EFFECT OF PUBLIC EXPENDITURE ON ECONOMIC GROWTH IN NIGERIA (1981-2013)

CHAPTER ONE

1.0 INTRODUCTION

1.1 BACKGROUND OF STUDY

“Since the collapse of the oil boom in 1981, the Nigerian economy has undergone considerable strains and stresses. The pressure has been evident in the persistent deficits in balance of payments, low external reserves, deficit in government finances, mounting external debts etc”.( Central Bank of Nigeria,1992)
The inherent weakness in the structure of the economy as reflected in the over-dependence on foreign exchange earnings from oil, undue dependence on imports for its productive base in the face of declining foreign exchange earnings and weak terms of trade led to a situation in which government sought to bridge the domestic financial gap with external borrowing.
Until recently that the Nigerian government negotiated and secured about $18b debt relief from the Paris club of creditors, this external borrowings which was supposed to place the economy in a sound footing for economic recovery assumed an alarming proportion without noticeable improvement in the economy.
According to Sanusi (1988), ”the emergence of the glut in the international crude oil market in 1978 with the attendant strains on the balance of payments, external reserves and government finances, Nigeria, for the first time had recourse to borrow in large chunks and shorter maturities from the International Capital Market (ICM) at higher and variable interest rates”. A number of ICM jumbo loans were negotiated in 1978 and 1979 for balance of payments support purposes, and for the establishment of a domestic steel industry.
Stressing further, Sanusi (1988), opines that many more such ICM loans were raised especially as funds from bilateral and multilateral institutions became increasingly inadequate to meet the needs of governments. Consequently, ICM loans rose rapidly from $1.0billion in 1979 to $5.5billion in 1982 and to $23.5billion in 1987, when it constituted 40.2 percent of total external debt.
In the same period, state governments joined the bandwagon of external borrowing. By 2005, Nigeria’s external debt stock stood at $34billion, at a time when the total volume of exports from which to service the debt had dwindled by over a half in real terms. Such huge external debt stock with the associated debt service hampered economic growth and employment through principally putting a limit on imports as well as the development of infrastructure, which are critical for domestic productive activities.
Ojo (1989), states that, “it is no exaggeration to claim that Nigeria’s huge external debt was one of the hard knots of the Structural Adjustment Programme (SAP) introduced in 1986 to put the economy on a sustainable path to recovery”. The corollary of this statement is that if only the high level of debt service payments was reduced significantly, Nigeria would have been in a position to finance a large volume of domestic investment which would enhance growth and employment, but more often than not, a debtor has only very limited room to manage a debt crisis to advantage.
Only recently, owing to the unbearable burden of the debt stock, the Nigerian government initiated a debt relief agenda that led to an $18billion debt forgiveness from the Paris club.
1.2 STATEMENT OF THE PROBLEM.
The emergence of the international debt crises in the early 1980s was accompanied by intense debate on finding effective solution to it. According to the Central Bank of Nigeria (1992), the “ Nigeria, external debt stock witnessed substantial changes, both in quantum and structure over the years. In absolute terms, total external debt outstanding rose from $17,765million in 1983 through $23,364million in 1991 to $40billion towards the end of 2005. Thus, between 1983 and 2005, the external debt increased by US$22.235billion”.
There have also been some changes in terms of the structure and composition of the debt stock. Of the total outstanding in 1983, obligations to the Paris club of creditors amounted to US$5.390billion or 30.3 percent, while US$6.263 billion (35.3%), US$884million (5%) and US$1.526billion (8.6%) were owed to the London club of creditors, multilateral institutions and others respectively. “As at July 2005, about $28billion or 85% of the debt was owed to the Paris Club of 15 creditor nations. Only 8% was owed to multilateral institutions such as the African Development Bank and the World Bank, whilst the balance of 7% was owed to the London club of Commercial Creditors and holders of Promissory Notes”. (Okonjo – Iweala 2005:1).
At different times, Nigerian authorities have consciously adopted strategies to manage the country’s debt, not only to restore external equilibrium but also to stimulate sustainable growth in the economy. While these efforts provided some relief, the debt burden remained unbearable until the debt relief granted to Nigeria by the Paris club of creditors in 2005
In the light of the above, it becomes relevant more than ever before to examine the debt relief agenda and its implications on the economy, particularly in the rapidly changing international economic environment.
1.3 OBJECTIVES OF THE STUDY
Consequent on the research questions stated below, the broad objectives formulated for this study is to examine the implications of Paris Club debt relief on Nigeria.
Implicitly, the sub – objectives are stated as follows:
1) To ascertain the impacts of external debt indicators on the debt financing investment in the economy.
2) To evaluate the implications of Paris Club debt relief on Nigerian economy.
3) To trace the causal relationship between external debt and economic growth in Nigeria.
1.4 RESEARCH QUESTIONS.
The under listed questions will constitute the research questions for this study.
(i) What are the impacts of debt indicators on the debt financing investment in the economy?
(ii) What are the implications of Paris Club debt relief on Nigerian economy?
(iii) What is the causal relationship between external debt and economic growth in Nigeria?
1.5 RESEARCH HYPOTHESES
The following hypotheses were tested in this study;
 There is no correlation between external debt indicators and debt financing investment in the economy.
 Paris Club debt relief has no significant impact on Nigerian economic growth.
 There is a negative causal relationship between external debt stock and economic growth in Nigeria.

