Nigerian Banking Industry and the Theories of Intermediation

Abstract

Banks play an important role in the financial system of an economy. According to the theory of financial intermediation, they exist because they can reduce transaction costs and resolve information asymmetries between borrowers and lenders. However, as developments in information technology (IT), deregulation, deepening of financial markets, etc. tends to reduce transaction costs and informational asymmetries, financial intermediation theory tends to come to the conclusion that intermediation becomes useless and thus, banks are no longer relevant. This paper reviews literature on theory of financial intermediation in relation to the raison d’etre of banks in the modern time with the aim of examining whether development in IT and the deepening of the financial market render banks less important in Nigeria. The paper uses content analysis to analytically synthesise the contentious issues in financial intermediation. The paper posits that banks are considered the engine of growth for Nigerian economy. Also, despite the globalization of financial services, driven by deregulation and information technology, and despite strong price competition, the banking industry in Nigeria is not declining in importance but it is growing. To maintain their relevance however, Nigerian banks will have to provide access to the payments system; access to liquidity on demand; package and sell or repackage and resell risk through a number of different institutional arrangements; offer information that include the certification of the quality of assets together with credit review and possible follow-up; and remain a conduit for government guarantees both explicitly and implicitly.