TITLE PAGE THE FINANCIAL SYSTEM AND ECONOMIC GROWTH IN NIGERIA BY ANAGBOGU, FLORENCE GINIKA PG/M.Sc./09/53684 AN M.Sc. DISSERTATION PRESENTED TO THE DEPARTMENT OF BANKING AND FINANCE, FACULTY OF BUSINESS ADMINISTRATION, UNIVERSITY OF NIGERIA, ENUGU CAMPUS IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE AWARD OF MASTER OF SCIENCE (M.Sc.) IN BANKING AND FINANCE SUPERVISOR: DR. J.U.J. ONWUMERE FEBRUARY, 2014 i
Approval Page This is to certify that this dissertation by Anagbogu, Florence Ginika with Registration number PG/M.Sc./09/53684 presented to the Department of Banking and Finance, University of Nigeria, Enugu Campus, was supervised and approved to have met the conditions necessary for the award of Master of Science Degree (M.Sc.) in Banking and Finance of the University. ----------------------------- -------------------- Dr. J. U. J. Onwumere Date (Supervisor) ----------------------------- -------------------- Dr. J. U. J. Onwumere Date (Head of Department) ii
Declaration I, ANAGBOGU FLORENCE GINIKA, a post graduate student in the department of Banking and Finance, with registration number PG/M.Sc./09/53684 do hereby declare that I have satisfactorily completed my research dissertation in partial fulfilment of the requirements for the award of Master of Science Degree (M.Sc.) in Banking and Finance. The work in this dissertation is original and has not been submitted either in part or full in any other degree of this University or any other Institution..... ANAGBOGU, FLORENCE GINIKA.. Date iii
Dedication I dedicate this work to God Almighty for his endless love, mercy, wisdom, knowledge, understanding and direction throughout this phase of my academic pursuit and to the Blessed Virgin Mary, for her intercession. To my Dad and Mum for their love, unalloyed support and unquantifiable investment in my life. iv
ACKNOWLEDGEMENTS My profound gratitude goes to my supervisor, Dr. J.U.J. Onwumere, for his love, mentorship, contribution, advice, encouragement, motivation and meticulous supervision in the course of my research work. I sincerely appreciate him for the special attention he gave me from the beginning of this work to its completion. I am indeed grateful to you, sir, and pray God to continue to shower his blessings on you and your family. I wish to thank Dr. Ujunwa Austin for his encouragement, guide and input in this work and for providing me with some relevant materials and annual reports. To my lecturers, Prof. Uche, Dr. Modebe, Dr. Nwude, Dr. Onah, Dr. Chikeleze and all lecturers in the department of Banking and Finance, I appreciate you all for the knowledge imparted to me. I also appreciate Mrs Aneke and Mrs Chika of the Department of Banking and Finance. My special thanks goes to my colleague, Mr. Ubagwu Charles, for his encouragement, motivation, patience and tireless assistance in my course of writing this dissertation. I am indeed grateful to you. To my friends and colleagues, Amaka Okolo, Maureen, Chinwe, Chynwe, Ebere, Emma, James, Mr. Tony Ageme, Angela, Ify, Mrs. Nsofor, Mrs. Onuselogu, Godswill and my roommate Prisca, thanks for your love, contribution and understanding. Finally, I wish to say a very big thank you to my parents, Mr. and Mrs. Emmanuel Anagbogu, for their love, support, advice and prayers. In fact, words alone cannot express my gratitude to you. I will forever remain indebted to you. To my sisters and brothers, Mrs. Nwanneka Eze, Mrs. Njideka Ezenkwu, Mrs. Anurika Onwudiwe, Nkechi, Amobi, Ekene, Ifeyinwa and Tochukwu, I wish to thank you all for your love, understanding, prayers and support both financially and morally. I love you all. To my uncle, Chief Anthony Obi, thanks for your love and care. v