1.6 SCOPE OF THE STUDY
The scope of this dissertation is limited to Nigeria’s external debt profile and implications of the Paris Club debt relief on the economy. This is to enable the researcher to be as specific as possible and to focus his attention more objectively in consonance with the research questions and objectives.
To accomplish this, the study covered the period from 1980 to 2008. The choice of this
period is because in the 1980s, the management of the external debt became the major
responsibility of the CBN, and as a result of this, external debt became pronounced. Again,
a close examination of Nigeria’s growth rate shows that the relative position of the country
started to deteriorate significantly in the 1980s, when Nigeria found itself in a quagmire of
economic problems. The acute economic crises since this period has resulted in the
extremely poor growth performance of the economy, which is attributable to a host of
factors; both internal and external. The prominent among the external factors is the
escalating external debt stock.

1.7 SIGNIFICANCE OF THE STUDY
Given the dimensions and magnitude of Nigeria’s external debt burden, the intricacies of debt management and the attendant consequences of huge debt stock on the economy, this study would no doubt be of immense benefit to a wide range of economic operators, policy makers, government as well as the academia.
First, this study would expose to the reading public the magnitude and severity of Nigeria’s external debt as well as government management efforts.
Second, it would add to the very limited literature on Nigeria’s debt issues, thereby offering the academia, financial sector and the general public the much needed information in this area.
Third, the recommendations, offered would guide the government and monetary authorities in such areas as debt accumulation and management.
Fourth, it would greatly assist policy makers and implementers in designing effective economic policies that can thrive in the face of serious debt crises and place the economy on sustainable for development.
Fifth, this dissertation would be an articulated source of materials or reference to students that would want to carry out further research work on this topic or an aspect of it in the future.
1.8 OPERATIONAL DEFINITION OF TERMS:
I consider it necessary to define some important words used in this study in order to enhance understanding in the context in which they are used throughout this dissertation.

