Effect of Financial Intermediation and Regulations on Financial Deepening and Growth: Evidence from Nigeria

Sebastian O. Uremadu*, A.C. Nwokocha**, Charity E. Duru-Uremadu ***
*Professor, Banking and Finance, College of Management Sciences, Michael Okpara University of Agriculture, Umuahia, Nigeria.
** Fellow, Nigeria Institute of Management, Lagos, Nigeria.
*** Assistant Lecturer, Educational Management, College of Education (COED), Michael Okpara University of Agriculture, Umuahia, Nigeria.
Periodicity:March - May'2017
DOI : https://doi.org/10.26634/jmgt.11.4.13450

Abstract

In this paper, the authors have conceptualized that effective financial system regulations and efficient financial intermediation will increase financial deepening thereby leading to real GDP growth. This paper examines the effect of financial intermediation and government regulations on financial deepening and growth in Nigeria using time series data and OLS (Ordinary Least Squares) regression methodology. In particular, macroeconomic data covering 24 years were used to conduct these investigations and analysis. Their findings showed that government bank regulations proxied by total balances with the central bank lead financial deepening in Nigeria. It is then followed by another surrogate of a financial intermediation variable (i.e. total demand deposit liabilities) as 2nd ; cash reserve ratio representing another surrogate of a regulatory variable ranked 3rd , while total bank credit to domestic economy that represents another surrogate of financial intermediation ranked 4th in their descending order of magnitude. The negative influence of cash reserve ratio and total bank credit on financial deepening and growth were also found. It is therefore recommended that monetary authorities should step up their bank regulation efforts so as to persuade Nigerian banks to efficiently perform their financial intermediation roles in order to positively engender adequate financial deepening in the financial system that will lead to desired real GDP growth.

Jel Classification: G21, G28, 016, E41, E43, E44, F31.

Keywords

Financial Intermediation, Financial Deepening, Real GDP Growth, Financial System, Financial Institutions, Financial Markets, Bank Regulations, Financial Assets and Financial Liabilities, Contagion, Monetary Authorities

How to Cite this Article?

Uremadu, S.O., Nwokocha, A.C., and Duru-Uremadu, C.E. (2017). Effect of Financial Intermediation and Regulations on Financial Deepening and Growth: Evidence from Nigeria. i-manager’s Journal on Management, 11(4), 30-52. https://doi.org/10.26634/jmgt.11.4.13450

