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The
Determinant Of Savings In Nigeria
ABSTRACT
The term
savings refers to the part of income immediately spent or consumed but reserved
for futureconsumption, investment or unforeseen contingencies. This study examines
the determinants of savings in Nigeria between 1985-2011, 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. The method
of analysis used in testing the hypothesis are coefficient of multiple
determination {R2}, T –test,F-statistics. Data for the study was obtained from
the central bank of Nigeria statistical bulletin, the major findings was that
per capita disposable income{pdy} has a positive and significant impact on
aggregate savings in Nigeria. Based on the findings, some recommendations of
policy and suggestions have been made.
5
CHAPTER ONE
1:1
BACKGROUND OF THE STUDY
Capital
formation is an important factor of an economy growth. For a country like
Nigeria to attain economic growth, serious effort should be geared towards
capital formation by encouraging savings.
The
financial institution markets, regulators and instrument interact within an
economy to provide financial services such as foreign exchange transaction,
financial intermediation and resources mobilization and allocation.
The
financial system in Nigeria can be categorized into two, the formal (organized)
and informal (unorganized) financial system. The formal financial system is
categorized into capital and money market institutions and these comprises of
the banks and non banks financial institution, while the informal sector is
made up of the local money lenders (Esusu), the thrifts and savings
associations, merchants, shopkeeper or traders, friends and relatives etc. here
the system is poorly developed, limited economic information, defective system
of accounting and not integrated into the formal financial system. But it is
very important and plays a major role in the Nigerian financial system.
6
Miracle and
Cohen (1980) noted that a great bulk of the African population makes little or
no use of formal saving and lending institutions, because they offer relatively
low returns, savers are reluctant to use formal institutions.
The crucial
role played by the financial system in the economic development of an economy
was recognized by Gold Smith (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 rends in saving rates in Nigeria have been of great concern to the
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 especially in Nigeria. A sound, developed, healthy and reliable
financial system relate to saving mobilization efficient financial intermediaries
roles, is first to reduce hoarding and help spread the risk between household
and firms.
Secondly,
hey create liquidity in the economy by borrowing short term and lending long
term loan. Thirdly disseminate information between ultimate lenders and ultimate
borrowers there by mobilizing savings from surplus units and channeling them to
deficit units through the help of financial techniques, instruments, and
institution. Fourth, lower interest rate by bringing about stability in capital
market. Fifth, the intermediaries promote development in the financial
transaction. Gibson and Isiaka Lobos (1994). The Nigeria financial system
7
comprises he
regulatory/supervisory authorities, bank and non bank financial institution.
As at the
end of 2007, the system comprised of the regulatory/supervisory authority. The
Central bank of Nigeria (CBN), the Nature Insurance Commission (NAICOM), the
Nigeria Deposit Insurance Corporation (NDIC). The Securities and Exchange
Commission (SEC) and finally the Federal Mortgage Bank of Nigeria (FMBN). The
CBN is the principal regulator and supervisor in the money market followed by
deposit money banks (DMBS), Discount Houses, the people bank of Nigeria and
Community Banks. The CBN exclusively regulates the activities of the finance
companies and promotes the establishment or specialized or development
financial institution.
The security
and exchange commission (SEC) is the apex regulatory authority in the capital
market. The Nigeria stock exchange (NSE) is a self regulatory or user
regulatory institution. The issuing house, registrars and stock brokers, who
also interact with the money market, complete the chain the capital the NAICOM
is the regulatory authority in the insurance industry while FMBN regulates
mortgage finance activities in Nigeria.
Saving
refers to the part of income not immediately spent or consumed but reserved for
future consumption, investment or unforeseen contingencies, it is considered as
an indispensable weapon for economic growth and development. Its
8
role is
reflected in capital formation through increase in capital stock and the impact
its makes on the capacity to generate more and higher income.
Savings can
also be known as a sacrifice of current consumption that provides for the
accumulation of capital, which in turn, provides additional output that can
potentially be used for consumption in the future(GERSOVIZ 1988).in other words
savings is the different between current earnings and consumption. We can also
define savings as he deposit and saving ability acquired by the organized
financial institution including bank and non banking financial intermediaries
or it is described as a financial accumulated by the public, both government
and private agents in the organized financial channels. These financial assets
include savings and time deposit in the banking institution provident funds,
insurance premium stocks and bonds etc.the intermediation process involves
moving funds from surplus sectors of the economy to deficits sector units(Nnann
and Englama 2004).To expand financial savings involves shifting of fund from
the personal and household sector to the business or corporate sector which in
turn leads to greater investment, income growth, employment and capital
formation, which cannot be achieved without increasing the rate of savings.
