growth requires minimum levels of skills and literacy on the part of the population, a shift from personal or family organization to large scale unit (Nnanna, 2004). Some of this existing growth models are two-Gap model, Marxian Theory, Schumpeterian Theory, Harrod-Domar Theory of Growth, Neo-classical Model of Growth and Endogenous Growth Theory. The growth models relevant to this are Neo-classical Model of Growth and Endogenous Growth Theory, since these growth models explain the situation in developing economies such as Nigeria, Ghana, e.t.c