ABSTRACT
This empirical study examined the effect of financial sector development on the economic growth in Nigeria 1993-2016. The study made use of secondary data, sourced for a period of 24 years. The ordinary least squares multiple regression analytical framework was used in the analysis. Financial deepening was proxied by broad money supply/GDP ratio, alongside market capitalization/GDP ratio and private sector credit/GDP ratio, while real gross domestic product was used to measure economic growth. The results revealed that market capitalization and private sector credit has a positive effect on economic growth while financial deepening (broad money/GDP) had a positive and insignificant effect on economic growth of Nigeria. Consequently, it was recommended among other things that Nigeria should place greater emphasis on financial sector development with special focus on capital markets development to ensure economic growth.
TABLE OF
CONTENTS
Title
Page i
Declaration ii
Certification iii
Dedication iv
Acknowledgements v
Table of
Contents vi
List of
Tables ix
Abstract x
CHAPTER 1: INTRODUCTION
1.1 Background to the Study 1
1.2 Statement of the Problem 3
1.3 Objectives of the Study 4
1.4 Research Questions 4
1.5 Research
Hypotheses 5
1.6 Significance
of the Study 5
1.7 Scope
of the Study 6
1.8 Limitations of the
Study 6
1.9
Definition of Terms 6
CHAPTER 2:
REVIEW OF RELATED LITERATURE
2.1 Conceptual Framework 8
2.1.1 Concept of Financial Development 8
2.1.2 Overview of the
Nigerian Financial System 12
2.1.2
Central Bank of Nigeria 15
2.1.3 Commercial Banks 17
2.1.4 Nature of Deposit Money Banking In
Nigeria 18
2.1.5 Overview
of the Nigerian Capital Market 20
2.1.6 Nigerian Security and Exchange Commission 21
2.1.7 Performance of the Financial Sector 23
2.1.8 Concept of Economic Growth 24
2.1.9 Financial Sector Development and Economic
Growth 26
2.2
Theoretical Review 27
2.3 Empirical Review 28
2.4 Summary of Literature 33
2.4.1 Gap in the literature 34
CHAPTER 3: RESEARCH METHODOLOGY
3.1 Research
Design 36
3.2 Area of Study 36
3.3 Sources of Data Collection 36
3.4 Model
Specification 36
3.5 Description of the
Research Variables 37
3.5 Method of Data Analysis 38
CHAPTER 4: DATA PRESENTATION AND ANALYSIS
4.1 Presentation of Data 40
4.2 Data
Analysis and Discussion of Results 41
4.3
Regression Analysis 42
4.3.1 Discussion of Findings and Hypotheses Testing 43
CHAPTER 5: SUMMARY CONCLUSION AND RECOMMENDATION
5.1 Summary of Findings 45
5.2
Conclusion 45
5.3 Recommendations 46
REFERENCES
APPENDIX
LIST OF TABLES
TABLE PAGE
4.1: Nigeria dataset for the
period (1993 – 2016) 40
4.2: Summary
of descriptive statistic 41
4.3: Regression
Analysis (Dependent variable, real GDP) 42
CHAPTER
ONE
INTRODUCTION
1.1 Background to the Study
The
financial sector of any economy in the world plays a vital role in the
development and growth of the economy. The development of this sector
determines how it will be able to effectively and efficiently discharge its
major role of mobilizing fund from the surplus sector to the deficit sector of
the economy. This sector has helped in facilitating the business transactions
and economic development of most countries in the world (Aderibigbe, 2004).A well-developed
financial system performs several critical functions to enhance the efficiency
of intermediation by reducing information, transaction and monitoring costs. If
a financial system is well developed, it will enhance investment by identifying
and funding good business opportunities, mobilizes savings, enables the
trading, hedging and diversification of risk and facilitates the exchange of
goods and services (Omofa, 2017).
The
Nigerian financial system can be broadly divided into two categories namely:
the formal financial system and the informal financial system. The formal
financial system can be further subdivided into capital and money market
institutions and these comprise the banks and non-bank financial institutions.
The informal sector comprises the local money lenders, the thrifts and savings
associations etc. The financial services sector is made up of the banking
system, other financial institutions, and the securities, insurance and pension
sub-sectors (CBN, 2009). These institutions trade in financial instruments such
as domestic currency, foreign currency, stocks, bonds and derivatives.
Economic
growth on the other hand, is a gradual and steady change in the long-run which
comes about by a general increase in the rate of savings and population
(Jhingan, 2005). Economic growth is measured by the increase in the amount of
goods and services produced in a country. It has also been described as a
positive change in the level of production of goods and services by a country
over a certain period of time. An economy is said to be growing when it
increases its productive capacity which later yield more in production of more
goods and services (Jhingan, 2005). Economic growth is usually brought about by
technological innovation and positive external forces. It is the yardstick for
raising the standard of living of the people. It also implies reduction of
inequalities of income distribution.
The
link between financial sector and economic growth has been debated in financial
and economic literatures. Many researchers are of the view that there still
exists great dichotomy regarding the role of financial intermediaries in
facilitating sustainable economic growth in the long term.According to the new
growth theorists, a well-developed financial sector facilitates high and
sustainable economic growth (Hicks, 1969 cited in Garba (2014)). The Nigerian
financial system comprises the money market, the capital market, and the
institutions and channels that facilitate the smooth intermediation of
financial transactions in the economy. This means no profitable investment
would be frustrated on account of lack of finance.Consequently, the financial system play a key role in the mobilization and
allocation of savings for productive use, provide structures for monetary
management which is the basis for managing liquidity in the system. It also
assists in the reduction of risks faced by firms and businesses in their
productive processes, improvement of portfolio diversification and the insulation
of the economy from the vicissitudes of international economic changes.
