Impact of Financial Sector Development on Nigeria

Impact of pecuniary orbit Development on NigeriaIMPACT OF FINANCIAL firmament DEVELOPMENT ON SECTORIAL GROWTH IN NIGERIA IMPLICATION FOR ECONOMIC GROWTH IN NIGERIASECTION ONEIntroductionBasic bothy, the banking sphere of influence and the non-bank institutions make up the fiscal system in Nigeria which is responsible for the suppu proportionalityn of economical yield in the Country. During the pre-liberalization era (from 1986 and below), government had sufficient financial resources to finance a intelligent proportion of economic activities (Adegbite, 2005). However, this era suffered from artificially low cost of commercial credit go forthing in inappropriate pricing of credit and deposits, acute scarcity of loanable silver in the system and lastly low level of capital formation for economic emergence. Studies reveal that the flow of credit to the priority celestial spheres did non meet the positively charged targets and failed to impact positively on output and ho use servant prices (Nnanna, 2001 Mordi, 2009).In an attempt to make the financial sector buoyant, the government decided to deregulate and liberalize all the sectors of the economy as outlined in the Structural Adjustment Program introduced in1986. During this period, interest rates were low and this eased the flow of credit to the desired sectors of the economy. By 1992, the number of banks had risen from 56 in 1986 to 120 and a capacity utilization rate of 38.1%, while the GDP rate stood at 2.9%. Due to the banking woe from 1994 to 2002, the total number banks dwindled to 99. However, the capacity utilization rose to 48% with an increased ontogenesis rate of 4%. This was due to recapitalization process undertaken by the Central aver of Nigeria (CBN) to sustain the financial sector, hence, making it competitive.In 2004, the consolidation exercise made the banking industry a leading player in the actualization of the goals set by the government for the National stinting Empowerme nt and Development Strategy (NEEDS) programme. In 2009, as part of the broad economic measures to respond to the adverse effects of the globular financial and economic crises, the CBN in conjunction with the fiscal authorities engineered measures to avert a collapse of the financial system with a view to maintaining economic growing (Odeniran and Udeeaja, 2010). Unfortunately, the supply of credit to investors remains questionable as capacity utilization rate is still low (50%), thus, retarding economic maturation with GDP of 7.5%. Despite the change magnitude usings within the financial sector, economic outgrowth still lags behind. A lot of studies consider investigated the nexus between financial sector development and economic growth on an aggregative approach. However, their studies did not look at the specific sectors which financial development influences in Nigeria, for example, agricultural sector, manufacturing sector, industrial sector and the external sector. Henc e, a original question that arises is to find out whether a link exists between financial sector development and economic growth.Going to specifics, this study aims at answering the pursual questionsWhat is the effect of financial sector development on the agricultural sector in Nigeria?What is the effect of financial sector development on manufacturing sector in Nigeria?What is the effect of financial sector development on industrial sector in Nigeria?What is the effect of financial sector development on the external sector in Nigeria?What are the constraints associated with financial sector development in Nigeria?Research ObjectivesThe main objective of this work is to investigate the link between the financial development and economic growth in Nigeria. The specific objectives areTo examine the impact of financial sector development on the agricultural sector in Nigeria.To investigate the effect of financial sector development on the manufacturing sector in Nigeria.To analyze t he impact of financial sector development on the industrial sector in Nigeria.To study the effect of financial sector development on the external sector in Nigeria.To identify the constraints associated with financial sector development in Nigeria.Theoretical critical reviewThe relationship between financial sector development and economic growth covers a broad spectrum of ideas much(prenominal) as intermediation, repression, liberalization, regulation, diversification, innovations, reforms and implementation.Though financial systems are mere intermediaries that insure the optimal allocation of savings for investment (Chick, 1998), withal, they play a decisive role in the process of economic development (Stiglitz, 1998). These views are upheld by the pre- chance uponnesians and also recognized by the post-Keynesians, though with some degree of discordance.Keynes in the 1930s hypothesized that finance precedes savings (Zina and Trigui, 2001). However, the basic import of the post- Keynesians such