References

[1]. Adam, J.A., (1998). “Financial Intermediation and Economic growth: Evidence from Nigeria”. Journal of Economic Management, Vol.5, No.2, pp.25-48.
[2]. Adam, C.S., W.P. Cavendish, and P.S. Mistry, (1990). “Issues in Privatization and Capital Market Development”. Conference on Capital Market Development and Privatization, Bombay, India.
[3]. Aderibigbe, J.O., (2004). “An Overview of the Nigerian Financial System”. CBN Bullion, Vol.28, No.1, pp.69-78.
[4]. Agu, C.C., and J.o. Chukwu, (2008). “Toda and Yamamato Causality between Bank-Based Financial Deepening and Economic Growth”. European Journal of Social Sciences, Vol.7, No.2, pp.189-198.
[5]. Azege, M., (2004). “The Impact of Financial Intermediation on Economic Growth: The Nigerian Perspective”. Unpublished, Lagos State University.
[6]. Beck, T., R. Levine, and N. Loayza, (2000). “Finance and the Sources of Growth”. Journal of Financial Economics, Vol.58, No.1, pp.261-300.
[7]. Bencivenga, V.R., and B.D. Smith, (1991). “Financial Intermediation and Endogenous Growth”. Review of Economic Studies, Vol.58, No.2, pp.195-209.
[8]. Bhattacharya, S., and Thakor, A.V., (1993). “Contemporary Banking Theory”. Journal of Financial Intermediation, Vol. 3, No.1, pp.2-50.
[9]. Calderón, C., and Liu, L., (2002). The Direction of Causality Between Financial Development and Economic Growth (No. 184). Central Bank of Chile.
[10]. Casu, B., C. Girardone, and P. Molyneux, (2006). Introduction to Banking. Harlow England: FT Practice Hall.
[11]. Collier, P., and C. Mayer, (1989). “The Assessment: Financial Liberation, Financial Systems, and Economic Growth”. Oxford Review of Economic Policy, Vol.5, No.4, pp.1-12.
[12]. Collier, P., (1990). “Financial Systems and Development in Africa”. Collected papers from an EDI Policy Seminar held in Nairaobi, Kenya. The World Bank.
[13]. Diamond, D.W., (1984). “Financial Intermediation and Delegated Monitoring”. Review of Economic Studies, Vol. 51, No.3, pp. 393-414.
[14]. Diamond, D.W., and P.H. Dybvig, (1983). “Bank Runs, Deposit Insurance, and Liquidity”. Journal of Political Economy, Vol. 91, No.3, pp.401-419.
[15]. Diamond, D.W., (1995). “Liquidity, Banks and Markets”. CRSP Working Paper, University of Chicago.
[16]. Diamond, D.W., (1996). “Financial Intermediation as Delegated Monitoring: A Simple Example”. FRBR Economic Quarterly, Vol. 82, No.3, pp.51-68.
[17]. De Gregorio, J., and P. Guidotti, (1992). “Financial Development and Economic Growth”. IMF Working Paper, Vol. 92-101.
[18]. Demirguc-Kunt, A., and E. Detragiache, (1998). “Financial Liberation and Financial Fragility”. Annual Bank Conference on Development Economics, IMF Working Paper, No. WP 98/83. Washington, D.C. IMF.
[19]. Fry, M., (1988). Money, Interest and Banking in Economic Development. Baltimore: John Hopkins University Press.
[20]. Fama, E.F., (1985). “What's Different About Banks?” Journal of Monetary Economics, Vol.15, No.1, pp.29-39
[21]. Gelb, A., (1989). “Financial Policies, Growth and Efficiency”. PPR Working Paper No. 202, The World Bank, Washington DC.
[22]. Geweke, J., (1982). “Measurement of Linear Dependence and Feedback between multiple Time Series”. Journal of the American Statistical Association, Vol.79, No.378, pp.304-313.
[23]. Gelb, A., (1989). “Financial Policies, Efficiency and Growth: An Analysis of Broad Cross-Section Relationships”. Background Paper to the World Bank Development Report. The World Bank.
[24]. Greenwood, J., and B. Jovanovic, (1990). “Financial Development, Growth, and the Distribution of Income”. Journal of Political Economy, Vol.98, No.5 (Part 1), pp.1076- 1107.
[25]. Goldsmith, R.W., (1969). Financial Structure and Development New Haven: Yale University Press.
[26]. Ikhide, S.I., (1992). “Financial Deepening, Credit Availability and the Efficiency of Investment: Evidence from Selected African Countries”. Development Research Paper Series, No. 2.
[27]. Ikhide, S.I., (1997). “Financial Sector Reform and Growth of Capital Market in Nigeria”. Institute of Developing Economics, V.R.F Series No.291, Tokoyo, Japan.
[28]. Hellwig, M., (1991). “Banking, Intermediation and Corporate Finance”. In Alberto Giovannian and Colin Mayer, Eds; European Financial Integration, pp.35-63. Cambridge: Cambridge University Press.
[29]. Hondroyiannis, G., S. Lolos, and E. Papapetrou, (2008). “Financial Markets and Economic Growth in Greece, 1986-1999”. Journal of International Financial Markets, Vol.15, No.2, pp.173-188.
[30]. Horch, H., (1989). “Policies for Developing Financial Markets”. EDI Working Papers, The World Bank. No.340/041.
[31]. Khatkhate, D.R., (1988). “Assessing the Impact of Interest Rates in Less Developed Countries”. World Development, Vol.16, No.5, pp.577-588.
[32]. Killick, T., and M. Martin, (1990). “Financial Policies in the Adaptive Economy”. ODI Working Paper, No.35.
[33]. Killick, T., (1993). “The Adaptive Economy”. ODI Development Studies, The World Bank.
[34]. Lacker, J.M., (1991). “Why is there Debt?” Federal Reserve Bank of Richmond Economic Review, Vol.77, No.4, p.3.
[35]. Levine, R., (1997). “Stock Markets, Growth and Tax Policy”. Journal of Finance, Vol.46, No.4, pp.1445-1465.
[36]. Levine, R., N. Loayza, and T. Beck, (2000). “Financial Intermediation and Growth: Causality and Causes”. Journal of Monetary Economics, Vol.46, No.1, pp.31-77.
[37]. Llewellyn, D., (1999). The Economic Rationale for Financial Regulation”. FSA Occasional Papers Series, No.1. Retrieved from http://www.fsa.gov.uk/pubs/ occupapers/ep)1.pdf
[38]. Long, M., (1989). “Crises in the Financial Sector”. FDI Working Paper, The World Bank. No.340/020.
