Empirical Analysis of the Links Between Money Market Activities and Economic Growth in Nigeria

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

The Financial system is one of the most important creations of modern society. Its primary task is to move funds from surplus economic units to deficit economic units spenders to produce goods and services and to make investments in new equipments and facilities so as to facilitate the growth of the economy and improve the standard of living of its citizens. It is generally recognized that a financial system and its components play a catalytic role in the process of economic development. As the economy grows, the financial system becomes increasingly more complex and its structure more sophisticated (Ochejele, 1999). The financial system of any nation is a function of the size of its economy. A growing economy places more responsibilities on the financial sector to mobilize the needed capital to facilitate production, generate employment and income. An economy that does not experience growth on sustained basis is likely to have a very passive financial sector as there are no incentives for investment. Through the process of growth, financial system offers a wide range of portfolio options for savers and issuable instruments for investors, a function often referred to as financial intermediation (Oke, 1989).

The Nigerian financial system comprises of various institutions, financial markets and operations that are in the business of providing financial services. There are various financial markets, which are institutional arrangements that facilitate the intermediation of funds in an economy. The financial market is segmented into two: one is the money market, which deals in short term funds and the other, the capital market that is for long–term dealings in loanable funds (Anyanwu, 1996). The basis of distinction between the money market and the capital market lies in the degree of liquidity of instruments bought and sold in each of the market, which can be further sub-divided into the primary and

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