TABLE OF
CONTENT
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
1.2 Statement of Problem
1.3 Research Question
1.4 Objective of the Study
1.5 Research Hypotheses
1.6 Significance of the Study
1.7 Scope and
Limitations of the Study
CHAPTER TWO
LITERATURE REVIEW
2.1 Theoretical Literature
2.1.1
Economic Growth and Development.
2.1.2
Importance of Economic Growth and Financial System in Nigeria.
2.1.3
Theories on Financial Sector Performance and Economic Growth.
2.1.4 The
Role of Financial Development in Economic Growth and Development in
Nigeria.
2.1.5 Major
Obstacles to Economic Growth and Financial Development in Nigeria.
2.2 Empirical Literature
2.2.1 The
New Literature on Finance and Economic Development
2.2.2 Open Questions in the Literature on
Finance and Economic Growth
2.2.3 Limitations of the Previous Studies
CHAPTER
THREE
RESEARCH METHODOLOGY
3.1 Research Design
3.2 Model Specification
3.3. Estimation
Procedure
3.4 Data Discussion
3.5. Data Sources
CHAPTER FOUR
PRESENTATION
AND ANALYSIS OF RESULTS
4.1 Presentation of Results
4.1.1 Unit Roots Test
4.1.2 Co-Integration Result
4.1.3 Error Correction Model (ECM)
4.1.4 Granger Causality
4.2 Tests for Hypotheses
4.3 Implication of the Study
CHAPTER FIVE
SUMMARY, CONCLUSION AND
RECOMMENDATION
5.1 Summary of Findings
5.2 Conclusion
5.3 Recommendations
REFFERENCES
APPENDIX I
APPENDIX II
REGRESSION RESULTS
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The theoretical argument
that supports the link between financial development and growth is that a well
developed financial system performs several critical functions to enhance the
efficiency of intermediation by reducing information, transaction, and
monitoring costs. A well developed financial system enhances investment by
identifying and funding good business opportunities, mobilizes savings, enables
trading, hedges and diversification of risks, and facilitates the exchange of
goods and services. These functions result in a more efficient allocation of
resources, rapid accumulation of physical and human capital, and faster
technological progress, which in turn results to economic growth.
An
efficient financial system is one of the foundations for building sustained
economic growth and an open, vibrant economic system. In the early neoclassical
growth literature, financial services played a passive role of merely
channeling household savings to investors. Nevertheless, Demetrides and
Andrianova (2004) as structured in the works of Goldsmith (1969) and Mickinnon (1973)
were among authors who offered a contrary view. They proposed a more role for
financial services in promoting growth. Ever since, substantial volume of
theoretical and empirical literature has emerged, analyzing the role of finance
in growth and development. The success of the financial
System throughout
the world has been predicted on the initiation of financial sector reforms.
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. Prior to
1986 the activities of these institutions were regulated by the Federal
Ministry of Finance (FMF), Central Bank of Nigeria (CBN), Nigerian Deposit
Insurance Corporation (NDIC), Securities and Exchange Commission (SEC),
National Insurance Commission (NIC), Federal Mortgage Bank of Nigeria (FMBN),
and the National Board For Community Banks. But following the collapse of the
world oil market in the late 1970s, there was a drastic reduction in earnings
from crude oil as a result of which the country began to experience a severe
economic downturn. In
1981, Nigerian government adopted various austerity measures such as price
control and demand management policies. However, by December 1985, it became
evident that austerity measures without a proper structural adjustment were
inadequate response to the fundamental economic problems confronting the economy.
Consequent upon the foregoing, the Nigerian government initiated a series of
reform measures aimed at bringing about economic growth and stability in 1986. Paramount among these
policies was the financial sector liberalization. The aim of initiating these
reforms is to create a more efficient and stable system, which will facilitate
optimum performance in the economy. This
means providing a foundation for
implementing effective stabilization policies and successfully mobilizing
capital and putting it to effective use, which leads to achieving higher rates
of economic growth (Johnston and Sundararajan, 1999). Many countries have
experienced successful financial sector reforms which have been accompanied by
improvements in economic growth and efficiency of the financial system, while
other countries have faced financial crises and disruptions to economic growth.
