FINANCIAL INTERMEDIATION AND ECONOMIC GROWTH IN NIGERIA

FINANCIAL INTERMEDIATION AND ECONOMIC GROWTH IN NIGERIA

ABSTRACT: The study examined the effect of financial intermediation on economic growth in Nigeria over a period of thirty-four years (1985-2018). The secondary was sourced from the Central Bank of Nigeria (CBN) Statistical Bulletin. The findings of the study showed that: A positive and significant relationship exists between money and Gross Domestic Product in Nigeria, a positive and significant relationship exists between credit to the private sector and Gross Domestic Product in Nigeria while credit to the public sector has a positive and significant relationship with Gross Domestic Product. The study concluded that financial intermediation contributes positively and significantly to economic growth in Nigeria. The study recommended that Government should formulate a policy that is aimed at raising a broad money supply; by so doing, it would encourage and increase investment activities in the country while banks should be encouraged to continue to expand credit to the private and public sectors within the economy.

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CHAPTER ONE

INTRODUCTION

1.1     Background to the Study

Banks all over the world provide a wide range of services including financial intermediation to suit the needs of their customers, be they individuals, corporate or government customers. In developing nations such as Nigeria, the majority of the people are poor, capital for investment is in short supply, means of transport are underdeveloped as well as basic infrastructures. Banks through their intermediation role and other services, therefore, aim at overcoming these obstacles and thus, promote economic growth and development of the nation (Nwaeze, Michael and Nwabekee, 2014)

According to Agbada and Osuji (2013), the link between financial intermediation and economic growth has long received significant attention in the literature. This attention is well-justified since a better understanding of how the financial sector contributes to economic growth has important regulatory implications. Financial intermediation is the process whereby financial service providers like banks pull funds from the public as deposits and transform them into loanable funds. This implies that the intermediation process help turns deposit liabilities from surplus economic units to bank’s major interest earner, loans and advances to the deficit units of the economy. Specifically, Sanusi (2012) noted that finance literature has shown that the availability of financial factors goes a long way in determining the sustainable development of a nation. That is, the availability and access to funds for investment are an integral element in stimulating growth and development in any economy. Consequently, the will of the progress of every economy is hinged on the financial system. The financial system help enhance the production capacity of a nation outwards. Thus, efficient mobilization of funds and access to credit are essential to kick-start the economic growth and development of a nation.

According to Aziakpono (2015), financial intermediation plays a significant role in increasing the economic activities of an economy through the following functions. First, financial systems act as an effective conduit for channeling funds from surplus to deficit units by mobilizing resources and ensuring an efficient transformation of funds into the real productive sector of an economy. Secondly, financial intermediation leads to the transformation of the maturity of savers and investors’ portfolios, thus, providing sufficient liquidity to the system as the need arises. The third important role is risk reduction from the system through diversification and techniques of risk-sharing and pooling (Nissanke and Stein, 2013). In addition to these, Onodugo, Anowor and Kalu (2013) established that financial intermediation play a very vital role in economic development in Nigeria. Mahmood and Bilal (2010) opined that the rising magnitude of financial intermediation has adverse implications on the growth of Nigerian economy because in the absence of a developed capital market, the private sector which contributes a greater percentage to economic growth in Nigeria will primarily depend on bank credit as a source of financing their investments which will lead to economic growth. This means that the constant rise of financial intermediation discourages potential savings due to low returns on deposits, and ultimately reduces lending activities and investment potential of investors as a result of the high cost of funding (Mahmood and Bilal, 2010). To this end and given the active involvement of financial intermediaries (especially deposit money banks) in transactions ranging from payment, acceptance of deposits and selling of loans and advances among other services rendered to both the public and private sector and the volumes of empirical evidence in support of the finance-development growth nexus, it is imperative to thoroughly examine the effect of financial intermediation on economic growth in Nigeria.

