ABSTRACT
This empirical study examined the impact of financial sector
development on Nigerias economic growth 1981 to 2014. Secondary data on real
gross domestic product (RGDP), used as a proxy for economic growth; where
financial development was captured by three variables; Ratio of Money Supply to
GDP (MGDP), Ratio of Credit to Private Sector to GDP (CPGDP) and Real Interest
Rate (INT) which represented the explanatory variables and were sourced mainly from CBN publications . In the
course of empirical investigation, various advanced econometric techniques like
Augmented Dickey Fuller Unit Root Test, Toda- Yamamoto (TY) Test and VAR LM
Serial Correlation test were employed and the result revealed among others:
that none of the variables were stationary at level, but were rather
fractionary integrated leading to the test of Toda Yamamoto. The Toda
Yamamoto result indicated that there is causal relationship between Financial
Sector Development and Nigerias economic growth. The VAR LM Serial Correlation
test indicated the absence of autocorrelation.The study concluded that Nigeria
financial system is yet to be developed to its full capacity, hence there is
need to adequately deepen the financial system through innovations, adequate
and effective regulation and supervision, efficient mobilization of funds and
making such funds available for productive investment, and improved services
.
TABLE OF
CONTENTS
Title Page i
Approval ii
Dedication iii
Acknowledgement iv
Abstract v
Table of Contents vi
CHAPTER ONE: INTRODUCTION
Background of the Study 1
Statement of the Problem 3
Research Questions 4
Objectives of the Study 4
Hypotheses of the Study
4
Significance of the Study
5
Scope and Limitations of the Study
5
CHAPTER TWO: REVIEW OF RELATED LITERATURE
Theoretical Literature 6
Demand following and Supply leading hypothesis 6
Goldsmith Theory
8
McKinnon’s complementarity hypothesis 9
Shaw financial deepening hypothesis 10
Financial Development in an Economy 13
The Functional role of Financial System 13
Financial
Structure and Economic Growth 14
Overview of the Nigerian Financial System 15
Empirical
Literature
19
CHAPTER THREE: RESEARCH
METHODOLOGY
Research Design and Methodology 23
Model Specification 23
Estimation Procedure 24
Sources of Data 27
CHAPTER FOUR:
PRESENTATION AND ANALYSIS OF RESULTS
Unit Root Test 28
Vector
Auto-regression Result 30
Test of
Hypotheses 32
Implication
of the Study 34
CHAPTER FIVE: SUMMARY,
CONCLUSION AND RECOMMENDATION
Summary of Findings 36
Conclusion 37
Recommendations 38
REFERENCES 39
APPENDICES
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 (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. 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 growth is measured by 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 more 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-developed
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 and Nnanna, 2004).
According
to Beck (2000), a long list of scholars posit, a causal association between
finance and economic growth. La Porta (2000) argues that well developed capital
markets- especially thoseimbued with rights that protect investors promote the
efficient allocation of capital toprojects with high rates of return, in turn
stimulating savings, investments and economicgrowth. Evidence from both single
country (Guiso, Sapienza and Zingales (2004) andcross-country (Levine, 2006;
Demirguc Kurt and Levine (2001) studies suggest thateconomies with more
developed financial markets begin to grow earlier, attain highergrowth rates,
and achieve higher levels of per capita income than economies with
lessdeveloped financial markets. The Levine (2005) and Beck (2009) argue that the
positive effect of financial development over economic growth can be explained
by five mechanisms, whose operations reduce the negative impact of information
asymmetries among economic agents and the transaction costs involved in their
activities. According to them, financial system (1) provides means of payments
that facilitates a greater number of transactions in financial sector, (2)
concentrates the savings of a large number of investors in financial sector,
(3) makes possible the allocation of resources to their most productive
economic use, through the effective evaluation and monitoring of investment
projects in financial sector, (4) improves corporate governance, and (5)
contributes to risk management in financial sector.
1.2
Statement of the 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 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.
Thus,
there is the need to deepen the financial sector and reposition it for growth
and integration into the global financial system in conformity with
international best practices. According to Nzotta and Okereke (2009) one of the
most important policy concerns in most countries is the effect of consolidation
of financial institutions on financial sector growth and development. The first
major concern is the transmission mechanism. Consolidation could alter the
credit allocation of the financial system by fostering the creation of larger
banks having better access to the funds market. It also affects the
availability and pricing of loans in response to changes in the market dynamics
and the level of economic development.
1.3
Research Questions
This
research work shall seek relevant answers to these posers otherwise referred to
as the research questions. They include:
1.
To what extent does Financial Sector Development impact
on Nigerian economic growth?
2.
Is there any causal relationship between financial
sector development and Nigerian economic growth?
1.4
Objectives of the Study
The
general objective of this study is to examine the impact of financial sector
development on Nigerian economic growth. The specific objectives are to:
1.
Evaluate the impact of financial sector development on
Nigerian economic growth.
2.
Investigate the extent to which causal relationship
exists between financial sector development and Nigerian economic growth.
1.5
Hypotheses of the Study
This
research work shall be guided by the following hypotheses:
1.
Financial sector development does not have significant impact on Nigerian
economic growth.
2.
There is no causal relationship between Financial Sector development and
Nigeria economic growth.
1.6
Significance of the Study
This
study is a good source of information for researchers, as the results that
emerge from this study will inform debates on this subject. This research
further contributes to empirical literature on economic activity and financial
sector development in Nigeria. The study is also a valuable source of
information for policy formulation.
1.7 Scope and Limitations of the Study
This
study is limited to financial sector development and its impact on the Nigerian
economic growth. It covers a period of 34 years i.e. from 1981 to 2014.
Data
for this study shall be secondary, majorly from government own institutions
like the Central Bank of Nigeria. Sometimes, for obvious policy cover ups, such
data are intentionally manipulated by government to portray an acceptable picture
of the economy. The researcher is therefore limited to outcomes of such data.
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