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The study analyzed the impact of financial liberalization on the economic growth of Nigeria (1980 – 2016). The index of financial liberation was credit to private sector, exchange rate and interest rate. The specific objectives were to: determine the impact of credit to private sector on economic growth of Nigeria; determine the impact of exchange rate on economic growth of Nigeria and to determine the impact of interest rate on economic growth of Nigeria. Data used for the study were analyzed with trend and multiple regression analysis using the Ordinary Least Squares (OLS) method. The result shows that credit to private sector has positive and significant impact on gross domestic product of Nigeria while exchange rate has significant but negative impact on gross domestic product. On the contrary, interest rate has positive but insignificant impact on gross domestic product of Nigeria. It is recommended that the monetary authorities and policy makers in Nigeria need to support the liberalization process by formulating complementary policies and financial sector reform measures that will help in strengthening the impact of the liberalization process on the economy; formulate and implement monetary policies that leads to decrease in exchange rate and also ensure that the benefits of the liberalization exercise is maximized.
























  • Background of the Study

The financial system plays a key role in the development of economic growth. Financial liberalization is defined as removal of controls and restrictions placed on the financial sector by a governing authority. The history of financial liberalization can be traced back to 1970s due to the seminal work of McKinnon (1973) and Shaw (1973) in Orji, Ogbuagor and Orji, (2015) asserted that liberalization of the financial sector will lead to increase in savings, encourage investments and induce economic growth. Hence, many countries especially developing countries like Nigeria have embraced financial liberalization as the way forward for their economies.

Financial liberalization became a useful and important monetary policy in many countries following the directive from the “Washington Consensus” or “Bretton Woods.

Furthermore, Johnston andSundararajan (2009) opines that financial liberalization can be viewed as a set of operational reforms and policy measuresdesigned to deregulate and transform the financial system and its structure with the view to achieving a liberalized market-oriented system within an appropriate regulatory framework. Financial liberalization can take many forms such asderegulating interest rates, eliminating or reducing credit controls, allowing free entry into the banking sector, givingautonomy to commercial banks, permitting private ownership of banks, and liberalizing international capital flows.

The theoretical predictions are ambiguous on the role of financial market liberalization for promoting high and sustainableeconomic growth, by promoting cross-country risk-diversification, financialliberalization fosters specialization, efficiency in capital allocation and growth. By generating international competition, it may also improve the functioning of domesticfinancial systems, with beneficial effects on savings and allocation (Klein and Olivei, 2008).

In Nigeria contest, liberalization of the financial sector had repressed financial market which the government and the Central Bank of Nigeria (CBN), restricted and controlled the activities of the financial sector. However, following the adoption of SAP, Nigeria liberalized her economy in August 1987. This policy initiative commenced with the liberalization of interest rates. Apart from the liberalization of interest rates, the reform also involved promotion of market-based system of credit allocation, enhancing competition, and efficiency of the regulatory and supervisory framework (Jegede and Mokulolu, 2008; Aguet al., 2014). The adoption of this economic package was motivated by the need to proactively put the Nigerian banking industry and the economy at large on the path of global competitiveness. Interest rate liberalization which was the first financial reform to be undertaken was aimed at enhancing the ability of banks to charge market-based loan rates and hence guarantee the efficient allocation of scarce resources (Ikhide and Alawode, 2011). Other aspects of liberalization followed the liberalization of interest rates subsequently.

As it were, the performance of the Nigerian economy which is reflected by the growth rate of the Nigerian gross domestic product (GDP) shows that the economy has been fluctuating since 1960 when Nigeria got her independence.The economic growth is a gradual and steady change in the long-run which comes about by a general increase in the rate of savings and population (Jhingan, 2008). It has also been described as a positive change in the level of production of goods and services by a country over a certain period of time. Economic growth is measured by the increase in the amount of goods and services produced in a country. An economy is said to be growing when it increases its productive capacity which later yield more in production of more goods and services (Jhingan, 2008). Economic growth is usually brought about by technological innovation and positive external forces. It is the yardstick for raising the standard of living of the people. It also implies reduction of inequalities of income distribution.

The financial sector of any economy in the world plays a vital role in the development and growth of the economy. The development of this sector determines how it will be able to effectively and efficiently discharge its major role of mobilizing fund from the surplus sector to the deficit sector of the economy. This sector has helped in facilitating the business transactions and economic development. If a financial system liberalization is well developed, it will enhance investment by identifying and funding good business opportunities, mobilizes savings, enables the trading, hedging and diversification of risk and facilitates the exchange of goods and services. All these result in a more efficient allocation of resources, rapid accumulation of physical and human capital, and faster technological progress, which in turn results in economic growth Orji, Ogbuagor and Orji, (2015).


