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.