ABSTRACT This study examined the impact of the financial system with respect to banks and stock market on economic growth in Nigeria between 1991 and 2010. The debate among scholars on the comparative importance of banks and markets in promoting economic growth generated a lot of controversy. Some scholars argue that banks identify good projects, mobilize resources, monitor managers, and manage risk and so are better at promoting economic growth than the market. This gave rise to the bank-based financial system view. Others argue that the stock markets provide incentives for investors to acquire information, impose corporate control, and customdesign financial arrangements. According to these scholars, markets are better at promoting economic growth hence the market-based financial system view. In Nigeria, where its financial system comprises mainly banks and stock markets, focus has been on banks without adequate attention to the capital market. Policy makers tend to emphasize so much on banks in terms of reforms and individuals or companies depend so much on bank financing portraying Nigeria financial system as bank-based. With regard to this, the study sought to examine the bank-based and market-based financial systems and economic growth in Nigeria by assessing the impact of: (i) banks credit to private sector on economic growth in Nigeria, (ii) banks assets on economic growth in Nigeria, (iii) total value of shares traded on the stock exchange on economic growth in Nigeria, and (iv) market capitalization on economic growth in Nigeria. The ordinary least square method of analysis was employed to analyze the secondary data sourced from Central Bank of Nigeria Statistical Bulletin, Central Bank of Nigeria Annual Report and Statements of Account and Nigerian Stock Exchange Annual Reports and Statements of Account. Bank-based financial system proxied by banks credit to private sector and banks assets and Market-based financial system proxied by total value of shares traded and market capitalization served as the independent variables. Economic growth proxied by gross domestic product growth rate was used as the dependent variable. Results showed that (i) banks credit to private sector had a positive and significant impact on economic growth in Nigeria, (ii) banks assets had a positive and significant impact on economic growth in Nigeria, (iii) total value of shares traded had a positive and insignificant impact on economic growth in Nigeria, and (iv) market capitalization had a positive and significant impact on economic growth in Nigeria. These results showed that banks and market had positive impact within the period studied confirming the importance of both in promoting economic growth. The study therefore recommends that policy makers should make policies that will help develop both banks and market rather than focus on just one component of the financial system. Firms should be encouraged to raise long-term funds from the capital market rather than depend solely on bank financing. vi
TABLE OF CONTENTS Title Page - - - - - - - - - i Approval Page - - - - - - - - - ii Declaration - - - - - - - - - iii Dedication - - - - - - - - - iv Acknowledgements - - - - - - - - v Abstract - - - - - - - - - vi List of Tables - - - - - - - - - xi List of Figures - - - - - - - - - xii CHAPTER ONE INTRODUCTION 1.1 Background of the Study 1 1.2 Statement of Problem 5 1.3 Objectives of the Study 6 1.4 Research Questions 6 1.5 Research Hypotheses 6 1.6 Scope of the Study 7 1.7 Significance of the Study 7 1.8 Limitation of the Study 8 References 9 CHAPTER TWO REVIEW OF RELATED LITERATURE 2.1 Theoretical Framework 12 2.1.1 Financial Structure and Economic Growth 12 2.1.2 Competing Views on Financial Structure and Economic Growth 13 2.1.2.1 Bank-Based View and Economic Growth 13 2.1.2.2 Market-Based View and Economic Growth 16 vii
