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This study is an attempt to empirically investigate the study of financial deepening institution on economic growth in Nigeria from. The study used annual time series data for 1981- 2017 obtained from the Central Bank of Nigeria statistical bulletin. The study adopted simple percentage and chi square in analyzing the data obtained. The result of the analysis reveals that both bank based and stock market financial deepening proxies has significant and positive effect on economic growth and that the banking sector and stock market in Nigeria has an important role in the process of economic growth. The study recommended that policy makers should consider reducing impediments to liquidity in the stock market, easing restrictions on international capital and entry into the market to ensure that more companies are listed, policies aimed to reduce the high incidence of non performing credits to ensure that private sector credits are channeled to the real sector of the economy and monetary authorities should implement policies that increase the flow of investible funds and improves the capacity of banks to extend credit to the economy as this will make broad money supply and private sector, to significantly impact on economic growth in Nigeria.

                                             CHAPTER ONE


1.1 Background of the Study

The link between financial sector stability and growth is explained by increased market depth, which potentially increases market efficiency. The link between financial deepening institution and economic growth has long received significant attention from several economists’ literatures. Financial deepening institution helps in increasing the provision and choices of financial services which would come through its financial infrastructure. Financial deepening institutions comprises of central Bank of Nigeria, commercial banks, discount houses, other financial institutions, capital markets, Assets management, insurance companies and pension sub-sectors. The above institutions trade financial instrument such as domestic currency, foreign currency, stocks, and derivatives. The role of the financial sector in any economy is that of intermediation by channeling savings from the area of surpluses to that of deficits.

To best understand the impact of financial deepening on economic growth, it is imperative that we dig into its inception to understand its effects on the Nigerian Economy. Prior to 1986, the system was under “financial repression” with an undesirable real interest rate, a high tax burden on financial earnings, high liquidity, possible financial misallocations, and reserve requirement ratios (Central Bank of Nigeria, 2003). After 1986, the financial markets became an active part of the economy. The lifting of repressive controls on financial market instruments was realized gradually over 1986 and beyond as part of policy change. It was expected that the 1986 shift in policy stances in the form of SAP would be a watershed in the life of the national economy. Against all expectations, the Nigerian economy has remained underdeveloped. The present work is an attempt to investigate into the causal impact of financial deepening on economic growth in case of Nigeria.

Financial deepening institutions exist is to bring together savers and borrowers, and offering risk management facilities to borrowers and lenders by the way of insurance, hedging, and financial diversifications. While financial system facilitates information flow, it also enables supervision, investigation, risk management, and liquidity opportunities (Orhangazi, 2011).  According to (Bagehot, 1873), people demand a large portion of their money from system, banking and industrial system face a great danger. Capital markets and financial intermediaries contribute the financing process of real investment by facilitating transfers from surplus agents to deficit agents (Tobin, 1984). Financial deepening institution submits information about practicable investments and capital allocation in advance. After providing finance for investments to investors, it also enables supervision and usage for investments by corporate management. Moreover, it facilitates trade, diversification and risk management in economy. In addition, it fulfills the duty of corporation of savings and prompts it, and also facilitates the exchange of goods and services.

Financial deepening is the growth of accumulation of financial assets in an economy more than itself. When supply of financial asset increase in an economy, their variety of quality widens, new borrowers participate sector, and financial system develops further (Shaw, 1973). Therefore, development of financial system creates a feedback effect between financial and real development along with international integration. So, domestic financial deepening is strongly related with both higher investment and faster productivity growth (World Bank, 1997).

Economic growth here means the steady process of the economy by which the productive capacity augments over time to bring about increasing levels of national output (Todaro and Smith, 2009). Simon Kuznets gained the Nobel Economics Prize due to his working about national income historical growth in 1971. Kuznets (1959) described the economic growth as providing various economic goods to its population of a country in the long run capacity. It is discussed for many years that the financial development causes economic growth and these two variables have a relationship with each other. While the causality relation from financial development to economic growth is handled as supply leading, the approach of economic growth stimulates the financial development is expressed as demand following (Patrick, 1966). Therefore the question of whether there is a relationship between financial deepening and economic growth is raised as a research question here. The development of financial sector as supply leading, or demand following, or two-way lead to research of one-way and two way causality relation investigations.

