STRUCTURAL ANALYSIS OF THE NIGERIAN FINANCIAL SYSTEM IN THE POST LIBERALIZATION ERA AND IT'S IMPACT ON ECONOMIC GROWTH

1.0 Introduction

1.1 Background to the Study

Several arguments have been put forward about ways of improving the standard of living through a sustained growth process. This development has elicited paradigm shift in economic growth strategies and policies especially in developing economics and new frontiers were being explored to achieve economic growth.

The important role of finance in the process of economic growth and development was brought to lime light by the works of Bagehot (1873) and Schumpeter (1911). They pointed out the productivity and growth enhancing effects of services provided by a developed financial sector. They posit that the industrial revolution in England was the result of a functioning financial system that was instrumental in mobilizing and allocating long-term capital to the productive enterprises of the country. They argued that financial intermediaries play a crucial role in fostering technological innovation and economic growth by providing basic services such as mobilizing savings, monitoring managers, evaluating investment projects, managing and pooling risks, and facilitating transactions.

The seminal works of McKinnon (1973) and Shaw (1973) supported Schumpeter's view of promoting the development of financial sector to achieve economic growth. They criticized the financial repressionists? view adopted by many governments in developing countries in the early 1970s. The traditional justification for financial repression is that it is presumed to increase the rate of economic growth. This argument is based on the assumption that money and real assets are perfectly substitutable, that increasing returns in real asset markets relative to money market instruments will induce a change in investor behaviour, so shifting investment out of money market into capital investment. An important implication is that setting interest rate ceilings will reduce the rate of return on financial assets, and induce a shift to investments in productive assets, thereby increasing the rate of economic growth. Government restrictions on the banking system such as interest rate ceilings, high reserve requirements and directed credit programs hinder financial development and reduce output growth.

According to McKinnon, capital accumulation is the most critical element necessary for economic growth, while Shaw emphasizes the ability of the banking system to intermediate adequate amount of credit to finance higher economic growth. Both argue that removing interest rate and credit allocation controls will ease the repressed financial system, which would in turn improve the rate of economic growth through efficiency in financial intermediation subject to improved financial discipline (Dawood, 2004). The basic idea was that adequate savings are necessary for the realization of investment projects desperately needed for the economic growth and development of less developed economies. However, government intervention that seeks to boost investment by keeping real interest rates low prohibit the accumulation of savings in the form of banks? deposits (Akinlo and Egbetunde, 2010). McKinnon and Shaw arguments gave rise to theoretical ideas and policy recommendations which support the liberalization of the financial system.

The liberalization of the financial sector involves the removal of all forms of government interventions in the financial system so that the cost and allocation of loanable funds are determined by the forces of demand and supply. Liberalization which would be associated with higher interest rates would stimulate savings. This is based on the assumption that savings are responsive to interest rates, that is, the higher the saving rate and that the higher the level of investment leading to a higher growth. The liberalization of the financial system was expected to be accompanied by changes in the structure and composition of the financial system as new instruments and institutions are expected to be added to the already existing ones (Oima and Ojwang, 2013). The aggregate size of the financial sector, its sectoral composition, and range of attributes of individual sectors determine their effectiveness in meeting users? requirements.

Structural changes in the financial system were expected to give rise to a reliable and inexpensive money transfer within the country, reaching remote areas and poor households. There will be remunerative deposit facilities and other investment opportunities offering liquidity and a reasonable risk-return trade-off. Entrepreneurs will have access to a range of sources for funds for their working- and fixed-capital formation; affordable mortgage and consumer finance will be available to households. The credit renewal decisions of banks and the market signals coming from organized markets in traded securities will help ensure that good use continues to be made of investable funds. Insurance intermediaries and the portfolio possibilities offered by liquid securities markets will help maximize the risk pooling and the shifting of risk at a reasonable price to entities that are able and willing to absorb it.

The Nigerian government like most developing countries in Africa, who desired economic growth and development, adopted the Structural adjustment Programme (SAP). SAP has the objective of restructuring and diversifying the productive base of the economy in order to reduce dependency on oil export as well as to reduce the dominance of unproductive investment in the public sector and to enhance the growth potential of the private sector (Philips, 1987).

The financial system of the Nigerian economy was liberalized as part of the Structural Adjustment Programme (SAP) in 1986. The justification given was that the liberalized financial system would better perform the function of financial intermediation by mobilizing more savings that would be invested and this will be accompanied by the much desired economic growth and development. These laudable objectives can only be achieved if the liberalized financial system provides efficient and sufficient outlets for mobilising savings as well as those necessary for investment (Ujunwa, Salami and Nwakoby, (2012)).

