Background of the Study
The financial system of a country which the banking industry is part, refers to the totality of the regulatory and participating institutions as well as instruments involved in the process of financial intermediation.
An efficient system is widely accepted as a necessary condition for an effective functioning of a nation’s economy. The state of development of the financial market in a country, as noted by Varsh (1991), serves as barometer for measuring the stage of development of the economy. The mix of these financial intermediaries varies from country to country, reflecting the stage of development and the degree of sophistication of the country’s economic agents. The market provides services that are essential to a modern economy by offering access to a variety of financial instruments that enable economic agents to poll, price and exchange risk. This is done through assets with attractive yield and marketability.
In addition to the intermediation role, a nation’s financial links the domestic economy with the rest of the world by providing the means for the settlement of international transactions. It has also been observed that growth in the financial industry, if transmitted well, would result in the growth of real sector and the opposite is possible if the financial sector is repressed and inefficient (Cameroon, 1972). The component of the financial system that is at the centre of the intermediation role and the greasing of the engine of economic growth and development is the banking sector.