Financial depth has been increasing in recent times, but a lot remains to be achieved. This gives credence to the wide varieties of reforms that have taken place in the country since 1986, all in a bid to formalize and integrate many stakeholders and players, especially the informal sector. In 2004, the CBN carried out a far reaching reform. The reform exercise led to the increase in the minimum capital requirements for the commercial and micro-finance banks respectively. At the end, there were 25 commercial banks. This was further reduced to 24 banks at the end of December 2007 with the emergence of Stanbic Bank Plc and IBTC Bank to form Stanbic IBTC Bank Plc. In the post consolidation era, there are fewer banks now with improved minimum capital requirement of ₦25 billion each. Unfortunately, the fear of systemic risk lingers, the supply of credit to investors is still questionable, while the country’s economic growth is relatively low. This poses a major challenge to the country’s economic growth and financial sector.

1.2 Statement of the Problem

The Central Bank of Nigeria (CBN) has invested so much to ensure that the financial sector in Nigeria maintain a considerable depth and remain liquid with a view to competing effectively within the global financial market. They came up with several reforms in response to the challenges posed by developments in the system such as systemic crisis, globalization, technological innovation and financial crisis. These reforms often seek to act proactively to strengthen the system. Yet, there is still need to deepen the Nigerian financial sector and reposition it for growth and integration into the global financial system in conformity with international best practices. Nevertheless, there have been notable developments in the Nigerian financial market recently. However, in spite of these, a lot still remains to be achieved. According to (Oriavwote & Eshanake, 2014), “the problem of macroeconomic instability has continued to be a hindrance to the development of the financial sector in Nigeria. Frequent policy reversals have caused disinvestment in the financial and real sectors, which have negatively affect ted macroeconomic performance”. The implication from the above is that the need for increased financial accessibility and inclusion is imperative, hence the need for this study. This study therefore examined the financial development and economic growth in Nigeria with a view to ascertaining if financial deepening leads or follows economic growth.

1.3 Objectives of the Study

The main objective of this study is to examine the influence of financial deepening on economic growth using time series data set in Nigeria from 1981 to 2017. Specifically the study seeks to:

  1. To ascertain a long run relationship between financial deepening variables and economic growth in Nigeria.
  2. To examine the effect of money supply on economic growth in Nigeria.
  • To determine the effect of private sector credit on economic growth in Nigeria.
  1. To assess the effect of market capitalization on economic growth in Nigeria.

1.4 Research Question

Research questions formulated for this study are:

  1. Is there any significant relationship between financial deepening and economic growth?
  2. Does the private sector credit influence economic growth in Nigeria?
  3. Does market capitalization have any significant impact on economic growth in Nigeria?
  4. To what extent is the effect of money supply on economic growth in Nigeria?
  5. To what level has the financial savings stimulated economic growth in Nigeria?


1.5 Statement of Hypothesis

The following Research hypotheses were formulated to guide the study:

H0: There is no significant causal relationship between market capitalization, private sector credit, money supply and real Gross Domestic Product in Nigeria.

H1: There is no significant causal relationship between market capitalization, private sector credit, money supply and real Gross Domestic Product in Nigeria.

H0: Financial deepening has no positive effect on economic growth in Nigeria.

H2:  Financial deepening has a positive effect on economic growth in Nigeria.

1.6 Significance of the Study

Since Economic growth is driven capital accumulation, based on the belief that financial development enhances economic growth. The significance of these studies is that the link between financial sector and economic growth could be traced through the activities of the banks and non-bank institutions in the financial system. It is belief that at the end of this research the findings will be beneficial to the following stakeholders:

Financial Institution: This study will help the financial Institution operators to understand the dynamics in financial policies thereby equipping them to participate in a more sustainable manner in the financial system. The financial institutions are the channels through which financial deepening is implemented to foster economic growth.