Nigerians
savings still falls below the requirement of its financial system due to low
per capital income, under investment in productive instruments, and investment
in unproductive channels e.g. Glod, jewel, income inequalities and
9
demonstration
effects, etc.to remedy this problem depend on the level of development of the
financial sector mentioned above as well as the saving habit of the citizens.
The availability of investible funds can be a starting point for all
investment. In the economy which will eventually translate to economic growth
and development (Uremadu 2006).
The
relationship among savings, investment and growth has historically been very
close, hence the unsatisfactory growth performance of several developing
countries, example Nigeria, has been attributed to poor savings and investment.
This poor growth performance has generally led to a dramatic decline in
investment. Domestic savings rates have not better, thus worsening the already
uncertain balance of payment position, the role of savings in the economic
growth of any country cannot be overemphasized (Cheta 1999). Conceptually,
savings represent that part of income not spent on current consumption.
Institutions
in financial sector like deposit money banks (DMBS) commercial Banks 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
Odoko and Englama (2004) are of the view that the level of funds mobilization
by financial institution is quite low due to a number of reason, ranging from
low savings deposits rates of the poor banking habit or culture of
10
people.
According to them another impediment to funds mobilization is the attitudes of
banks to small savers.
Another
limitation of saving mobilization is the fact that the concentrations of banks
are heir offices are based in favour of urban areas. Among the reasons for
this, is the fact that the established banks under rate the volume of savings
seeking to be mobilized and channeled into productive investment in the rural
areas. It is often argued that since the rural economy operates at a near
subsistence level, there is very little that can be squeezed out of income and
consumption. Because of this, it has not been realized that the large volume of
idle funds, through is small units per individuals exist in the rural areas.
In Nigeria
there is basically lack of incentives to savings which had adversely affected
savings. Some of these factors include poor banking habits, attitude of banks
to small savers, poor orientation, unemployment, instability in the political
system etc, corrupt taxation system, instability in banking system etc. one of
the problems of mobilizing savings and deposits has always been a major problem
for economic growth and development in Nigeria.
According to
Friedman (1952) the impact of health on saving has been long recognized in
theory, but its effect on the aggregate savings have been considered to be over
shadowed by another factor, inflation causes price of tangible assets to
rise sharply
and changes in net worth based on rising market value giving the
11
illusion of
well being the magnitude of the impact of wealth on saving rate may have the
reassured experiences of economic crisis have highlighted the fact low and
declining saving rate have contributed to generate unsustainable current
account deficits in many countries.
The above
arguments underscores the fact that there exist a link between savings and the
growth performance of the economy, both in Nigeria and in the world over. This
necessitates the need to carry out a detailed study of what actually determines
the rate of savings in the contexts of Nigeria economy.
1.2
STATEMENT OF THE PROBLEM
Saving is a
macro-economic variable used to attain economic growth and development
(Wikipedia encyclopedia, 2009). In Nigeria, there is lasting need to further
step-up efforts in mobilizing small savings in both urban and rural areas,
given the poor savings culture of the Nigerian people and the theoretical link
between saving and investment which underscore the importance of savings on the
growth of every economy. When savings are low, interest rate increases and
investments becomes low there will be low income and decrease in the Gross
National Product (GNP) and Gross Domestic Product (GDP) of the nation which
leads to the poor living standard of the people and hinders the depositors from
savings.
12
This
research work would attempt to examine the magnitude and nature of such
variable as interest rate, inflation, income, urbanization on savings in
Nigeria.
1.3 RESEARCH
QUESTION
Important
research question that arise include what are then the determinant of saving in
Nigeria economy? Could it be that there are few dominant determinants of saving
due to our poor economy? Could these dominants be consumption rather and
interest or many more? Why is the rate of savings in Nigeria very low? Is it as
a result of saving in Nigeria very low? Is it as a result of policies requiring
further review to make if effective the study intends to answer these
questions?
1.4
OBJECTIVES OF THE STUDY
The broad
objectives of the study are to examine the determinant of savings in Nigeria
economy. However, the specific objectives are as follows.
1. To determine the impact of savings on the
economic growth
2. To determine whether consumption
expenditure is a major determinant of savings in Nigeria economy.
3. To determine the magnitude and nature
of the elast
functions in
Nigeria.
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