CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Insurance companies are contractual financial institutions that specialize in providing insurance cover or protection to their customers against insurable risk. They mobilize large amounts of financial resources from the premium paid by the policy holders and use part of the funds to invest after payment of claims various reforms in the finance sector and insurance sub sector of Nigeria have expanded the scope of investment of insurance companies. Hence, insurance companies hold assets in government securities, stock, shares and bonds, mortgages and loans, cash and bills receivable and miscellaneous items (Aderibigbe, 2012). The investment objectives of insurance companies are mainly safety, liquidity and growth.
These objectives which form the framework of investment portfolio structure of these firms are based on the nature of liabilities of the insurance firms, their operational focus and guidelines of the industry regulators which vary from one country to another and the stages of development in the various countries. In view of the investment practices and of portfolio insurance companies, Ahmed (2012) describes them as creator of wealth and mobilizer of funds for economic growth. Banks like many other economic organizations are expected to generate profitable incomes through effective and efficient utilization of portfolio of resources (inputs) to ensure continuity and meeting the investment returns expected by the shareholders. Banks core function to a large extent is financial intermediation that is taking money from the surplus units in terms of different kinds of deposit accounts to service the deficit units through loans and advances at different prices. Banks in performing their functions are on line in the wheels of economic and social l development in the country. Banking system plays fundamental roles in the growth and development of an economy as deposited money in banks acts as channels through which financial resources are allocated in efficient and effective manner to the deficit units of the economy.
Financial intermediation is perhaps the basic and most important functions of the banks, especially in developing countries like Nigeria where available resources are generally inadequate or insufficient to meet the capital and developmental needs of the economy, (Nnanna, 2009).The building block of capital formation is expected to come from efficient operation of the retail banks which energize the deepening of the capital market. The investment portfolio of commercial banks in Nigeria according to CBN (2014) comprises of ordinary shares, preference shares, debentures, subsidiaries, and other investments. Insurance companies and commercial banks are financial institutions that play crucial role in the financial intermediation and economic growth in any economy. In Nigeria, the contributions of investment portfolios of both insurance companies and commercial banks to economic growth are below expectation compared to other developing nations. Several problems are accountable for this development. The economic effect of restructuring the ailing economy posed a serious liquidity problem to the insurance companies and commercial banks. From the economic problem, there are contractions of business due to reduction in investment as a result of poor saving (Victor, 2013). Accord to NDIC (2011), no meaningful investment can be made in an area where there is constant crisis or continual changes of government regulations. The NDIC Quarterly (2012) is of the view that there are several ways through which government exercises control of financial institutions, which constitutes a problem to their investment portfolio. Aldo, in 2011, an urgent call for restructuring the economic was made as the Nigeria economy was witnessing persistent inflationary trend and general recession in the Gross Domestic Product, which according to Nwankwo and Jones (2014) the inflation made the bank based scheme to be administered by the Central Bank of Nigeria (CBN) as its possess the power to manage the country’s foreign exchange resource in keeping with the needs of the country’s economy. In fact in the insurance business, there was a great deal of buying and selling and this was affected by the inflationary trends that hamper the exchange of money both locally and internationally to pay insurance and re-insurance premium and investment (Victor, 2013). Furthermore, lack of investible assets, inability to identify profitable investment opportunities, legal restrictions, volatility of environment and poor project evaluation techniques hamper the diversification of investment portfolios of both the insurance companies and banking industries in Nigeria.