Prior to the liberalization of the Nigerian financial system, the system was highly repressed. Interest rate controls, selective credit guidelines, exchange rate regulations, ceiling on credit expansion and use of reserve requirements and other direct monetary control instruments characterized the system. Entry into the banking system was also restricted. Consequently, the introduction of the liberalization of the system led to the adoption of a market based interest and the establishment of a market based autonomous foreign exchange market, among others.

The liberalization of the Nigerian financial system took off with the liberalization of lending and deposit interest rates aimed at guaranteeing efficient allocation of resources followed by deregulation of entry barriers into the banking sector to enhance bank efficiency through increased competition in service delivery and management. The liberalization of the financial system led to the restructuring of the supervisory authorities? (CBN, SEC and NDIC) of the nation's financial sector and their capacity were strengthened by increasing their viability through adequate regulations regarding minimum capital requirements, specifying the range of assets and liabilities they can acquire, introduction of uniform accounting standards for banks to ensure accuracy, reliability and comparability. Nigeria embarked on the programme of financial liberalization in order to maximize the benefits associated with a free market system.

1.2 Statement of Research Problem

Prior to1986, the Nigeria financial sector was highly regulated. The cost and allocation of credit were controlled by the government. This era witnessed interest rate ceilings fixed by law, directed credits, accommodation of government borrowing, exchange rate controls and informal modes of intermediation and all forms of direct government controls of the system. During this period, the nation's economy was besieged by high level of indebtedness,

unfavourable balance of payment, over dependence on oil revenue, Absence of new investment, wide spread distortion and imbalances in the economy (Anyanwu, 1996).

In July, 1986, the Federal Military government introduced the Structural Adjustment Programme (SAP). The financial system of the Nigerian economy was liberalized as part of the Structural Adjustment Programme (SAP) in 1986.

One of the objectives of the liberalization policy was to encourage the establishment of new financial institutions through relaxed entry requirements (Mordi, Englama and Adebusuyi, (2010)).The liberalized financial system was expected to be accompanied by changes in the structures and composition of the financial system as new instruments and institutions are expected to be added to the existing ones thereby leading to increase in the efficient outlets for savings mobilization and investment thereby enhancing economic growth (Ujunwa, Salami and Nwakoby, (2012)).

Though, the Nigeria financial system experienced radical structural and institutional changes such as phenomenal increase in the number of institutions operating in the sector and the addition of some innovative types such as Peoples Bank of Nigeria (PBN), community banks as well as specialized institutions such as primary mortgage institutions (PMIs), Bureaux de Change (BDCs), and even Nigeria Deposit Insurance Corporation (NDIC) was established primarily to insure deposits against total lost in the event of bank failure.

Despite all these, the financial system may not has shown a significant improvement it its ability to mobilize saving as the level of savings in the country is low; this low degree of savings is accompanied by liquidity trap, capacity underutilization and low rate of capital formation (Adesoye, Maku and Atanda,(2011)). More so, an examination of the banking sector shows that the sector has remained largely oligopolistic and uncompetitive. Few large banks control the greater segment of the market in terms of total assets, total liabilities and total credit in the banking system (Maduka and Onwuka, 2013).

Empirical evidences from the Nigerian economy show that despite the adoption of financial liberalization, the domestic economy has not experienced impressive performance as envisaged (Bakare, 2011).

According to Umejiaku (2011), after over two decades of reforms in the financial sector, Nigeria is not one of the countries that may have a success story of financial sector reform positively influencing real macroeconomic activities. The aftermaths of all these are the high level of unemployment, most especially youth unemployment which is not unconnected with the high level of social vices, violence and terrorism the country is witnessing as well as high level of poverty (Okpara, 2010).

Also, the failure of the financial sector to finance the long term investment required in the real sector of the economy has also being the bane of the nation's economic growth and development. Most industries such as Textile, Automobile, petrochemical etc that existed before 1986 have long gone out of business and this contributed to the country's worsening balance of payments and balance of trade positions as the country is total dependent on the importation of all form of goods (both consumable and capital) and services (Alabi, 2009) .

Furthermore, a look at the performance of the economy in the post-liberalization era brings mixed feeling, for instance, in 1987, savings grew by 34.03% and by 1989 and 1995 it grew by 2.37% and 0.027% respectively. In 2000, the growth rate of savings was 38.7% and by 2005, it increase to 65.13% before declining to 3.307% in 2010 and 9.701% in 2011.