Debt conversion:
This involves exchanging external debt for domestic debt or equity. The redemptor, if he is not the original creditor, uses foreign exchange to purchase a country’s debt at a discount, either from the original creditor or in the secondary market. The debtor negotiates with the agency responsible for managing the conversion programme in the debtor country, usually the Central Bank to exchange the acquired debt for local currency or local debt.(Central Bank of Nigeria briefs, Series No.93/04)
Debt Restructuring:
The restructuring of debt involves the conversion of an existing debt into another category of debt, through refinancing, rescheduling, buy-back, issuance of a collateralized bond, and the provision of new money. .(Central Bank of Nigeria briefs, Series No.93/04)
Debt Refinancing
This involves the procurement of a new loan by a debtor to pay off an existing debt, particularly short- term trade debt. The new loan may be contracted from the same creditor(s) or a new set of creditors as the case may be. The repayment of such debts normally negotiated with the creditors is contained in the loan agreements. . (Central Bank of Nigeria briefs, Series No.93/04)
Debt Rescheduling
The rescheduling of debts involves changing the maturity structure. It usually covers repayments ( principal or principal and interest) falling due in a particular period, usually one year. This exercise does not only postpone the debt repayment, but also spreads it over a number of years with an initial period of grace. Interest payments will however continue to be paid until the debt is finally liquidated. (Central Bank of Nigeria briefs, Series No.93/04)
Vulture Funds
These are monies demanded by some companies that purchase the debt of a country at a discount and then sue for repayment of the full amount plus additional penalties. They are funds or investment companies that seek to profit by buying distressed investments, seeking a high return in the future on a bargain priced purchase. In the private sector, vulture funds buy assets such as bonds near or in default or equities near or in bankruptcy.( www.Africaaction.org/resources)
Commercial Sovereign Debt
This is simply called commercial debt and it is debt owed by national governments to private sector creditors such as commercial banks. This should not be confused with private debt, which is simply the debt owed by private sector borrowers to private lenders.( www.Africaaction.org/resources)
Hedge Fund
This is a very specialized investment company, open only to wealthy individuals or institutional investors, that allow the fund manager to use a variety of complex investment techniques prohibited for mutual funds, pension funds, and other traditional types of financial companies. ( www.Africaaction.org/resources)

The Paris Club
This is the forum in which creditor governments meet to negotiate the rescheduling, restructuring, reduction or cancellation of debts owed to them by other countries. The Paris Club originated in 1956 as an ad hoc group and remained a very informal arrangement until the late 1970s.( www.Africaaction.org/resources)

Odious Debt
Legally, odious debt is that debt that resulted from loans granted to illegitimate or dictatorial governments that used the money to oppress the people or for personal purposes. .( www.Africaaction.org/resources)
Interest Options
This involves the use of interest rate as a base for a spread; of particular importance is the London Inter- Bank Offer Rate (LIBOR) used commonly as the reference interest rate with 1 or 1.5 percent spread above LIBOR. .(Central Bank of Nigeria briefs, Series No.93/04)
Interest Retiming
This involves the extension of interest repayment intervals which enables a country to postpone one or more interest rates.(Central Bank of Nigeria briefs, Series No.93/04)
Currency Re-domination
This is a situation where a country may be allowed to convert the currency of its debts to other currencies with lower interest rates with a view to reduce debt service payments. (Central Bank of Nigeria briefs, Series No.93/04)

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CHAPTER ONE/INTRODUCTION

Small and medium-sized businesses have typically gotten little attention, although playing significant roles in our emerging economy and employing approximately three times as many people as large-scale industry. Since the federal government changed its policy to place more of a focus on small and medium-sized firms in order to achieve self-reliance, there have been several conversations and publications on the responsibilities banks should play in assisting and advising them.

Small businesses are universally acknowledged as being crucial to a country’s economic growth. Empirical research demonstrates that they boost a country’s level of productivity, reduce poverty, and aid in creating jobs. The government has made major investments in fostering SME growth and entrepreneurship in recognition of the essential role SMEs play in Nigeria’s economic development. SME development is essential to a country’s industrialization. A key strategy for expanding SMEs is simple access to funding.

Afolabi (2013) asserts that the lack of lending by banks, particularly commercial banks, has impeded Nigeria’s industrial development process from developing a robust and flourishing SMEs sector during the preceding several years. The goal of commercial banks’ intermediary position is to enable them to provide financial assistance to SMEs. SMEs need sufficient finance in the form of short- and long-term loans in order to participate in the economy (Olachosim, Onwuchekwa & Ifeanyi, 2013).

