CHAPTER ONE
1.0
INTRODUCTION
1.1
BACKGROUND OF THE STUDY
The
financial system is a collection of various institutions, markets, instruments
and operators that interact within an economy to provide financial services.
The services provided include resource mobilization and allocation, financial
intermediation and foreign exchange transactions. The Nigeria financial system
can be categorized into two viz; the formal or organized and informal or
unorganized financial system. The informal sector comprises of local money
lenders (ESUSU), the thrifts and savings associations etc. it is poorly
developed, limited in readiness and not integrated into the formal financial
system, but plays a major roles in the Nigerian financial system. While the
formal financial system on the other hand can be further categorized into
capital and money market institutions and these comprise of the banks and
non-banks financial institutions.
The crucial role played by the
financial system in the economic development of an economy was recognized by
Goldsmith (1955), Cameron (1967), McKinnon (1973) and Shaw (1973), they
demonstrated that the financial sector could be a catalyst of economic growth
if it is well developed and healthy. Over the past decades, the declining
trends in saving rates in Nigeria have been of great concern to policy makers and
researchers. This is due to the critical importance of savings for the
maintenance of strong and sustainable growth in the world economy particularly
in Nigeria.
Statistics around the globe have shown
that savings rates have doubled in East Asia and stagnated in sub Saharan
Africa, Latin America and the Caribbean (Loayza, Schmidt-Hebbel and Jerven,
2000). The benefits accruable from a healthy and developed financial system
relate to savings mobilization and
efficient financial intermediation roles (Gibson and Tsaka lobos, 1994), First,
through the financial intermediation functions of financial institutions,
savers and borrowers are linked up and this reduces transactions and search
costs. Second, they create liquidity in the economy by borrowing short-term and
lending long-term. Third, they reduce information costs, provide risk
management services and reduce risks involved in financial transactions.
Fourth, the intermediaries bring the benefits of assets diversification to the
economy. Fifth, they mobilize savings from atomized individuals for investment,
thereby solving the problem of indivisibility in financial transactions.
The Nigerian financial system
comprises the regulatory/supervisory authorities, bank and non-bank financial
institutions. As at end -2007, the system comprised of the Regulatory/
Supervisory authority, the central Bank of Nigeria (CBN), the Nigerian Deposit
Insurance Corporation (NDIC), the Securities and Exchange Commission (SEC), the
National Insurance Commission (NAICOM), the National Pension Commission (NPC),
and the Federal Mortgage Bank of Nigeria (FMBN). The CBN is the principal
regulator and supervisor in the money market, consisting of Deposit Money Banks
(DMBs), Discount Houses, the People Bank of Nigeria and Community Banks. The
CBN exclusively regulates the activities of Finance Companies and promotes the
establishment of specialized or development financial institutions. The SEC is
the apex regulatory/ supervisory authority in the capital market. The Nigerian
Stock Exchange (NSE) is a self-regulatory or user- regulatory institution. The
Issuing Houses, Registrars and stock brokers, who also interact with the money
market, complete the chain in the capital. The Federal Ministry of Finance,
together with the CBN constitutes the monetary authorities and share control
over Bureau de change. The NAICOM is the regulatory authority in the insurance
industry, while the FMBN regulates mortgage finance activities in Nigeria.
There are also 24 deposit money banks (DMBs), 750 community banks, 112 finance
companies, 703 Bureau –de-change, 1 stock exchange, 1 commodity exchange, 93
primary mortgage institutions, 5 development finance institutions, 77 insurance
companies, 709 microfinance banks, and
581 registered insurance brokers. (CBN Annual Report and statement of Accounts,
2007).
Savings refers to the deposit and
saving abilities acquired by the organized financial institutions including
bank and non-bank financial intermediaries or it is described as a financial
assets accumulated by the public – both government and private agents in the
organized financial channels. These financial assets include savings and time
deposits in the banking institutions, provident funds, insurance premium,
stocks and bonds etc. as was stated earlier on. The intermediation process
involves moving funds from surplus sectors/ units of the economy to deficit
sectors/ Units (Uremadu, 2002, Odoko, Nnanna and Englama, 2004). The expansion of financial savings involves shifting
of funds from the personal and household sector to the business or corporate
sector which in turn, leads to greater investment, employment and income
growth. The extent to which this could be done depends on the level of
development of the financial sector mentioned above as well as the savings
habit of the populace. The availability of investible funds is therefore
regarded as a necessary starting point for all investments in the economy,
which will eventually translate to economic growth and development (Uremadu,
2006). In Nigeria Nnanna, Odoko and Englama (2004) are of the view that the
level of funds mobilization by financial institutions is quite low due to a
number of reasons, ranging from low savings deposits rates of the poor banking
habit or culture of the people. According to them, another disincentive to
funds mobilization is the attitudes of banks to small savers.
