Factors That Reduce Savings In Nigeria

Project and Seminar Material for Economics

Project and Seminar Material for Economics


This study investigates the core leading factors that reduce savings in Nigeria between 1980 -2010 using ordinary Least Square (OLS) econometric framework, which will enable us proffer solutions for the improvement of savings in the economy, which is also an important component for economic development in any country. Base on data collected, it is discovered that savings output in Nigeria during the period was unsatisfactory but was later discovered as a necessary factor for economic development and growth. This research shows the significance of savings which is achieved when saving habits is greatly considered by public private and government. The empirical results show a negative influence of trade openness (TDO) on aggregate savings. The work therefore submits that effort should be geared towards improving export capacity by improving productivity in industrial sector, which provide employment and increase per capital income as a bid to accelerate savings. And since interest rate signals a positive influence on savings in Nigeria, there should also be an intensified impact on real rates, spread and financial liberalization and or financial developing in Nigeria.

Table of Content

  • Title Page
  • Approval Page
  • Dedication
  • Acknowledgment
  • Abstract
  • Table of Content

Chapter One

1.0 Introduction

  • 1.1 Background of the Study
  • 1.2 Statement of the Problem
  • 1.3 Objectives of the Study
  • 1.4 Statement of Hypothesis
  • 1.5 Significance of the Study
  • 1.6 Scope and Limitation of the Study

Chapter Two

2.1 Theoretical Literature

  • 2.1.1 Development of Saving in Nigeria
  • 2.1.2 Theoretical Review
  • Determinant of Savings
  • Income
  • Wealth
  • Inflation
  • Foreign Savings
  • Demographic Variables
  • Growth
  • Financial Development
  • Interest Rate
  • Urbanization
  • 2.1.4 Conclusion
  • 2.2 Empirical Review
  • 2.3 Limitations of the Precious Studies

Chapter Four

4.0 Presentation of Model Result

  • 4.1 Result Summary
  • 4.2 Economic Interpretation of Result
  • 4.2.1 Real Gross Domestic Product
  • 4.2.2 Trade Openness
  • 4.2.3 Interest Rate
  • 4.2.4 Net Capital Inflow
  • 4.3 Evaluation Based on Economic Criteria
  • 4.4 Statement Criteria (First Order Test)
  • 4.4.1. Coefficient of Determination (R2)
  • 4.4.2 the T Test
  • 4.5 Econometric Criteria (Second Order Test)
  • 4.51 Normality Test
  • 4.5.2test for Autocorrelation
  • 4.5.3test for Heteroscedasticity
  • 4.5.4 Test for Multicollinearity

Chapter Five

5.0 Summary, Conclusion and Policy Recommendation

  • 5.1summary of Findings
  • 5.2 Conclusion
  • 5.3 Policy Recommendations
  • Bibliography
  • Appendix

Chapter One

1.0 Introduction

1.1 Background Of The Study

Financial institution, market, regulators and instrument all comprises a set of complex and closely interconnected financial system, providing financial services in an economy, such services include mobilization and allocation of resources, distribution of investment funds among firms, financial intermediation and foreign exchange transactions.

The Nigeria financial system can be categorized into two via; the formal or organized and informal or unorganized financial system, the banks and non-banks financial institutions make up the organized financial system. While, the unorganized sector comprises of indigenous bankers, local money lenders (ISUSU), shop-keeper or traders, merchants, landlords, savings associations, friends and relatives etc. the system is poorly developed, limited economic information, defective system of accounting and not integrated into the formal financial system, but very important to the Nigerian financial system.

Capital formation, buying and selling of bonds and securities, creation of new assets and liabilities, executing monetary and credit policies of the central bank etc, are the roles and functions of financial system geared towards economic development of an economy. Patriotic researchers and policy makers have observed a declining savings rate in Nigeria over the past decades; this is due to the critical importance of savings for the maintenance of strong and sustainable growth in the world economy particularly in Nigeria.

A sound, healthy and reliable financial system relates to savings mobilization and efficient financial intermediation roles;

  1. First, reduces hoarding and help spread the risk between household and firms.
  2. Second, lowers interest rates thereby bringing about stability in capital market.
  3. Third, they create liquidity in the economy by borrowing short-term and lending long-term.

Fourth, disseminate information between ultimate lenders and ultimate borrowers thereby mobilizing savings from surplus units and channeling them to deficit units through the help of financial techniques, instruments and institutions.

Fifth the intermediaries promote developmental investment.

