FINANCIAL DEEPENING AND ECONOMIC GROWTH IN NIGERIA
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Abstract
This study aims to explore the impact of financial deepening and economic growth in Nigeria. The study used chi square and simple percentage to analyze the data. The analysis’s findings indicate that both stock market and bank-based financial deepening proxies have a sizable and favorable impact on economic growth and that the Nigerian stock market and banking industry play a key part in that process. The study recommended that policymakers take into account removing barriers to stock market liquidity, lowering barriers to foreign capital and entry into the market to ensure that more companies are listed, policies aimed at lowering 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.
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The Nigerian financial system has transitioned from a period of direct government controls to one of increased liberalization; however, the financial sector has shown evidence of increased deepening over the years; little is known empirically about the effect of financial deepening on the country’s economic growth. Increased market depth, which may boost market efficiency, explains the relationship between financial sector stability and growth. Through its financial infrastructure, financial deepening contribute to expanding the availability and selection of financial services. The Nigerian Central Bank, commercial banks, discount houses, other financial institutions, capital markets, asset management, insurance companies, and pension sub-sectors are among the financial institutions that are deepening the market (Antzoulatos, 2008).
Financial deepening has been regarded as one of the techniques whose execution can hasten development. However, the impact of this method must be assessed and examined on a regular basis, particularly in developing economies (Okafor, 2016). Financial deepening is defined as the process of developing and expanding financial institutions such as banks, stock exchanges, and insurance companies, among others, in relation to the size of a country’s economy. It also refers to an increase in the availability of financial products and services with a broader range of options to all levels of society. A strong financial system is critical to a country’s economic prosperity. It promotes the process of economic growth by mobilizing and allocating financial resources efficiently, as well as providing a well-functioning payment/transfer mechanism. Mukundi (2013) went further to opine that financial deepening (depth) is a concept usually understood to mean three things. First, that sectors and agents are able to and indeed use a range of financial markets for savings and investment decisions, including at long maturities. This is the element of degree of access to finance. Secondly, the financial intermediaries and markets are able to and actually deploy larger volumes of capital and larger turnover, without necessitating large corresponding movements in asset prices. This happens when the market is liquid (Chami, Fullenkarnp and Sharma, 2009). Thirdly, the financial sector is able and does create a broad menu of assets for risk sharing, a purpose that is providing opportunity for hedging and diversifying.
A financial sector’s strength and performance can be measured using macro-indicators such as monetary assets to GDP ratio, currency to money ratio, deposits ratio, interest rate spread, money multiplier, and so on. Less use of cash, i.e. an increase in the level of non-cash payments and transfers of funds, diminishing velocity of money markets and capital markets, competitiveness and specialization in financial functions and institutions, a high and stable ratio of money supply (broad money) to GDP, and low premiums savings and lending rates, are all indicators of financial deepening or depth. The indexes listed below have been used to assess the amount of financial deepening.
READ ALSO: AN EMPIRICAL STUDY OF FINANCIAL DEEPENING INSTITUTION AND ECONOMIC GROWTH IN NIGERIA 1981-2017
To effectively understand how financial deepening affects economic growth, it is crucial that we examine its genesis to comprehend its implications on the Nigerian economy. According to the Central Bank of Nigeria (2003), the system was experiencing “financial repression” prior to 1986 due to an unfavorable real interest rate, a high tax rate on financial earnings, large liquidity, potential financial misallocations, and reserve requirement ratios. The financial markets started to play a more significant role in the economy after 1986. As part of a policy reform, the restrictive regulations on financial market instruments were gradually lifted during 1986 and beyond. It was anticipated that the SAP policy shift of 1986 would mark a turning point in the development of the country’s economy. Contrary to forecasts, Nigeria’s economy has not advanced much. The current effort aims to investigate the relationship between financial depth and economic growth in Nigeria.
According to (Todaro and Smith, 2009), economic growth refers to the steady process of the economy in which the amount of national production rises over time as a result of increased levels of productive capacity.
