Importance of Financial Institution

Nature of financial institutions Financial institutions are the organizations which perform the essential functions of channeling funds from those with surplus funds (suppliers of funds) to those with shortages of funds (user of funds). Financial institutions are active in today’s global markets include commercial banks, insurance companies credit unions, finance companies, savings and loan associations, saving banks, pension funds, mutual funds, and similar organization.

Their fundamental role in the financial system is to serve both ultimate lenders and borrowers but in a much more complete way than brokers and dealers do.

Financial institutions issue securities of their own-often called secondary securities to ultimate lenders and at the same time primary securities from borrowers. The secondary securities issued by financial intermediaries include such familiar financial intermediaries include such familiar financial instruments as checking and savings accounts, life insurance policies, annuities and shares in mutual fund.

For the most part, these securities share several common characteristics. They generally carry low risk of default.

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Financial institutions are accept primary securities from those who need credit and in doing so, take on financial assets that many savers, especially those with limited funds and limited knowledge of the market, would find unacceptable. Money lending in one form or the other has evolved along with the history of the mankind. Even in the ancient times there are references to the moneylenders.

Shakespeare also referred to ‘Shylocks’ who made unreasonable demands in case the loans were not repaid in time along with interest. Indian history is also replete with the instances referring to indigenous money lenders, Sahukars and Zamindars involved in the business of money lending by mortgaging the landed property of the borrowers.

Towards the beginning of the twentieth century, with the onset of modern industry in the country, the need for government regulated banking system was felt.

The British government began to pay attention towards the need for an organised banking sector in the country and Reserve Bank of India was set up to regulate the formal banking sector in the country. But the growth of modern banking remained slow mainly due to lack of surplus capital in the Indian economic system at that point of time. Modern banking institutions came up only in big cities and industrial centres. The rural areas, representing vast majority of Indian society, remained dependent on the indigenous money lenders for their credit needs.

Independence of the country heralded a new era in the growth of modern banking. Many new commercial banks came up in various parts of the country. As the modern banking network grew, the government began to realise that the banking sector was catering only to the needs of the well-to-do and the capitalists. The interests of the poorer sections as well as those of the common man were being ignored. The significance of the financial system to economic development is not quite clear-cut.

Some researchers such as Hicks (1969) are of the opinion that the financial system plays a crucial role in the mobilization of capital for industrialization. On the other hand, there are those, who hold a contrary view. In the 1980s, several African governments embarked on structural adjustments programs in order to correct the disruptions in their economies. As Geo-Jaja and Mangum (2001) note, structural adjustment programs seldom delivered on their intended objectives.

However, the relationship between financial development and economic growth during post-SAP period is examined using the Spearman rank correlation. The expected outcome of the structural adjustment program in Nigeria was marred by policy reversals of government. This is a possible reason for the poor performance of the financial sector of the economy. Therefore, financial development and economic growth have no consistent relationship in post-SAP Nigeria.