as Asimakopulos (1983), Kregel (1984-5), Davidson (1986), Richardson (1986) and Terzi (1986), in their chronological analysis, nominate that savings apparently appears to be a by-product in the process of the income creation. Two important theories that emerged in 1973 and have lent credence to the Keynesian hypothesis are the McKinnons Complementarity Hypothesis and Shaws Debt intermediation View. In their thesis they both argued that the repressed financial markets (low and administered interest rates, domestic credit controls, high reserve requirements and concessional credit practices) discourages savings, retards the efficient allocation resources, increases the segmentation of financial markets, constrains investment and in turn lowers the economic growth rate (see, Bouzid, 2012). These fundamental ideas of McKinnon-Shaw are enshrined in the Repression Theory and thus depict a positive relationship between interest rate and financial development. However, a number of authors feel that liberalizing the financial systems is the ultimate goal for investment and economic activities thus complimenting the McKinnon-Shaw thesis. Many developing countries have implemented financial liberalization policies finished the market-based interest rate determination, reducing controls on credit by gradually eliminating the directed and subsidized credit schemes, developing primary and secondary securities markets, enhancing competition and ability in the financial system by privatizing nationalized commercial banks with the aim of eliminating repressed regimes as suggested by the Liberalization Theory.Two other hypotheses that explain financial development and economic growth are the Supply Leading Hypothesis and Demand Following Hypothesis, in line with the views of Patrick (1966) and Demirguc-Kunt and Levine (2008) postulate a feedback instrument between economic growth and financial development. According to the supply-leading hypothesis, financ ial deepening stimulates economic growth. The demand-following hypothesis on the other hand, posits economic growth precedes financial development. This implies advancements in economic activities trigger an increase demand for more than financial services and thus leading to greater financial sector development (Gurley and Shaw 1967), also in line with the views of Goldsmith (1969) and Jung (1986).A positive relationship between financial sector development and economic growth has largely been projected by exogenic Growth Models as well as Endogenous Growth Models. Bencivenga and Smith (1991) and Levine (1991) endogenous growth simulations to a greater extent have identified the transmit through which financial markets affect long-run economic growth. The end result of this model is that economic growth performance is related to financial development, technology and income distribution (see, Chukwuka, 2012).The growth models developed by Harrod and Domar affirm the role of inv estment in economic growth, based on the dual characteristics of investment Firstly, investment creates income Demand fix and secondly, it augments the productive capacity of the economy thereby increasing its capital stock Supply Effect. In summary, the Harrod-Domar growth model postulates that economic growth go forth proceed at the rate which society can mobilize domestic savings resources coupled with the productivity of the investment (Somoye, 2002).Empirical ReviewSubstantial belles-lettres have analyzed the link that exist between financial system development and economic growth. These analyses have raised a lot contention on the direction of causality, but however fall within the remits of the theories. First, the Harrod-Domar growth model leads to a hypothesis which affirms a one-way causality from financial development to economic growth. Second, there is unidirectional causality from growth to finance, empirically confirmed by Shan, et al (2001) who concluded that econ omic growth causes financial development in China. And the tierce which does not rule out a bi-directional causality between economic growth and financial development as hypothesized in early and recent literary works (Gurley and Shaw 1960, 1967 Bencivenga and Smith, 1991).Measuring financial development as the ratio of financial intermediary assets divided by gross national product, Goldsmith (1969) analyzed entropy from xxxv countries for the period 1860-1963 and discovered that a positive correlation with feedback effects existed between financial development and economic growth over longer periods. He however established that financial development largely occurs during the early stages of economic development when countries have low levels of income. De Gregor and Guidotti (1995) reached the same conclusion that financial development and economic growth are strong in the early stages of development but further showed that the effect of financial development on growth becomes paleer as countriesbecome more developed, perhaps because of problems