The Impact of Financial Development on Economic Growth in Nigeria
Chapter One
OBJECTIVES OF THE STUDY
- To analyze the impact of financial sector growth/development on economic growth in Nigeria.
- To assess the causal relationship between financial sector growth and economic growth (i.e. which is causing which).
CHAPTER TWO
LITERATURE REVIEW
An Overview of the Nigerian financial market Market
According to Anyanwu (1993) the key players on the Nigerian financial market include the Securities and Exchange Commission (SEC), which is the overall supervisory and regulatory body for the market, the Nigerian Stock Exchange (NSE), issuing houses, stock-brokers, unit trusts as well as company registrars. As the apex institution in the financial system, CBN closely monitors activities development in the financial market. The SEC was established in 1979 to replace the Capital Issues Commission (established 1973) with the overall objective of promoting an orderly, active and transparent financial market. Its major functions include:
- i) registering all security dealers and approving security issues; ii) maintaining surveillance over the securities market to prevent fraudulent and unfair trade practices; iii) ensuring protection for the investing public; and iv) regulating mergers and acquisitions and authorizing the establishment of unit trusts.
The instruments traded in the financial market are:
- Debt securities
- Equity shares
Debt securities are debentures or bonds that may have specified maturity or may be redeemed on a series of dates. There are even some without any fixed redemption dates while some may be redeemed by pre arranged sinking fund or by lottery. These securities usually attract interest since they are strictly speaking loans. Most have fixed interest rates but the current trend is to make it attract floating rates of interest. (Anyanwu 1993).
Equity on the other hands is securities method by which companies raise funds by issuing share. Hence the buyer becomes part owner of the firm.
Alile (1985) provided the definition of several concept which include;
- The Primary Market – where company shares are issued for the first time before being quoted on the stock exchange.
- The Secondary Market –this is for trading in existing stocks.
Shares can be; ordinary shares or preference shares. The later are shares of companies on which contractually fixed dividends must be paid before those on other shares. There are convertible shares, participating preference shares and redeemable preference shares. Other instruments include the federal government development loan stock and state government bonds.
CHAPTER THREE
RESEARCH METHODOLOGY
Method of Data Analysis
This sub-section presents the techniques used in analyzing the data for the study. It shows the methods adopted in order to achieve the objectives of this study. The unit root test procedures, the specifications of the causality as well as the co integration models are discussed.
The Unit Root Tests
It is required that before the application of most standard econometric techniques, the stochastic properties of variables should be examined. This involves subjecting the series to a unit root test. Because, most time series are usually non-stationary and using non stationary variables in the model might lead to spurious regression (Granger and Newbold, 1977). The first or second difference terms of most variables will usually be stationary (Ramathan, 1992).
CHAPTER FOUR
PRESENTATION, ANALYSIS AND INTERPRETATION OF RESULTS
Stochastic Properties of the Data
To proceed with the test, we examined the plot of each series to see whether there is a trend or not as shown in figure 4.1. A trend variable is necessary in the ADF and PP regression if trends are present in the series. In the absence of a trend in a series, only an intercept is included in testing for unit roots.
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
Summary of Findings
The study examined the causal relationship and impact of financial development on economic growth in Nigeria using alternative sets of Financial development indicators. The findings of the study reveal the following: Theoretical and empirical literature reviewed in this study document three categories of evidences, they are: First, a unidirectional (one-way) causality from financial development to economic growth. Second, there is a unidirectional causality from growth to financial development. The third alternative is the co-evolution (bidirectional causality) between economic growth and financial development hypothesized in both early and some recent literature. For instance, a number of models argued that the process of growth has a feedback effect on financial markets by creating incentives for further financial development, which means that the two variables are endogenously determined. Our causality result is expected to confirm at least one of these arguments. It should provide evidence that indicate the argument our finding is consistent with.
The granger causality results at lags 7 reveals some evidence of causal links between financial development indicators and economic growth in Nigeria in the period under review. Specifically, the results from causality test at lags 7 show that value of transaction and turnover ratio each drives real GDP with no reverse or feedback effect. Thus, this supports the evidence of unidirectional causal link from these two indicators to real gross domestic product. In essence, the general causality results imply that financial development do cause economic growth in Nigeria. This result is consistent with the dominant view and is in line with those theories that support the finance – led growth hypotheses. That is it is in support of supply leading hypothesis, financial repression hypothesis and Harrod – Domar growth theory argument. 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 Bagehot (1873), Schumpeter (1912), Hicks (1969), (McKinnon and Shaw, 1973), Fry (1988), Roubini and Sala-i-Marti (1992), Harrison et al (1999), Christopoulos and Tsionas (2004), Nieuwerburgh, et. al., (2005), Mishra, et. al., (2010), Odeniran and Udeaja, (2010) and Usman and Adejare, (2012). Results obtained from empirical studies conducted using data from Nigeria that were consistent with the supply-leading argument, include Aigbokhan (1996), Adam and Sanni (2005), Okpara (2010), Adelakun (2010) Afees and Kazeem (2010) and Kolapo and Adaramola (2012).