Numerous empirical studies on financial deepening have been conducted as a result, with varying degrees of success in determining its effects and implications for economic growth. These inconsistent conclusions depend on the data sets and proxies used to measure financial deepening as well as the nations’ relative states of development. Financial deepening has been measured using a number of variables in various research. For instance, market capitalization/GDP or the ratios Ml/GDP, M2/GDP, and M3/GDP have been used to estimate the size of the financial industry (King and Levine, 1993). Using metrics like the credit to the private sector/GDP and/or value traded ratio, the financial sector’s activity has also served as a stand-in for the financial system’s deepening.
Other studies have used metrics like turnover ratios, bank overhead expenses, or net interest margins to quantify financial deepening in terms of the effectiveness of the financial sector (Antzoulatos, 2008). However, numerous studies have utilized various combinations of these variables to assess the evolution of the financial system in various nations. Antzoulatos (2008); Huang (2005).
The initial level of financial development is a good predictor of the subsequent rates of economic growth, according to a number of empirical studies conducted across countries (Levine and King, 1993). On the other hand, other studies (De Gregorio and Guidotti, 1995) show evidence of the detrimental effects of financial deepening on growth. This study will investigate the influence of financial deepening on economic growth in Nigeria.
1.2 Statement of the Problem
The Central Bank of Nigeria (CBN) has made significant investments to make sure that Nigeria’s financial industry maintains a significant depth and remains liquid in order to effectively compete within the global financial market. In response to the difficulties presented by systemic crises, globalization, technical innovation, and financial crisis, they developed a number of reforms. These improvements frequently aim to strengthen the system proactively. In line with global best practices, the Nigerian financial industry still has to be strengthened and repositioned for expansion and integration into the global financial system. Nevertheless, the Nigerian financial market has recently seen some noteworthy improvements. Nevertheless, despite these, there is still more to be accomplished. “The issue of macroeconomic instability has continued to be a barrier to the development of the financial sector in Nigeria,” claim Oriavwote and Eshanake (2014). Disinvestment in the real estate and banking sectors as a result of frequent policy reversals has a detrimental impact on macroeconomic performance. The need for greater financial inclusion and accessibility follows logically from the foregoing, which is why this study is necessary. In order to determine whether financial deepening precedes or follows economic growth, this study looked at both financial development and economic growth in Nigeria.
1.3 Objectives of the Study
The main objective of this study is to investigate the influence of financial deepening on economic growth. The specific objectives are;
- To determine a long-term link between Nigerian economic growth and financial deepening characteristics.
- To investigate the effect of money supply on economic growth in Nigeria.
- To ascertain the impact of private sector loans on Nigeria’s economic expansion.
- To evaluate how market capitalization affects Nigeria’s economic expansion.
1.4 Research Question
Research questions formulated for this study are:
- Is there any significant relationship between financial deepening and economic growth?
- Does the private sector credit influence economic growth in Nigeria?
- Does market capitalization have any significant impact on economic growth in Nigeria?
- To what extent is the effect of money supply on economic growth in Nigeria?
- 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 a 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 capital accumulation drives economic growth, it follows that financial development should also drive economic growth. These studies are important because they show how the actions of banks and non-bank institutions within the financial system can be used to determine the relationship between the financial sector and economic growth. It is anticipated that the following stakeholders will benefit from the research’s findings:
To 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.
To 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.
To 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.
To Researchers, it is expected that individuals or groups who want to understand the indebt 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 will add to already existing empirical literatures in the Nigerian context.
1.7 Scope and Limitation of the Study
The scope of this research work is quite broad that it encompasses the study of financial deepening and economic growth in Nigeria, it will cover the activities of the Central Bank of Nigeria from 1981-2017. A study of this nature cannot be done without some problems and as such it was constrained by many factors:
Time: While embarking on this detailed research work, the researcher will be having lectures, preparing for examination. So time will not be enough for the researcher to perfect the work.
Finance: Financial inadequacy was a major limitation to this work; the researcher is faced with financial difficulties as a student. The need for materials, transport fare and logistics needed for this research was not adequately provided.
1.8 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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