1.2     Statement of the Problem

Certain issues or factors have continued to pose problems to the success of financial intermediation and its contribution to the growth of the Nigerian economy. Financial repression is one factor that affects and constitutes a great problem to financial intermediation by banks. The sources of repression are government legislation and policies such as legal restrictions on activities and interest rate policies that distort the full operation of the market mechanism in fixing prices for financial resources. There is also the issue of poor banking habit among Nigerians, especially in the rural areas. This may be a result of illiteracy, losses these people have sustained in the past due to bank failures and distress, etc. other challenges include inefficiency in management, operational incompetency, poor corporate governance, and unhealthy competition. Thus, these culminated in poor performance of banks and hindered the financial sector from delivering financial services optimally to the satisfaction of both investors and customers.

However, the effect of financial intermediation on economic growth has generated a heated debate. In spite of this seeming obvious link between financial intermediation and economic growth, economists remain polarized in their opinions and findings. While some studies found that financial intermediation drives economic growth and exerts a significant impact on it (Tonye and Andabai, 2014; Nwite, 2014), others have argued and found that financial intermediation has no significant impact on economic growth (Beck and Hesse, 2016). However, Odhiambo (2011) argued that a bi-directional causality exists between financial intermediation and economic growth. This study seeks to contribute to the existing body of literature by examining the effect of financial intermediation on economic growth in Nigeria.

1.3     Purpose of the Study

The main purpose of this study is to examine the effect of financial intermediation on economic growth in Nigeria. Specifically, the study seeks to achieve the following objectives:

1. To evaluate the effect of money supply on the Gross Domestic Product in Nigeria.
2. To determine the effect of credit to the private sector on Gross Domestic Product in Nigeria.
3. To ascertain the effect of credit to the public sector on Gross Domestic Product in Nigeria.

1.4     Research Questions

The following research questions are posed to help guide the study:

1. To what extent does money supply affect the Gross Domestic Product in Nigeria?
2. To what extent does credit to the private sector affect Gross Domestic Product in Nigeria?
3. To what extent does credit to the public sector affect Gross Domestic Product in Nigeria?

1.5     Research Hypotheses

The following null hypotheses are formulated to help guide the study:

H0₁: There is no significant relationship between money supply and Gross Domestic Product in Nigeria.

H0₂: There is no significant relationship between credit to the private sector and Gross Domestic Product in Nigeria.

H0₃: There is no significant relationship between credit to the public sector and the Gross Domestic Product in Nigeria.

1.6     Significance of the Study                                     

Theoretically, this study has the potential of contributing greatly to the growth of existing theories in social and management sciences, particularly in finance and banking by helping to enrich the body of knowledge through its reliable findings on the assessment of the effect of financial intermediation on economic growth in Nigeria. The study will be of immense significance in ascertaining the progress so far made by the government in improving the Nigerian economy through the financial system. Also, the study will assist in unveiling the challenges or factors militating against effective implementation of government policies and programs on the financial sector and will make useful suggestions towards ensuring the achievement of goals of such financial policies and programs.

Practically, this study will contribute to providing the decision/ policy makers and other key actors in the government with the road-maps that will necessitate prompt, responsive and efficient policymaking in the Nigerian financial sector. It will also suggest the panacea through which frequent failures in the Nigerian financial sector and policies can be effectively tackled.

Empirically, this study will serve as a foundation or base for future researchers who may in due course of time wish to embark on the investigation by assessing the effect of financial intermediation on economic growth in Nigeria. In other words, this research will serve academia as a useful and veritable reference that will stimulate future research for other related studies in relation to financial intermediation and its contribution to Nigerian economic growth.

1.7     Definition of Terms

• Bank Deposits: Bank deposits are money placed into banking institutions for safekeeping.
• Credits: This is loans advanced by formal institutions. It could be short term or long term.
• Credit to Private Sector: This refers to financial resources provided to the private sector, such as through loans, purchases of non-equity securities, and trade credits and other accounts receivable, that establish a claim for repayment.
• Credit to Public Sector: This includes financial resources provided to the public sector, such as through loans, purchases of non-equity securities, and trade credits and other accounts receivable, that establish a claim for repayment.
• Economic Development: This is the sustained, concerted actions of policymakers and communities that promote the standard of living and economic health of a specific area.
• Economic Growth: This is the increase in the market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP.
• Financial Intermediation: This refers to the activities of institutions that borrow money from individuals and other institutions in order to make loans or other investments.
• Financial System: This refers to the institutional or other arrangements that transfer savings from those who generate them to those who ultimately use them for consumption or for investment purposes.
• Gross Domestic Product: Monetary value of all goods and services produced in a country annually.
• Loan: This consists of total amount involving an agreement between banks and borrowers where banks trust a borrower to repay fund plus interest for either loan, credit card or line of credit at a later date.
• Money Supply: This is the entire stock of currency and other liquid instruments in Nigeria’s economy as of a particular time.

