FINANCIAL DEEPENING AND ECONOMIC GROWTH IN NIGERIA

FINANCIAL DEEPENING AND ECONOMIC GROWTH IN NIGERIA  (ECONOMICS PROJECT TOPICS AND MATERIALS)

CHAPTER ONE

1.1     INTRODUCTION

Financial deepening is defined as the process of development and expansion of financial institutions such as, banks, stock markets, and insurance companies etc relative to the size of a country’s economy. It also refers to the increase in the provision of financial products and services with a wider choice to all level of the society. A robust financial system plays a crucial role in the economic development of a country. It facilitates the process of economic growth through mobilization and efficient allocation of financial resources and provision of a well-functioning system of payments/transfer of funds. One of the factors behind rapid, and sustained economic, growth achieved by middle and high-income countries (Mexico and Venezuela, United Kingdom and United States of America respectively) has been their well-established financial sector. On the other hand, one of the common characteristics of low Income countries is the poor performance of their financial system. The strength and performance of a financial sector can be evaluated in terms of some macro-indicators like monetary assets to GOP ratio, currency to money ration, deposits ratio, interest rate spread, money multiplier etc:

Financial deepening or depth is characterized by the following: Less use of cash i.e. increase in the level of non-cash payments and transfer of funds, diminishing velocity of money markets and capital markets, competitiveness and specialization in financial functions and institutions, high and stable ratio of money supply (broad money) to GDP and low premiums savings and lending rates etc. The following are indices that have been used in the measurement of the level of financial deepening.

1.1.1 MONEY/GDP RATIO

This is a major indicator of financial sector deepening. It refers to the ratio of monetary assets in the economy to the GDP. It is a measure of the level of liquidity in the financial system and the ability of such a financial system to finance economic growth. Thus a country with a higher Money / GDP ratio-will have a more developed and efficient financial sector. Economic units will only the form monetary assets/instruments when they feel convenient in terms of liquidity, risk, return and efficiency of payments.

Such money instruments will only be offered by a well developed financial sector. Money/GDP ratio is higher for more developed countries when compared with those of low income countries. A financial sector with a higher Money/GDP ratio is thus able to provide funds needed for investment purposes than a financial system with a low money/GDP ratio.

FINANCIAL DEEPENING AND ECONOMIC GROWTH IN NIGERIA  (ECONOMICS PROJECT TOPICS AND MATERIALS)