The
essence of emphasis on the development of the Nigerian financial sector is in the
theory of financial repression which posits that efficient utilization of
resources via a highly organized, developed and liberal financial system
enhances economic growth. This thesis, more or less, confirmed the conclusions
of earlier works on the importance of the financial system which could be
traced back to the works of Schumpeter (1912) as put forward by Masten (2008)
and Arcandi (2012). Further enhancements to this hypothesis were explored in the
works of Galbis (2011).This school of thought is classified as supply-led
theory of finance-growth nexus. While there is a near consensus that a
well-functioning financial sector is a precondition for the efficient
allocation of resources and the exploitation of an economy’s growth potential,
the economic literature is less consensual on how and to what extent finance
affects economic growth. This,
invariably, culminated in the emergence of demand-led theory of finance-growth
nexus. Recent developments in some economies around the world seem to provide
support for this school of thought. Specifically, the rapid growth of many
Asian economies was accomplished despite a domestic financial sector that could
not be regarded as developed (Shan, 2001).This observation also holds for China (Lardy,
1998). With an average real GDP growth of 13.5 percent between 2005 and 2007, China’s economic performance is extremely difficult to reconcile
with the widespread view that its repressive financial system grossly distorts
the optimal allocation of loan able funds and is, therefore, inefficient. In
view of this puzzle, some empirical analysis is required at country level to
examine whether it is the development of the financial sector that leads to
economic growth or vice versa. Time series studies have been conducted on U.S,
U.K, Japan,
Netherlands
and Canada
towards resolving this issue (See: Wachtel and Rousseau (2005); and Lee and
Wong (2005)). However, not much has been done on Africa,
in general and Nigeria,
in particular.
1.2 Statement of Problem
The
financial system play a key role in the mobilization and allocation of savings
for productive use, provide structures for monetary management, 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. Nzotta (2009)
further contends that the financial system, additionally, provides the
necessary environment for the implementation of various economic policies of
the government which is intended to achieve non-inflationary growth, exchange
rate stability, balance of payments equilibrium foreign exchange management and
high levels of employment. Yet, according to Olofin and Afandigeh (2008:48)
this sector is poorly developed, limited in reach and not integrated into the
formal financial system. Its exact size and effect on the economy remain
unknown and a matter of speculation.
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 as posit by (Beck,
2011; Beck, 2013). 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. 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.
In
spite of all this authorities with their different reforms, they have not been
able to address financial crises properly and also the studies carried out on
Nigeria have not clearly resolved the issue as most of them concluded that
financial sector development did not promote economic growth while a few of
them found evidence to support demand-leading hypothesis. A closer examination
of these previous studies reveals that conscious effort was not made to explore
various proxies of financial development as most of them used only the ratio of
broad money to national income (M2/GDP). Hence, these studies actually modeled
the impact of financial deepening on economic growth in Nigeria. In
addition, there is the problem of endogeneity, which has not been carefully
addressed in previous studies according to Arcandi (2012).
1.3 Research Question
In the course of the research, the following
questions will be addressed;
1 .To
what extent has financial sector development impacted on economic growth of Nigeria?
2. Is
there any long-run relationship between financial sector development and
economic growth in Nigeria?
3. Is
there any significant causal relationship between financial sector development
and economic growth in Nigeria?
1.4 Objective
of the Study
The objective of this paper is to examine the impact
between financial sector development and economic growth of Nigeria.
The specific objectives of these studies are: to,
1.
Empirically investigate the impact of financial sector development on Nigeria’s
economic growth.
2.
Evaluate the long-run relationship between financial sector development and Nigeria’s
economic growth.
3.
Examine if there is any causal relationship between financial sector
development and Nigeria’s
economic growth.
1.5 Research
Hypotheses
The hypotheses to be tested in the course of this
research work are:
Ho: That financial sector development does not have
significant impact on the economic growth of Nigeria
Ho: That financial sector
development does not have significant long- run relationship with the economic
growth of Nigeria.
Ho: That financial sector development does not have
causal effect on Nigeria’s
economic growth
1.6
Significance of the Study
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 is important because of the following reasons:
1. Provides means of payments that facilitates a
greater number of transactions. 2. Concentrates the savings of a large number of
investors, 3. Makes possible the allocation of resources to
their most productive economic use, through the effective evaluation and
monitoring of investment projects, 4. Improves corporate governance, and
5 contributes to risk management
1.7 Scope and Limitations
of the Study Though the research would make
reference to the related studies of other economies of the world with a view to
reviewing related literature on the subject matter, data for this work shall
only be on Nigeria economy. Such variables shall include those related in
existing literature to budget deficits and inflation. It shall be collected between
a wide range of time spanning over a period of thirty two years from 1981 to
2013. 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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