research work seeks to examine the impact of savings on financial development
in Nigeria. Time series data from 1970 to 2013 were computed from world
development indicators. The period was assumed long enough to proffer solution
for the improvement of savings in the economy. The study used an Autoregressive
Distributed Lagged (ARDL) estimation technique, built on the McKinnon
complementary hypothesis framework to investigate the impact of savings on
financial development. The result revealed that domestic savings has a positive
significant on financial development both in long and short-run in Nigeria. It
is also seen that inflation has a negative significant on financial development
in the long and short run. The study therefore concluded that since interest on
deposit propel depositors to save, the interest rate should be increased in
other to enhance savings which in turn leads to effectiveness of the financial
Background to the Study
Many people find it difficult to save because
it actually involves decreasing current consumption and investment in future
standard of living. It is the belief of the citizens that savings is the
remaining after their current wants and needs have been attained. Savings is
the portion of current income not spent on consumption and when it is applied
to capital investment, savings increase output(Olusoji2003). Financial
development on the other hand serves as the institution that channel resources
from surplus economics unit to deficit units for investment purposes. Savings
and Financial development are important economic tools which are used to raise
the standard of living in a country. The importance of savings and financial
development can be based on the aspect that country that save more tends to
grow faster, provided that their financial system is deep, increasing savings
and ensuring that they are directed to the productive investment are central to
accelerating economic growth and development. Furthermore, higher savings leads
to capital accumulation which in turns leads to economic growth and
According to the theory
of savings, there is a positive relationship between savings and financial
development on the economic growth of a nation. In light of these, the
neoclassical exogenous growth model(Solow1956) is of the motion that increase
in a country savings increases the country per capital income and vice versa. The
endogenous growth theory by Romer (1986) and Lucas (1988) predict that the
savings rate determine the long run growth of the nation, that is an increase
in savings rate leads to an increase in economic growth.
A trend analysis of the
ratio of total savings to GDP in Nigeria shows that the saving rate has been
fluctuating overtime. The savings/GDP ratio was 2% in 1960, latter increase to
7.8% and 11.6% in 1970 and 1980 respectively. In 1990 and 2000, it declined to
11.1% and 8.4% respectively. In 2011, the savings/GDP ratio in Nigeria stood at
17.4% (CBN 2011).For we to have a better understanding of these research topic,
we need to understand the link between savings and financial development and
how they both affect economic growth. Capital formation is an important factor
in determining economic growth of a country. Countries that are able to
accumulate high level of capital tend to achieve a faster rate of economic
growth and development. But basically all these cannot be achieved without
generating sufficient savings which serves as prove that there is a positive
relationship between savings and financial development in a nation. The impact
of savings on financial development in a country has attracted the attention of
researchers and policy makers in the past.
This research work will
be emphasizing on the literature review of past researcher and try to generate
solution to the negative impact it has on the economic growth of a country. This
research topic will be making use of inflation, real interest rate, domestic
national savings and growth rate per capita GNP as a variable for savings and
money supply, credit to private savings as a ratio to GDP and market
capitalization as an indicators for financial development.
According to the
economist, the relationship among savings, investment and economic growth has
historically been very close; hence, the unsatisfactory growth performance of
several developing countries such as Nigeria have been attributed to poor
saving and investment. Saving rates have not fared better, thus worsening the
already precarious balance of payment position.
According to khan and Villanueva(1991) explained that many attempt have
been made to correct external imbalances by reducing aggregate demand which
further led to the decline in investment, expenditure, thus aggravating the
problem of sluggish growth and declining savings and investment rates.
The dismal growth
record in most African countries, relative to other regions of the world has
been of concern to economists. This is because the growth rate registered in
most African countries is often not commensurate with the level of investment.