1.2 Statement of the Problem

The Nigerian financial market, like those of other less developing countries, was highly regulated leading to financial disintermediation which retarded the growth of the economy. Most third world countries (including Nigeria) had in the past used governmental interventions as a tool allocation of resources. These interventions have been described as not only repressive but a major factor retarding the growth process of the economy in addition to being harmful to the banking sector whose interest the liberalization is aimed at protecting. Indeed, the Nigeria growth performance has become worrisome over the last two decades. During this period, growth is sluggish and dismal to the extent that the efficacy of the various dosages of different reform policies remains an open-ended question due to the current issue of economic recession in the Country (Akingunola, Adekunle, Badejo and Salami, 2016).

McKinnon et al., (1973) brought the problem of financial repression in developing countries into focus. They claimed that financial liberalization policies would increase savings, which would spur investments and economic growth, but negative real interest rate causes a decline in the savings level, resulting in low investment levels and growth rates. Although, with rising interest rates financial liberalization would increase both savings and productive investment levels but, on the contrary, Structuralists and the neo- Keynesians stated that financial liberalization hurts economic development and increases the rate of inflation as a result of deregulation of financial system. Furthermore, financial liberalization causes an increase in interest rates and manufacturing costs, causing prices to rise.

On the basis of financial liberalization paradigm, developing countries took initial financial liberalization measures in the early 1980s, sometimes yielding impressive results. This motivated other countries to liberalize their financial systems without putting necessary and accurate measures into consideration which will force financial liberalization to increased fragility and vulnerability giving rise to crises.

According to Klein and Olivei (2008), financial liberalization may be harmful for growth in the presence of distortions and deregulation of number of financial institutions in the country. It maytrigger financial instability, as well as misallocation of credit and capital which aredetrimental for private and public business performance and macroeconomic performance. The empirical literature has not been able to resolve this theoretical controversy. The financial liberalization does not affect growth heterogeneously across countries at different stages of institutional and economic development because countries had different macroeconomic framework which may not be in tandem with liberalization of financial market.

On the other hand, opponents of financial liberalization argue that it increases the risk of speculative attacks and increases a country’sexposure to international shocks and capital flight which is harmful to economic growth (Mohammad, 2013).

However, financial liberalization according to theory is meant to foster economic growth through increase in savings via an increase in real deposit rate and increase in private investment in high priority sectors, but how this policy has contributed to the growth of the Nigerian economy remains an empirical question and as a result. Most previous empirical research on the topic did not captured clearly the exact channels through which financial liberalization had impacted on economic growth of Nigeria. This is because the financial liberalization variables were lumped together in a multiple regression model such that the growth impact differential of each variable was not clearly isolated.

To avoid this pitfall in the existing empirical literature, the study will isolate the growth impact differential of each financial liberalization variables [credit to private sector, exchange rate, interest rate and lending rate] on the Nigerian economy. Using this study approach, the empirical results of the study will provide a strong basis to make a meaningful analytical discussion of the exact impact that liberalization of the Nigerian economy in 1986 have had on its growth. This will help fill the gap in the literature.

Hence, this research work seek to examine the impact of financial liberalization on economic growth of Nigeria (1980 – 2016).





1.3 Objectives of the Study

The broad objective of the study is to examine the impact of financial liberalization on the economic growth of Nigeria (1980 – 2016). The specific objectives are to:

  1. determine the impact of credit to private sector on economic growth of Nigeria.
  2. determine the impact of exchange rate on economic growth of Nigeria.

iii. determine the impact of interest rate on economic growth of Nigeria.


1.4 Research Questions

  1. What are the impact of credit to private sector on economic growth of Nigeria?
  2. What are the impact of exchange rate on economic growth of Nigeria?
  3. What are theimpact of interest rate on economic growth of Nigeria?


1.5 Research Hypotheses

H01: Credit to private sector has no significant impact on economic growth of Nigeria.

H02: Exchange rate has no significant impact on economic growth of Nigeria.

H03: Interest rate has no significant impact on economic growth of Nigeria.


1.6 Significance of the Study

The role of financial liberalization in the developmental journey of an economy cannot be over emphasized, especially with the current trend of globalization. Nigeria being part of the global village, is not left out of this world development. This research work focus on how financial liberalization impact on economic growth of Nigeria. The findings of this research work transcend beyond mere academic brainstorming, but willbe of immense benefit to federal agencies, policy makers, intellectual researcher and public and private sector, domestic and international trade think tanks that occasionally prescribe and suggest policy options to the government on financial related issues. It will also help the government to see the effectiveness of financial liberalization policy on the economic growth of the nation over the years.

This research work will further serve as a guide and provide insight for future research on this topic and related field for students who are willing to improve on financial liberalization related topics. It will also educate the public on various government policies as related to financial liberalization issues.


1.7 Scope of the Study

The study will focus on the impact of financial liberalization on economic growth of Nigeria. It will span through the period of 1980 – 2016.



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