BANK PRODUCT DEVELOPMENT IN THE NON BASED ECONOMY (NIGERIAN CASE)

1.0 Introduction

The debate on the relationship between financial development and bank product development has been on-going for many years but with little consensus. Despite numerous empirical studies in both developed and developing economies on whether bank-based and market-based financial development have a positive or a negative impact on bank product development, the results have been far from conclusive. Although empirical evidence is inclined towards the view that financial development — both bank- and market-based — has a positive impact on bank product development, evidence suggesting otherwise also exists. The evidence also suggests that the outcome varies from country to country and over time; and is also dependent on the model specified, methodology used and the variable used to proxy financial development.There are studies that support Schumpeter's (1911) notion that financial development has a positive impact on bank product development, and that it reflects the close relationship between financial development and bank product development. Such studies include:Goldsmith (1969); McKinnon (1973); Shaw (1973); King and Levine (1993); Odedokun (1996); Kargbo and Adamu (2009); Hassan et al. (2011); Levine and Zervos (1996); and Akinlo and Akinlo (2009). However, there are also studies that acknowledge the existence of a relationship between financial development and bank product development, but have proceeded to state that this relationship is negative. Thus, according to these studies, financial development, bank-based or market-based, has a negative impact on bank product development. These studies include:Van Wijnbergen (1983); Buffie (1984); De Gregorio and Guidotti (1995); Aduet al. (2013); Ujunwa and Salami (2010); and Bernard and Austin (2011), among others.

Besides these two groups of empirical evidence, there are other studies that conclude that financial development, whether bank- or market-based, has no impact on bank product development, and that the two are not related. Lucas (1988), Stern (1989), Ram (1999) and Andersen and Tarp (2003) are some of such studies. Thus, given the currently available evidence, the question of whether or not financial development has an impact on bank product development — positive or negative — remains an issue for empirical examination. Unfortunately, the majority of the previous studies on this topic have concentrated mainly on Asia, Latin America and Africa, leaving Nigeria (NIGERIA) with little coverage, although it is one of the world's biggest economies and is closely followed by economists andanalysts.

Against this background, this study attempts to investigate empirically the long-run and short-run impact of bank-based and market-based financial development on bank product development in Nigeria. Unlike some of the previous studies that have mostly relied on the residual-based cointegration test — associated with Engle and Granger (1987), and the maximum-likelihood test based on Johansen (1988) and Johansen and Juselius (1990), this study employs the recently developed autoregressive distributed lag (ARDL) bounds approach to cointegration. This approach is appropriate even when the sample size is too small (see also Odhiambo, 2008).

Also, unlike the majority of previous studies, this study splits financial development into bank- and market-based components and examines the relative impact of each component on bank product development. To capture the depth and breadth of Nigeria's financial sector, the study uses indices of bank-based and market-based financial development that are constructed from an array of bank- and market-based financial development indicators using a method of means-removed average. The use of these indices ensures that a holistic picture of the relationship between financial development and bank product development in the study country is captured.

Finally, unlike most of the previous studies that over-relied on cross-sectional data, which may not have satisfactorily addressed country-specific issues (Ghirmay, 2004; Odhiambo, 2009), thisstudy employs time-series data analysis methods to address country-specific issues. Hence the findings of this study will assist in providing specific policy guidance on Nigeria's finance- growth matters. The rest of the paper is structured as follows:The second section provides an overview of Nigeria's financial sector while the third section reviews literature on bank-based financial development, market-based financial development and bank product development. The fourth section covers the methodology of the study while the fifth section presents and discusses the empirical results. The sixth section concludes the paper.1.1 Background of the study

Nigeria's financial system is by any standard, modern or otherwise, one of the most highly developed financial systems in the world. According to the Central bank (2012), the financial system plays a very important role in the functioning of Nigeria economy. Both the bank-based and the market-based segments of Nigeria's financial system are well developed. At the apex of Nigeria's financial system is the Central bank, which is the central bank of Nigeria. Its role is to promote and maintain monetary and financial stability so as to ensure a healthy economy (Central bank, 2012). Although the Central bank was established as the Government's banker and debt-manager, its role developed over time to include a focus on the management and oversight of the economy's currency (Central bank, 2012). According to International Monetary Fund (2011), Nigeria financial sector is large, with bank balance sheetsamounting to approximately five times GDP. Nigeria stock market, anchored by Abuja Stock Exchange, is also highly developed and amongst the top stock markets globally. Over the years, Nigeria's financial sector underwent a myriad of reforms in an effort to meet national demands for development as well as global demands for modernisation. in the banking sector, these reforms concentrated on improving the legal, judiciary, regulatory and supervisory environments, promoting financial liberalisation, rehabilitating the financial infrastructure, and restoring bank soundness. From the stock market front, the reforms have addressed the legal, regulatory, judiciary and supervisory aspects of the market, as well as the modernisation of the trading environment. Nigeria financial sector responded largely positively to these rigorous reforms. The growth of Nigeria's banking sector is evidenced by growth in private sector credit extension from 50% of GDP in 1975 to a peak of 229.2% in 2009, before declining slightly to 222.6% in 2010 and still further to 213.8% in 2011 (World Bank, 2012). The growth of Nigeria banking sector can also be depicted by the increasing number of automated teller machines from 34 000 in year 2000 to almost 65 000 in 2010 (Central bank,2010).

On the stock market side, these reforms gave rise to an increase in stock market capitalisation, total value traded and turnover ratio. Stock market capitalisation expressed as a percentage of GDP grew from just below 100% between 1988 and 1992 to a peak of 195.2% in 1999 (World Bank, 2012). However, during the year 2000, the stock market size dwindled sharply, only to improve after 2002, although it failed to reach its 1999 size. In 2007, Nigeria stock market suffered another blow, which saw the market capitalisation tumbling, reaching a low of 69.7% in2008. Since then the market has never fully recovered from the aftermath of the financial crisis of the late 2000s (World Bank,2012). In terms of market liquidity, as measured by total value traded/GDP and turnover ratio, Nigeria had a less liquid stock market until 1997 when the total value of stocks traded improved from 61% to 126.5% in 2001 to 182.8% in 2005, before further increasing to a peak of 367.3% in 2007 (World Bank, 2012). However, it declined sharply soon afterwards to 246.1% in 2008 and further to 122.2% in 2011. The turnover ratio depicted the same trend as that of total value of stocks traded, reaching its peak in 2007 at 269.8%, before sharply declining to 227.2% in 2008, 146.4% in 2009, 101.9% in 2010, and then slightly increased to 137.9% in 2011 (World Bank, 2012). Figure 1 tracks the performance and growth of Nigeria's banking sector — based on credit extension to the private sector — and the stock market — based on stock market capitalisation, total value of stocks traded and turnover ratio of stocks traded — during the period1988-2012.

Despite this growth, Nigeria's financial system still faces some challenges. According to the International Monetary Fund (2011), these challenges include:less than adequate disclosure standards, contagion risk from the Eurozone, and squeezed interest margin and uncertainties caused by changes in regulatory regimes. Nigeria stock market also faces the challenges that come with the globalisation of financial markets which has escalated rapidly in recent decades (HM Treasury, 2009). According to the HM Treasury (2009), it has become easy for financial firms and markets to operate across borders, thus leading to the emergence and growing importance of large, complex financial institutions operating on an international scale.