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The impact of savings on the financial development in Nigeria for the period of 34 years (1981-2015) was examined. The study employed the use of time series data and the OLS estimation technique to estimate the multiple linear regression models developed in the methodology of this study. The key findings of this study include; Real Gross Domestic Product has a positive and significant relationship with financial development in Nigeria. Furthermore, the study revealed that exchange rate has a negative and insignificant relationship with financial development in Nigeria. Finally, the study revealed that there is negative and significant relationship between inflation and financial development of Nigeria. The study recommended that government through monetary authorities should make policies that will maintain stable interest rate and avoid actions that will lead to interest rate fluctuations.
1.1 Background to the Study
Many people find it difficult to save because it 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 increases output (Olusoji, 2003).
Financial development on the other hand serves as the institution that channels resources from surplus economics 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 development (Ajayi, 2014).
According to the theory of savings, there is a positive relationship between savings and financial development on the economic growth of a nation. The neoclassical exogenous growth model (Solo, 2010) opined 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 leads to an increase in economic growth.
The financial sector of any economy in the world also plays a vital role in the development and growth of the economy. The development of this sector determines how it will be able to effectively and efficiently discharge its major role of mobilizing fund from the surplus sector to the deficit sector of the economy. This sector has helped in facilitating the business transactions and economic development (Aderibigbe, 2004).
1.2 Statement of the Problem
The issue of low 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 savings 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 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. in 1991, 1992, 1993, 1994 and 1995 (early 190s) the declining savings rate in Nigeria was 22.854, 19.519, 15.021 12.846 and 12.839 respectively. However, this trend conceals a large and increasing dispersion of savings rate, particularly among developing countries like Nigeria (Economy Data Watch, 2015).
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 (1998) and Shaw (2000), 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 savings and channeling of the mobilized savings through the financial system. Over two decades ago, Nigerian economy witnessed the introduction of structural adjustment programme (SAP) which 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 been met.
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 Objectives of the Study
The broad objective of the study is to examine the effect savings on financial sector development in Nigeria. Specifically, the study intends to:
1.4 Research Questions
Based on the fore going analysis. Therefore, the following research questions can be deduced.
1.5 Research Hypotheses
H01: savings have significant effect on financial development in Nigeria.
H02: inflation rate does not have any significant impact on financial sector development in Nigeria
1.7 Scopeof the Study
The scope of this study covers savings and financial sector development in Nigeria from 1981 to 2015 based on the availabledata.
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