Nearly three times as many people are employed by small companies as by big ones, yet they often get little attention while being crucial to our growing economy. Since the federal government changed its policy to place more of a focus on small and medium-sized firms in order to achieve self-reliance, there have been several conversations and publications on the responsibilities banks should play in assisting and advising them.

Small businesses are universally acknowledged as being crucial to a country’s economic growth. Empirical research demonstrates that they boost a country’s level of productivity, reduce poverty, and aid in creating jobs. The government has made major investments in fostering SME growth and entrepreneurship in recognition of the essential role SMEs play in Nigeria’s economic development. SME development is essential to a country’s industrialization. A key strategy for expanding SMEs is simple access to funding. Afolabi (2013) asserts that the lack of lending by banks, particularly commercial banks, has impeded Nigeria’s industrial development process from developing a robust and flourishing SMEs sector during the preceding several years.

The goal of commercial banks’ intermediary position is to enable them to provide financial assistance to SMEs. SMEs need sufficient finance in the form of short- and long-term loans in order to participate in the economy (Olachosim, Onwuchekwa & Ifeanyi, 2013). It’s crucial to understand that small and medium-sized firms’ performance in developing nations depends greatly on the quality of the investment they get. Without a doubt, if money were used properly and effectively, SMEs may run more effectively. The success with which each country’s financial system contributes to the growth and development of its economy, however, primarily relies on how far advanced that development is. The high requirements of SMEs and the banks’ limited supply capacity still differ greatly. The capacity to pool resources to satisfy SME credit requests is a strength of traditional commercial banks, who are integral parts of the financial systems of almost all countries.

It’s crucial to understand that small and medium-sized firms’ performance in developing nations depends greatly on the quality of the investment they get. Without a doubt, if money were used properly and effectively, SMEs may run more effectively. The success with which each country’s financial system contributes to the growth and development of its economy, however, primarily relies on how far advanced that development is. The high requirements of SMEs and the banks’ limited supply capacity still differ greatly. The capacity to pool resources to satisfy SME credit requests is a strength of traditional commercial banks, who are integral parts of the financial systems of almost all countries.

 

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THE FINANCIAL SYSTEM AND ECONOMIC GROWTH IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1       Background of the Study

A financial system is a set of rules, regulations and the aggregation of financial arrangement, institutions and agents that interact with each other and the rest of the world to foster economic growth and development of a nation (Nzotta and Okereke, 2009). According to Nwude (2004), financial systems consist of financial markets, financial intermediaries, financial instruments, rules, conventions and norms that facilitate and regulate the flow of funds through the macro-economy. A good financial system, according to Rousseau and Sylla (2001), is one that has these five key components: (i) Sound public finances and public debt management, (ii) Stable monetary arrangement, (iii) A variety of banks some with domestic and others with international orientations and perhaps some with both orientation, (iv) Well functioning securities market, and (v) A central bank to stabilize domestic finances and manage international financial relations.

Economists argue about the relationship between the financial system and economic growth. Economic growth can be defined as the expansion of the economy through a simple widening process. It involves enhancing the productive capacity of an economy by employing available resources to reduce risks, remove impediments which otherwise could lower costs and hinder investment (Sanusi, 2011). Economic growth also refers to a sustained increase in the output of an economy (Hogendorn, 1992).

The role of the financial system in promoting economic growth generated so much controversy among scholars and practitioners. Economists hold four different views on the relationship between finance and growth: supply leading view, demand following view, bi-directional relationship and no relationship between finance and growth (Apergis, et. al., 2007). The supply leading view asserts that finance impact positively on economic growth (King and Levine, 1993; Neusser and Kugler, 1998; Levine, et. al., 2000). This theoretical stand-point is traced to the work of Schumpeter (1911), cited in Arestis and Dematriades, (1993) who argues that production requires credit to materialize, and that one can become an entrepreneur by previously becoming a debtor…what the entrepreneur first wants is purchasing power before he requires any goods. Specifically, he sees financial intermediaries as agents of growth. Demirguc-Kunt (2008) stresses that financial systems help mobilize and pool savings, provide payments services that facilitate the exchange of goods and services, produce and process information about investors and investment projects to enable efficient allocation of funds, monitor investments and exert corporate governance after these funds are allocated, and help diversify, transform and manage risk. The financial system, as opined by Miller (1998), plays a very crucial role in alleviating money frictions and, hence, influencing savings rate, investment decisions, technological innovations and long-run growth rate.

