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Chapter one


1.1 Background of the Study

Every economy’s financial sector is critical to its development and progress. The development of this sector affects how effectively and efficiently it will be able to carry out its primary function of mobilising funds from the surplus to the deficit sectors of the economy.

This sector has helped to facilitate business transactions and economic development (Aderibigbe, 2004). A well-developed financial system performs a number of key services that improve intermediation efficiency by lowering information, transaction, and monitoring costs.

A well-developed financial system encourages investment by recognising and supporting strong business prospects, mobilising funds, allowing for risk trading, hedging, and diversification, and facilitating the trade of commodities and services.

All of these factors contribute to more efficient resource allocation, rapid accumulation of physical and human capital, and faster technical progress, all of which lead to economic growth.

According to Ajayi (1995), development in the real sector directly determines the rate of growth in the financial sector, whereas growth in finance, money, and financial institutions drives the real economy.

Economic growth is a progressive and consistent shift over time caused by a rise in the rate of savings and population (Jhingan, 2005). It has also been defined as a positive shift in a country’s production of products and services over time.

Economic growth is defined as an increase in the quantity of products and services produced in a country. An economy is said to be developing when its productive capacity improves, resulting in more production of products and services (Jhingan, 2003).

Economic growth is typically driven by technological innovation and positive external pressures. It serves as a measure for enhancing people’s standards of living. It also indicates a reduction in economic inequality.

According to Oluyemi (1995), any economy’s financial sector can help promote rapid economic transition by acting as a growth engine. It follows that no economy can ever prosper without significant expansion in the financial sector.

An effective financial system is critical for fostering long-term economic progress and an open, vibrant economy. Countries with well-developed financial institutions tend to grow quicker; specifically, the size of the banking system and the liquidity of stock markets have a large positive impact on economic growth (Beck and Levine, 2002; Nnanna, 2004).

According to Beck (2000), a large number of experts believe there is a causal relationship between finance and economic growth. According to La Porta (2000), well-developed capital markets, particularly those endowed with investor protection rights, facilitate the efficient allocation of capital to projects with high rates of return, hence promoting savings, investments and economic growth.

Evidence from both single-country (Guiso, Sapienza, and Zingales (2004) and cross-country (Levine, 2006; Demirguc Kurt and Levine (2001) studies suggests that economies with more developed financial markets start growing earlier, achieve higher growth rates, and have higher per capita incomes than economies with less developed financial markets.

According to Levine (2005) and Beck (2009), the positive effect of financial development on economic growth can be explained by five mechanisms, each of which reduces the negative impact of information asymmetries among economic agents and the transaction costs associated with their activities.

According to them, the financial system

(1) provides means of payment that facilitates a greater number of transactions in the financial sector,

(2) concentrates the savings of a large number of investors in the financial sector,

(3) allows for the allocation of resources to their most productive economic use, through the effective evaluation and monitoring of investment projects in the financial sector,

(4) improves corporate governance, and

(5) contributes to risk management in

1.2 Statement of the Problem

The Nigerian financial sector, like that of many other developing countries, was heavily regulated, resulting in financial disintermediation that slowed economic growth.

The correlation between the financial sector and economic growth has been poor. The financial sector does not properly and efficiently serve the real sector of the economy, particularly the high-priority industries that are also seen as economic growth drivers.

Banks are claiming billions in profits, but the actual sector remains poor, lowering the economy’s productivity level. Most operators in the production sector are folding up due to an inability to obtain loans from banking institutions or because the cost of borrowing was prohibitively expensive.

Nigerian banks have focussed on short-term loans rather than long-term investment, which should have created the foundation of a robust economic change.

Since the implementation of the Structural Adjustment Programme (SAP) in 1986, in an effort to accelerate the economy’s recovery from its deteriorating conditions, there has been a significant lot of interest in the operations and expansion of the financial sector. This is because restructuring in this sector was a key component of the SAP reform.

Thus, it is necessary to develop the financial sector and posture it for growth and integration into the global financial system in accordance with international best practices.

According to Nzotta and Okereke (2009), one of the most pressing policy issues in most nations is the impact of financial institution consolidation on financial sector growth and development. The first big issue is the transmission mechanism.

Consolidation may alter the credit allocation of the financial system by encouraging the formation of larger banks with greater access to the funds market. It also has an impact on loan availability and pricing when market dynamics and economic development levels vary.


This research activity will seek applicable answers to these posers, often known as research questions. They include:

1. To what extent does financial sector development affect Nigerian economic growth?

2. Is there a causal link between finance sector expansion and Nigerian economic growth?

1.4 Objectives of the Study

The overall goal of this research is to investigate the impact of financial sector development on Nigerian economic growth. Specific aims are to:

1. Assess the influence of financial sector development on Nigeria’s economic growth.

2. Determine the extent to which a causal relationship exists between financial sector expansion and Nigerian economic growth.

1.5 Hypothesis of the Study

This research will be led by the following hypotheses:

1. Financial sector expansion has little impact on Nigerian economic growth.

2. There is no direct link between financial sector expansion and Nigeria’s economic growth.
1.6 Significance of the Study

This study is a valuable source of information for scholars because the findings will inform discussions on the subject. This study adds to the empirical literature on economic activity and financial sector development in Nigeria. The paper is also an important resource for policymakers.

1.7 Scope and Limitations of the Study

This study focuses on financial sector development and its impact on Nigerian economic growth. It covers 34 years, from 1981 to 2014.

Data for this study will be secondary, primarily from government-owned entities such as the Central Bank of Nigeria. Sometimes, for obvious policy reasons, such data is purposefully distorted by the government to paint an acceptable picture of the economy. The researcher is thus limited to the results of such data.

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