Academic journal article International Review of Management and Business Research

An Empirical Assessment of Financial Sector Development and Economic Growth in Nigeria

Academic journal article International Review of Management and Business Research

An Empirical Assessment of Financial Sector Development and Economic Growth in Nigeria

Article excerpt

Introduction

A well-developed financial system engenders technological innovation and economic growth through the provision of financial services and resources to entrepreneurs who have the highest probability of implementing innovative products and processes (Schumpeter, 1911). Inadequate access to the formal financial sector in Nigeria has been as a result of the lack of collateral required due to risks involved in lending but also due to high costs involved in small financial services and weak legal enforcement (Ray, 1988). In Nigeria, financial markets have not developed to expectations and the underdeveloped financial markets have further deteriorated the level of economic 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. The problem of macroeconomic instability has continued to be a hindrance to the development of the financial sector in Nigeria. Frequent policy reversals have caused disinvestment in the financial and real sectors which have negatively affected macroeconomic performance.

The lack of adequate coordination and harmonization of fiscal and monetary policies have even deteriorated the performance of the Nigerian financial sector. The high cost of assessing funds has also discouraged investors from patronizing the banking system. The development of the financial sector in Nigeria has also been hindered by poor state of infrastructure utilized in the financial sector. These include power supply, problem of telecommunication, which include difficulty in internet access etc. This has increased the cost of operation. The lack of efficient payment system has also hindered the development of the financial sector in Nigeria. The excessive use of cash has not enhanced 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 averaged 12.0 percent in 1986 rose to 26.5 percent in 2003 (Nnanna, Englama and Odoko, 2004). 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-imposition of interest rate ceiling brought about negative real deposits rates which hindered macroeconomic performance. The objective of this paper is thus to examine empirically, the implications of financial development for economic growth in Nigeria.

Other than this introductory section, the rest of the paper is divided into four sections. The second section is on the review of literature. The third section is on the methodology which is closely followed by the fourth section which is on results and discussions. The fifth section concludes this paper.

Literature Review

The link between the financial system and economic performance has been scrutinized by a large number of studies. Some stress that the importance of the financial system is overstated (see Lucas, 1988, in King and Levine, 1993a, Svensson, 2007) and others are of the view that the financial sector plays a minor role in economic development where instead the development of financial markets is a consequence of economic growth (Kuznets, 1995, in Luintel and Khan, 1999). In early economic literature, Schumpeter (1911), in King and Levine, 1993a) and Hicks (1969, in Luintel and Khan, 1999) viewed financial development as a cause of growth. Ndebbio (2004) investigated financial deepening, economic growth and development in selected Sub-Saharan African countries. Using OLS regression, the study found that financial development weakly affect per capita growth of output. This was attributed to shallow finance and absence of well functioning capital markets. …

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