[39]. Lopes, S.T., (1988). “Reforms of the Financial Sector”. EDI Working Papers. The World Bank No. 340/012.
[40]. Meir, G.M., (1976). Leading Issues in Economic Development. New York: Oxford University Press.
[41]. Mohamed, S.E., and M. Sidiropoulos, (2006). “Finance-Growth Nexus in Sudan: Empirical Assessment Based on an Application of the ARDL Model”. In Savings and Development by L.Vigang (2009) (Eds).
[42]. McKinnon, R.I., (1973). Money and Capital in Economic Development. Washington DC: The Brookings Institution.
[43]. Ndebbio, J.E.U., (2004). “Financial Deepening, Economic Growth, and Development: Evidence from Selected SSA Countries”. Research Papers, AERC, No. pp.42.
[44]. Ndekwu, E.C., (1991). “Interest Rates, Bank Deposits and Growth of the Nigerian Economy”. NISER Monograph Series No. 4.
[45]. Nissanke, M., (1991). “Marketing Domestic Savings for African Development and Diversification: Overview”. A paper for International Development Centre, University of Oxford.
[46]. Nnanna, O.J., A. Englama, and F.O. Odoko, (2004). Financial Markets in Nigeria. A Central Bank of Nigeria Publication.
[47]. Omachonu, J., (2012a). “Banks go aggressive on deposit mobilization – to benefit from high rates on securities”. BusinessDay, Monday,27 August, 2012, pp.1 & 4.
[48]. Omachonu, J., (2012b). “Overcoming Liquidity Squeeze through Financial Intermediation”. BusinessDay, Monday, 27 August 2012, pp.21 & 27.
[49]. Omole, O.A., (1999). “Financial Deepening and Stock Market Development in Nigeria”. NISER Monograph Series, No.15. Ibadan: MSER.
[50]. Oyejide, T.A., (1972). “Deficit Financial, Inflation and Capital Formation: An Analysis in Nigeria. Ibadan. University of the Nigerian Experience, 1957-1970”. The Nigerian Journal of Economics and Social Studies, Vol. 14, pp. 27-43.
[51]. Polak, J.J., (1989). Financial Policies and Development. Development Centre Studies, OECD, Paris.
[52]. Popiel, P., (1989). “Recent Developments and Innovations in International Financial Markets”. EDI Working Papers, The World Bank, No.340/035.
[53]. Popiel, P., (1990). “Developing Financial Markets in Sub-Saharan African”. EDI Working Papers. The World Bank, No. 340/046.
[54]. Popiel, P., (1994). “Financial Systems in Sub-Saharan Africa: A Comparative Study”. World Bank Discussion Papers 260; African Technical Development Series.
[55]. Rahman, A.A., and N.Z. Sidek, (2011). “Spill-over effect of US Sub-prime Crisis on ASEAN-5 Stock Markets”. International Journal of Mathematical Models and Methods in Applied Sciences, Vol.5, No.6.
[56]. Roe, A., and P.A. Popiel, (1988). “Managing Financial Adjustment in Middle – Income Countries”. An EDI Policy Seminar Report, The World Bank.
[57]. Robinson, J., (1952). The Generalization of the General Theory and other Essays. New York: Prentice-Hall.
[58]. Shaw, E.S., (1973). Financial Deepening in Economic Development. New York: Oxford University Press.
[59]. Soyode, A., (1991). “Structural Adjustment Programme and its Impacts on the Nigerian Stock Market”. Research in Third World Accounting, Vol.2, pp.335-352.
[60]. Soyode, A., (1992). “Economic Restructuring and the Impact on the Nigerian Stock Market”. A Seminar Paper, University of Ibadan.
[61]. Soyode, A., and F. Adekanye, (1992). “Financial System Regulation, Deregulation and Savings Mobilization in Nigeria”. AERC Research Paper No. 11, Nairobi, Kenya.
[62]. Stiglitz, J.E., and A. Weiss, (1981). “Credit Rationing in Markets with Imperfect Information”. American Economic Review, Vol.11, No.3, pp.393-410.
[63]. Sundararajan, V., and S.P Leite, (1991). “Issues in Interest Rate Management and Liberation”. In Paul Collier (Ed.), Financial Systems and Development in Africa, EDI Seminar Series, The World Bank, pp.147-158.
[64]. Uremadu, S.O., (2004). Principles of Business Finance: DCF and Investment Decisions. Benin City: Mindex Publishing Ltd.
[65]. Uremadu, S.O., (2012). “Bank Capital Structure, Liquidity and Profitability: Evidence from the Nigerian Banking System”. International Journal of Academic Research in Accounting, Finance, and Management Sciences, Vol.2, No.1, pp.98-113.
[66]. Uremadu, S.O., (2006). “Impact of Real Interest Rate on Savings Mobilization in Nigeria”. (Unpublished Ph.D Thesis Submitted to the Department of Banking and Finance, UNN Enugu Campus, Enugu State.)
[67]. Waqabaca, C., (2004). “Financial Development and Economic Growth in Fiji”. Economics Department, Reserve Bank of Fiji Working Papers, No.3.
[68]. World Bank, (1989). Financial Systems and Development. World Bank Report, 1989: New York: Oxford University Press.
[69]. World Bank, (1990). “Financial Systems and Development”. Policy and Research Series, The World Bank.
[70]. Van Wijnbergen, S., (1982). “Interest Rate Management in LDGs”. Journal of Monetary Economics, Vol.12, No.3, pp.433-452.
[71]. Vogel, R.C., (1987). “The Role of Groups, Credit Unions, and other Cooperatives in Rural Lending”. World Bank, Agriculture and Rural Development Department, Washington, D.C.
If you have access to this article please login to view the article or kindly login to purchase the article

Purchase Instant Access

Single Article

North Americas,UK,
Middle East,Europe
India Rest of world
USD EUR INR USD-ROW
Pdf 35 35 200 20
Online 35 35 200 15
Pdf & Online 35 35 400 25

Options for accessing this content:
  • If you would like institutional access to this content, please recommend the title to your librarian.
    Library Recommendation Form
  • If you already have i-manager's user account: Login above and proceed to purchase the article.
  • New Users: Please register, then proceed to purchase the article.