Financial Deepening and Economic Growth in Nigeria
Chapter One
BROAD OBJECTIVE OF THE STUDY
This research thus aims at investigating whether financial deepening in the Nigerian financial system has led to any significant growth of the economy.
SPECIFIC OBJECTIVES OF THE STUDY
Through this study, the researcher intends to:
- Determine the relationship between gross national savings and real deposit rate.
- Determine the nature of the relationship between indices of financial sector development and economic growth.
CHAPTER TWO
LITERATURE REVIEW
In recent times there has been a rise in conflicting views on the relationship between financial deepening and economic growth across the globe. Studies like Waqabaca (2004), Azege (2004), Nzotta and Okereke (2009), Sulaiman, Oke and Azzez (2012) revealed positive relationship between financial deepening and economic growth, while studies of Ardic and Damar (2006), Guryay, Safakli and Tuzel (2007) revealed contrary. The impact of financial deepening on economic growth has been studied in financial structure theories including bank- based, market-based, financial service based and law and finance-based theories. The need for a well-developed and functional financial system will aide growth if the various economic agents in the market see their investment decisions as catalyst for economic growth and development of the economy they operate.
Conceptual review
Financial Deepening
Financial deepening is defined as the effectiveness of financial institutions in mobilizing savings for the investment purposes. This is due to the fact that growth of domestic savings crucial for diversification of financial claims. As such it is the increased ratio of money supply to Gross Domestic Product (Nzott, 2004). According to Shaw (1973) financial deepening involves specialization in financial functions, organized domestic financial institution and markets gain relation to foreign markets. An increase in monetary system will enhance profitability of other institutions as well.
Financial deepening may promote economic growth by its ability to mobilize more investments thereby lifting returns to financial resources, and hence raises productivity. Financial markets are important as they play intermediation role, by channeling funds from savers to investors (Ghani, 1992).With efficiency and without repression, the outcome of financial deepening is usually a well-developed financial sector with a sustainable economic growth. However, where there is no developed financial deepening also called “financial shallowness” the growth of the economy is not guaranteed (Tigabu, 2009). From the foregoing debate, a competitive and well-developed financial sector must be an important contributor to economic growth.
Well-functioning financial institutions will lead to economic efficiency, expanded liquidity, mobilized savings, capital accumulation and the transfer of resources from non- growth sectors to the more growth-inducing sectors. Besides, financial deepening encourages a competent entrepreneur response in these growth induced economies. Financial deepening has been found to enable the financial intermediaries to effectively perform their functions into productive capital (Ndege, 2012).
CHAPTER THREE
RESEARCH METHODOLOGY
Introduction
This chapter presents the methodology that will be used to conduct the study. It specifies the research design, what the target population will be, how data will be collected and the method of analysis.
Research Design
The study adopted a causal and longitudinal research designs. The researcher sought to determine the causal relationship between financial deepening and economic growth. According to Cooper and Schindler (2003) causal research design is the investigation of cause-and-effect relationships between variable under study. The design is used in preliminary and exploratory studies to allow researchers to gather information, summarize, present and interpret for the purpose of clarification. This design is also useful because it secures evidence showing the relationship between the variables under study. Longitudinal research design is concerned with multiple observations over time (Cooper & Schindler, 2003). The fact that this study involved studying data over a given period of time, the design fits the study. This study sought to determine the relationship between financial deepening and economic growth in Nigeria.
Population and Sampling
The population of the study was all the 21 commercial banks in Nigeria with the exclusion criteria where commercial bank under receivership was not be included, therefore 41 banks were studied (see Appendix iii). Due to the manageability of the population size the study was a census study.
CHAPTER FOUR
DATA ANALYSIS AND FINDINGS
Introduction
In this chapter, the focus is on the presentation of data and interpretation of the findings. The tools adopted for this study included descriptive statistics, the root test for stationarity using Dickey and Fuller, this was then followed by Johansen cointegration test that tests the long run relationships between variables. Post estimation tests of Impulse response were performed to establish the length that effects will last. Granger causality test was carried out to determine whether there exist any causal relationships between the variables under study. Residual autocorrelation test was carried out to find the goodness of the fitted vector error correction model.
CHAPTER FIVE
DISCUSSION, CONCLUSION AND RECOMMENDATIONS
Introduction
This chapter presents the discussions and conclusions based on the findings of the study, recommendations and areas for further research.
Summary and Discussion of the Findings
The purpose of this study was to investigate the relationship between financial deepening on economic growth in Nigeria, with major focus on finding the relevance of the theories in the Nigerian economy that is whether the financial deepening leads to economic growth or whether the economic growth triggers financial deepening. The reviewed literature on the relationship between the economic growth and financial development overwhelmingly suggest as positive, first-order relationship between the two. However, an empirical study on the issue of causality between the financial development and economic growth was not very clear.
To represent economic growth, the study used GDP (Gross domestic product) and percentage change data natural logarithm was taken. Financial deepening was defined to include the commercial bank liquid liabilities, credit to the private sector by the commercial banks, commercial and central bank asset ratio (CCBA) and the causal relationship between the financial deepening and economic growth. All these were ratios to the GDP.
