ABSTRACT
The purpose of this study is to
examine the effect of the Financial Sector development on the economic
performance in Nigeria. The Time series data from 1986-2015 was imputed into
the regression equation using some econometric techniques like Augmented Dickey
Fuller(ADF) test, Johansen Co-integration test, Ordinary Least Square
Regression. The result shows that Financial sector development variables:
market capitalization, credit to private sector, Inflation, trade openness
affect positively the Economic performance variable– Gross Domestic Product.
This result is in consonant with some earlier studies reviewed in the
literature that found financial sector development variables to affect
positively gross domestic product.
TABLE OF CONTENT
PAGES
Title
Page i
Dedication
ii
Certification
iii
Acknowledgement iv
Abstract v
Table
of content vi
CHAPTER ONE: INTRODUCTION
1.1
Background of the study 1
1.2
Statement of the problem 3
1.3
Objective of the study 4
1.4
Research Question 4
1.5
Research Hypothesis 4
1.6
Significance of the study 4
1.7
Scope of the study 5
1.8
Limitation of the study 5
CHAPTER TWO: LITERATURE REVIEW
2.1
Preamble 7
2.2
Theoretical Framework 7
2.3
Empirical review 21
CHAPTER THREE: RESEARCH METHODOLOGY
3.1
Theoretical review 29
3.2
Model specification 30
3.3
Definition of terms 26
3.4
Types of sources of data 31
3.5
Techniques for the data analysis 32
3.6
Limitation of the study 36
CHAPTER FOUR: DATA PRESENTATION AND
ANALYSIS
4.1
Preambles 34
4.2
Econometric properties of data 34
4.3
Trend of analysis 36
4.4
Test of hypothesis 37
CHAPTER FIVE: SUMMARY,CONCLUSION AND
RECOMMENDATION
5.1
Summary of findings 43
5.2
Conclusion 43
5.3
Recommendation 44
REFERENCES 46
APPENDICES
48
CHAPTER
ONE
1.1 BACKGROUND
TO THE STUDY
The
relationship between economic growth and financial development has been the
subject of both theoretical and empirical analysis in economic literature for a
long period of time. Although there are numerous studies examining this
relationship, there is no consensus on the effect of financial development on
economic performance. A number of theories indicate that financial development
leads to economic growth. Studies that support this view include those of
Habibullah and End (2006); Galindo (2007), Ang (2008); Giuliano and
Ruiz-Arranz(2009) and Nkoro and Uko (2013). These studies maintain that a
well-structured financial sector creates strong incentives for investment and
also fosters trade and business linkages and technological diffusion. This is
mainly through mobilizing savings for productive investment which thus promotes
economic growth. Another school of thought believes that economic performance
translated to growth creates demand for financial services and therefore
economic growth precedes financial development. Studies that advocate this view
include Sunde (2013), Odhiambo (2008), etc. Another strand holds that financial
advancement plays a minimal role, if any, on economic performance in relation
to growth (Lucas, 1988) and Adusei (2012). However, in the recent past, there
has been empirical evidence that there exist a bi-directional relationship
between economic performance and financial development Fowowe (2010), Rachdi
and Mbarek (2011).
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
funds from the surplus sector to the deficit sector of the economy. This sector
has helped in facilitating business transactions and economic development
(Aderibigbe 2004).
A well-developed
financial system performs several critical functions to enhance the efficiency
of intermediation by giving information, reducing transactions 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. All these result in a more efficient allocation of
resources, rapid accumulation of physical and human capital, and faster
technological progress, which in turn results in economic growth. Development in the real sector, as noted by
Ajayi (1995), influences the speed of growth of the financial sector directly,
while the growth of the finance, money and financial institutions influence the
real economy. The economic growth 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). 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.