Contrary to the view of Schumpeter and other scholars on the importance of finance to economic growth is Robinson’s (1952), cited in Levine (2004) who stresses that finance simply follows growth and that where enterprise leads, finance follows. She argues that although growth may be constrained by credit creation in less developed financial systems, in more sophisticated systems, finance is viewed as endogenous responding to demand requirements. The demand following view states that finance actually responds to changes in the real sector and that economic growth creates a demand for developed financial institutions and services (Jung, 1986).

The third view supports the bi-directional relationship between financial system and economic growth (Demetriades and Hussein, 1996; Greenwood and Smith, 1997). Finally, proponents of the last view reject the existence of a finance-growth relationship (Lucas, 1988).

The debate revolves around the role of bank and capital market in promoting economic growth. Among scholars who support the view on the importance of financial system to economic growth came a different line of argument. This centered on the categorization of the financial system into bank-based and market-based and the comparative importance of both systems to economic growth. Attempts were made to find out whether one type of financial system better promotes economic growth than the other (Arestis, et. al., 2005). Using data from UK and US as market-based versus Japan and Germany as bank-based, studies have shown the relevance of financial structure, that is the degree to which a financial system is bank-based or market-based to economic growth (Hoshi, et. al., 1991; Mork and Nakkrumura, 1999; Weinstein and Yafeh, 1998; and Arestis, et. al., 2001). However, this relevance has been criticized since these countries in the past have shared similar growth. This has widened the debate along four competing theories of financial structure; bank-based view, market-based view, financial services-based view and legal based view.

The bank-based view emphasizes the importance of banks in identifying good projects, mobilizing resources, monitoring managers, and managing risk while stressing the deficiency of market-based economies. It points out the short-coming of the market-based financial system as revealing information publicly, thereby reducing incentives for investors to seek and acquire information. Information asymmetries are thus accentuated, more so in market-based rather than in bank-based financial systems (Arestis, et. al., 2005). The bank-based view therefore, stresses the importance of financial intermediation in ameliorating information asymmetries and inter-temporal cost. Information asymmetries may introduce inefficiency in the system and reduce the level of activity, increase sensitivity to disturbances such as changes in the riskless interest rate and or in productivity (Gertley, 1988). According to the bank-based view, bank-based financial systems, especially, in countries at an early stage of economic development, are more effective at fostering growth than market-based financial systems.  Levine (2004) posits that financial intermediaries improve   (i) acquisition of information on firms,   (ii) intensity with which creditors exert corporate control, (iii) provision of risk reducing arrangements, (iv) pooling of capital, and (v) ease of making transaction.

The bank based financial system is seen to be in a better position to address agency problems and short-termism than the market-based (Stiglitz, 1985; Singh, 1997). Furthermore, banks may be more effective in providing external resources to new firms that require stage financing because banks can more plausibly commit to making additional funding available as the project develops than markets that may have more difficult time in making credible, long term commitment.

Arestis and Demetriades (1993) assert that the basic features of a bank-based financial system are; Close involvement of banks with industrial firms, Companies having committed and knowledgeable shareholders with strong bank presence on management boards and Companies relying on bank loans and not so much on equity with banks exercising important monitoring roles.

