ABSTRACT
This work examines the relationship between financial development and industrial growth in Nigeria. It focuses on the impact of stock market and bank deepening variables such as market capitalization, value traded, turnover ratio referred to as Stock Market Development SMD in the study as well as Bank Credit to Private Sector (BCP) to capture bank deepening has on industrial growth of Nigeria. Stock market provides the avenue through which long term fund could be raised for investment project. It is reputed to perform critical functions, which promote industrial growth and prospects of the economy. On the other side banks also provide fund in the short term that can also be used for investment. Empirical evidence linking financial market development to industrial growth has been inconclusive even though the balance of evidence is in favour of a positive relationship between financial market development and industrial growth. This research explores the hypothesis that financial market development promotes industrial growth in Nigeria and attempts to confirm its validity or otherwise, using annual data from 1981 to 2010 for Nigeria particularly in an era of bank consolidation. All the variables are stationary at first difference using the Augmented Dickey Fuller (ADF) and Phillip Perron (PP) tests. The Johansen Co-integration test result showed that there exist a positive relationship between financial development and industrial growth, also by employing vector error correction model (VECM) technique on the commonly used financial development indicators. From the result, it was revealed that the coefficient of the error correction term ECM (-1) carries the expected negative sign and is highly significant at 5.0 per cent level. The model validates the hypothesis that the financial market development promotes industrial growth in Nigeria during the period of analysis.
CHAPTER ONE
Introduction
1.1Background to the Study
One of the salient features of Nigeria’s growth drive is a conscious development of the financial sector. For example, in the early seventies, as a result of the prevailing economic paradigm at that time, the sector was highly regulated with government holding controlling shares in most of the banks. In 1986, the liberalization of the banking industry was a major component of the Structural Adjustment Programme (SAP) put in place at that time to drive the economy from austerity to prosperity (CBN, 2010). In 2004, the consolidation exercise in the banking industry took a leading role in the National Economic Empowerment and Development Strategy (NEEDS), which was in place at that time to drive the economic agenda of the government. In 2009, as part of the broad economic measures to respond to the adverse effects of the global financial and economic crises, the Central Bank of Nigeria in conjunction with the fiscal authorities engineered measures to avert a collapse of the financial system with a view to maintaining industrial growth (CBN, 2010).
Over the last two decades the determinants of industrial growth have attracted increasing attention in both theoretical and applied research. Yet, the process underling economic performance is inadequately conceptualised and poorly understood, something which can be partly attributed to the lack of a generalized or unifying theory and the myopic way conventional economics approach the issue (Artelaris et al, 2007). Industrial growth in a developing economy rest on an efficient financial sector that pools domestic saving and mobilizes foreign capital for productive investments. In the developing countries, industries need more funds to increase their investment so that they can meet globalization constraint. Hicks (1969); argues that in the nineteenth century, many private investment projects were so large that they could no longer be financed by individuals or from retained projects. The stock market then serves as an important tool in the mobilization and allocation of savings among competing uses which are critical to the growth and efficiency of the economy (Alile, 1984). Recent theoretical literature on financial development and industrial growth identifies three fundamental channels through which capital markets and other financial market and industrial growth may be linked (Pagano, 1993): First, capital market development increases the proportion of savings that is channelled to investments; Second, capital market development may change the savings rate and hence, affect investments; Third, capital market development increases the efficiency of capital allocation.
It is well known that stock market and other financial market institutions play a major role in the economy through enhancing the efficiency in capital formation and allocation. They enable both corporations and the government to raise long-term and short term capital which enables them to finance new projects and expand other operations, In this regard, it is observed that the performance of the economy is boosted when capital is supplied to productive economic units. Furthermore, as economies continue to develop, additional funds are therefore needed to meet the rapid expansion and the stock market therefore serves as an appropriate avenue for the mobilization and allocation of resources among competing uses which are critical to the growth and efficiency of the economy. A well-developed financial system engenders technological innovation and economic growth through the provision of financial services and resources to entrepreneurs who have the highest probability of implementing innovative products and processes (Schumpeter, 1911).
Inadequate access to the formal financial sector in Nigeria has been as a result of the lack of collateral required due to risks involved in lending but also due to high costs involved in small financial services and weak legal enforcement (Ray, 1988). In Nigeria, financial markets have not developed to expectations and the underdeveloped financial markets have further deteriorated the level of economic growth in Nigeria. Although the Nigerian financial system recorded some progress in the last few years, like the national economy, it has been faced with many challenges. The problem of macroeconomic instability has continued to be a hindrance to the development of the financial sector in Nigeria. Frequent policy reversals have caused disinvestment in the financial and real sectors which have negatively affected macroeconomic performance. It is against this background that this research study on financial development and the composition of industrial growth in Nigeria is being studied.
1.2 Statement of Problem
Nigeria has experienced high volatility in inflation rates. Since the early 1970’s, there have been four major episodes of high inflation, in excess of 30 percent. The growth of money supply is correlated with the high inflation episodes because money growth was often in excess of real industrial growth. However, preceding the growth in money supply, some factors reflecting the structural characteristics of the economy are observable. Some of these are supply shocks, arising from factors such as famine, currency devaluation and changes in terms of trade.
