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.
1.1.2 CURRENCY RATIO
This is the ratio of currency in
circulation to monetary assets. A low currency ratio is indicative of a
efficient financial sector in which there is a high level of financial
intermediation. It also signifies the efficiency of the financial system
in mobilizing savings as well as the existence of an -efficient payment
system. In middle income and high income countries. this ratio is
usually low and reduces over time but the same situation does not exist
in developing countries in which a large amount of money in circulation
is in the form of liquid cash (currency).
1.1.3 MONEY MULTIPLIER
Money multiplier indicates the
responsiveness of money supply to the changes in the monetary base
(total amount of currency that is either circulated in the hand of the
public or in the commercial bank deposits held in the central bank's
reserves}, as an indicator of financial deepening, it shows the ability
of the monetary authority in altering the total amount of money in
circulation using the monetary base.
1.1.4 MARKET CAPITALIZATION/GDP RATIO
This gives a picture of the level of
development of the capital market in an economy. The capital market is a
market for raising long-term funds for investment. The market
capitalization of the capital market is the sum total of the product of
the price of each quoted stock and the total number of the outstanding
(issued) stocks. The ratio thus measure the ability of the capital
market to supply the needed funds for investments and economic growth,
the larger this ratio the more developed the financial sector would be
and the higher the impact of the intermediation activities in the
capital market on economic growth.
M2 is a category within the money supply that includes M1 in addition to all time related deposits, savings deposits, and non institutional money-market funds.
This is one of the most widely used
measures of financial deepening. The higher this ratio is the greater
the level of financial sector development. This measure however has a
shortcoming when used to measure the level of financial sector
development. This measure however has a shortcoming when used to measure
the, level of financial deepening for developing economies in which the
payment system is cash based, an" increase M2 /GDP ratio
cold have been brought by an increase in currency outside the banks such
that the ratio will be measuring level of liquidity preference rather
than financial depth.
The increasing importance of the
financial sector in the process of economy has come to the limelight in
recent times. The financial sector assumes an important role in the
process of economic growth because of its primary function as an
intermediary between sectors of the economy which have excess funds on
one hand and those that are in need of funds on the other hand. In
recent times, the effect of financial deepening on economic growth in
any economy has been underscored and this derives its strength from the
financial liberalization theory championed by Mckimnon, Shaw and curly
1973. Since in development economics, capital is a function of
investments on the other hand depends on level of gross national
savings. It then follows all things being equal, that any factor or
policy that can increase the level of savings in any economy will surely
lead to economic growth. It is worthy to note that in most developing
country which record low levels of savings to GDP, the governments
always practice financial repression in which financial controls such as
interest rate ceilings and floors, mandatory credit allocation policies
are used to enforce a regime of low interest rates which is expected to
boost investments, but contrary to this expectation, the opposite is
the case as savings and consequently investments still remain low
because of the existence of negative real interest rates usually caused
by a high inflation rate which is common in most developing countries.
Since positive real interest rates
encourage savings. Financial sector liberalization as opposed to
repression has been advocated as a policy for bringing development to
the financial sector through financial deepening. Thus with
liberalization, the demand for and supply of savings and loanable funds
are determined by market forces which will also ensure a more efficient
allocation of the financial resources towards the attainment of economic
1.2 STATEMENT OF THE RESEARCH PROBLEM
The Nigerian financial system has moved
from a period of direct government controls to an era of increased
liberalization, the financial sector however has shown evidence of
increased deepening over the years, Little is known in empirical terms
about the effect of the financial deepening on the economy growth of the
country. to this end, it becomes
imperative to investigate the effect of financial deepening on economic growth of the country.
1.3 RESEARCH QUESTIONS
The research hopes to answer the following questions:
1. Is there a link between real
deposit (money in bank over a period of time) and the level of savings
(money that can be used at any time) in the economy? If so, in what
direction is this relationship?
2. Has financial liberation over
the years had an effect on the level of deepening in the financial
system and if so what direction?
3. Is there any relationship
between financial sector development and economic growth and if so, what
is the nature of this relationship?
1.4 BROAD OBJECTIVE OF THE STUDY
This research thus aims at investigating
whether financial deepening in the Nigerian financial system as led to
any significant growth of the economy.
1.5 SPECIFIC OBJECTIVES OF THE STUDY
Through this study, the researcher intends to:
1. Determine the relationship between gross national savings and real deposit rate.
2. Determine the nature of relationship between indices of financial sector development and economic growth.
1.6 STATEMENT OF HYPOTHESIS
To discern if financial deepening has impact on economic growth, the following hypotheses are stated in null form:
1. Ho: That real deposit rates have no significant relationship with the level of savings in the Nigerian Economy.
2. Ho: That real income does not have any significant relationship with the current level of savings.
3. Ho: That level of savings of a previous period has no significant relationship with the current level of savings.
1.7 JUSTIFICATION OF THE STUDY
Most financial sectors in developing
economics including Nigeria have at one time or the other operated under
institutional controls imposed by their governments or regulatory
authority. This however, has not augured well for the mobilization of
financial resources for the purpose of investments in the economy. The
inability of the financial system to carry out its primary function is
seen in the Nigerian economy and the role of the financial sector in the
process of economic growth with a view to prescribing necessary
remedies to the problems that hamper the growth of the financial sector
and its ability to significantly contribute to economic growth in the