THE IMPACT OF BANKING SECTOR ON ECONOMY GROWTH 1970 -2015

THE IMPACT OF
BANKING SECTOR ON ECONOMY GROWTH 1970 -2015
CHAPTER ONE
INTRODUCTION
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
in Nigeria
Ha1:  Banking sector reforms have significant impact on
economic growth in
Nigeria.
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.



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