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THE IMPACT OF FINANCIAL INCLUSION ON NIGERIA’S ECONOMIC GROWTH

 Format: MS-WORD   Chapters: 1-5

 Pages: 70   Attributes: COMPREHENSIVE RESEARCH

 Amount: 3,000

 Feb 19, 2020 |  11:03 pm |  2108

CHAPTER ONE

INTRODUCTION

1.1     Background to the Study

Financial inclusion implies the ability of financial institutions to effectively mobilize savings for investment purposes. The growth of domestic savings provides the real structure for the creation of diversified financial claims. Financial inclusion generally entails an increased ratio of money supply to Gross Domestic Product (Popiel, 1990), Nnanna and Dogo, 1999) and Nzott, 2004). The sum of all the measures of financial assets gives us the approximate size of financial inclusion. That means that the widest range of such assets as broad money, liabilities of non-bank financial intermediaries, treasury bills, value of shares in the stock market, money market funds, etc, will have to be included in the measure of inclusion. Indicators of financial inclusion differ in economies and between the countries.

It is also possible that, different financial markets have different levels of financial inclusion, for example, the countries that have efficient financial systems have higher financial inclusion ratios. The share of assets in GNP of developed countries’ financial markets is greater than that of the developing countries (Jovanovic, 1990).

Financial inclusion can be measured using several kinds of indices, a few of these are: the ratio of the growth rate of broad money (M2) to that of the gross domestic product; ratio of Total banking assets to GDP, Gross Savings in the economy to GDP as well as Gross Domestic Investment to GDP as well as the Interest Rate.


Growth in financial sector should translate into the growth of the economy, because growth in the financial sector will make available funds for investment. In the capital market, market capitalization is the most widely used indicator in assessing the size of a capital market to an economy. Before 1988, the total market capitalization was less than N10 billion from 1988 to 1994, it hovered between N10 billion to N57 billion. In 2003, it was N1.3593 trillion, N2.1125 trillion in 2004 and N5.12 trillion in 2006.The market capitalization recorded the highest value of N13.2294 trillion in 2007. But this fell to N9.562 trillion in 2008 due to the global financial meltdown.

The percentage market capitalization compared to the economy’s Gross Domestic Product (GDP) helps to assess the size of the stock market. In 1981, this was 10.5%, but fell to 7.4% in 1994. It rose again to 9.3% in 1995, 10.6% in 1996; 18.9% in 2003, 25.6% in 2004 and 27.4% in 2005.

The question is whether the development in the financial sector, which has led to financial inclusion, has been able to bring about anticipated growth, considering the fact that Nigeria still experiences high level of unemployment, inflation rates are still high, lack of credit for investment, the deposit and lending rates are still very wide apart, there is wide disparity between the lending and deposit rates. Therefore, this study examines the extent to which financial inclusion has impacted on economic growth in Nigeria.

1.2     Statement of Problem

The relevance of the financial system to economic growth is not precise. The direction of causality between the supply of fund and the demand for fund on financial inclusion and growth has always been a controversial issue. That is, what causes growth in the sector between the supply of fund and the demand for fund? There are two main opposing hypotheses which are testable: the ‘supply leading’ hypothesis versus the ‘demand-following’ hypothesis. Supply-leading emphasizes financial inclusion as an important prerequisite for growth. The supply-leading hypothesis suggests that financial inclusion fuels growth.

 Since 1986, the monetary authorities in Nigeria have adopted various measures aimed at deepening the financial system and reducing the level of financial repression in the system. The reform of the financial structure led to changes in Nigeria’s financial sector in an effort to foster competition, strengthen the supervisory role of the regulatory authority and streamline the relationship between the public and financial sectors of the economy. Many new financial instruments/assets and techniques have been developed and existing ones have been modified, the financial markets have been adapted to meet new demands and new circumstances.