1.8     Limitations of the Study

The scope of this study includes: the content scope, time scope, and geographical scope

• Content Scope: This study is designed to determine the effect of financial intermediation on economic growth in Nigeria.
• Time Scope: The study is a time series study covering the period of 34 years (1985 – 2018).
• Geographical Scope: Geographically, the study will mainly concentrate on the Nigerian economy. However, this research work is limited to secondary data.

1.9         Organization of the Study

To facilitate the effective handling of the study, this study will be divided into five chapters. Chapter one is an introductory chapter, which contains background to the study, statement of the problem, aims, and objective of the study, research questions, hypotheses, significance of the study, etc. Chapter two is the review of literature. Chapter three will deal with the research methodology. Chapter four will contain data presentation, data analysis and interpretations of the results while Chapter five presents a summary, conclusion, and recommendations. A complete bibliography will be included at the end of chapter five.

TABLE OF CONTENTS

Title page                                                                                          i

Declaration                                                                                                 iii

Certification                                                                                      iv

Dedication                                                                                         v

Acknowledgment vi

Abstract                                                                                            vii

Table of Content                                                                                         viii

CHAPTER ONE: INTRODUCTION

1.1     Background to the Study                                                                  1

1.2     Statement of the Problem                                                        3

• Purpose of the Study 4

1.4     Research Questions                                                                 5

1.5     Research Hypotheses                                                              5

1.6     Significance of the Study                                                                  6

1.7     Definition of Terms                                                                 7

1.8     Limitations of Study                                                                   8

1.9     Organization of the Study                                                      9

References                                                                               10

CHAPTER TWO: LITERATURE REVIEW

2.1     Conceptual Review                                                                 11

2.1.1  Concept of Financial Intermediation                                       11

2.1.2  Requirements of Financial Intermediation                               12

2.1.3  Role Played by Banks in Financial Intermediation                           14

2.1.4  Financial Intermediation and Economic Growth                     16

2.1.5  Money Supply and Economic Growth                                             17

2.1.6  Credit to Private Sector and Economic Growth                      18

2.1.7  Credit to Public Sector and Economic Growth                        20

2.2     Theoretical Framework                                                           22

2.2.1  Goldsmith Theory                                                                             22

2.2.2  Finance Growth Theory                                                                    23

2.3     Empirical Review                                                                              24

References                                                                               29

CHAPTER THREE: RESEARCH METHODOLOGY

3.1   Research Design                                                                        32

3.2     Nature and Sources of data                                                     32

3.3     Operational Measures of Research Variables                                   33

3.4     Model Specification                                                                 34

3.5     Data Analysis Technique                                                                  35

References                                                                               36

CHAPTER FOUR: DATA PRESENTATION, ANALYSIS, AND INTERPRETATION OF RESULTS

4.1     Data Presentation                                                                    37

4.2     Data Analyses                                                                         39

4.2.1    Ordinary Least Square Technique of Regression Analyses   39

4.3     Interpretation of the Results:                                                   39

4.4     Testing of Research Hypotheses                                             42

4.5     Discussion of Findings                                                            45

CHAPTER FIVE: SUMMARY, CONCLUSION, AND RECOMMENDATIONS

5.1     Summary                                                                                 47

5.2     Conclusion                                                                              49

Recommendations

Bibliography

LIST OF TABLES

Table 4.1: Annual Time Series Data on Gross Domestic Product (Gdp), Money Supply (M2), Credit to Private Sector (Cps) and Credit to Private Sector (CPUs)

Table 4.2: Regression Analyses