IMPACT OF SAVINGS ON FINANCIAL DEVELOPMENT IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

 Many people find it difficult to save because it actually involves decreasing current consumption and investment in future standard of living. It is the belief of the citizens that savings is the remaining after their current wants and needs have been attained. Savings is the portion of current income not spent on consumption and when it is applied to capital investment, savings increase output(Olusoji2003). Financial development on the other hand serves as the institution that channel resources from surplus economics unit to deficit units for investment purposes. Savings and Financial development are important economic tools which are used to raise the standard of living in a country. The importance of savings and financial development can be based on the aspect that country that save more tends to grow faster, provided that their financial system is deep, increasing savings and ensuring that they are directed to the productive investment are central to accelerating economic growth and development. Furthermore, higher savings leads to capital accumulation which in turns leads to economic growth and development.

According to the theory of savings, there is a positive relationship between savings and financial development on the economic growth of a nation. In light of these, the neoclassical exogenous growth model(Solow1956) is of the motion that increase in a country savings increases the country per capital income and vice versa. The endogenous growth theory by Romer (1986) and Lucas (1988) predict that the savings rate determine the long run growth of the nation, that is an increase in savings rate leads to an increase in economic growth.

A trend analysis of the ratio of total savings to GDP in Nigeria shows that the saving rate has been fluctuating overtime. The savings/GDP ratio was 2% in 1960, latter increase to 7.8% and 11.6% in 1970 and 1980 respectively. In 1990 and 2000, it declined to 11.1% and 8.4% respectively. In 2011, the savings/GDP ratio in Nigeria stood at 17.4% (CBN 2011).For we to have a better understanding of these research topic, we need to understand the link between savings and financial development and how they both affect economic growth. Capital formation is an important factor in determining economic growth of a country. Countries that are able to accumulate high level of capital tend to achieve a faster rate of economic growth and development. But basically all these cannot be achieved without generating sufficient savings which serves as prove that there is a positive relationship between savings and financial development in a nation. The impact of savings on financial development in a country has attracted the attention of researchers and policy makers in the past.

This research work will be emphasizing on the literature review of past researcher and try to generate solution to the negative impact it has on the economic growth of a country. This research topic will be making use of inflation, real interest rate, domestic national savings and growth rate per capita GNP as a variable for savings and money supply, credit to private savings as a ratio to GDP and market capitalization as an indicators for financial development.

According to the economist, the relationship among savings, investment and economic growth has historically been very close; hence, the unsatisfactory growth performance of several developing countries such as Nigeria have been attributed to poor saving and investment. Saving rates have not fared better, thus worsening the already precarious balance of payment position.  According to khan and Villanueva(1991) explained that many attempt have been made to correct external imbalances by reducing aggregate demand which further led to the decline in investment, expenditure, thus aggravating the problem of sluggish growth and declining savings and investment rates.

The dismal growth record in most African countries, relative to other regions of the world has been of concern to economists. This is because the growth rate registered in most African countries is often not commensurate with the level of investment. In Nigeria for instance, the economy witnessed tremendous growth in the 1970s and early 1980s as a result of the oil boom. Following the oil boom, there was investment boom especially in the public sectors. However, with the collapse of the oil market in the 1980s, investment fell, thereby resulting in a fall in economic growth. Although a vast empirical literature has shed light on various aspects of saving behavior, several crucial questions remain unanswered with regard to the relevance of policies in raising the saving rate and the non-policy determinant of saving.

1.2   Statement of research Problem

The issue of low level of savings in Nigeria has become a gigantic status dominating the economy. In Nigeria, the dismal growth record has been a great concern to the economy due to the poor saving rate. In these respect financial development in performing their roles was found to have potential scope and prospect for mobilizing financial resources and allocating them to investment. But in light of the problem derived, the savings if probably developed will not only facilitate financing of economic development but would also contribute immensely to the development of income. In Nigeria, the problem of saving has always been the bane of economic growth. In Nigeria, savings rate has been declining since the first oil shock and in the early 1990s. However this trend conceals a large and increasing dispersion of savings rate, particularly among developing countries.

In Nigeria, financial sector reforms began with the deregulation of interest rates in august 1987 (Chete, 1999) prior to this period, the financial system operated under financial regulation and interest rates were said to be repressed. According to McKinnon(1973) and Shaw(1973), financial repression arises mostly when a country imposes ceiling on deposit and lending nominal interest rates at a low level relative to inflation. The resulting low or negative interest rates discourage saving and channeling of the mobilized savings through the financial system. Over two decades ago, Nigerian economy witnessed the introduction of Structural Adjustment Program (SAP) which shifted emphasis from public sector to private sector. The goal was to among other things, encourage savings, investment and capital formation in order to enhance economic growth. By encouraging savings, resources were diverted from current consumption and invested in capital enterprises. Unfortunately things have not worked out as expected. The initial optimism expressed about public sector reforms has not been met.

Although, the reform program led to privatization and commercialization of many state enterprises and improvement in some macroeconomic variables like the nominal interest rate and money supply, but not without its disappointing performances. For example, Nigeria continues to be confronted with low rate of real economic growth. Besides, the aggregate supply continued to diminish leading to demand-pull inflation. One worrisome aspect of the result of liberalization of the public sector in Nigeria is the extent of distress in the real sector as well as high rate of unemployment.

 1.3 Objective of the Study

The objective of this research topic is to determine how savings actually affect financial development which in turns determines the economic growth of a nation. The objective can be carried out using the time series data to estimate relevant data over the year. The time series data helps to know whether the country is making progress or experiencing recession. This study focuses on the following:

1. The impact of savings on financial development.
2. To examine the relationship between savings and financial development.
3.  To carry out an analysis on the trend of saving in Nigeria
4. To examine the direction of casualty between savings on financial development

1.4   Research Questions

The following are the questions arising from this research topic:      

1. Does saving have any impact on financial development?
2. Is there a significant relationship between savings and financial development
3.   What is the direction of casualty between savings and financial     development?

          4)   Can low savings be attributed to income? 

1.5   Research hypothesis

The hypothesis which arises from our research questions shall be tested

Ho: There is no significant relationship between domestic savings and financial development.

H­1: There is a significant relationship between domestic savings and financial development.

1.6 Justification of the Study

This study is of justification in the following ways:

1. It would assist firms in acquiring adequate deposit which will be used to finance business investment.
2. It would also serve for personal career and independence, with a possible link to investment in a micro economic sense.
3. The findings of these study will assist in examine whether saving targeting would achieve a better economic growth.

1.7 Scope of the study

The research work to be carried will be based on evaluating the impact of savings on financial development of the Nigerian economy and will be utilizing time series data from 1970 through 2013. The choice of this period was influenced by the availability of authentic data at the period of this research.

The necessary data for this analysis is secondary data and time series in nature, which will be sourced from relevant and trustworthy statistical sources of data such as the CBN (statistical bulletin, economic and financial review), the national bureau of statistics and other sources which will be stated as applicable.