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THE IMPACT OF FINANCIAL DEVELOPMENT ON ECONOMIC GROWTH IN NIGERIA

CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

Given the link between the financial sector and the rest of the economy, the financial sector’s importance in any economy cannot be overstated.

In the age of globalization, a well-functioning financial sector is critical for capturing advantages from the global market while also protecting the domestic economy from foreign shocks. The financial system could also react to domestic economic conditions.

Furthermore, the significance of financial institutions in promoting economic growth has been thoroughly debated in the literature, with several schools of thought offering their perspectives and theories.

Through their intermediate position, Schumpeter (1911) emphasized banks’ importance in fostering technical progress. He believes that efficient savings allocation, as well as identifying and backing entrepreneurs with the best odds of successfully implementing innovative goods and manufacturing processes, are strategies for achieving this goal.

As a result, several researchers (McKinnon 1973, Shaw 1973, Fry 1988, King and Levine 1993) have backed up the preceding assertion concerning the importance of banks to economic growth.

A growing number of recent empirical studies have relied on measurements of sizes or structures to give evidence of a link between financial system development and economic growth in assessing the relationship.

They discovered that financial development has a considerable impact on economic growth using macro or sector level data such as the scale of financial intermediation or external finance relative to GDP.

Theoretical debates about the importance of financial development and the role of financial intermediation in economic growth have dominated the literature on development finance for decades.

Financial development, according to studies by Gurley and S haw (1967), Goldsmith (1969), Jayarante and Strahan (1996), Kashya and Stein (2000), Beck et al (2000,2003), Driscoll (2004), and others, can promote economic growth by increasing savings, improving allocative efficiency of loanable funds, and promoting capital accumulation in both developed and developing economies.

Nonetheless, despite recent results indicating financial development and economic growth are definitely linked, this relationship has captivated economists’ minds over time, despite the fact that the pathways and even economists of causality have remained unsolved in both theory and empirical research (Fitzgerald, 2006).

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

Finally, the goal of this research is to examine the relationship between the public sector and its results thus far, in order to determine whether it offers and/or provides an efficient and/or successful means of addressing Nigeria’s economic growth problems.

However, according to a recent study, the financial industry has a larger impact than previously thought (World bank, 1996; Almeyda, 1997).

 STATEMENT OF THE PROBLEM

In any economy, the banking industry (financial sector) is regarded to offer enormous potential for job growth and wealth creation.

In Nigeria, the sub-sector has remained relatively minor in terms of its contribution to the country’s gross national product (GNP) and employment generation.

However, a number of issues have hampered the financial sector’s expansion and effective contributions to Nigeria’s economic development. The real sector’s growth could be influenced by the financial sector’s performance, which could have an impact on overall economic growth. However, successive rounds of reforms and difficulties have had an impact on the financial sector. The recapitalization initiative resulted in the closure of a number of banks.

Microfinance banks and insurance businesses’ capital bases were also examined. Recently, Nigeria’s central bank and monetary policy council revised interest rates upwards in order to reduce the country’s inflation rate (ogboi, 2011). These are just a few of the sector’s improvements. According to the Manufacturing Association of Nigeria (MAN), which was mentioned in Amefule(2011), Nigeria lost 1.9 million dollars due to a difficult working environment, which included financial issues.

We are now in a position to address the most basic questions about the impact of finance sector development on Nigerian economic growth.

1. What influence will the financial sector’s growth/development have on Nigeria’s economic growth?

2. What impact/effect would financial sector services have on investment?

OBJECTIVES OF THE STUDY

1. To investigate the impact of the financial sector’s expansion and development on overall economic growth.

Nigeria.

2. To determine whether there is a causal relationship between financial sector and economic growth.

(To put it another way, which is causing which).

 HYPOTHESIS OF THE STUDY

Since Nigeria’s birth as a nation in 1960 and her conversion to a republic in 1963, practically every aspect of the Nigerian economy has altered dramatically. While certain sectors/areas of the economy have improved, others remain in dire straits.

As a result, the most important part of the research is the importance of both commercial banks and financial sector expansion to Nigeria’s economic growth.

As a result, this study will provide an in-depth analysis, allowing the general public to completely comprehend the financial sector’s nitty-gritty and, as a result, to be well-versed in the economy’s growth tendencies.

H0: The growth and development of the financial sector has a substantial impact on economic growth in the United States.

Nigeria.

H1: Economic growth and finance sector growth have a causal relationship.

SIGNIFICANCE OF THE STUDY

Furthermore, the Nigerian government has prioritized the development of the financial sector in its various development plans.

A thorough examination of the financial sector’s issues is essential. Such a review will enable the sector face the ever-increasing demand upon it; and with such amazing knowledge we can therefore foster economic growth by adopting suitable economic policies.

Finally, since the essence of every research work is to build upon and add to the existing bank of knowledge, this study promises to build upon as well as add substantially to the deposit of knowledge and relative to area of financial sector growth as well as growth in the economy. It would also help us understand the strong bond between financial sector and

SCOPE AND LIMITATION OF THE STUDY

The role and contributions of the financial system/sector to the economy are covered in this research. Furthermore, the study does not consider other sectors of the economy, instead focusing solely on the financial sector’s activities and how they stimulate growth.

Equally, in spite of all odds, this work contains information which are reliable and authentic. Other possible limitations of the analysis is that credit ratio used in the study do not capture financial development that takes place outside of the banking system such as the stock or bond markets. However, it might be of lesser significance since financial development comes about mostly with the banking sector and other channels are still not very developed. Demirguc-Kunt, Levine (2008),

asserts that a more general flaw in all studies of the finance-growth nexus is that, according to the theory, financial institutions stimulate economic growth by lowering information and transaction costs, monitoring borrowers, managing risks, and facilitating the exchange of goods. Researchers, on the other hand, lack adequate tools to analyze how successfully a financial system offers these services to the economy.

As a result, the empirical proxies for financial progress do not always match the theory.

Finally, the study will span 25 years (1987-2011), and we will conduct our analysis solely on the basis of this time range. Hence anything outside the time frame is unaccounted for in this study.

 

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