with measuring financial development or because financial intermediaries actually have larger effects in less developed countries than in more developed ones and this is in line with the findings of Wachtel and Rousseau (1998) while considering five industrialized Countries. These argument has been debunked in the finding of Besci and Wang (1997) who reached the conclusion that even though financial development occurs and may precede economic growth, its direction of causality is unclear in an economic sense.In a similar work, Rousseau and Sylla (1999) further found strong support for finance led growth after examining the historical role of finance in the U.S from 1790-1850.Empirical studies have shown that financial development can lead to economic growth only through financial sector development at the micro level. For instance, Rajau and Zingales (1998) in their study showed that industrial sectors that rela tively need more external finance develop more disproportionately faster in countries with more developed financial markets. Beck and Levine (2002) supported this finding using different financial development measures. Wurgler (2000) noteworthy that countries with a higher level of financial development increase investment more in growing industries and decrease investment more in declining industries than financially underdeveloped economies.In Nigeria, Adelakun (2010), used the ordinary least squares estimation method to determine the perceived relationship between financial development and economic growth. The result showed that there is a substantial positive effect of financial development on economic growth in Nigeria, however, this requires diversification of financial instruments. Shittu (2012) using entropy from 1970 to 2010 employed the error correction mechanism also concluded that financial intermediation can propel economic growth in Nigeria. These findings are oppos ite word to earlier studies. For instance, Ndebbio (2004), using an ordinary least squares regression analysis, established that the strength of the effect of financial sector development on per capita growth of output is weak due to the absence of a well functioning capital market, while Nnanna (2004) using the same approach concluded that financial sector development did not significantly affect per capita growth of output.Odeniran and Udeaja (2010) tested the nexus between financial development in a VAR framework over the period 1960-2009. Their results suggest bidirectional causality between financial development and economic growth variable. Based on this finding, they indicate that the current reforms in the Nigerian banking sector should not be emphasized unilaterally. Rather, attention should be disposed(p) to the complimentary and coordinated development of financial reforms and changes in the authentic sector of the economy.Methodology and Source of dataChoosing the ind icators for financial development is an uphill task because the provision of financial services is broad. Adelakun (2010) noted that, there is a diverse array of agents and institutions involved in the financial intermediation activities, thus making the definition of proxies difficult. Thus, for simplicity this study shall adopt Erdal et. al (2007) model, which is a slight modification of the growth model of Ram (1999). Thus, the model shall be adopted to include the different sectors to be investigated. Financial development indicators to be considered areMoney supply to GDP ratio (M2) measures the degree of monetisation in the economy as well as the depth of the financial sector, bank deposit liabilities to GDP ratio(BK), determines the capacity of the banking sector, domestic credit to GDP ratio (DC), which reflects the extent to which financial intermediaries allocate savings, ratio of private sector credit to GDP ratio (PS) which profitable investments, monitor managers, facil itate risk management, and mobilize savings, real interest rate (Ri), the ratio of bank liquidity to GDP (BKL), the ratio of gross fixed capital formation to GDP (GFC), trade openness as a ratio of GDP (TO) is a measure of external sector, agriculture out to GDP ratio (AG) for the agriculture sector, GY, which is the annual growth of the gross domestic product (GDP), industrial output to GDP ratio (IO) and manufacturing to GDP ratio (MA).The different model specifications areAnd the overall financial growth link is given asA Priori ExpectationThe expected signs of all the coefficients for the different variables are positive except for the interest rate coefficients which are negative.Source of DataThe data shall be collected from the Central Bank of Nigerias statistical bulletin, Nigerias National Bureau of Statistics and World Bank world development report.ReferencesAdelakun, O (2010) Financial Sector Development and scotch Growth in Nigeria.International Journal of scotch Devel opment Research and Investment Vol. 1, No 1.Adegbeti, E. 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