Investment did not do better as well. For instance, in 1987, investment in the Nigerian economy grew by 3.416% while in 1995 investment growth rate was 34.42% and by 1998 it was -0.26%. in 2008 and 2011 respectively, investment in Nigeria grew by 5.99% and 4.48% respectively.
Growth rate of the economy also follow saving and investment in its behaviour during the period under review. In 1987 GDP growth rate was -0.57% while in 1991 GDP growth rate stood at -0.81%. By 1998 GDP growth rate stood at 0.42% while by 2005 and 2011, it improved to 6.51% and 7.40% respectively.

Sequel to the issues discussed above, this study raised the following research questions:

1. How has the Nigerian financial structure changed since the liberalization policy was introduced in 1986?
2. What is the impact of financial structure on savings and investment in the posy- liberalization era in Nigeria?
3. What is the impact of the changes in the Nigerian financial system's structure on economic growth since liberalization?

1.3 Objectives of the Study

The broad objective of this study is to assess the impact of the evolution and structural changes in the Nigerian financial system in the post liberalization era on economic growth.
The specific objectives of this research are as follows:

1. To analyse the trend and pattern of changes in the structure of the Nigerian financial system since the adoption of the financial liberalization policy in 1986.
2. To assess the impact of financial structure on Savings and investment in Nigeria.
3. To assess the impact of the structural changes in the Nigerian financial system since liberalization on economic growth in Nigeria.

1.4 Justification for Study

Developing countries (LDCs) are generally characterized by several features including capital scarcity and lower industrial base when compared with the developed countries (DCs) of the world. The accumulation of capital in any developing country like Nigeria requires an effective, efficient and sound financial sector (Khazri and Djellassi, 2011). In pursuit of this, the government of the country embarked on the liberalization of the sector by adopting the

SAP. Therefore, it is imperative that after over twenty five (25) years of the implementation of this policy to examine its effectiveness in the term of changes in the structure of the financial system and its contribution to economic growth. This is intended to be done in this study

Furthermore, the literature on the Nigerian financial structure is quite substantial. However, the greater part of them focussed on sectoral analysis albeit, and testing of the age long controversies of market based versus bank based financial system. Consequently very little information could be derived from such literature as basically, the structural transformation that financial liberalization brought is often ignored.

For instance, Agbaw (1998) studied the impact of financial deepening on economic growth in Nigeria using least square and cointegration analysis, therefore ignoring the possibility of simultaneity. Bulus (2011) investigated the impact of banking sector reforms on the various sector of the Nigerian economy using error correction method without paying cognisance to the interrelationships among the various sector. Though, Olofin and Afangideh (2008) investigated the role of financial structure on economic growth using a small macroeconometric model, the model did not adequately investigate the transmission mechanism of financial liberalization.

This study, therefore intend to fill this gap by examining the structural changes in the financial system and its impact on the growth of the Nigerian economy since the liberalization of Nigerian financial sector using a system of equation of three endogenous variables estimated using three stage least square (3SLS) which capture endogeneity both in the variables and in the error terms..

Also, investigation of the impact of financial structure on economic growth in Nigeria would be important given the continuing debate on this issue {See Onwumere, Onudugo and Imo

(2013), Oima and Ojwang (2013) Maduka and Onwuka (2013)}. Therefore, this study help shed more light on the controversies surrounding financial structure and economic growth in Nigeria.

1.5 Scope and Limitation of the Study

The Nigerian financial system has gone through various phases since the country became independent. However, for the purpose of this study, only data from 1986-2012 was used. This is purposely used because the liberalization of the Nigerian economy started in 1986. Furthermore, the various institutions involved in the financial system such as issuing houses, deposit money banks, stock exchanges, investment banks, insurance companies will be given adequate attention.

Notwithstanding, whatever level of viability attributed this work, caution should be taken as the data used in this study were sourced from secondary sources whose authenticity cannot be guaranteed by the research.

1.6 Organization of the Study

This study is organized into five chapters.

1. Chapter one presents the general introduction.
2. Chapter two deals with the review of literature; this consists of conceptual literature, theoretical literature, empirical and other relevant literature that could help to explain the relationship among the variables.
3. Chapter three develops and describes the methodology.
4. Chapter four presents and analyses the empirical estimates as well draws implications from the findings.
5. Finally, chapter five presents the summary, conclusion and recommendations of the study.