The co-integration result implies that there exists a significant long-run relationship between financial market and economic growth variables. There exist four vectors or four different linear combinations of the financial market indicators that can drift together roughly at the same time with the RGDP. The significant long run relationship is identified to be between market capitalization and RGDP as well as other variables.
This suggests that in the Long-run, economic growth determines financial development. This is in agreement with the demand following hypothesis, ie this result supports the demand led theory of finance – growth nexus. Empirical studies reviewed in this study confirming the existence of long run relationships between financial development and economic growth comprises; Levine and Zervos (1996), Agbawn (1998), Nieuwerburgh, et. al., (2005), Apergis et. al, (2007), Okpara (2010), Afees and Kazeem, (2010), Mishra, et. al., (2010), Ogege and Ezike (2012) and Kolapo and Adaramola (2012).
Conclusion
This study investigated the impact of the financial development on the growth of Nigerian economy. Empirically, we have been able to investigate the causal link between the capital performance indicators, with a number of the variables/indicators of financial reforms not generating the expected impact even though their direction of movement and pattern of effectiveness can be said to be shaped by some fundamental characteristics of the economy. At a more robust lag; ie lags 7, a one way causal relationship running from value of transaction
(VT) and turnover ratio (TOR) to RGDP is found. VT is significant at 1% level, while TOR at 10% level. We therefore, conclude that there is some evidence of causal relationships between financial development and economic growth in Nigeria as indicated by these indicators during our sample period. Results obtained were consistent with the supply-leading argument, giving rise to a conclusion in the work that financial development resulting from increases in financial institutions and financial resources, following financial liberalization, has stimulated growth in the real sector.
The co-integration result obtained shows the existence of a long run relationship between the growth of the economy proxied by real gross domestic product and the financial market indicators. The one period lag of the market all share index, capitalization, value of shares traded and turnover ratio, does not impact significantly on the growth of the RGDP. The study therefore, reached a conclusion that financial development and growth in Nigeria have a significant long run relationship; the variables are co – integrated. The economic implication of the finding suggests a need for more focus on the enhancement of the financial market so as to engender greater growth of the economy. This could be achieved through enlightment campaign on the importance of the financial market to the industrialists/small scale investors and more relaxation of the stringent entry requirements of the companies into the Nigerian Stock Exchange.
Policy Recommendations
In order for the Nigerian financial market to be pivotal force in the growth and development, of the Nigerian economy the following suggestions or recommendations are put forward.
- The government is therefore advised to put up measures to stem up investors‟ confidence and activities in the market and more foreign investors should be encouraged to participate in the market for improvement in the declining market capitalization so that it could contribute significantly to the Nigerian economic growth.
- Maintain state of the art technology like automated trading and settlement practice, electronic fund clearance and eliminate physical transfer of shares.
- There is also need to restore confidence to the market by regulatory authorities through ensuring transparency and fair trading transaction and dealing in the stock exchange. It must also address the reported case of abuse and sharp practices by some companies in the market.
- To boost the value of transactions in the Nigerian financial market, there is need for availability of more investment instruments such as derivatives, convertibles, future, and swaps options in the market.
- Given the present political dispensation, all the tiers of government should be encourage to fund their realistic developmental programme through the financial market. This will help in boosting the activities of the financial market, as well as the financial sector. Also, it will redirect the resources that may be used in other spheres of the economy.
REFERENCES
- Abiola, I. and Babatunde, M.A (2011) “Effect of Financial Reforms on Financial development in Nigeria,” Asian Journal of Business and Management Sciences, Vol. 1 No. 8 [44-52].
- Acaravci, A; Ozturk, I and S.K. Acaravci (2007) “Finance-Growth Nexus: Evidence from Turkey”, International Research Journal of Finance and Economics, Issue 11, 29 – 40.
- Adam, J. A. & Sanni, I. (2005) “Stock Market Development and Nigeria‟s Economic Growth.Journal of Economics and Allied Fields, 2 (2), 116-132.
- Adegbite, M. A. and Babalola T. A. (2001): “The Performance of the Nigerian Financial market since Deregulation in 1986: Central Bank of Nigeria Economic and Financial Review Vol. 37 No. 3.
- Adeoye, B.A. (2007) „Financial Sector Development and Economic Growth: The Nigerian Experience”. Paper presented at the 48th Annual conference of the Nigerian Economic Society. Abuja Sheraton and Towers, 22nd – 24th August 2007.
- Aderibigbe J. O (2004), “An Overview of the Nigerian Financial System‟ CBN Bullion Vol. 28 No. 1 Jan/March.
