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. Insurance firms as institutional investors invest in government securities, loans and housing or real estate development, among others (Ojo, 2010). For instance, according to Insurance Act of 2013, Section 25(1) “an insurer shall at all times in respect of the insurance transacted by it in Nigeria, invest and hold invested in Nigeria assets equivalent to not less than the amount of policy holder’s funds in such accounts of the insurer”. The 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 inter-mediation 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 inter-mediation 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