1.2 STATEMENT OF THE PROBLEM
Service sector is the lifeline for the social economic growth of a country. It is today the largest and fastest growing sector globally contributing more to the global output and employing more people than any other sector.Though the insurance industry and the banking sector are thought to be the two main branches of the financial services industry, there are significant differences between them. The basic activities of the banking sector focus on credit and settlement services, while the fundamental function of insurance industry is to indemnify the losses. However, the connections between the banking sector and the insurance industry were observed to increase at different levels lately. At the capital level, mutual holding between the banks and insurance companies, especially the establishment of bank owned insurance companies, are becoming prevalent. At the business level, based on the development of bancassurance, the expansion of cross-selling has been vigorous among financial (insurance) groups. At the product level, some life insurance products share some features in common with saving business and other investment-link products of banks, which naturally help the insurance companies and the banks to form a competition-substitution relationship, while general insurance can secure banks by covering mortgage losses. Therefore, there is a complex relationship involving both cooperation and competition between the banks and the insurance companies.This relationship calls for the need to comparatively evaluate the performance of insurance and banking industries in the development of Nigerian economy, hence the need for this research work.
1.3 AIMS OF THE STUDY
The major purpose of this study is to examine a comparative evaluation of the performance of insurance and banking industries in the development of Nigerian Economy. Other general objectives of the study are:
- To examine the roles of insurance and banking industries towards economic development in Nigeria.
- To examine the similarities between the two industries and how they depend on each other to function.
- To examine the impact of insurance and banking industries on the development of Nigerian economy.
- To compare the performance of insurance and banking industries towards the development of Nigerian economy.
- To examine the relationship between insurance, banking industries and development of Nigerian Economy.
- To examine ways governments should help the industries to function well in Nigeria.
1.4 RESEARCH QUESTIONS
- What are the roles of insurance and banking industries towards economic development in Nigeria?
- What are the similarities between the two industries and how they depend on each other to function?
- What are the impacts of insurance and banking industries on the development of Nigerian economy?
- How is the performance of insurance and banking industries towards the development of Nigerian economy?
- What is the relationship between insurance, banking industries and development of Nigerian Economy?
- What ways should government help the industries to function well in Nigeria?
1.5 RESEARCH HYPOTHESES
Hypothesis 1
H0: There is no significant relationship between the performance of insurance industries and economic development in Nigeria.
H1: There is a significant relationship between the performance of insurance industries and economic development in Nigeria.
Hypothesis 2
H0: There is no significant relationship between the performance of banking industries and economic development in Nigeria.
H1: There is a significant relationship between the performance of banking industries and economic development in Nigeria
1.6 SIGNIFICANCE OF THE STUDY
This research work will benefit policy makers, students, businessmen, financial experts, the academic and researchers because it will help improve their general understanding of these concepts, the roles and importance of the insurance and banking industries in our society and their contribution to the development of the economy. Thus, this study will be significant to policy makers to make appropriate policy which will go a long way toward alleviating the problems facing the insurance and banking industries and bring about the desired improvement in the nation’s economy since developing economy like Nigeria which is bedevilled by need to determine the appropriate policy mix to achieve stability. The study differs significantly from most works along this line in that it utilized a broad measure of insurance and banking industries performance indicators and thus robustly tracks the impact of insurance and banking industries performance on economic growth. Finally, this research work will be useful to students and researchers who might wish to undertake study and research work on this area.
1.7 SCOPE OF THE STUDY
The study is based on a comparative evaluation of the performance of insurance and banking industries in the development of Nigerian Economy, a case study of Veritas Kapital assurance plc, American int’l insurance plc, Zenith bank plc and Diamond bank plc Aba, Abia state.
1.8 LIMITATION OF STUDY
Financial constraint– Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
Time constraint– The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.
1.8 DEFINITION OF TERMS
Insurance: This is an agreement between two parties namely the insurer and the insured, whereby on payment of a sum of money called premium by the insured, to the insurer, the insurer promises to indemnity in cases of loss or accident occurrence.
Bank: A business that keeps money for individual people or companies, exchanges currencies, makes loans, and offers other financial services.
Performance: The accomplishment of a given task measured against preset known standards of accuracy, completeness, cost, and speed.
Economic Development: Economic development implies the structural changes in the society; both technological advancement and resource discovery economic development is however the growth accomplished by the changes in the economic and political structure.
