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DETERMINANTS
OF SAVINGS IN NIGERIA (1980 – 2007)
ABSTRACT
This study
examines the determinants of savings in Nigeria between 1980 -2007, which will enable us to
proffer solution for the improvement of savings in the economy, since it is an
important component of the economic development of any country. On the basis of
available data, the study is of the view that savings output in Nigeria during
the period was generally unsatisfactory
and discouraging until of late when it was recognized as an important
ingredient for growth and development. It was discovered that real GDP
per-capita has the highest effect on financial savings in this research work.
The findings
of this research work shows that for savings to rise to a significant level in
the economy, incentives on savings should be grossly considered by the public,
private and government. Savings here refers to the deposit and liabilities
acquired by the organized financial institutions including bank and non-bank
financial intermediaries. Policy recommended included: strengthening the legal framework of the financial sector,
creating and maintaining a stable macroeconomic environment for savings and
investment, development of appropriate
saving scheme, fostering the development of the money market and the
facilitation and establishment of the
financial institutions and their branches in the rural areas, as well as the
financial instruments and services they
offer.
TABLE OF
CONTENTS
TITEL PAGE
………………………………………………………… i
APPROVAL
PAGE ………………………………………………….. ii
DEDICATION
………………………………………………………..iii
ACKNOWLEDGMENT
………………………………………………iv
ABSTRACT
…….……………………………………………………..v
TABLE OF
CONTENTS………………………………………………vi
CHAPTER ONE
INTRODUCTION
1.1 Background of Study
……………………………………………1-8
1.2 Statement of Problems
…………………………………………. 8-9
1.3 Aim of study …………………………………………………….10
1.4 Objectives of the Study
………………………………………….10
1.5 Statement of Hypothesis
…………….…………………………..10
1.6 Significance of the
study…………………………………………11
1.7 Scope and limitation of the
study………………………………...12
CHAPTER TWO
LITERATURE
REVIEWS
2.1 Stylized
evolution of savings in Nigeria ……………………..13-20
2.2 Trend of
savings in Nigeria …………………………………..20-29
2.3
Theoretical review and Evidence….………………………….29-37
2.4
Empirical review and Evidence ………………………………37-45
2.5 Factors
influencing savings in Nigeria ……………………….45-55
CHAPTER
THREE
RESEARCH
METHODOLOGY
3.1 Model
Specification ………………………………………….56-59
3.2 Method
of Evaluation ………………………………………. 59-64
3.3 Economic
Apriori Criteria……………………………………65
3.4 Data
Required and Source ……………………………………66
CHAPTER FOUR
PRESENTATION
OF REGRESSION RESULTS
4.1 ADF Test
for Stationary …………………………………………67-70
4.2 Co
integration test ……………………………………………….70-71
4.3
Presentation of model results ……………………………………72-73
4.4 Economic
interpretation of results ………………………………73-75
4.5
Statistical Criteria for Evaluation of Result (R2)…………………76-78
4.6
Econometric criterion (Second order test) ………………………79-83
4.7
Evaluation of the hypothesis …………………………………….83-84
CHAPTER FIVE
SUMMARY,
RECOMMENDATIONS AND CONCLUSION
5.1 Summary
of Findings ……………………………………………85-86
5.2 Policy
Recommendations ………………………………...............87-88
5.3
Conclusion ……………………………………………………….88-89
Bibliography
…………………………………………………………90-94
Appendixes
……………………………………………
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:-
ØTo
ascertain the determinants of savings in Nigeria.
ØTo
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.
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