In Nigeria for instance, the economy witnessed tremendous growth in the 1970s
and early 1980s as a result of the oil boom. Following the oil boom, there was
investment boom especially in the public sectors. However, with the collapse of
the oil market in the 1980s, investment fell, thereby resulting in a fall in
economic growth. Although a vast empirical literature has shed light on various
aspects of saving behavior, several crucial questions remain unanswered with
regard to the relevance of policies in raising the saving rate and the
non-policy determinant of saving.
Statement of research Problem
The issue of low level
of savings in Nigeria has become a gigantic status dominating the economy. In
Nigeria, the dismal growth record has been a great concern to the economy due
to the poor saving rate. In these respect financial development in performing
their roles was found to have potential scope and prospect for mobilizing
financial resources and allocating them to investment. But in light of the
problem derived, the savings if probably developed will not only facilitate
financing of economic development but would also contribute immensely to the
development of income. In Nigeria, the problem of saving has always been the
bane of economic growth. In Nigeria, savings rate has been declining since the
first oil shock and in the early 1990s. However this trend conceals a large and
increasing dispersion of savings rate, particularly among developing countries.
In Nigeria, financial
sector reforms began with the deregulation of interest rates in august 1987
(Chete, 1999) prior to this period, the financial system operated under
financial regulation and interest rates were said to be repressed. According to
McKinnon(1973) and Shaw(1973), financial repression arises mostly when a
country imposes ceiling on deposit and lending nominal interest rates at a low
level relative to inflation. The resulting low or negative interest rates
discourage saving and channeling of the mobilized savings through the financial
system. Over two decades ago, Nigerian economy witnessed the introduction of
Structural Adjustment Program (SAP) which shifted emphasis from public sector
to private sector. The goal was to among other things, encourage savings,
investment and capital formation in order to enhance economic growth. By
encouraging savings, resources were diverted from current consumption and
invested in capital enterprises. Unfortunately things have not worked out as
expected. The initial optimism expressed about public sector reforms has not
Although, the reform
program led to privatization and commercialization of many state enterprises
and improvement in some macroeconomic variables like the nominal interest rate
and money supply, but not without its disappointing performances. For example,
Nigeria continues to be confronted with low rate of real economic growth.
Besides, the aggregate supply continued to diminish leading to demand-pull
inflation. One worrisome aspect of the result of liberalization of the public
sector in Nigeria is the extent of distress in the real sector as well as high
rate of unemployment.
1.3 Objective of the Study
The objective of this
research topic is to determine how savings actually affect financial
development which in turns determines the economic growth of a nation. The
objective can be carried out using the time series data to estimate relevant
data over the year. The time series data helps to know whether the country is
making progress or experiencing recession. This study focuses on the following:
impact of savings on financial development.
examine the relationship between savings and financial development.
3) To carry out an analysis on the trend of
saving in Nigeria
examine the direction of casualty between savings on financial development
1.4 Research Questions
The following are the
questions arising from this research topic:
saving have any impact on financial development?
there a significant relationship between savings and financial development
3) What is the direction of casualty between
savings and financial development?
Can low savings be attributed to income?
1.5 Research hypothesis
The hypothesis which
arises from our research questions shall be tested
Ho: There is no significant
relationship between domestic savings and financial development.
H1: There is a significant
relationship between domestic savings and financial development.
Justification of the Study
This study is of
justification in the following ways:
It would assist firms in acquiring
adequate deposit which will be used to finance business investment.
It would also serve for personal career
and independence, with a possible link to investment in a micro economic sense.
The findings of these study will assist
in examine whether saving targeting would achieve a better economic growth.
Scope of the study
The research work to be
carried will be based on evaluating the impact of savings on financial
development of the Nigerian economy and will be utilizing time series data from
1970 through 2013. The choice of this period was influenced by the availability
of authentic data at the period of this research.
The necessary data for
this analysis is secondary data and time series in nature, which will be
sourced from relevant and trustworthy statistical sources of data such as the
CBN (statistical bulletin, economic and financial review), the national bureau
of statistics and other sources which will be stated as applicable.