FINANCIAL SECTOR DEVELOPMENT IN NIGERIA AND ECONOMIC PERFORMANCE.
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FINANCIAL SECTOR DEVELOPMENT IN NIGERIA AND ECONOMIC PERFORMANCE.
Chapter one
1.1 Background of the Study
For a long time, economists have studied the relationship between economic growth and financial development, both theoretically and empirically. Despite countless research looking at this relationship, there is no agreement on the impact of financial development on economic success. A variety of hypotheses propose that financial development leads to economic growth.
This approach is supported by studies by Habibullah and End (2006), Galindo (2007), Ang (2008), Giuliano and Ruiz-Arranz (2009), and Nkoro and Uko (2013).
According to these research, a well-structured financial system provides substantial incentives for investment while simultaneously promoting trade and commercial links and technological dissemination.
This is achieved primarily by mobilising savings for productive investment, hence promoting economic growth. Another school of thinking holds that economic performance translated into growth generates demand for financial services, and hence economic growth comes before financial development.
Sunde (2013), Odhiambo (2008), and other studies support this approach. Another school of thought maintains that financial improvement has little or no impact on economic performance in terms of growth (Lucas, 1988; Adusei, 2012).
However, in recent years, there has been empirical evidence indicating there exists a bi-directional relationship between economic performance and financial progress. Fowowe (2010); Rachdi and Mbarek (2011).
Every economy’s financial sector is critical to its development and progress. The development of this sector affects how effectively and efficiently it will be able to carry out its primary function of mobilising cash from the surplus to the deficit sectors of the economy. This sector has helped to facilitate business transactions and economic development (Aderibigbe, 2004).
A well-developed financial system serves numerous essential purposes to improve intermediation efficiency, including information provision, transaction reduction, and cost monitoring.
A well-developed financial system encourages investment by recognising and supporting strong business prospects, mobilising funds, allowing for risk trading, hedging, and diversification, and facilitating the trade of commodities and services.
All of these factors contribute to more efficient resource allocation, rapid accumulation of physical and human capital, and faster technical progress, all of which lead to economic growth.
According to Ajayi (1995), development in the real sector directly determines the rate of growth in the financial sector, whereas growth in finance, money, and financial institutions drives the real economy. Economic growth is a progressive and consistent development over time caused by a rise in the rate of savings and population (Jhingan 2005). It has also been defined as a positive shift in a country’s production of products and services over time.
Macroeconomic variables are used to measure economic performance, which is then converted into economic growth, which measures the rise in a country’s production of products and services.
An economy is said to be developing when its productive capacity improves, resulting in more production of products and services (Jhingan 2003).
Economic growth is typically driven by technological innovation and positive external pressures. It serves as a measure for enhancing people’s standards of living. It also indicates a reduction in economic inequality.
According to Oluyemi (1995), any economy’s financial sector can help promote rapid economic transition by acting as a growth engine. It follows that no economy can ever prosper without significant expansion in the financial sector.
An effective financial system is critical for fostering long-term economic progress and an open, vibrant economy. Countries with well-structured financial institutions tend to grow faster, particularly in terms of banking system size and stock market liquidity.
seem to have a large positive impact on economic growth (Beck and Levine, 2002; Nnanna, 2004).
1.2 Statement of Problem
The Nigerian financial sector, like that of many other developing countries, was heavily regulated, resulting in financial disintermediation that slowed economic growth.
The correlation between the financial sector and economic growth has been poor. The financial sector does not properly and efficiently serve the real sector of the economy, particularly the high-priority industries that are also seen as economic growth drivers. Banks are declaring billions of dollars in profits, but the real sector continues to weaken, lowering the economy’s productivity level.
Most operators in the production sector are folding up due to an inability to obtain loans from banking institutions or because the cost of borrowing was prohibitively expensive.
Nigerian banks have focussed on short-term loans rather than long-term investment, which should have created the foundation of a robust economic change.
Since the implementation of the Structural Adjustment Programme (SAP) in 1986, in an effort to accelerate the economy’s recovery from its deteriorating conditions, there has been a significant lot of interest in the operations and expansion of the financial sector. This is because restructuring in this sector was a key component of the SAP reform.
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