THE DETERMINANTS OF COMMERCIAL BANK DEPOSITS IN NIGERIA 1989 - 2007: A STUDY OF UNION BANK OF NIGERIA PLC

ABSTRACT
The study focused on factors which affect the deposit mobilization operations of commercial banks in Nigeria, particularly the Union Bank of Nigeria Plc. The study tried to find out the relationship between total volume of commercial bank deposits and interest rate, inflation rate, loans and advances and the number of bank branches.
The study relied primarily on secondary data published by official sources. The diagnostic statistic used in the study was the ordinary least square (OLS). From the study, it was found out that all the independent variables were positively related to bank deposit (dependent variable).
The result also shows that there is a positive and moderately significant relationship between bank deposit and loans and advances with a coefficient of 0.53. Hence, loans and advances is inelastic to bank deposit. Number of bank branches has a positive but weak relationship with bank deposit and is also inelastic in nature. Inflation rate has a positive – weak relationship with bank deposit, while real interest rate has a negative – weak relationship with bank deposit with the value of -0.05
From the value of the t-statistic, the coefficients of the four explanatory variables were all significant and the probability of rejecting any of them was less than 1%. The standard errors for the four explanatory variables were all very low. Hence, all the variable coefficients were all significant and accepted. Based on the findings, my recommendation therefore, is that inflation rate which is currently standing on 1 digit contrary to what it was from 1991 – 2005 has reduced its severe constraint on agricultural and industrial sector, thus, advantage should be taken on this by banks to direct loans towards these sectors of the economy.
Also, interest rate which when increased encourages savings that would eventually lead to improved bank deposit, should be given priority.

It is clear from the study that the more the branch network, the higher the deposit mobilized which implies that the number of bank branches affects the bank deposit and positively too. Therefore, there should be a proliferation of bank branches both in the rural and in the urban areas.

CHAPTER ONE
1.0       INTRODUCTION
1.1       BACKGROUND TO THE STUDY
In a developing country like Nigeria, the role of banks and other financial institutions cannot be over emphasized. Banks play the middle-man role of channeling funds from the fund surplus sectors to deficit sector of the economy which is of immense benefit to the even growth of the economy. To achieve its objectives, the banking industry has to develop well articulated guidelines and policies geared towards effective utilization of scarce funds.

This research work setout to evaluate the determinants of banks deposits in Nigeria. Bank deposits are accounting entries showing the credit balance in favour of a customer. In other words, banks deposits are funds (money) deposited with commercial banks with a view to earning some interest and also for safe keep over a period of time.

The origin of bank deposits can be traced to the Bank of England (London) and the goldsmith who because of the nature of their business, had facilities to store valuables. The goldsmiths accepted deposits (gold) from merchants who had no safe place for the safe keep of their valuables or money. Later, the receipts issued by goldsmiths for deposit were used by the merchants as means of payments by transferring the claim on the goldsmith to the holder of the receipt.

In 1844, the bank of England assumed the monopoly of note issue. With this development, early bankers issued bank notes of fixed denomination which were more widely acceptable. There came a point in time when bankers began to lend money to their customers.

This was made possible by the fact that since cash or piece of gold held by Mr. A was quite the same as the piece of gold held by Mr. B, the deposits could be lent to other people before maturity when the depositor could be repaid with new deposits from other customers. This anonymity really helped in the development of the banking system. Consequently, the increasing use of bank notes meant that fewer people would withdraw their deposit in cash from the banks. Banks therefore found it safe to lend out, at interest, some of the money deposited with them.

When bankers found out that lending out money proved to be a profitable business, they began to offer inducement in form of interest to depositors in order to encourage people to increase their deposits. Following this outcome, bankers began to lend out their own notes and with experience, they were able to know how much cash they ought to keep in their vault to meet customer’s withdrawal demands. They later realized that not all customers would come to withdraw their deposits, and so they can predict the margin of safety (percentage of cash to deposit) in order to avoid any friction in the process.

The Nigerian Enterprises Act of 1972 otherwise known as the Indigenization Act was promulgated with the sole aim of encouraging indigenous business ownership and control. One of the problems envisaged in the course of implementing the Act was inadequate finance with which to fund the businesses to be taken over from foreigners by indigenous business men. The inability of individual business men to single-handedly finance their business activities gave rise to the need for extension of credit facilities through customers’ deposits by commercial banks.

Commercials banks as it were, perform two basic functions namely; acceptance of deposit from the public and lending out money deposited to the public.

The deposit function according to Aladeje Ojo (1982) includes savings deposits, current deposits and time deposits.

Savings deposit are deposits of individual institutions, cooperate bodies and government who want to save on regular basis operated through the use of passbooks, withdrawal slips, and identity cards.