To attain the set objectives, the study employed the linear regression analysis to determine the relationship between the dependent and the independent variables. The study performed preliminary tests for normality, multicollinearity, autocorrelation and heteroskedasticity. The researcher further performed post analysis tests such as VECM, impulse response functions and the variance decompositions.
The study results from the impulse response analysis show that a one standard deviation shock on all the independent variables immediately caused an increase in the economic growth in the first year before declining in the second year and then stabilizing after subsequent years. These findings were confirmed by the variance decomposition results which showed that the individual independent variables largely influenced the change in economic growth except the CCBA which marginally influenced change in the economic growth. Singling out on the commercial bank savings, the results show that a change in the deposits will result into a 50% change in the economic growth. The study findings are in consistence with the views of Jappelli and Pagano (1994) who found that the higher the domestic savings rate, the higher the economic growth.
To determine the causal linkage between the financial deepening and economic growth, the granger causality test gives evidence of no causality between the financial deepening indicators and economic growth (GDP) and vice versa. The study therefore concluded that causality between the financial deepening indicators and GDP does not exist. In addition lack of causality does not persist. However, there is a unidirectional causality running from credit to private sector to GDP. In addition, the study finds that commercial central bank asset ratio granger cause GDP growth. Further, evidence from the results was the unidirectional causality between commercial and central bank asset ratio and liquid liability. This indicates that financial deepening is not an appropriate indicator to forecast the economic growth. This is consistent with Attanasio and others (2000) who also found weak causal linkage between the two variables (financial deepening and economic growth. However, contrary to our findings, some studies established bi-causal relationship or unidirectional causality. Katırcıoglu and Naraliyeva (2006) found a bicausal linkage between the savings and economic growth.
The study findings further showed that the commercial bank credit to the private sector was a stimulant to the economic growth. This was evident in the results for the impulse response analysis where the economic growth respondents very fast to the change in the credit to the private sector. The result in the variance decomposition was clear that a change in the credit to the private sector will cause a change of more than 40% in the economic growth. The study findings are in consistent with the arguments by Akpansung and Babalola (2010) in their study examined the relationship between the banking sector credit and economic growth in Nigeria where they found the private sector credit positively influenced the economic growth.
The findings of the study revealed that one standard deviation shock in liquid liability results into an immediate increase in the economic growth before fluctuation in the coming periods. The results in the variance decomposition which revealed that a change in the liquid liability would result into a more than 64% change in the economic growth is in consistent with the views by Agu and Chukwu (2008); Aslam (2008); and Aziakpono (2008) that there exists a positive relationship between liquids liabilities ratio and economic growth.
Conclusion
The study sought to establish the relationship between financial deepening indicators and the economic growth in Nigeria. From the empirical analysis the study found that there was positive significant effect between the financial deepening on economic growth in the long run. Lending credence to the supply leading hypothesis that financial deepening cause‟s economic growth. Also, the private sector credit contributes positively to economic growth same as commercial bank deposit and liquid liabilities. Others with positive effect in the economic growth were the commercial bank deposits and CCBA though marginal.
From the findings therefore, even though there has been clear improvement in the financial sector in the recent past, the degree of financial intermediary development is still below the required threshold needed to spur economic growth. The implication is that the financial sector is still not able to mobilize and effectively allocate funds to the private sector. From the demand side, it was also observed that GDP had a positive and significant impact on savings, bank asset, money supply and private sector credit, thereby laying credence to the demand following hypothesis. In the Long-run, there is strong evidence that economic growth is leading financial development when bank credit to private sector is used thereby supporting the demand following hypothesis. This study concluded that financial deepening propels economic growth because the variables of financial deepening were more significant in explaining economic growth, therefore supporting the supply leading hypothesis.
Recommendations
There should be a determined effort by the monetary authorities to bridge the gap existing between lending rate and deposit rate, foster a moderate rise in nominal rates and stabilize inflationary pressures so that the people will be fully motivated to save in a bid to generate needed loanable funds for investment in Nigeria.
There is an urgent need to sustain a higher level of macroeconomic stability in Nigeria, reduce the high incidence of non performing credits ensure that private sector credits are channeled to the real sector of the economy, enhance the level of corporate governance in the financial system.
Based on the findings of the study, another recommendation is that monetary authorities should continue with the policy reforms to consolidate the emerging confidence in the financial system. The financial sector reforms should be intensified; this will create a sound market-oriented financial sector, leading to an increase in the level of financial savings and level of financial activities in the financial markets, which will translate to increased deepening and hence economic growth.
Limitations of the Study
The first limitation of the study was that this study was done on the commercial banks in Nigeria only. However, financial deepening is not limited to commercial banks only but also others such as mutual funds, insurance companies, and co-operative societies among others.
Secondly, this study used secondary data. This is a limitation because the secondary data may not have been collected with this study in mind and therefore the accuracy of the data may have been compromised.
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