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THE IMPACT OF FINANCIAL REFORMS ON MONEY DEMAND AND ECONOMIC GROWTH IN NIGERIA

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THE IMPACT OF FINANCIAL REFORMS ON MONEY DEMAND AND ECONOMIC GROWTH IN NIGERIA

 

ABSTRACT

The study investigated the impact of financial sector reform on money demand and the rate of economic growth in Nigeria. The residual based autoregressive distributed lag-error correction model (ARDL-ECM) was used to analyse the study with a time series data sourced from the central bank of Nigeria statistical bulletins and World Bank Development Indicators records covering a period of 1970-2013. A dummy variable was created to represent the financial reform periods-especially the recent reform periods that commenced fully in 2005. The result established that money demand and economic growth have responded positively to policies of financial sector reform introduced in Nigeria recently as both the bank reform indicator-private sector credit and stock exchange indicator stock value traded-though with a negative impact. In agreement, the study also investigated the impact of money demand on economic growth via financial development. The results also indicate that financial development has positively affected money demand in Nigeria-when examined from private sector credit from banks and negatively related to economic growth from the stock market side. Thus, from the findings of the study, financial reform was found to have positively impacted on money demand and economic growth.

 

CHAPTER ONE

INTRODUCTION

 

1.1 Background of the Study

The rising importance of the financial sector in the economic development of countries especially developing countries, as well as the rapid rate of innovation in the sector has generated growing research interest in financial policy changes. The Nigerian financial system is one of the largest and most diversified in Sub-Saharan Africa (Afangideh, 2010). The system became liberalized when the structural adjustment programme was introduced in 1986. In recent years, the system had undergone significant changes in terms of the policy environment, number of institutions, ownership structure, depth and breadth of markets, as well as in the regulatory framework.

The financial reforms which began in 2004 with the consolidation programme were necessitated by the need to strengthen the banks and financial sector in general. The policy thrust at inception, was to grow the banks and position them to play pivotal roles in driving development across the sectors of the economy. As a result, banks were consolidated through mergers and acquisitions, raising the capital base from N2 billion to a minimum of N25 billion, which reduced the number of banks from 89 to 25 in 2005, and later to 24. However, this led to the expanded use of branches by existing and new banks. The expansion of branch banking in Nigeria has occurred with the development of new technologies to deliver financial services, such as Automated Teller Machines (ATMs) and other stored value cards. These cost effective innovations and products that have become available, have the purpose of reducing the pressure on over-the-counter services to bank customers.

It is important to note that the recapitalisation and merging of some banks affected dealings in the stock market as banks raised their required minimum capital through the capital market by issuing new securities.

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