The existence and development of the financial markets brings about a higher level of saving and investment and enhance the efficiency of capital accumulation, (Hicks 1969, Levine 1993, Diego 2003). Demand-following posits that financial inclusion follows growth; development of the financial markets is merely a lagged response to economic growth. This implies that any early efforts to develop financial markets might lead to a waste of resources which could be allocated to more useful purposes in the early stages of growth. As the economy advances, this triggers an increased demand for more financial services and thus leads to greater financial development, (Robinson 1952, Lucas 1988, Favara 2003).

All these have been aimed at deepening the financial system. But how has all these impacted on economic growth in Nigeria. This research will examine the causal relationship that exists between finance and growth within the Nigerian economy, is it supply leading or demand following in nature?

1.3     Objectives of the Study

The main objective of the study is to examine empirically the extent of financial inclusion in Nigeria, and its impact on the Nigerian economy since the onset of financial reforms in 1986 up to 2018.

The specific objectives of the study include:

i. To examine the causality of financial inclusion on economic growth in Nigeria.

ii. To investigate the impact of financial inclusion on economic growth in Nigeria.

iii. To find out if Financial Inclusion has an influence on the Nigerian Economy

1.4     Research Hypothesis

The research will test one main hypothesis which is as follows:

i.             H0: B0=Financial inclusion has no casual effect on economic growth in Nigeria.

ii.           H0: B0= Financial inclusion has no significant impact on economic growth in Nigeria.

iii.          H0: B0= Financial Inclusion has no influence on the Nigerian Economy.

1.5     Justification of the Study

Although most studies have found that financial inclusion to contribute to economic growth, example McKinnon (1973), Goldsmith (1969), and Levine (1993), they have not ended the debate on the direction of causality between economic growth and financial inclusion. It is expected that the outcome of this research will shed more light on the role of financial inclusion on economic growth in Nigeria.

If the development of financial system affects economic growth positively, large financial inclusion rate will make economic growth increase. When this rate is small, due to weak financial inclusion economic growth will not reach the required level (Greenwood, 1990). Thus, how economic growth is affected by financial inclusion or financial system is an important point for discussion. Thus this study aims at attaining the relationship between Financial Inclusion and Economic Growth in Nigeria. This study contributes to knowledge by investigating empirically the causal relationship between financial inclusion and economic growth in Nigeria.

1.6     Organization of the Chapters

The study is structured into five chapters. Chapter one is introduction which is included background to the study, objectives of the study, scope of the study, significance of the study. Chapter two is Literature Review, Conceptual Literatures, Theoretical framework and Empirical Framework. Chapter three is research methodology. Chapter four is presentation and analysis of data obtained from the secondary sources. Chapter five is summary, conclusion and recommendations.


References

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Barrell, R.., and Pain, N. (1997). Foreign Direct Investment, Technological Change and Economic Growth within Europe. The Economic Journal, 107, Pp. 1770 – 1786.

Barro, R. J., and Sala-i-Martin, X. (1995). Economic Growth. McGraw-Hill.

Beck and Demirguc-Kunt, (2008). Exchange – rate Strategies in the Competition for Attracting Foreign Direct Investment. Journal of the Japanese and International Economics, Vol. 15, No. 2, pp. 178 – 198.

Bencivenga and Smith (1991) and Levine (1991). The Characteristics and Determinants of FDI in Ghana. HWWI Research Paper, No. 2 – 15.

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Cheng, L.H. and Kwan, Y. K. (2000). What are the Determinants of the Location of FDI? The Chinese Experience. Journal of International Economics, Vol. 51, Pp. 379 – 400.

Cheng, L. K., and Zhao, H. (1995). Geographical Patterns of Foreign Direct Investment in China: Location, Factor Endowments, and Policy Incentives. Department of Economics, Hong-Kong University of Science and Technology, February.

Cushman, D.O. (1985). Real Exchange Rate Risk, Expectations and the Level of Direct Investment. Review of Economics and Statistics, Vol. 67, pp. 297 – 307.

Dancheng (2008) and Sinclair, M. Thea. (1995). Foreign Direct Investment, Joint Ventures, and Endogenous Growth. Department of Economics, University of Kent, UK, mimeo.

Demirgüc-Kunt et al., (2015). Investment under Uncertainty. Princeton: Princeton University Press.

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