The role of financial intermediation on the capital market and economic development

Project Abstract

Financial intermediation plays a crucial role in the capital market and economic development of a country. This research aims to investigate the impact and significance of financial intermediaries on the overall economic growth and stability. The study will explore how financial intermediaries such as banks, insurance companies, and investment funds facilitate the flow of funds from savers to borrowers in the capital market. Through a comprehensive literature review, this research will analyze the mechanisms through which financial intermediaries contribute to the efficient allocation of capital in the economy. By acting as middlemen between surplus units (savers) and deficit units (borrowers), financial intermediaries help reduce information asymmetry, mitigate risk, and lower transaction costs, thus promoting investment and economic growth. Moreover, the study will delve into the role of financial intermediaries in providing liquidity to the capital market. By offering various financial products and services, intermediaries enhance market liquidity, which is essential for the smooth functioning of the capital market. This, in turn, fosters investor confidence and encourages capital formation, leading to economic development. Furthermore, the research will investigate the regulatory framework governing financial intermediaries and its impact on the capital market. Effective regulation is crucial in ensuring the stability and integrity of financial intermediaries, thereby safeguarding the interests of investors and maintaining overall market efficiency. The study will analyze the regulatory policies and mechanisms that govern the operations of financial intermediaries and their implications for capital market development. In addition, the research will examine the relationship between financial intermediation, capital market development, and economic growth. By studying empirical data and conducting statistical analysis, the research aims to provide insights into the causal linkages between these variables. Understanding how financial intermediation influences capital market dynamics and economic performance is essential for policymakers, regulators, and market participants to make informed decisions and formulate appropriate strategies. In conclusion, this research seeks to shed light on the critical role of financial intermediation in shaping the capital market and driving economic development. By exploring the functions, mechanisms, and regulatory aspects of financial intermediaries, the study aims to contribute to the existing body of knowledge on the subject and provide valuable insights for policymakers and stakeholders in enhancing the efficiency and resilience of the financial system.

Project Overview

<p> </p><p><strong>INTRODUCTION</strong><br><strong>1.1 &nbsp; &nbsp; AN OVERVIEW OF THE STUDY </strong><br>In every country, there exist a financial system that is responsible for the regulating the financial environment of the country, determine the types and amount of funds to be issued, cost of funds and the uses of these funds.<br>The financial system plays fundamental role in the growth and development of an economy, particularly by serving as fulcrum for financial intermediation between the surplus and deficit units in the economy. It consists of financial intermediates, financial markets, financial institutions rules, norms and conventions that facilitate and regulate the flow of funds within the macro economy.<br>Banks and other financial institution are providers of liquidity and payment services and therefore represent an important nerve center of the economy and the link between the real and financial sectors., in particular, they facilitate the intermediation of financial resources through the promotion of the savings and investment process, as well as, constitute the institution framework for the conduct of monetary policy and channel for the transmission mechanism. Thus, the financial system is the hub role of financial intermediation, anchor payment services and is the bedrock of monetary policy implementation.<br>The development of the financial system charges in tandem with the development in the economy. The Nigeria financial system has continued to transform in character, ownership, structure, depth and extent of the instruments, number of institutions and regulatory framework. The financial system is the counter-part of the real system and because the financial system has to do with the provision of finance the facilitate activities in the real sector, any deficiency therein will reflect negatively on the real system and will have negative impact on the economy as a whole.<br>The financial system thus function primarily for the purpose of allocating and utilizing financial resources efficiently for economy advancement. The financial market comprises two broad segments; the capital and the money markets. Institutions or organization in both markets constitute financial intermediates that play the vital role of intermediation and other roles in the economy.<br><strong>The Money Market</strong>: is the market which creates opportunities for raising and investing short-term funds. It is also refers to a collection or group of financial institutions or exchange system set up for dealing with short-term credit instruments. The various financial instruments that are exchange or traded in the money market include treasury bill, treasury certificates, commercial paper, bank acceptance etc.<br><strong>The Capital Market: </strong>On the other hand, is simply the aspect of the financial system which mobilized medium to long-term funds and channel same into industries and government for project financing. It is distinct from the money market which function principally to meet the short-term financial requirement of household (individuals), corporate bodies and government. The capital market is a connection of instrument, institutions, individuals and facilitates acting in concert to facilitate the savings and investment process and consequently fostering socio-economic development. The capital market has two segments</p><ol><li>The primary market (New issue)</li><li>The secondary market</li></ol><p>The primary market is the market that provides mechanism for corporate bodies and government to raise funds through the issuance of securities, which are subscribed by the general public of private placement.<br>The Securities and Exchange Commission (SEC) sits at the apex of the primary market, regulating the issues of public companies and all private companies with foreign participation. The operators or intermediates in this market are issuing house, stock broking firms, the registrar, underwriter, receiving banker, trustee, solicitors to the issue, the reporting accountant and issuer. Investors pass on their resources to some of these institutions for investment purposes. The role of intermediation played by these intermediates in the primary market will be discussed extensively in chapter two of this research work.<br>The secondary market by contrast provides an avenue for the sales and purchase of existing securities, that is, securities which have been sold in the primary market and which are being disposed off by the initial or subsequent holders of the security. It therefore enable investors to easily convert their holding of securities into cash.<br>The major instrument used to raise fund at the Nigerian capital market includes:</p><ol><li><strong>Equity</strong>: Ordinary shares and preference shares.</li><li><strong>Debt</strong>: Government bonds (federal, state, local government).</li><li><strong>Industrial Loan</strong>: Debentures stock and bonds.</li></ol><p>The major participants in the Nigerian capital major are as follows:</p><ol><li>The Securities and Exchange Commission (SEC)</li><li>The market intermediaries or operators</li><li>The Central Banks of Nigeria (CBN)</li><li>The Nigerian Stock Exchange (NSE)</li><li>The Federal Ministry of Finance (FMF)</li></ol><p>The regulatory bodies of Nigerian Capital Market are:</p><ol><li>The Federal Ministry of Finance (FMF)</li><li>The Central Bank of Nigeria (CBN)</li><li>The Securities and Exchange Commission (SEC)</li><li>The Nigerian Stock Exchange (NSE)</li></ol><p>The constituencies in the Nigerian Capital market can be broadly classified into four categories.</p><ol><li>Fund providers (individuals, unit trust, pension fund)</li><li>Users of funds (companies, Government)</li><li>Intermediates (Stock broking firms, issuing houses, registrars, audit firm)</li><li>Regulators (SEC, NSE, CBN, FMF)</li></ol><p>Some of these constituencies of the Nigerian capital market will be discussed in details in capital market will be discussed in details in chapter two of this research work.</p><p><strong>1.2 &nbsp; STATEMENT OF THE RESEARCH PROBLEM &nbsp;</strong></p><p>Financial intermediation will not be necessary, if the lender and the borrower can come into direct contact and would infact not be necessary if there is no deficit or surplus sector or unit.</p> <br><p></p>