THE CONTRIBUTION OF THE FINANCIAL SYSTEM IN ECONOMIC GROWTH OF NIGERIA

THE CONTRIBUTION OF THE FINANCIAL SYSTEM IN ECONOMIC GROWTH OF NIGERIA

ABSTRACT

The study examines the contribution of the banking industry to the development of Nigeria economy. Specifically, the study seeks to examine the relationship between economic growth and the level of financial intermediation and to determine the impact of interest rate on economic development of Nigeria. The study adopts survey method in order to obtain genuine information needed for the study. The research also make use of questionnaire as the instrument for data collection while the data collected was analyzed using tables, percentage and hypothesis were tested using Chi-Square. The findings of the study shows that there is a significant relationship between economic growth and the level of financial intermediation by the banks, and that banking industry interest rate have significant impact on economic development of Nigeria. Finally, the study recommend that the government should provide enabling environment for the banking industry to enable them carryout their financial intermediation responsibility very well and that the regulatory body responsible for regulating the interest rate charged by the bank should ensure that the banks do not charge too much or higher interest rates on loans.

CHAPTER ONE

INTRODUCTION

1.           Background of the Study

A sound financial system is critical to economic growth. It enhances economic performance of the players by improving the overall welfare of the people. The financial system provides a platform for financial infrastructure to help allocate resources to individuals/units that are potentially more productive, to invest those resources (Odhiambo, 2014). The financial system provides a balance between those who have funds to invest and those in need of funds, if the problem of information asymmetry is solved. The transfer of funds from surplus units (mainly household) to deficit units (mainly business, government and some households) can take place directly, while direct finance, as the process is called is inconvenient both for ultimate provider of funds and the ultimate user of funds.

The Nigerian financial system includes financial markets (money and capital markets), financial institutions including the regulatory and supervisory authorities, development finance institutions (Urban Development Bank, Nigerian Agricultural and Rural Cooperatives bank) and other finance institutions (insurance companies, pension funds, finance companies, Bureau de change, and Primary Mortgage Institutions), among others (Abdi 2017).

The structure of the Nigerian Financial System has been through remarkable changes, ranging from their ownership structure, the length and breadth of financial instruments used to the number of institutions established, regulatory and supervisory frameworks as well as the overall macro-economic environment within which they operate.

The importance of the financial system in any economy cannot be over-emphasized given the symbiotic relationship between the sector and the rest of the economy. In this era of globalization, efficient financial system are essential to attract gains from the world market, and as well insulate the domestic economy from external shocks. The financial system could also responds to the demand created as a result of economic development in the domestic economy. Theoretically the role of the financial sector can be summarized as follows: the financial sector generates wealth in the economy and facilitate the exchange of goods and services, it facilitates the process of resource mobilization, it mobilizes savings etc (Akinboade 2018).

The importance of the financial system as a catalyst in economic development is widely recognized by both monetary and development economists. In fact the need to develop domestic financial system and patterns of behaviour necessary to generate and mobilize scarce capital funds as a key condition to economic growth and development originated in the classic work of Schumpeter (1934). Since then such great interest has been aroused among researchers that the role of financial system in the economic development of African countries has come under increasing scrutiny by researchers (Agu, 2014).

Economic growth is a gradual and steady change in the state of the economy in the long-run which comes about by a general increase in the rate of savings and population (Jhingan, 2015). It can be characterized as an upward change in the level of production of goods and services by a country over a certain period of time. The financial system have been underdeveloped overtime and the underdevelopment in the financial markets has further dampened the level of economic growth in Nigeria. Even though the Nigerian financial system had experienced some progress in the past years, it has encountered some series of challenges. The issue of macroeconomic instability has continued to pose a hindrance to the development of the financial sector in Nigeria. Frequent policy reversals have resulted to disinvestment in the financial and real sectors which have impacted negatively on macroeconomic performance (Oriavwote & Eshenake, 2014). On this note, this study therefore seeks to examine the contribution of the financial system in economic growth of Nigeria: a comparative analysis of market and bank based system.