Theoretically, nothing stops economies
that are faced with different preferences, income streams and demographic
characteristics from choosing different saving rates. In practice however, the
inter-temporal choices that underlie saving depends on an array of market
failures, externalities and policy-induced distortions that are likely to drive
savings away from social levels. Development economists have been concerned for
decades about the crucial role of domestic saving mobilization in the
sustenance and reinforcement of the saving-investment-growth chain in Nigerian
economy. The relationship among saving, investment and growth has historically
been very close; hence, the unsatisfactory growth performance of several
developing countries. Example; Nigeria has been attributed to poor saving and
investment. This poor growth performance has generally led to a dramatic
decline in investment. Domestic saving rates have not fared better, thus
worsening the already precarious balance of payments position (Chete, 1999). In
the same vein, attempts to correct external imbalances by reducing aggregate
demand have led to a further decline in investment expenditure, thus aggravating
the problem of sluggish growth and
declining savings and investment in the rates (when and Villanueva, 1991).
Therefore,
as earlier said, the role of savings in the economic growth of any country
cannot be overemphasized. Conceptually, savings represents that part of income
not spent on current consumption; when applied to capital investment, savings
increase economic growth and output (Olusoji, 2003). Institutions in financial
sector like deposit money banks (DMBs)/ commercial banks mobilize savings deposit
on which they pay certain interest. To effectively mobilize savings in an
economy, the deposit rate must be relatively high and inflation rate stabilized
to ensure a high positive real interest rate, which motivates investors to save
from their disposable income. In Nigeria, one of the problems of mobilizing
savings and deposits has always been a major problem for economic growth and
development.
In
Nigeria, there is basically lack of inducement to savings which had adversely
affected savings. Some of these inducements or incentives include; poor banking
habits, attitudes of banks to small savers, poor orientation, unemployment,
employment, instability in the banking system, instability in the political
system etc.
1.2 STATEMENT OF PROBLEM
In Nigeria, the saving culture is very
poor relative to other developing economies (Uremadu, 2006) and that
necessitates the need to put in place a coherent economic policy that will be
capable of providing the much needed enabling environment and also there is an
urgent need to encourage Nigerians to change their current attitude towards
saving, thereby placing the right saving culture by institutions and regulatory
agents who influence the decisions of households, firms and government. For
instance, during the period 1986 to 1989, domestic savings averaged 15.7% of
Gross domestic product (GDP) and however with the distress in the financial
sector of the 1990s, the rate of aggregate saving declined significantly. (CBN,
Statistical Bulletin, 2006). The distress syndrome resulted in a significant
fall in domestic saving in the period 1990 to 1994 with the saving to GDP ratio
dropping to 6 %.( CBN, statistical bulletin, 2006).
With the rate of savings standing at
only 6.4% in Nigeria in 2004, there is the need to examine the main
constituents of growth or fall in savings in Nigeria. As pointed out earlier,
since national policy- be it macroeconomic or microeconomic- generates
variables which could influence the propensity of economic and financial actors
to save. This research work would attempt to examine from policy perspectives,
the magnitude and direction of such variables as: interest rate, income,
growth, urbanization, foreign (aid) sector, fiscal policy etc. on savings in
Nigeria.
1.3
AIM OF THE STUDY
The aim of this study is to examine, in time and space the
main determinants of savings in Nigeria, in order to situate them within the
general performance of the Nigeria national economy.
1.4
OBJECTIVES OF THE STUDY
In the light of
the above problems, the objectives of this research work include:-
Ø To
ascertain the determinants of savings in Nigeria.
Ø To
determine the impact of saving on the economic growth.
1.5
STATEMENT OF THE HYPOTHESIS
The hypotheses to be tested in this
research work are:
H1;
the factors that influence savings have no significant determinant in Nigeria.
H²; savings have no significant impact
on economic growth
1.6 SIGNIFICANCE OF THE
STUDY
This research work will be of immense
help to policy formulators particularly those involved in the development of
the Nigerian economic agenda. It will help them in choosing the appropriate
policy in the macroeconomic policy management, particularly those affecting
savings in Nigeria.
Also, through the findings and
suggestions of this research project work, a greater awareness will be
generated in the financial arena or sectors so as to appreciate the efforts
being carried out by the federal government of Nigeria through the Central Bank
of Nigeria and Federal Ministry of Finance in improving the policies affecting
positively saving in recent years.
Finally, this study will assist in a
modest way to increasing students’ knowledge on the practical and real-life
situations of the theories they learn in the everyday classroom.
1.7
SCOPE AND LIMITATIONS OF THE STUDY
The scope of this study is to estimate
and evaluate the determinants of savings in Nigeria (1980-2007).
The research has been constrained by
lack of fund, human error and limited time frame which imposed difficulties
when serious attempt to effect a general in –depth towards the study of the
determinants of savings in Nigeria.