Investors: The result of the study would be of benefit to investment analysts and investors in examining the effectiveness of financial deepening and thus evaluating the option available for accessing long-term, short-term, non-debt financial capital which enables investors to avoid over reliance on debt financing.

Policy Makers: The effect of financial deepening on economic growth is important as this will inform and update Nigeria policy makers to give priority to all policies that affect financial deepening and find ways through which financial deepening can be made more effective and efficient. This study will help formulate policies capable of enhancing the development of the financial sector. According to Ndebbio (2000), the financial sector is the conduit through which financial deepening is manifested.

Researchers: Individuals or groups who want to study the effect of financial deepening on economic growth will find this work very useful because it carefully analyzed the impact of financial deepening on economic growth and proffered solutions on how financial deepening can be made more efficient. As a matter of fact, it adds to already existing empirical literature in the context of Nigeria.

1.7 Scope and Limitation of the Study

This present research covers the period from 1981 to 2017. This period however, is considered by the researcher wide enough to assess empirical literatures that will influence policy decisions in the financial sector of the economy. The major constraint of this research is the sourcing of the relevant material as some of the materials needed were not readily available. Money is also a serious impediment. This is as a result of numerous trips. That has to be embarked upon for the purpose of the work. The prevailing like fuel price contributed to the increase of transportation fare. A lot of money is also needed for the typing and binding of the research work itself. Another major limitation is the inability of the respondents to make available some useful material, which they describe as confidential and therefore it cannot be made available. Again, there is issue of time constraint which enforced on the researcher a lot of handwork to ensure that the research was completed with the stipulated time and other factors that cannot be avoided.

1.8 Justification of the Study

This study is justified by several evidence from existing literatures on the subject matter. Although most studies have found that financial development contributes to economic growth, for instance Goldsmith (1969), Levine (1993), and McKinnon (1973), they have not ended the debate on the direction of causality between financial deepening and economic growth. It is expected that the outcome of this present research will shed more light on the role of financial deepening on economic growth in Nigeria. If the development of financial system affects economic growth positively, large financial deepening rate will make economic growth increase. When this rate is small, due to weak financial deepening, economic growth will not reach the required level (Greenwood, 1990). Thus, how economic growth is affected by financial deepening or financial system is an important point for discussion. This study contributes to knowledge by investigating empirically the causal relationship between financial deepening and economic growth in Nigeria.

1.9 Definition of Terms

Financial Deepening: Financial deepening is a term used by economists to refer to increasing provision of financial services. It can refer both a wider choice of services and better access for different socioeconomic groups. Financial deepening can have an effect on both individuals’ and societies’ economic situations.

Economic growth: Economic growth occurs when an economy’s productive capacity increases which, in turn, is used to produce more goods and services. Jhingan (2003) defines economic growth as a process whereby the real per capital income of a country increases over a long period of time. According to him, economic growth is measured by the increase in the amount of goods and services produced in a country.

Financial Development: Financial development is part of the private sector development strategy to stimulate economic growth and reduce poverty. Overcoming “costs” incurred in the financial system.

Market capitalization: Market capitalization is the market value of a publicly traded company’s outstanding shares. Market capitalization is equal to the share price multiplied by the number of shares outstanding

Private sector credit: Domestic credit to private sector refers to financial resources provided to the private sector by financial corporations, such as through loans, purchases of non-equity securities, and trade credits and other accounts receivable, that establish a claim for repayment.

Money supply: In economics, the money supply is the total value of monetary assets available in an economy at a specific time. There are several ways to define “money”, but standard measures usually include currency in circulation and demand deposits.

Real Gross Domestic Product: Real gross domestic product is a macroeconomic measure of the value of economic output adjusted for price changes. This adjustment transforms the money-value measure, nominal GDP, into an index for quantity of total output.



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