THE IMPACT OF BANKING SECTOR ON ECONOMY GROWTH 1970 -2015
1.1 Background to the Study
One of the cardinal economic objectives of the developing countries, including Nigeria is to achieve high economic growth that will lead to rapid economic development and reduce poverty and unemployment rate (Bamidele, 1998).
The importance of well functioning financial market in economic growth and development cannot be over emphasized. A growing body of literature finds that the development of financial markets has a positive impact on growth. Through an efficient intermediation process, financial markets improve productivity of investment by channeling funds to the most profitable investment projects, which translate into economic growth (Hammah, 2008). Further evidences that financial institutions are necessary ingredients in the growth process abound (Lewis, 1955; Schumpeter, 1934).
Having realised the crucial roles financial sectors plays in boosting economic growth, the Nigeria governments over the years in a bid to concurrently strengthen the banking sector and enhance viable stable economic growth, have introduced several banking reforms. In 1986, the Nigeria government introduced the liberalization programme and this resulted in an enormous increase in the number of banks. Also in 2004, the banking sector was also consolidated and this reform witnessed such positive changes like relative high capital base; rise in nominal deposit and lending rates; emergence of a variety of financial products and services; and overall improvement in the financial sector infrastructure (Soludo, 2007).
Despite these reported achievements and positive development that characterized these reforms, the Nigerian economy that is blessed with abundant natural resources and potential human resources has been wallowing in severe poverty. It is disheartening to note that in recent times, poverty has become paversive in Nigeria, engulfing an overwhelming proportion of the country’s population. Indeed, the country’s per capital real income has been declining over the years, it has become very low in recent times and this is why the country has been classified as a low income economy as against its middle income economy in the early post independence era (Obadan, 2003).
It is against this backdrop that it therefore becomes imperative to evaluate the impact of both the liberalization and consolidation banking sector reforms on economic growth in Nigeria.
1.2 Statement of Problem
The Nigerian government having realised that adequate supply of credit to the economy is a crucial factor for growth process, have introduced several reforms to boost the growth of the banking sector thereby boosting the economic growth and reducing the rate of poverty and unemployment in the country. The fact that these various reform efforts have resulted in growth in the number of financial institutions and instruments, it is of paramount importance to note here that, this in itself cannot be taken as evidence of financial growth that is accompanied by growth in the real sector.
Inspite of the numerous reforms, the Nigerian growth rate has been quite discouraging over the years. A quick look at some basic economic indicators confirms this conclusion. The output growth rate as measured by changes in the real Gross Domestic Product (GDP) has been very volatile. For example, the economy recorded negative growth rate from 1981 - 1984. However, from 1985 to 1990, an average growth rate of 6.3 percent was recorded. Thereafter, economic performance deteriorated with GDP declining to barely 1.0 percent by 1994. Between 1999 and 2002, the GDP growth rate has averaged 3.5, 2003 to 2006, GDP rose to 5.8 percent and 2007 – 2009, an average growth rate of 6.5 percent was recorded. Indeed, the economy is expected to grow by a minimum of 7.0 percent per annum, if the millennium development goal of reducing the level of poverty by half is to be achieved by 2015 (CBN, 2004).
Furthermore, although Nigeria is generally regarded as oil rich economy, the contribution of the oil sector to GDP has not exceeded 14 percent, over the years, while that of non-oil sector still remains very dominant in the overall GDP. In recent times, available data shows that Nigeria especially her non oil economy is declining over the years in productivity as is evident in declining total factor productivity (World Bank, 2006). Overall, the existence of a significant output gap in the economy is incontrovertible.
Therefore, the question whether the reforms programme achieved its ultimate objectives remains an empirical question which this study intends to provide an insight. It is to this end that this research work seeks to measure the impact of banking sector reforms on economic growth in Nigeria.
1.3 Research Questions
Specifically, the study will strive to answer the following research questions:
i. What are the roles of the banking sector in economic growth in Nigeria?
ii. To what extent has the banking sector reforms impact on economic growth in Nigeria?
1.4 Objectives of the Study
The main objective of the study will be ascertain the impact of the banking sector reforms on economic growth in Nigeria. Specifically, the study focuses on the following areas:
i. To identify the roles of the banking sector in economic growth in Nigeria.
ii. To assess measure the impact of the banking sector reforms on economic
growth in Nigeria.
1.5 Research Hypothesis
The null hypothesis that is formulated to guide the study will be tested at 0.05% level of significance.
Ho1: Banking sector reforms do not have significant impact on economic growth
Ha1: Banking sector reforms have significant impact on economic growth in
1.6 Justification of the Study
The significance of the study is premised on the importance of financial sector to the economic growth. Since the financial sector of any country forms one of the main determinants of economic growth, to neglect such study as the financial sector would be as serious as neglecting the economy itself.
More so, the Gross Domestic Product (GDP) as proxy for standard of living in any economy has been very volatile. It has been agreed by most analysts of Nigerian economy that its growth path has been extremely unstable, and also shown a long run decline trends (Nnanna, 2004).
This study will provide an insight into the relationship between banking sector reforms and economic growth. It is a departure from previous studies of this kind in that, it will not only look at the impact of banking reforms on the aggregate GDP, but will further look at the effect of banking reforms on some sectors of the economy by disaggregating the GDP.
However, in spite of numerous banking reforms, the performance of the Nigerian non-oil sector has not been impressive. The non-oil economy, over the years has been declining in productivity and competiveness as is evidenced in declining total factor productivity (World Bank, 2006). Overcoming the challenges of non oil sector declining growth calls for evaluating the impact of the banking sector reforms on economic growth in Nigeria.
Further justification for the study is the 2009 episode of financial crisis witnessed in the Nigerian Banking Sector in which eight of its banks were declared distressed (CBN Audit of Banks, 2009). This work therefore, will not only be an empirical contribution to knowledge, but as well serve as blue print to policy makers, operators and regulators in the financial sector on how to transform the Nigerian Banking Sector into one of the safest and fastest growing banking sector among the emerging economies.
1.7 Scope and Limitation of the Study
The study focused on the extent to which banking sector reforms impact on economic growth in Nigeria. It covers the period between 1986-2009 because, it did not only mark the era of the liberalization and consolidation of the financial system, but also marked the epoch of significant impact of the late 1980s and that of 2004 reforms.
The main limitation of this works is on the model used which made certain assumptions in order to be able to abstract from realities. This process therefore gives room to inexactness in the representation of the true world situation.