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This empirical study examined the impact of financial sector development on Nigerias economic growth 1981 to 2014. Secondary data on real gross domestic product (RGDP), used as a proxy for economic growth; where financial development was captured by three variables; Ratio of Money Supply to GDP (MGDP), Ratio of Credit to Private Sector to GDP (CPGDP) and Real Interest Rate (INT) which represented the explanatory variables and were  sourced mainly from CBN publications . In the course of empirical investigation, various advanced econometric techniques like Augmented Dickey Fuller Unit Root Test, Toda- Yamamoto (TY) Test and VAR LM Serial Correlation test were employed and the result revealed among others: that none of the variables were stationary at level, but were rather fractionary integrated leading to the test of Toda Yamamoto. The Toda Yamamoto result indicated that there is causal relationship between Financial Sector Development and Nigerias economic growth. The VAR LM Serial Correlation test indicated the absence of autocorrelation.The study concluded that Nigeria financial system is yet to be developed to its full capacity, hence there is need to adequately deepen the financial system through innovations, adequate and effective regulation and supervision, efficient mobilization of funds and making such funds available for productive investment, and improved services

                                                                   CHAPTER ONE


1.1              Background to the Study

 The financial sector of any economy in the world plays a vital role in the development and growth of the economy. The development of this sector determines how it will be able to effectively and efficiently discharge its major role of mobilizing fund from the surplus sector to the deficit sector of the economy. This sector has helped in facilitating the business transactions and economic development (Aderibigbe, 2004). A well-developed financial system performs several critical functions to enhance the efficiency of intermediation by reducing information, transaction and monitoring costs. If a financial system is well developed, it will enhance investment by identifying and funding good business opportunities, mobilizes savings, enables the trading, hedging and diversification of risk and facilitates the exchange of goods and services. All these result in a more efficient allocation of resources, rapid accumulation of physical and human capital, and faster technological progress, which in turn results in economic growth. Development in the real sector, as noted by Ajayi (1995) influences the speed of growth of the financial sector directly, while the growth of the finance, money and financial institutions influence the real economy.

The economic growth is a gradual and steady change in the long-run which comes about by a general increase in the rate of savings and population (Jhingan, 2005). It has also been described as a positive change in the level of production of goods and services by a country over a certain period of time. Economic growth is measured by the increase in the amount of goods and services produced in a country. An economy is said to be growing when it increases its productive capacity which later yield more in production of more goods and services (Jhingan, 2003). Economic growth is usually brought about by technological innovation and positive external forces. It is the yardstick for raising the standard of living of the people. It also implies reduction of inequalities of income distribution. Oluyemi (1995) regards the financial sector of any economy as an engine of growth that could greatly assist in the promotion of rapid economic transformation. It can be concluded that no economy can ever develop without an appreciable growth in the financial sector. An efficient financial system is essential for building a sustained economic growth and an open vibrant economic system. Countries with well-developed financial institutions tend to grow faster; especially the size of the banking system and the liquidity of the stock markets tend to have strong positive impact on economic growth (Beck and Levine, 2002 and Nnanna, 2004).

According to Beck (2000), a long list of scholars posit, a causal association between finance and economic growth. La Porta (2000) argues that well developed capital markets- especially thoseimbued with rights that protect investors promote the efficient allocation of capital toprojects with high rates of return, in turn stimulating savings, investments and economicgrowth. Evidence from both single country (Guiso, Sapienza and Zingales (2004) andcross-country (Levine, 2006; Demirguc Kurt and Levine (2001) studies suggest thateconomies with more developed financial markets begin to grow earlier, attain highergrowth rates, and achieve higher levels of per capita income than economies with lessdeveloped financial markets. The Levine (2005) and Beck (2009) argue that the positive effect of financial development over economic growth can be explained by five mechanisms, whose operations reduce the negative impact of information asymmetries among economic agents and the transaction costs involved in their activities. According to them, financial system (1) provides means of payments that facilitates a greater number of transactions in financial sector, (2) concentrates the savings of a large number of investors in financial sector, (3) makes possible the allocation of resources to their most productive economic use, through the effective evaluation and monitoring of investment projects in financial sector, (4) improves corporate governance, and (5) contributes to risk management in financial sector.

1.2              Statement of the Problem

The Nigerian financial sector, like those of many other less developed countries, was highly regulated leading to financial disintermediation which retarded the growth of the economy. The link between the financial sector and the growth of the economy has been weak. The real sector of the economy, most especially the high priority sectors which are also said to be economic growth drivers are not effectively and efficiently serviced by the financial sector. The banks are declaring billions of profit but yet the real sector continues to weak thereby reducing the productivity level of the economy. Most of the operators in the productive sector are folding up due to the inability to get loan from the financial institutions or the cost of borrowing was too outrageous. The Nigerian banks have concentrated on short term lending as against the long term investment which should have formed the bedrock of a virile economic transformation.

Since the adoption of the Structural Adjustment Programme (SAP) in 1986, in an attempt to quicken the recovery of the economy from its deteriorating conditions, a great deal of interest has been shown in the activities and development in the financial sector. This is so because the restructuring of this sector was a central component of the SAP reform.

Thus, there is the need to deepen the financial sector and reposition it for growth and integration into the global financial system in conformity with international best practices. According to Nzotta and Okereke (2009) one of the most important policy concerns in most countries is the effect of consolidation of financial institutions on financial sector growth and development. The first major concern is the transmission mechanism. Consolidation could alter the credit allocation of the financial system by fostering the creation of larger banks having better access to the funds market. It also affects the availability and pricing of loans in response to changes in the market dynamics and the level of economic development.

1.3              Research Questions

This research work shall seek relevant answers to these posers otherwise referred to as the research questions. They include:

1.      To what extent does Financial Sector Development impact on Nigerian economic growth?

2.      Is there any causal relationship between financial sector development and Nigerian economic growth?

1.4              Objectives of the Study

The general objective of this study is to examine the impact of financial sector development on Nigerian economic growth. The specific objectives are to:

1.      Evaluate the impact of financial sector development on Nigerian economic growth.

2.      Investigate the extent to which causal relationship exists between financial sector development and Nigerian economic growth.

1.5      Hypotheses of the Study                        

This research work shall be guided by the following hypotheses:

1. Financial sector development does not have significant impact on Nigerian economic growth.

2. There is no causal relationship between Financial Sector development and Nigeria economic growth.

1.6              Significance of the Study

This study is a good source of information for researchers, as the results that emerge from this study will inform debates on this subject. This research further contributes to empirical literature on economic activity and financial sector development in Nigeria. The study is also a valuable source of information for policy formulation.

1.7        Scope and Limitations of the Study

This study is limited to financial sector development and its impact on the Nigerian economic growth. It covers a period of 34 years i.e. from 1981 to 2014.

Data for this study shall be secondary, majorly from government own institutions like the Central Bank of Nigeria. Sometimes, for obvious policy cover ups, such data are intentionally manipulated by government to portray an acceptable picture of the economy. The researcher is therefore limited to outcomes of such data.

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