Economic
performance is measured by macroeconomic variables which are translated to
economic growth that ultimately measures the increase in the amount of goods
and services produced in a country. An economy is said to be growing when it
increases its productive capacity which later yield more in production of goods
and services (Jhingan 2003). 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. Oluyemi (1995) regards the financial
sector of any economy as an engine of growth that could greatly assist in the
promotion of rapid economic transformation. It can be concluded that no economy
can ever develop without an appreciable growth in the financial sector. An
efficient financial system is essential for building a sustained economic
growth and an open vibrant economic system. Countries with well-structured
financial institutions tend to grow faster; especially the size of the banking
system and the liquidity of the stock markets
tend to have
strong positive impact on economic growth (Beck and Levine, 2002 in Nnanna,
2004)
1.2
STATEMENT OF PROBLEM
The Nigerian financial sector, like those of many other less
developed countries, was 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 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. The banks are declaring billions of profit but yet the
real sector continues to get 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. The Nigerian banks have concentrated on short
term lending as against the long term investment which should have formed the
bedrock of a virile economic transformation. Since the adoption of the
Structural Adjustment Programme (SAP) in 1986, in an attempt to quicken the
recovery of the economy from its deteriorating conditions, a great deal of
interest has been shown in the activities and development in the financial
sector. This is so because the restructuring of this sector was a central
component of the SAP reform.
It
is evident that the empirical studies which focus on the link between financial
development and economic growth show mixed results and this may be attributed
to the estimation methodologies and quality and span of data used as well as
the direction of causality. In Nigeria, there are few empirical studies that
focus on the effect of financial development on economic growth using time
series data. In addition, these studies do not examine the short-run and
long-run effect of financial development on economic growth. While a
significant number of empirical studies in which Nigeria is included use panel
and cross-section data to examine the
relationship between financial development and economic growth, there is no
consensus on the findings. This may be due to the fact that these countries
have different levels of financial and economic development. More so, the
previous studies have not adequately addressed the problem of financial
development as it affects economic growth. The research work, therefore,
intends to complement the existing empirical studies by using time series
approach with a view to shedding more light on this important relationship, by
focusing on the effect of financial development on economic growth.
1.3 OBJECTIVE OF THE STUDY
The broad objective of this study is to examine the effects of the
financial sector development on economic performance in Nigeria. The specific
objectives are:
1.
To examine the trend of
the financial development and Nigeria’s economic performance from (1986-2015).
2.
To analyze the
relationship between financial development and economic performance
3.
To investigate the effect
of financial development on economic growth.
1.4 RESEARCH QUESTIONS
·
What is the trend of the
financial development and Nigeria’s economic
Performance
over the years ?
·
Is there a relationship
between financial sector and economic performance?
·
Does financial development
affect economic growth?
1.5 RESEARCH HYPOTHESES
:
There is no relationship between financial sector and economic
performance.
:
There exists a relationship between financial sector and economic
performance.
:
Financial development does not affect economic growth.
:
Financial development affects economic growth.
1.6 SIGNIFICANCE OF STUDY
There
have been several studies on the financial sector development and economic
performance. However, most of the studies consider one component of the
financial sector in relation to economic performance. Many studies have been
conducted on Capital market and economic growth, banking credit and economic
growth and likewise foreign direct investment and economic growth. The use of
one component of the financial sector like banking credit or capital market as
a representative of the entire financial sector is inadequate, because the
essence of the financial sector which is that of intermediation cannot be
solely performed effectively by one subsector of the financial system like
banking or capital market neither can it be handled by foreign direct investment
alone. Therefore, the gaps that prompted this study are, first, the fact that
most studies conducted previously in Nigeria on the financial sector and
economic growth used only one component of the financial sector. Taking one
component of the financial sector to represent the whole financial sector will
not be an adequate sample of the entire financial sector.
1.7
SCOPE OF STUDY
The main focus of
the study is financial sector development and economic performance in Nigeria.
Within the period (1985-2015), the country has witnessed a tremendous
development in her financial sector. This period relevantly covers the era of
liberal economic policies and also the advent of Structural Adjustment
Programme (SAP) as it affects the economy as a whole. More so, the effect of
the financial development will not be appreciated without relating it with
economic growth.
1.8 LIMITATIONS
OF STUDY
The
efficiency and effectiveness of this research work is limited among other
things to estimations as well as data and information obtained from government
and corporate bodies. The study is limited due to a number of constraints
involving time and resources which make it mandatory for the researcher to make
do with the most relevant macroeconomic and financial indicators.
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