Effects Of Banking Sector Reforms On Nigerian Economy
The study examines the effect of banking sector reforms on economic growth in Nigeria from 1986-2013. Specifically, the study evaluates the extent to which bank capitalization (CAP) and interest rate (INTD) have affected economic growth in Nigeria. Secondary data were generated from various issues of Central Bank of Nigeria Statistical Bulletin, and the World Development Indicators of the World Bank. Ordinary Least Square (OLS) regression was adopted to test the two hypotheses formulated for the study. The study revealed that bank capitalization (CAP) has significantly affected economic growth in Nigeria and interest rate (INTD) has also affected economic growth significantly, though at long run. The study recommends that the CBN should build and maintain a well-articulated and properly implemented banking reforms such that will stimulate savings through high real deposit rate and lending rate which will result in financial deepening and thus, economic growth.
Table of Content
- 1.1 Background of the Study
- 1.2 Statement of the Problem
- 1.3 Objective of the Study
- 1.4 Research Questions
- 1.5 Research Hypothesis
- 1.6 Significance of the Study
- 1.7 Scope of the Study
- 1.8 Limitation of the Study
- 1.9 Definition of Terms
- 1.10 Organization of the Study
Review of Literature
- 2.1 Conceptual Framework
- 2.2 Theoretical Framework
- 2.3 Empirical Review
- 3.2 Research Design
- 3.3 Model Specification
- 3.4 Techniques of Analysis
Results and Discussion
- 4.1 Unit Root (Stationarity) Test
- 4.2 Model Estimation (OLS)
Summary, Conclusion and Recommendation
- 5.1 Summary
- 5.2 Conclusion
- 5.3 Recommendation
1.1 Background of the Study
Financial intermediation is the process through which financial institutions transfer resources from surplus unit of the economy to deficit ones. However, for financial institution to discharge this role effectively, they have to be developed (Ragan and Zingales 2002 in Abubakar and Gani 2013). A well-developed financial system are to mobilized house hold savings, allocate resources efficiently, diversify risks, induce liquidity, reduce information and transaction costs and provide an alternative to raising fund through individual savings and retained earnings. (Anyanwu 2010). It is crystal clear that nations who have good financial system have a tendency to develop its economic growth more quickly. (Aurangzeb 2012). In other words, a financial institution should provide comprehensive services to their customers with sound projects easy assets to fund and build confidence in investors.
It was observed that financial market (Banks in particular) play a significant role in the growth of the real economy by channeling funds from savers to borrowers in an efficient way to facilitate investment and thus, economic growth. Schumpeter (1911). In facilitating these financial intermediating activities such that will attract economic growth, there must be a sound and efficient banking system.
Banking sector reforms in Nigeria started in 1952 with the adverse effects of the Banking Ordinance which led to the collapse of many indigenous banks (Nzotta 2004). Banking became a business, evolving but highly regularized. However, due to weak and unsound financial system in African countries, Nigeria inclusive, Structural Adjustment Programme (SAP) was adopted in 1986. Since the adoption of SAP and subsequent economic reform policies and programmes, the main policy thrust of the government remains the transformation from inefficient state dominated economy with substantial rigidities to a more competitive market-oriented economy with more diversified production resulting in economic growth (Iwayemi 2006 in Adelegun and Oriavwote 2014).
According to Azeze and Oke (2012), banking sector reforms are implemented to enhance the intermediation role of banks so as to achieve economic growth. The reforms ensure that banks are well positioned to greatly mobilize savings and optimally allocate these mobilized savings in form of credit to profitable investments. These investments are of cognizance to the development process of a nation as provided in the framework of the dual-gap analysis.
In other words, banking reforms should engender financial development in all sectors of the economy and thus, achieving economic development and growth.
1.2 Statement of Problem
Reforms rest on improving the effectiveness and efficiency of the institutions/sectors (Soludo 2004). Since financial reforms are targeted to transform all the financial sectors positively, banking reform is expected to impact positive changes in banking sector and thus, efficiency. Reforms are usually introduced into the system when there is an observed departure in the focus and direction of the sectors of economy from the original or desired focus or objectives (Ubom 2008 in Akpan 2012). Mbaeri, Adioha and Uzokwe (2015); Obamuyi and Olorunfemi (2011); Osabuohiren (2008) opined that banking sector reforms impacted positively on Nigeria economic growth. Researchers like Azeez and Oke (2012); Akpan (2012); Adelegon and Orianwote (2014) argued that banking reforms have not adequately and positively impacted on the Nigerian economy. The above studies and their findings revealed that there is divergence of findings resulting in research gaps which this study seeks to fill.
