The study examined the impact of financial development and economic growth in Nigeria for the period of 1970 to 2014 using the ordinary least square (OLS) method. The different measure of financial development was used to capture the different channels through which finance can affect growth. The empirical findings provide evidence that there is a positive significant relationship between financial development and economic growth in Nigeria. Thus, there is the need to deepen the financial system the more as this significantly contributes to Nigeria’s economic growth and development
- Background of the Study
Financial development involves the establishment and expansion of institutions, instruments and markets that support the investment and growth process of financial assets. A well-developed financial system engenders technological innovation and economic growth through the provision of financial service and resources to entrepreneurs who have the highest probability of implementing innovative products and processes.
Over the years, a salient feature of Nigeria’s growth drive has been a conscious development of the financial sector. For example, in the early seventies, as a result of the prevailing economic paradigm at that time, the sector was highly regulated with government holding controlling shares in most of the banks. In 1986, the liberalization of the banking industry was a major component of the Structural Adjustment Programme (SAP) put in place at that time to drive the economy from austerity to prosperity. In 2004, the consolidation exercise in the banking industry took a leading role in the national Economic Empowerment and Development Strategy (NEEDS),which was in place at that time to drive the economic agenda of the government. In 2009, as part of the broad economic measures to respond to the adverse effects of the global financial and economic measures to respond to the adverse effects of the global financial and economic crises, the central bank of Nigeria in conjunction with the fiscal authorities engineered measures to avert a collapse of the financial system with a view to maintaining economic growth.
The essence of emphasis on the development of the Nigerian financial sector is in the theory of financial repression which posits that efficient utilization of resources via a highly organized, developed and liberal financial system enhances economic growth. This thesis, more or less, confirmed the conclusions of earlier works on the importance of the financial system which is classified as supply-led theory of financial-growth nexus.
While there is a near consensus that a well-functioning financial sector is a precondition for the efficient allocation of resources and the exploitation of an economy’s growth potential, the economic literature is less consensual on how and to what extent finance affects economic growth. This, invariably, culminated in the emergence of demand-led theory of finance-growth nexus. Among others, Robinson (1952) argues that where enterprise leads, finance simply follows, suggesting that is it economic development which creates the demand for financial services and not vice versa.
It is against whether it is the development of the financial sector that leads to economic growth or vice versa. This study contributes to the literature by examining the relationship between financial sector development and Nigeria’s economic growth, hence, addressing the country’s specific dimension to finance-growth debate.
1.2 Statement of the Problem
In Nigeria, financial markets have not developed to expectations and underdeveloped financial markets have further deteriorated and level of economics growth in Nigeria. Although the Nigerian financial system recorded some progress in the last few years, like the National economy, it has been faced with many challenges.
In recent times, research interest have focused on investigating whether stock markets, especially in developing countries, have achieved the development-oriented goals for which they were originally conceived. The concept of stock market liquidity, for instance, has been used to demonstrate how developments in the securities market transmit to economic growth. This liquidity argument is based on the proposition that stock market enable forms to acquire much needed capital quickly and, by so doing, helps in facilitating capital allocation, investment, and growth. It also assists in reducing investment risk due to the ease with which equities are traded and play crucial role in helping to determine the level of economic activities in most economics. The problem of macroeconomic instability has continues to be a hindrance to the development of the financial sector in Nigeria. In addition, the competitiveness that resulted from the entry of new banks into the financial system and the liberalization of interest rates brought about a sharp rise in nominal deposit and lending rates. Maximum lending rate which averages 12.0 percent in 1986 rose to 26.5 percent in 2014. Although interest rates responded positively to financial liberalization, real rates behaved differently. For most of the reform years, real deposit rate was negative and averaged -13.5 percent compared to -7.7 percent during financial repression, high inflation rates during the reform coupled with re-impression of interest rate ceiling rough about negative real deposits rates which hindered macroeconomic performance.
From the foregoing, it is believed that Nigeria’s financial sector has and is still facing some serious problems, amidst various development reforms in the sector. This research work seeks to investigate the impact of financial development on economic growth in Nigeria as well as try to proffer policy measures to these problems.
1.3 Objective of the Study
The main aim of this study is to provide an empirical investigation of the theoretical concept that financial development often leads to economic growth.
Specifically, the study intends to:
- To examine the impact financial development on economic growth in Nigeria.
1.4 Research Hypothesis
H0: Financial development has no significant impact on economic growth in Nigeria
H1: Financial development has significant impact on economic growth in Nigeria.
1.5 Scope of the Study
The study shall focus on the empirical relationship that exists between also examine the financial development and economic growth. The study shall also examine the extent of financial development in Nigeria. The empirical investigation shall be restricted to the period between 1970 to 2014 inclusive.
1.6 Significance of the Study
A vital component of any move towards economic growth is an integrated effort towards financial development; hence, this study is significant in the following ways:
- It would provide an objective view of the trends, structures and effectiveness of financial development in Nigeria.
- The study would also provide an econometric basis upon which to examine the impact of financial development on economic growth in Nigeria.
- Lastly, it would provide policy recommendations to policy-makers on ways to boost economic growth through financial development.
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