Banks currently pay interest of between 2% - 5% annually on this account in Nigeria.

Current or demand deposits are operated with the use of cheques. The deposits are payable on demand or to the order of the customer without giving any notice of withdrawal. Customers that operate this account have access to credit facilities like loans and overdrafts. However the customer is made to pay for the services rendered by the banks to them in the form of commission on turn over (COT).

Time deposits are equally operated by individuals, institutions, firms and government. Time deposits attract fixed interest for customers because the money is deposited for a fixed time period.

1.2  STATEMENT OF THE PROBLEM
The study of bank deposits has been of interest to many scholars, investors and government in particular. That is why this work was conceived to take a critical look at the determinants of commercial bank deposits in Nigeria with particular reference to Union Bank of Nigeria Plc.

It is an established fact that the major objectives of monetary and banking policies sector in any economy is to mobilize domestic financial resources by financial intermediaries which specialize in bridging the financial gap between savings surplus and savings deficit sectors. In that process, banks facilitate the optimal allocation of surplus funds.
But despite this intermediary function, studies and facts over the years have revealed that a large quantum of money is still trapped outside the banking sector. That is, a large number of people still prefer to live the crude way of keeping money under the carpet and with a number of non-formal financial institutions (such as thrift collectors, local cooperatives and likes).
Against this background, this study seeks to find out how banks mobilize deposits by extending loans and advances to prospective investors as well as identifying the factors that influence bank deposits.

Also, it is 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) has formed part of the major reference materials for this study. The study shall indicate how the flow of savings, and efficient credit mechanism coupled with a balanced range of viable investment options depend on the ability of commercial bank to mobilize deposits and to manage such deposits efficiently.

1.3 OBJECTIVES OF THE STUDY
The objectives of this research work are as follows:-

To provide a working definition of the concept of bank deposits

To update the information content of existing studies on the determinants of bank deposits

To identify the factors which determines bank deposit in the Nigerian economy and quantify the relationship established

To determine the effect of bank deposit on credit creation in the Nigerian economy
Finally, to offer suggestions based on the findings of this study on the formulation of appropriate monetary policy relating to bank deposit mobilization and management.

1.4 RESEARCH QUESTIONS
Bank deposits or money in its modern form is neither edible nor material for clothing. In fact, it is neither a structure for shelter nor an instrument for entertainment. Given this explanation, the questions that come to minds include the following;

How can bank deposits enhance economic growth and development?

Are banks and other financial institutions parasites on society as they are sometimes said by mobilizing and controlling deposits of customers?

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

1.5 RESEARCH HYPOTHESIS
This study seeks to test the following hypothesis in the null form.

Ho: The level of interest rate is not positively related to the volume of bank deposits.

Ho: The rate of inflation is not positively related to the volume of bank deposits for the period

Ho: The volume of loans and advances is not positively related to the level of deposits of banks

Ho: The number of bank branches is not positively related to the volume of bank deposits.

1.6 SIGNIFICANCE OF THE STUDY
According to Teriba (1980), the need for business in West Africa and Nigeria in particular is to keep part of their surplus funds as deposits in banks had not been duly appreciated in the past. This has been attributed to a number of reasons, namely people cannot read or write cheques, many of the citizenry belong to the low income group, the public needs small amount of money for purchasing goods and services and finally, absence of banks in rural areas.
In the light of the above, therefore, this study seeks to educate business in Nigeria and elsewhere on the determinants of bank deposits; the benefits to both individuals and commercials banks and finally how the public can be encouraged to save part of their money with the commercial banks to enable them create credits.
In addition, this study will contribute to the pool of existing knowledge regarding bank deposit in Nigeria. It is hoped that knowledge derivable from this study will help to sharpen the financial role of corporate managers and investment analysis in banks and other financial institutions.

1.7       SCOPE OF THE STUDY
The study covers the deposit operations of commercial banks in Nigeria with particular reference to Union Bank of Nigeria Plc.

It deals more specifically with the factors which determine bank deposit level as well as the credit creation ability of commercial banks in Nigeria.

Equally, suggestions will be made to financial and monetary policies that would enhance commercial banks activities in the economy.

Union Bank of Nigeria Plc was chosen for this study because of it’s standing as one of the oldest bank in Nigeria which has had a fair share of the nation’s varied regulatory policies.

1.8       LIMITATION OF THE STUDY
The limitations of this study arise from difficulties involved in collecting data from various sources. This is why a cross sectional study of individual commercial banks was not possible. Cost and willingness of workers to give adequate information were other limitations. However, the above limitations of the research work did not affect the conclusion to be drawn from the study.

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Item Type: Postgraduate Material  |  Attribute: 109 pages  |  Chapters: 1-5
Format: MS Word  |  Price: N3,000  |  Delivery: Within 30Mins.
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