The market-based view on the other hand highlights the positive role of market and stresses the problem with the bank-based view. Powerful banks can stymie innovation by extracting informational rents and protecting established firms with close bank-firm ties from competition (Hellwig, 1991; Rajan, 1992). It further stresses that powerful banks with few regulatory restrictions on their activities may collude with firm managers against other creditors and impede efficient corporate governance (Hellwig, 1991; Wenger and Kaserer, 1998). According to the market-based view, markets reduce the inherent inefficiencies associated with banks and enhance economic growth (Levine, 2002). Stock market influences information acquisition, corporate control, risk management and savings mobilization (Levine, 2000). It contributes to economic growth by enhancing liquidity of capital investments (Levine, 1997). A liquid equity market allows savers to sell their shares easily if they so desire thereby making shares relatively more attractive investments. According to Osinibu (1998), the stock market is an economic institution, which promotes efficiency in capital formation and allocation. It enables governments and industry to raise long-term capital for financing new projects, and expanding and modernizing industrial or commercial concerns. If capital resources are not provided to those economic areas, especially industries where demand is growing and which are capable of increasing production and productivity, the rate of expansion of the economy often suffers. As countries pass through stages of development, they become more market-based than bank-based (Boyd and Smith, 1998).

Arestis and Demetriades (1993) assert that the basic feature of a market-based financial system is having highly developed markets. Most external long-term funds are raised from the capital market which is an open and active market in encouraging mergers and takeovers. This market provides substantial amounts of financing to industries.

The financial service view supports neither the bank-based nor the market based financial structure but sees the importance of both systems in promoting economic growth. These financial systems do not compete but exist to ameliorate different cost (Levine, 2000).  According to the financial services view, both financial systems should be seen as complementing each other rather than substituting. This view stresses the importance of creating an enabling environment where these financial systems can provide sound financial services rather than distinguishing between the two.

The Legal based view is an extension of the financial services based view and it posits that it is the overall level and quality of financial system as determined by the legal system that helps improve the efficient allocation of resources and economic growth. It argues that a well functioning legal system facilitates the operations of both banks and markets (Laporta, et. al., 1997, 1998, 1999).

Earlier works along this line used cross-country data. Researchers were encouraged to broaden the argument along individual country, particularly developing countries in order to capture individual country peculiarities. In Nigeria case studies, some works examine financial system and growth along four theories of financial structure; bank-based, market-based, financial services and legal-based in order to ascertain which theory is most consistent with the Nigerian financial system (Olofin and Afangindeh, 2008; Sabiu, et. al., 2009; Ujunwa, et. al., 2012). It remains inconclusive as to which components of the financial system better promotes economic growth. This study therefore sought to assess bank-based and market-based financial systems in order to ascertain their impact on economic growth in Nigeria.

1.2       Statement of Problem

One of the problems militating against the rapid growth of developing economies is the inadequate provision of investible funds. To this direction, it has been posited that the Nigerian financial system, like those of other developing countries particularly in the Sub-Saharan Africa, has overtime remained weak and a cause for concern to policy makers (Adejuwon and Kehinde, 2011). Policy makers in addressing this issue have come up with several financial reforms which have focused more on the banking sector without paying adequate attention to the capital market. For instance, Recapitalization and Consolidation exercise in the banking sector, bail-out of banks without equal concession to the capital market even though it was affected drastically by the global economic melt-down, Removal of corrupt bank directors among others.

The capital market which is also an important segment of the financial system seems to have been neglected despite the crucial role it played during the bank recapitalization and consolidation in Nigeria. Al Faki (2006) puts the figure that was raised by banks from the capital market as N406.4 billion. Since then, many banks have gone to the capital market to raise additional capital for purposes such as expansion and enhancement of operational efficiency through investment in Information Communication Technology (Donwa, P. and J. Odia, 2011). This emphasis on the banking sector which portrays Nigeria as having a bank-based financial system now raises an important research question: Does one segment of the financial system better promote economic growth than the other?