The primary problem of industrialisation in Nigeria is a hostile operating environment that creates uncertainties and unmanageable unknowns for entrepreneurs, industrialists, innovators and serious business people. The Government bureaucratic, regulatory and fiscal policy is a major impediment to Nigeria’s industrialisation, which clearly shows a lack of coherence or coordination from the various arms of government. There are over 20 government ministries, agencies and parastatals at federal, state, and local governments’ levels that industry has to contend with constantly.
The Nigeria economy is one of the largest in Africa, but theoretical and empirical research have given little emphasis on the nature of financial development and industrial growth bearing in mind the recent downturn in the financial market and how it affects the real sector of the economy and this have generated a lot of controversies and further research needs to be carried out on the nature of relationship between the financial sector and economic growth in order to ascertain the link between financial development and industrial growth. The major question is that does the level of industrial growth experienced over the years commensurate with level of development in the financial sector, vice a vice the stock market and banking industries, what is the nature of the relationship between financial development and industrial growth and the direction of causality relationship which still remains unresolved. This study therefore sought to examine the presence of causal linkage if any, between financial development and the composition of industrial growth in Nigeria.
Also, the Central Bank of Nigeria (CBN) has been trying hard to ensure that the financial sector in Nigeria maintain a considerable depth and remain liquid with a view to competing effectively globally. Beyond competition at the global scale, the CBN seeks to ensure that the financial sector plays it role in the achievement of growth and development in Nigeria. In view of these, several reforms have been implemented. The reformation exercise led to the increase in the minimum capital requirements for the commercial banks, and micro-finance banks respectively. This brings to bear the existence of twenty five commercial banks. In the post consolidation era, there are fewer banks now with improved minimum capital requirement of ₦25 billion each. Unfortunately, the fear of systemic risk lingers, the supply of credit to investors is still questionable, while industrial growth relatively stable. It is in the light of the above that this study seeks to examine the relationship between financial development and the composition of industrial growth in Nigeria.
1.3 Research Objectives
The main objective of this research study is to re-examine the financial development and the composition of industrial growth puzzle from the perspective of bank performance and stock market development using Nigeria as a case study. This study also intend to assess the individual impact of both on industrial growth in Nigeria as a case study bearing in mind the recent reform that has occurred in the financial sector of the country. The specific objectives are aligned as follows:
To re-examine the financial development and composition of industrial growth puzzle in Nigeria.
To assess the individual impact of stock market and bank performance on the composition of industrial growth in Nigeria.
To examine whether the level of development in the industrial sector reflect in the financial market development and vice versa.
To make recommendations as to how the operations of the market could be improve to boost the composition of industrial growth and development in Nigeria.
1.4 Research Questions
Is there a dynamic linkage between financial development and the composition of industrial growth in Nigeria?
Is the impact of stock market and banks deepening on industrial growth statistically significant?
Does the level of development in the industrial sector reflect in the financial market and vice versa?
1.5 Research Hypothesis
There is no dynamic linkage between financial development and industrial growth.
There is insignificant individual and combined impact of stock market and bank deepening on industrial growth.
The level of industrial growth is not reflected in financial market development.
There is no casual relationship between stock market, bank performance and economic growth.
There is no bi-directional causality between financial development and economic growth.
1.6 Significance of the Study
Various studies had been carried out on financial development and economic growth in Nigeria. Very few of these studies provided or related their study to the composition of industrial growth. This study is a good source of information for researchers, as the results that emerge from this study will inform debates on this subject. This research further contributes to empirical literature on industrial sector activity and financial market growth in Nigeria. The study is also a valuable source of information for policy formulation.
1.7 Scope and Limitations of the Study
This research work only looked at a particular part of the industrial sector (the financial sector). This work did not cover all the facets that make up the financial sector, but focus only on the capital market and its activities as it impacts on the Nigerian Industrial growth. The empirical investigation of the impact of the capital market on the industrial growth in Nigeria was restricted to the period between 1983 and 2013 due to the non-availability of some important data. In order to achieve reasonable thoroughness in the study, some limitations would be encountered by the researchers; this range from high cost that will be involve, time constraint and inability to conduct empirical data investigation on the topic.
1.8 Organization of the Study:
The study is divided into five (5) chapters and organized as follows: Chapter one form the introduction part, this is where the main theme of the research is given. It comprises of the statement of the problem, objectives of the study, research questions and hypotheses, significance of the study, scope and delimitation of the study and organization of the study. Chapter two is the literature review of the impact of financial market on the composition of industrial growth in Nigeria. Chapter three forms the research methodology which includes sources of data, method of data analysis and model specification. Chapter four is the data analysis while chapter five includes the summary, conclusion and recommendations.
CHAPTER TWO
LITERATURE REVIEW
2.0 Introduction
This chapter of the research study covers the literature review of the study. Literatures will be systematically reviewed to access useful knowledge related to this research study. It would be carried out following these sub-themes itemized below:
Conceptual Review
Theoretical Review
Empirical Review
Gaps in the Literature
2.1 Conceptual Review
There are different definitions and interpretations for industry, depending on whom and where you get the definition, Industry is the production of an economic good or service within an economy; it is often classified into three broad sectors:
The Primary or extractive industry,
The Secondary or manufacturing industry, and
The Tertiary or services industry.