2.1.2.3 Financial System-Based View and Economic Growth 18 2.1.2.4 Legal System-Based View and Economic Growth 20 2.1.3 Overview of Financial Development and Economic Growth 20 2.1.3.1 Role of the Financial System 24 2.1.3.1.1 Clearing and Settling Payments 25 2.1.3.1.2 Providing Information and Monitoring Investment Projects 25 2.1.3.1.3 Managing Risks 26 2.1.3.1.4 Pooling Resources 27 2.1.4 Financial System Development Indicators 28 2.1.5 Overview of Economic Growth Theories 30 2.1.5.1 Classical Theory 30 2.1.5.2 Neo-Classical Theory 30 2.1.5.3 Harrod-Domar Growth Theory 31 2.1.5.4 New-Growth Theory 31 2.1.6 Overview of the Nigerian Financial System 32 2.1.6.1 Bank Development in Nigeria 33 2.1.6.1.1 Recapitalization and Consolidation of Banks 34 2.1.6.1.2 Bail-Out of Distressed Banks 36 2.1.6.2 Stock Market Development in Nigeria 37 2.2 Empirical Evidence on Financial System and Growth 38 2.2.1 Evidence on Bank-Based Versus Market Financial Systems 43 2.3 Summary of Literature Review 46 References 50 CHAPTER THREE RESEARCH METHODOLOGY 3.1 Research Design 58 viii
3.2 Nature and Sources of Data 58 3.3 Model Specification 58 3.3 Description of Research Variables 60 3.4.1 Dependent Variable (Economic Growth) 60 3.4.2 Independent Variables 60 3.4.2.1 Credit to Private Sector 60 3.4.2.2 Bank Assets 60 3.4.2.3 Total Value of Shares Traded 61 3.4.2.4 Market Capitalization 61 3.4.3 Control Variables 61 3.5 Techniques of Analysis 61 References 63 CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS 4.1 Introduction 65 4.2 Data Presentation 65 4.3 Determination of Research Variables 73 4.3.1 Economic Growth 73 4.3.2 Independent Variables 74 4.3.2.1 Credit to Private Sector as a Ratio of GDP 74 4.3.2.2 Bank Assets as a Ratio of GDP 75 4.3.2.3 Total Value of Shares Traded as a Ratio of GDP 76 4.3.2.4 Market Capitalization as a Ratio of GDP 78 4.3.3 Control Variables 79 4.3.3.1 Government Expenditure as Ratio of GDP 79 4.3.3.2 Gross Capital Formation as a Share of GDP 80 ix
4.4 Data Analysis 82 4.4.1 Test of Hypothesis One 82 4.4.2 Test of Hypothesis Two 83 4.4.3 Test of Hypothesis Three 84 4.4.4 Test of Hypothesis Four 86 4.5 Discussion of Research Findings 87 References 91 CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS 5.1 Summary of Research Findings 94 5.2 Conclusion 95 5.3 Recommendations 95 5.3.1 Recommended Areas for Further Studies 96 5.4 Contribution to Knowledge 97 Bibliography 99 Appendix 109 x
LIST OF TABLES 4.2.1 Indicators of Bank-Based Financial System 65 4.2.2 Indicators of Market-Based Financial System 67 4.2.3 Government Expenditure, Gross Capital Formation and Gross Domestic Product 70 4.3.1 Determination of GDP growth rate 73 4.3.2.1 Determination of Bank Credit to Private Sectors as a Ratio of GDP 74 4.3.2.2 Determination of Bank Assets as a Ratio of GDP 75 4.3.2.3 Determination of Total Value of Shares Traded as a Ratio of GDP 76 4.3.2.4 Determination of Market Capitalization as a Ratio of GDP 78 4.3.3.1 Determination of Government Expenditure as a Ratio of GDP 79 4.3.3.2 Determination of Gross Capital Formation as a Ratio of GDP 80 4.4.1 The Result of OLS for Hypothesis One 82 4.4.2 The Result of OLS for Hypothesis Two 83 4.4.3 The Result of OLS for Hypothesis Three 85 4.4.4 The Result of OLS for Hypothesis Four 86 xi
LIST OF FIGURES 4.2.1 Growth Rate of Credit to Private Sector 66 4.2.2 Growth Rate of Bank Assets 67 4.2.3 Growth Rate of Total Value of Shares Traded 69 4.2.4 Growth Rate of Market Capitalization 70 4.2.5 Growth Rate of Government Expenditure 71 4.2.6 Growth Rate of Gross Capital Formation 72 4.2.7 Growth Rate of Gross Domestic Product 72 4.3.2.1 Bank Credit to Private Sector/GDP 75 4.3.2.2 Bank Assets/GDP 76 4.3.2.3 Total Value of Shares Traded/GDP 77 4.3.2.4 Market Capitalization/GDP 79 4.3.3.1 Government Expenditure/GDP 80 4.3.3.2 Gross Capital Formation/GDP 81 xii