Additionally, the system provides linkages for the different sectors of the
economy and encourages a high level of specialization expertise and economies
of scale (Oeniran&Udeaja, 2010). In his study, Garba (2014) revealed that development in financial sector
variables viz: banking sector credits, total market capitalization and foreign
direct investment positively affect economic growth variables – Real Gross
Domestic Product. Hence, this study seeks to examine the effect of financial sector
development on the economic growth of Nigeria.
1.2
Statement of the Problem
The Nigerian financial sector, like those of
many other less developed countries, has been highly regulated leading to
financial disintermediation which retarded the growth of the economy. The link
between the financial sector and the growth of the economy has been very weak.
The real sector of the economy, most especially the high priority sectors which
are also said to be economic growth drivers are not effectively and efficiently
serviced by the financial sector as posit by Omofa, (2017). The banks are
declaring billions of profit but yet the real sector continues to be weak
thereby reducing the productivity level of the economy. Most of the operators
in the productive sector are folding up due to the inability to get loan from
the financial institutions or the cost of borrowing was too outrageous.
Also, most Nigerian banks and financial institution
have concentrated on short term lending as against the long term investment
which should have formed the bedrock of a strong economic transformation.
Meanwhile, most of the financial institutions are reluctant to give credits to
the productive sector while some demand for high collateral or high interest
rate before lending money to productive sector of the Nigeria economy. These
unwholesome practices scare most entrepreneurs away from advancing their
production as a result of capital constraints which adversely affect the
economy (Aderigbigbe, 2001). Also, the Nigerian financial sector has suffered a
lot of setbacks owing to high exchange rate and economic repression due to the
global fall in crude oil prices (Hakeem, 2009 and Omofa, 2017). It is against
this background that this study seeks to empirically examine the effect of financial
sector development on the economic growth of Nigeria.
1.3
Objectives of the Study
The main objective of this study is
to examine the effect of
financial sector development on the economic growth of Nigeria. The
specific objectives of the study include:
i. To examine the effect of total
market capitalization on real gross domestic product in Nigeria.
ii. To determine the effect of private
sector credits on real gross domestic product in Nigeria.
iii. To ascertain the effect of financial
deepening on real gross domestic product in Nigeria.
1.4 Research Questions
The
following research questions, formulated in line with the research objectives,
guided the study:
i. What
extent of effect does total market capitalization have on real gross domestic
product in Nigeria?
ii. What is
the extent of the effect of private sector credits on real gross domestic
product in Nigeria?
iii. What
extent of effect does financial deepening have on real gross domestic product
in Nigeria?
1.5 Research Hypotheses
The following hypotheses, stated in null
form, were tested at 5% significance level:
H01: Total
market capitalization has no significant effect on real gross domestic product
in Nigeria.
H02: Private
sector credits has no significant effect on real gross domestic product in
Nigeria.
H03: Financial
deepening has no significant effect on real gross domestic product in
Nigeria.
1.6 Significance of the Study
This study is important and useful in the
following ways:
Government Policy Makers: This research will be of great benefit to the
Nigerian government and fiscal policy makers. This study will promote the
understanding of role financial sector development in economic growth and the
efficient ways of optimizing the development of the financial sector through
sound fiscal and monetary policies.
Investors: It
is expected to inform the productive sector of the economy (and entrepreneurs)
about the possible effects of poor utilization or miss appropriation of financial
sector loans/credits (leadings). It is also expected to expose in details the
benefit accruable if such loans are utilized efficiently and effectively.
Financial Institutions: This study will help the
financial institutions especially commercial banks to ascertain solution to the
problem they have in financing business organizations, industries and entrepreneurs
with loan if there is any. It will equally educate borrowers on money policy
surrounding loan from the central bank of Nigeria (CBN).
Academics: will help those in academics build on
this work as a reference to the extent they intend to take this research to.
1.7 Scope of the Study
The
study empirically examined the effect
of financial sector development on the economic growth of Nigeria from 1993
to 2016. The basis for the 1993 as the base year was to capture the various
monetary and fiscal era (pre and post-merger) in Nigeria, on the Nigerian
economy. The study was limited to the use of data collected from annual report
of Central Bank of Nigeria.
1.8 Limitations of the Study
This study was limited by both human
and scientific error (5% significance level). This study is not exhaustive as
it only focused on some of the poxies for measuring financial sector
development and its limited within 1993 to 2016. However, the researcher worked
very hard to project a result that can be relied upon.
1.9 Definition
of Terms
Financial sector: The financial sector is a category of stocks
containing firms that provide financial services to commercial and retail
customers; this sector includes banks, investment funds, insurance companies and real estate.
Development: Development entails the act or process of developing;
growth; progress.
Economic Growth: It can be described as a positive change in
the level of production of goods and
services by a country over a certain period of time.
Credit Risk: This refers to delinquency and default by
borrowers i.e. fai ure to make payment as at when due.
Economic
development: this
is the process by which a nation improves the economic, political, and social well-being of
its people.
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