The Nigerian financial system comprises the regulatory/supervisory authorities, bank and non-bank financial institutions. As at the end of 2007, the system comprised of the Regulatory/ Supervisory authority, the central Bank of Nigeria (CBN), the Nigerian Deposit Insurance Corporation (NDIC), the Securities and Exchange Commission (SEC), the National Insurance Commission (NAICOM), the National Pension Commission (NPC), and the Federal Mortgage Bank of Nigeria (FMBN). The CBN is the principal regulator and supervisor in the money market, consisting of a Deposit Money Banks (DMBs), Discount Houses, the Peoples Bank of Nigeria and Community Banks.

The CBN exclusively regulates the activities of Finance Companies and promotes the establishment of specialized or development financial institutions. The SEC is the apex regulatory/ supervisory authority in the capital market. The Nigerian Stock Exchange (NSE) is a self-regulatory or user- regulatory institution. The Issuing Houses, Registrars and stock brokers, who also interact with the money market, complete the chain in the capital. The Federal Ministry of Finance, together with the CBN constitutes the monetary authorities and share control over Bureau de change. The NAICOM is the regulatory authority in the insurance industry, while the FMBN regulates mortgage finance activities in Nigeria.

Saving is a sacrifice of current consumption that provides for the accumulation of capital, which in turn, provides additional output that can potentially be used for consumption in the future (Gersovitz, 1988). In other words, savings is the difference between current earnings and consumption. It has also been defined as “deferred consumption” or part of income, which is not spent.

Savings is described as a financial assets accumulated by the public – both government and private agents in the organized financial system. To expand financial savings involves shifting of funds from the personal and household sector to the business or corporate sector which in turn, leads to greater investment, income growth, employment and capital formation; which cannot be achieved without increasing the rate of savings. Nigeria’s saving still falls below the requirements of its financial system due to low per capital income, under-investment in productive instruments, and investment in unproductive channels, e.g. gold, jewelry, income inequalities and demonstration effect. etc. To remedy this problems depend on the level of development of the financial sector mentioned above as well as the savings habit of the citizenry. The availability of investible funds can be a starting point for all investments in the economy, which will eventually translate to economic growth and development (Uremadu, 2006).

The relationship among saving, investment and growth has historically been very close; hence, the unsatisfactory growth performance of several developing countries. Example; Nigeria has been attributed to poor saving and investment. This poor growth performance has generally led to a dramatic decline in investment. Domestic saving rates have not fared better, thus worsening the already uncertain balance of payments position (Chete, 1999). The role of savings in the economic growth of any country cannot be overemphasized. Conceptually, savings represents that part of income not spent on current consumption. Institutions in financial sector like deposit money banks (DMBs)/ commercial banks mobilize savings deposit on which they pay certain interest. To effectively mobilize savings in an economy, the deposit rate must be relatively high and inflation rate stabilized to ensure a high positive real interest rate, which motivates investors to save from their disposable income. In Nigeria Nnanna, Odoko and Englama (2004) are of the view that the level of funds mobilization by financial institutions is quite low due to a number of reasons, ranging from low savings deposits rates of the poor banking habit or culture of the people.

According to them, another impediment to funds mobilization is the attitudes of banks to small savers. Another limitation to savings mobilization is the fact that the concentration of banks and their offices are biased in favor of urban areas.

Among the reasons for this, is the fact that the established banks under-rate the volume of savings seeking to be mobilized and channeled into productive investment in the rural areas. It is often argued that since the rural economy operates at a near subsistence level, there is very little that can be squeezed out of income and consumption. Because of this, it has not been realized that large volumes of idle funds, though in small units per individual exist in the rural areas. In Nigeria, there is basically lack of incentives to savings which had adversely affected savings. Some of these factors include; poor banking habits, attitudes of banks to small savers, poor orientation, unemployment, instability in the political system, corrupt taxation system, instability in the banking system, etc. One of the problems of mobilizing savings and deposits has always been a major problem for economic growth and development in Nigeria.

1.2 Statement of the Problem

In Nigeria, there is lasting need of further efforts especially in mobilizing small savings in both urban and rural areas, and the process of financial intermediation itself, knowing fully well the saving culture in Nigeria is very poor relative to other developing economies (Uremadu, 2006). In this respect, Commercial banks in performing their roles, was found to have potential scope and prospects for mobilizing financial resources and allocating them to investment.

But given the problems inherent in the formal sector, the informal savings associations, if properly developed would not only facilitate the financing of economic development but would also contribute to the development of income, and that necessitates the need to put in place a coherent economic policy that will be capable of providing the much needed enabling environment and also there is an urgent need to encourage Nigerians to change their current attitude towards saving, thereby placing the right saving culture by institutions and regulatory agents who influence the decisions of households, firms and government.