1.3 Objectives of the Study
The main objective of the study is to examine the extent to which banking sector reforms have stimulated economic growth in Nigeria. Other specific objectives are:
- To identify the rationales for banking system reforms in Nigeria.
- To examine the extent to which bank capitalization reform affect economic growth in Nigeria.
- To evaluate the effect of interest rate deregulation on economic growth in Nigeria.
1.4 Research Question
The study will be guided by the following questions;
- What is the rationales for banking system reforms in Nigeria?
- To what extent to which bank capitalization reform affect economic growth in Nigeria?
- What is the effect of interest rate deregulation on economic growth in Nigeria?
1.5 Research Hypotheses
The following hypotheses are stated for the study:
- HO1: Bank capitalization reform has no significant positive effect on economic growth.
- HO2: Interest rate deregulation has no significant positive effect on economic growth.
1.6 Significance of the Study
The study will be of immense value to policy makers, government, financiers and researchers. Policy makers should ensure the involvement of stake holders like the top bank management officials while making policies. The study focuses on banking sector reforms and economic growth in Nigeria for the period 1986-2013. This study covers issues on bank capitalisation and interest rate. Reforms policies started with the introduction of the Structural Adjustment Programmes (SAP) in 1986 though before then there was a direct economic reform control on different sectors of the economy, banking inclusive.
1.7 Scope of the Study
The study covers the effects of banking sector reforms on Nigerian economy. The study covers the period 1986-2013.
1.8 Limitation of the Study
Like in every human endeavour, the researcher encountered slight constraints while carrying out the study. Insufficient funds tend to impede the efficiency of the researcher in sourcing for the relevant materials, literature, or information and in the process of data collection, which is why the researcher resorted to a limited choice of sample size. More so, the researcher simultaneously engaged in this study with other academic work. As a result, the amount of time spent on research will be reduced.
1.9 Definition of Terms
This is defined as the action of one object coming forcibly into contact with another or a marked impact or influence.
This is viewed as government intervention in the banking industry to provide a panacea for existing anomalies in the banking sector.
1.10 Organization of the Study
This research work is organized in five chapters, for easy understanding, as follows Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, definition of terms etc. Chapter two highlight the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding. Chapter five gives summary, conclusion, and recommendations made of the study.
Summary, Conclusions and Recommendations:
This chapter summarizes the findings on the extent to which banking sector reforms have stimulated economic growth in Nigeria. The chapter consists of summary of the study, conclusions, and recommendations.
5.2 Summary of the Study
In this study, our focus was on the extent to which banking sector reforms have stimulated economic growth in Nigeria. The study is was specifically set to identify the rationales for banking system reforms in Nigeria, examine the extent to which bank capitalization reform affect economic growth in Nigeria, and evaluate the effect of interest rate deregulation on economic growth in Nigeria.
The panel data used in this study were obtained from Central Bank of Nigeria Statistical Bulletin, and the World Development Indicators of the World Bank (2014).
The reforms were intended to ensure a diversified, strong and reliable banking sector which will guarantee the safety of depositor’s money, play active developmental roles in the Nigerian economy, be competent and competitive players in the African and global financial system. Though long run relationship exist between bank reforms and economic growth in Nigeria, Capital reform has not affected economic growth and Interest rate deregulation has not impacted positively on economic growth.
The result of the co-integration equations indicated that long run relationship exists between the dependent variable (Gross Domestic Product) and the independent variables (banking secctor reforms proxied by bank capitalization and interest deregulation. This follows that well articulated and properly implemented banking reform should lead to enhanced economic growth. This implies that financial reforms influence the direction of banking sector performance in Nigeria.
Though long run relationships exist between the selected variables for measuring banking sector reforms and economic growth.
With respect to the findings and the aim of this study, the researchers therefore recommend that;
- Since the banking sector occupies a critical spot in the economy, the researcher encourage regular but prudent reforms in the system for optimal economic role.
- Central Bank should build and maintain a sound and vibrant banking system such that will ensure that its policies are sustained.
- The regulatory and supervisory framework should be strengthened further.
- Interest rate policy should be made to stimulate savings through high real deposit rate and lending rate so as to effect financial deepening and thus economic growth.
- Since banking sector reforms have significantly impacted positively on Nigeria’s economy though at long run, there is need for more financial reforms re-appraisal for a better banking performance.
- Government should also ensure an enabling environment for business to thrive.
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