1.1BACKGROUND TO STUDY
Economic development has been defined as the process whereby the level of national production (that is national income) or per capita income, increase over a period of time (Nwankwo and Ejekeme, 2007: 34).
Specifically, economic development involves on increase in the size of the secondary sector of the economy and a corresponding decrease in the realistic importance of the primary sector. In a more conventional approach, economic development is defined as economic growth plus change. The changes here being interpreted as the achievement of better living conditions and an expanded rate of opportunities in work and leisure for the poor people. It involves more than just growth (Ogbonna, 2000: 23). This means that a sustained increase in total national income per head of population which involves changes such as improved performance of factors of production development of institution etc. The role of capital in economic development can therefore be appreciated as it provides the impetus for the effective and efficient combination of factors of production to ensure sustainable economic growth (Babalola and Adegbite, 2004:1). Finance companies as an agent of financial intermediation have in recent times been reorganized to serve the purpose of capital formation and mobilization.
Finance companies are institutions whose activities involve holding money balance and borrowed money from individual and other institutions with the aim of creating loans (Ogbonna, 2000:1)
Finance companies also create room for channeling funds from lenders to borrowers. Generally, finance companies mobilize fund from the surplus sector of the economy and channel it to the deficit sector of the economy.
Commercial banks traditionally lend to medium and large enterprises which are judged to be credit worthy (Anyanwu, 2004: 4). They avoid doing business with the poor and their micro-enterprises because the associated cost and risks are considered to be relatively high for this purpose, finance companies were given recognition by the Central Bank of Nigeria (Solomon, 2006: 231). Finance companies in other countries generally focus on consumer lending, but the lack of such a market in Nigeria and their inability to compete in the “corporate” market had led them to focus on lending to small and medium enterprises (SMEs) (Isern et al, 2009: 20). Finance companies appear to be mostly active in short term working capital loans, discounting of invoices (factoring), and some purchase order financing. Equipment leasing, particularly of small industrial equipment (especially generators) is also on the increase (Isern et al, 2009: 20). Finance companies like the discount house are licensed by the CBN and subject to the provision of the Central Bank of Nigeria (CBN) Decree No. 29, 1991 and the Banks and other financial institutions (BOFID) Decree No. 25 1991. In the wake of the deregulation of the economy many promoters applied to CBN for license to operate as a finance company. Initially provisional license to operate as finance companies were granted by CBN to about 500 companies that applied to be so registered. The minimum equity capital for starting a finance company was fixed at N5, 000,000 (Onoh, 2002: 105).
According to Nwaobi, (2003: 1) capital accumulation is a major factor governing the rate of development. Thus accumulation of real physical capital stock has been viewed as permitting more roundabout methods of production greater productivity, thereby providing an additional future stream of income to society. Finance companies thus through their activities accumulate capital where are channeled to the productive sectors for increased productivity and output. Isern (2009: 21) observed that finance companies have in recent years been relevant in the financing of small and medium scale enterprises. This has led the CBN along with the Finance Houses Association of Nigeria (FHAN), to look at ways...