As pointed out earlier, since national policy be it macroeconomic or microeconomic generates variables which could influence the propensity of economic and financial actors to save. This research work would attempt to examine from policy perspectives, the magnitude and direction of such variables as: interest rate, income, growth, urbanization, foreign (aid) sector, fiscal policy etc. on savings in Nigeria.

Therefore, this research question will try and answer the following:

  1. What are the factors that reduce savings in Nigeria?
  2. What impact does factors reducing saving have on aggregate savings in Nigeria?

1.3 Objectives of the Study:

In the light of the above problems, the objectives of this research work include:-

  1. To ascertain those factors that reduce savings in Nigeria.
  2. To determine the impact of the factors that reduce saving on aggregate savings in Nigeria.

1.4 Statement of the Hypothesis:

The hypotheses to be tested in this research work are:

  • H0; the factors that reduce savings has no significant impact on aggregate savings in Nigeria.
  • H1; the factors that reduce savings has a significant impact on aggregate savings in Nigeria.

1.5 Significance of the Study

This research work will be of immense help to policy formulators particularly those involved in the development of the Nigerian economic agenda. It will help them in choosing the appropriate policy in the macroeconomic policy management, particularly those affecting savings in Nigeria. Also, through the findings and suggestions of this research project work, a greater awareness will be generated in the financial arena or sectors so as to appreciate the efforts being carried out by the federal government of Nigeria through the Central Bank of Nigeria and Federal Ministry of Finance in improving the policies affecting positively saving in recent years. Finally, this study will assist in a modest way to increasing student’s knowledge on the practical and real-life situations of the theories they learn in the classroom.

1.6 Scope and Limitations of the Study

The scope of this study is to estimate and evaluate the factors that reduce savings in Nigeria (1980-2010).

The Limitations are constrained to lack of fund, human error and limited time frame, which imposed difficulties when serious attempt to effect a general in – depth towards the study of the factors that reduce savings in Nigeria.

Chapter Five

Summary, Conclusion and Recommendations

5.1 Summary of Findings

Based on findings in this study with the coefficient of various variables that was conducted employing econometric approach. It can be seen that trade openness is one of the major factors that reduce aggregate savings in the Nigeria. Which may some government policy that conflicts‟ with policy that aims at improving the export capacity?

Also, a greater proportion of aggregate savings in Nigeria is made by the low income earners who do not engage in long term savings that will generate the needed productive investment while the high- income group (potential investors) that should engage in long term saving engages in conspicuous consumption and stashes their money in foreign accounts.

Furthermore, we found out that the coefficient of interest rate, which is -57436, is high in Nigeria. This implies that the higher the interest on savings deposit the more willing will savers be to replace present consumption with future consumption. Hence the classical economists view the interest rate as a real reward or abstinence or thrift. This goes to substantiate the fact that Nigeria savings is predominantly mobilized from “target saves” who are mainly civil servants, small businessmen, artisan, traders and those who may be saving for their children in school or for retirement purposes. Their motive for saving is to provide for future consumption.

5.2 Conclusion

After econometrically analyzing the factors that affect savings behavior in Nigeria over the period of 1980 -2010. The empirical findings have some serious policy implications relevant to the growth and development of the nation. For the Nigeria economy to break away from its current level of underdevelopment, policy makers must recognize the importance of these variables- per capital real gross domestic product, trade openness, interest rate, Net capital inflow in the Nigeria economy.

Thus, the effective manipulation of these variables through consistent and effective target policies for facilitating adequate mobilization of savings is necessary for productivity investment.

5.3 Policy Recommendations

Following our empirical findings, the following recommendations are made for effective policy formulations.

  1. Luxurious consumption should be discouraged through the imposition of taxes on certain luxury goods.
  2. The banking industry should improve the banking facilities and also inculcate banking habit among Nigerians by innovating attractive products that will attract their customer‟s varying needs of liquidity, yield, risk, and maturity.
  3. Export capacity should be improved by simultaneously increasing productivity in capital goods for export as the most effective way of increasing foreign reserve, which has positive effect on the level of savings in Nigeria.
  4. Increased savings facilities disposable income should be follow up with policies that increase interest rate to achieve the desired objectives of raising the level of savings.
  5. It is crucial to note that adequate savings mobilization is a fundamental but not sufficient condition for an increase investment. Therefore, adequate mobilization of savings should be followed up with the provision of adequate information on potential investment opportunities in the country.

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