1.           Statement of the Problem

The fundamental question in economic growth that has preoccupied researchers is why countries grow at different rates. The empirical growth literature has come with numerous explanations of cross-country differences in growth, including factor accumulation, resource endowments, the degree of macroeconomic stability, educational attainment, institutional development, legal system effectiveness, international trade and the financial system. The list of possible factors continues to expand, apparently without limit. One critical factor that has begun to receive considerable attention more recently is the role of financial system in the growth process especially in the wake of the recent global economic and financial meltdown. The positive link between the financial depth and economic growth is in one sense fairly obvious. That is, more developed countries, without exception, have more developed financial markets. Therefore, it would seem that policies to develop the financial sector would be to raise economic growth. Indeed, the role of financial development is considered by many to be the key to economic development and growth (Agu, 2014).  While economists have generally reached a consensus on the central role of financial development in economic development theoretically; empirical works supporting this concept are conflicting. One school of thought asserts that financial system and development plays a limited role in accompanying the development of real activity; the second school of thought accords a crucial role to financial development in boosting the processes of growth, innovation and economic development; while for another group of scholars, the financial market promotes growth, with growth, in turn, comes market formation (Nicet-Chenaf, 2012). This study intends to bridge the existing gap in the literature by examining the contribution of the financial system in economic growth of Nigeria.

1.           Objective of the Study

The overall objective of this study is to examine the contribution of the financial system in economic growth of Nigeria: a comparative analysis of market and bank based system.

To achieve this, the study shall strive to accomplish the following specific objectives;

1.  Determine the impact of Deposit Money Bank Asset on economic growth in Nigeria.
2.  Ascertain the impact of Total Stock Market Capitalization on economic growth in Nigeria.

1.           Research Questions

This study will try to provide answers to the following questions;

1. What is the impact of Deposit Money Bank asset on economic growth in Nigeria?
   1. What is the impact of Total Stock Market Capitalization on long-run growth in Nigeria?

1.           Statement of Hypotheses

Based on these objectives, the following a prioriassumptions will be made;

H01: Bank-based financial structure (Bank Asset) does not have significant influence on growth in Nigeria.

H02: Market-based financial structure (Total Stock Market) does not significant impact on economic growth in Nigeria.

1.           Significance of the Study

This study will be great significance to the following:

1. To Policy Makers: Besides resolving theoretical debates, providing empirical evidence on financial structure will help in formulating growth-enhancing public policies. If the evidence supports either the bank based or market-based theory of financial system and economic growth, then policy makers can focus on formulating and implementing policies to encourage and/or enhance the development of a particular financial system.
   1. The Body of Academic: This study will contribute immensely in resolving the ranging debate on the relationship between financial system and growth. The study will contribute to existing literature, and will be of great value to further studies in Nigeria on financial structure and long-run growth.
   1. Financial Institutions: This study considers the role of banks and stock market in promoting long-run growth in Nigeria. This study, partly will review the channels through which bank and stock market activities promotes economic growth. This considerably is very important information for banks in their credit policy formulation, and for the Nigerian Stock Exchange in regulating stock market activities.
   1.           Scope of the Study

The scope of this study is limited to the contribution of the financial system in economic growth of Nigeria between 2010 to 2020. Making use of available data from other works along this line, the study will focus mainly on financial structure variable such as: total market capitalization, value of shares traded, banking credit to private sector, monetary aggregate such as currency, demand deposits, travelers’ cheque, other chequable deposits, savings deposits, small time deposits, money market deposits accounts, money market mutual fund etc.

The data will be collated from the Nigerian Stock Exchange fact books, the Nigerian Stock Exchange annual report and statements of account, Central Bank of Nigeria statistical bulletin, Central Bank of Nigeria annual statements of accounts.

1.8     Limitation of the Study

Some limitations that were identified and encountered in the process of the study include:

1. Financial constraint: – in running around to gather material for this study considering the economic meltdown, money and other resources where involved delayed the completion of this work.
2. Time: – The researcher was constrained by time in running round for the completion of this project.

1.9     Operational Definition of Terms

Financial Systems: A Financial system is a system that allows the exchange of funds between financial market participants such as lenders, investors, and borrowers.Economic Growth: Economic growth is a term used to indicate the increase of per capita gross domestic product (GDP) or other measure of aggregate income (Samuelson, 2016). It is often measured as the rate of change in GDP. Economic growth refers only to the quantity of goods and services produced and economic growth can be either positive or negative.