THE IMPACT OF FINANCIAL SECTOR DEVELOPMENT ON ECONOMIC GROWTH IN NIGERIA (1987-2011

CHAPTER ONE

1.1. BACKGROUND OF THE STUDY.

The importance of the financial sector in any economy cannot be overemphasized given the relationship between the sector and the rest of the economy.

In the era of globalization, efficient financial sector are essential to attract gains from the world market, and as well insulate the domestic economy from external shocks. The financial system could also respond to the domestic economy.

Furthermore, the importance of financial institutions in generating growth within the economy has been widely discussed in the literature, various schools of thoughts having views and ideas.

Schumpeter (1911), identified bank’s role in facilitating technological innovation through their intermediary role. He believed that efficient allocation of savings through identification and funding of entrepreneurs with the best chances of successful implementing innovation products and production process are tools to achieve this objective.

Several scholars therefore (McKinnon 1973, Shaw 1973, Fry 1988, King and Levine 1993) have equally buttressed the above postulation about the significance of banks to the growth of the economy.

In assessing the relationship, a larger number of recent empirical studies have relied on measures of sizes or structures to provide evidence of a link between financial system development and economic growth.2

They used macro or sector level data such as the size of financial intermediation or of external finance relative to GDP and found that financial development has a significant impact on economic growth.

For the past few decades, theoretical discussions about the importance of financial development and the role that financial intermediation play in economic growth have remained controversial and thus occupied a key position in the literature of development finance.

Studies by Gurley and S haw (1967),Goldsmith(1969), Jayarante and Strahan (1996), Kashya and Stein (2000), Beck et al (2000,2003), Driscoll (2004),etc,suggests that financial development can foster economic growth by raising savings, improving allocative efficiency of loanable funds and promoting capital accumulation in both well developed and emerging economies.

However, in spite of recent findings that financial development and economic growth are clearly related, this relationship has occupied the minds of economists overtime; although the channels and even economists of causality have remained unresolved in both theory and empirics (Fitzgerald, 2006).

Bayoumi and Melander(2008),coupled with King and Levine (1993) established that the banking sector’s development in Europe was not only correlated with economic growth but was also a cause of long-term growth and as such we can also assert that the financial sector growth(growth of the banking sector), has a strong influence on economic growth in Nigeria.

3Finally, the purpose of this paper is to analyze the relationship as well as analyze the results of the public sector so far and to ascertain whether it offers and provides an efficient and/or effective means of solving the problems facing economic growth in Nigeria.A recent study however indicates that the banking sector plays a more important role than it was believed earlier (World bank, 1996; Almeyda, 1997).

1.2. STATEMENT OF PROBLEM.The banking sector (financial sector) is acknowledged to have huge potentials for employment generation and wealth creation in any economy.

In Nigeria, the sub-sector has stagnated and remained relatively small in terms of its contribution to gross national product (GNP) and creation of job opportunities.

However, several problems have limited the growth and effective contributions of the financial sector to the economic development in Nigeria. The growth of the real sector could be determined by the financial sector performance and this could impact on economic growth. But the financial system has been affected by several bouts of reforms and challenges. A number of banks were pruned down through the recapitalization programme.

Among the recapitalized banks five chief executives were accused of fraud and replaced hence the inconsistency in operation.

Equally, microfinance banks and insurance companies had their capital base reviewed. More recently, the central bank of Nigeria and its monetary policy committee reviewed the interest rates upwards to dampen the rate of inflation in Nigeria (ogboi, 2011). These are among several

4other reforms in the sector. More so, according to the Manufacturing Association of Nigeria (MAN) cited in Amefule(2011), Nigeria lost 1.9 million owing to harsh operating environment including finance related problems.

From the foregoing we are poised to answer the most fundamental questions about the impact of financial sector development on economic growth in Nigeria.

1. What will be the impact of financial sector growth/development on the Nigerian economic growth?

2. What will be the impact/effect of financial sector services on investment?