AN ASSESSMENT OF THE DETERMINANTS OF COMMERCIAL BANK DEPOSITS IN NIGERIA 1989-2007 ( A CASE STUDY OF FIRST BANK OF NIGERIA PLC)

CHAPTER ONE

INTRODUCTION

1.1 Background of study

The importance of banks and other financial institutions in a developing country like Nigeria can not be overstated. Banks act as a middleman, directing funds from the fund surplus to the fund deficit sectors of the economy, which is extremely beneficial to the economy's growth. To fulfill its goals, the banking industry must adopt well-articulated norms and policies aimed at maximizing the use of limited resources. The goal of this study was to determine the factors that influence bank deposits in Nigeria. Bank deposits are accounting entries that represent a customer's credit balance. In other words, bank deposits are money put with commercial banks for the purpose of collecting income as well as safekeeping over time. The origins of bank deposits can be traced back to the Bank of England (London) and goldsmiths, who had facilities to store treasures due to the nature of their profession. The goldsmiths accepted gold deposits from merchants who lacked a secure location to store their treasures or money. Merchants later used the receipts provided by goldsmiths for deposit as a payment method, transferring the claim from the goldsmith to the recipient of the receipt.

The monopoly on note issues was taken over by the Bank of England in 1844. As a result of this development, early bankers began issuing fixed-denomination bank notes that were more universally accepted. Bankers began to lend money to their customers at some point in the past. This was made possible by the fact that, because Mr. A's cash or gold was identical to Mr. B's gold, the deposits could be lent to other people until maturity, when the depositor might be reimbursed with new deposits from other customers. This secrecy was extremely beneficial to the banking system's development. As a result of the increased use of bank notes, fewer people are withdrawing their deposits in cash from banks. As a result, banks felt it was safe to lend part of the money deposited with them at interest. When bankers realized that lending money was a viable business, they began to provide depositors with incentives in the form of interest to encourage them to increase their deposits. Following this development, bankers began to lend out their own notes, and with practice, they learned how much cash they needed to hold in their vault to meet customer withdrawal needs. They eventually understood that not all clients would come to withdraw their deposits, so they calculated the margin of safety (% of cash to deposit) to minimize any delays.

The Nigerian Enterprises Act of 1972, also known as the Indigenization Act, was enacted only to promote indigenous business ownership and governance. One of the issues anticipated during the Act's implementation was a lack of funds to fund the firms that would be taken over from foreigners by local businessmen. The difficulty of individual businessmen funding their operations on their own led to the need for commercial banks to extend credit facilities based on consumer deposits.

 Commercial banks, in a nutshell, perform two basic functions: accepting public deposits and lending out money placed by the public. According to Aladeje Ojo (1982), the deposit function encompasses savings deposits, current deposits, and time deposits. Individual institutions, cooperative entities, and governments that desire to save on a regular basis can open savings accounts using passbooks, withdrawal slips, and identity cards. In Nigeria, banks presently provide interest on this account ranging from 2% to 5% per year.  Cheques are used to make current or demand deposits. Without giving any notice of withdrawal, the deposits are payable on demand or to the customer's order. Customers with this account have access to credit services such as loans and overdrafts. Customers, on the other hand, are forced to pay for the services provided by banks in the form of commission on turnover (COT). Individuals, institutions, businesses, and the government all run time deposits. Because the money is placed for a specific amount of time, consumers receive a fixed rate of interest.

1.2 Statement of problem

Many academics, investors, and governments have been interested in studying bank deposits. That is why the purpose of this study is to examine the determinants of commercial bank deposits in Nigeria, with a focus on First Bank Nigeria Plc. It is common knowledge that one of the primary goals of the monetary and banking policies sector in any economy is to mobilize domestic financial resources through financial intermediaries that specialize in bridging the financial gap between the savings surplus and deficit sectors. Banks assist in this process by facilitating the most efficient deployment of surplus funds. Despite this intermediary role, investigations and facts have proven that a significant amount of money is nevertheless stranded outside the banking system. That is, a huge percentage of people still want to hide their money under the rug and use a variety of non-traditional financial institutions (such as thrift collectors, local cooperatives, and the like). In light of this, the purpose of this research is to learn how banks mobilize deposits by granting loans and advances to potential investors, as well as to discover the factors that influence bank deposits.

Also, it is in the interest of this research to examine how the interest rate influences bank deposits in advanced countries relative to the impact in developing countries. Studies like the determinants of structural shift in commercial bank deposits in Nigeria by A. Oyejide and A. Soyode (1998) have formed part of the major reference materials for this study. The study shall indicate how the flow of savings, an efficient credit mechanism coupled with a balanced range of viable investment options depend on the ability of commercial banks to mobilize deposits and to manage such deposits efficiently.

1.3 Objective of study

The following are objectives of this study:

1.     To examine if bank deposits can enhance economic growth and development.

2.     To examine if bank deposits contribute, in any way, to individuals' well being and economic development.

3.     To identify the factors which determine bank deposits in the Nigerian economy and quantify the relationship established.

1.4 Research question

The following research question guides this study:

1. Can bank deposits enhance economic growth and development?

2. Do bank deposits contribute, in any way, to individual well being and economic development?

3. What are the factors that determine bank deposits in the Nigerian economy and quantify the relationship established?

1.4 Significance of study

According to Teriba (1980), businesses in West Africa, particularly Nigeria, need to save a portion of their surplus profits because bank deposits have not been properly recognized in the past. This has been linked to a number of factors, including people's inability to read or write checks, the fact that many citizens are low-income, the fact that the public needs tiny amounts of money to purchase goods and services, and finally, the lack of banks in rural regions. As a result of the foregoing, this study aims to educate businesses in Nigeria and elsewhere about the determinants of bank deposits, the benefits to both individuals and commercial banks, and finally, how the general public can be encouraged to save a portion of their money with commercial banks in order to enable them to create credit. Furthermore, this research will add to the body of knowledge about bank deposits in Nigeria. It is intended that the knowledge gained from this study will help banks and other financial institutions enhance their financial roles and investment analysis.

This study will contribute to the current literature in this field and will also serve as a resource for academics, researchers, and students who may want to do future research on this or a comparable topic.

1.5 Scope of study

This study is aimed at assessing the determinant of commercial bank deposits in Nigeria 1989-2007,  with specific focus on examining if bank deposits can enhance economic growth and development,  if bank deposits contribute, in any way, to individuals' well being and economic development, and  identifying the factors which determine bank deposits in the Nigerian economy and quantify the relationship established. However, data necessary for this study will be obtained from First Bank of Gwarimkpa, Abuja and its staff.

1.6 Limitation of study

Finance,inadequate materials and time constraint were the challenges the researchers encountered during the course of the study.

1.7 Definition of terms

Commercial Bank : A commercial bank is a financial institution which accepts deposits from the public and gives loans for the purposes of consumption and investment to make profit.

Deposits: A deposit is a financial term that means money held at a bank. A deposit is a transaction involving a transfer of money to another party for safekeeping.

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