Some studies in Nigeria have examined the structure of the Nigerian financial system based on the bank-based and market-based financial systems view. The bank-based view sees banks as being better at promoting economic growth than the market while the market-based view says the markets are better at promoting economic growth.(Sabiu, et. al., 2009; Olofin and Afangideh, 2008; Ujunwa, et. al., 2012). Some of their findings classified the Nigerian financial system as bank-based and suggest that government should intensify efforts at promoting banking stability. The basic feature of a bank-based financial system is the close involvement of banks with industries through long-term financing but banks in Nigeria do not have much of such close ties with industries. A market-based financial system is characterized by highly developed market but the Nigerian capital market is still developing.

It therefore becomes imperative to investigate bank-based and market-based financial systems in Nigeria with a view to ascertaining their adequacy as stimulators of economic growth.

1.3       Objectives of the Study

The objective of this study is to assess the impact of the financial system on economic growth in Nigeria based on bank-based and market-based financial system views. To achieve this, the study sought to fulfill the following specific objectives;

1. To investigate the impact of bank credit to private sectors on economic growth in Nigeria.
2. To assess the impact of bank assets on economic growth in Nigeria.
3. To investigate the impact of total value of shares traded on economic growth in Nigeria.
4. To assess the impact of market capitalization on economic growth in Nigeria.

1.4       Research Questions

This study sought to provide answers to the following research questions:

1. To what extent does bank credit to private sectors impact on economic growth in Nigeria?
2. To what degree do bank assets impact on economic growth in Nigeria?
3. To what extent does total value of shares traded impact on economic growth in Nigeria?
4. How does market capitalization impact on economic growth in Nigeria?

1.5    Research Hypotheses

To achieve the above objectives, the following hypotheses were formulated and tested:

1. Banks’ credit to private sector does not have a positive and significant impact on economic growth in Nigeria.
2. Bank assets do not have a positive and significant impact on economic growth in Nigeria.
3. Total value of shares traded does not have a positive and significant impact on economic growth in Nigeria.
4. Market capitalization does not have a positive and significant impact on economic growth in Nigeria.

1.6       Scope of the Study

This study examined the Nigerian financial system and economic growth based on bank-based and market-based financial system views. The aggregate data were collected from Central Bank of Nigeria statistical bulletin, Nigerian Stock Exchange annual reports and statements of account and Central Bank of Nigeria annual reports and statements of accounts. The specific data include banks’ credit to the private sector, bank total assets, total value of shares traded, total market capitalization and real gross domestic product.

The study covered the period 1991-2010. In the year 1991, following the spate of large scale distress in the financial system, the banks and other financial institutions Decree 25 (BOFID) was promulgated to monitor the operations of the banking and financial sector and reduce the tide of distress. The Central Bank of Nigeria Decree of 1991 was also promulgated. This decree expanded the functions of the Central Bank granting it greater autonomy in monetary policy and repealed the Central Bank of Nigeria Act 1958. The Inter-ministerial Committee on the Nigerian Capital Market recommended the discontinuation of official pricing of securities as well as the establishment of more stock exchanges in 1991.

1.7      Significance of the Study

Most works done along this line have always been cross-country studies among developed countries but this study is on an individual country Nigeria which is still at its development stage. This study therefore is expected to be of immense benefits to the following:

Financial System Regulators: This study will assist regulators such as the Central Bank of Nigeria and Securities and Exchange Commission in making policies that are geared towards developing the Nigeria financial system to enable them compete with their counterparts in other countries.

Government: This study will also be of benefit to the government in ensuring long-term macroeconomic stability and creating conducive environment for both investors and savers to ensure confidence in the Nigerian financial system.

Body of academia: In the academic arena, this study will contribute to the enrichment of the literature on financial system and economic growth. It will also serve as a body of reserved knowledge to be referred to by researchers.

1.8 Limitation of the study

Due to unavailability of data, this study did not include other indicators of bank-based and market-based financial systems such as net interest margin, overhead cost, Liquid liability and turnover ratio. It also did not include other components of the Nigerian financial system such as Insurance companies, Finance houses, Mortgage banks, among others.

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