Reading: Effect of Financial Liberalization on Savings and Investment in Nigeria

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Effect of Financial Liberalization on Savings and Investment in Nigeria

Authors:

Danjuma Ahmad ,

University of Colombo, LK
About Danjuma
PhD Student, Department of Economics
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S.P. Premaratna

University of Colombo, LK
About S.P.
Department of Economics
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Abstract

In Nigeria, measures were taking by government between the period 1986 to 2005 to liberalise the financial sector as part of the overall structural adjustment programme (SAP) with the aim to promote economic growth and alleviate poverty. The financial reform assumes that deregulating the financial market will eliminate the distortion and fragmentation of the financial market. It will also improve the mobilisation of savings as well as efficiency in allocation of funds to viable investment projects in the economy. This in turn will help in accelerating economic growth. Literature in the area posits that liberalising interest rate and deepening of the financial market is growth enhancing. This hypothesis is tested by identifying two basics channel through which financial liberalisation is operational - savings and investment, and allocative efficiency. The analysis was carried out using macro data from Nigeria by employing Two-Stage-Least Square (2SLS) instrumental variable technique to analyse the data. Major findings pointed out that interest rate as determinant of savings is not statistically significant, and rising interest rate negatively affect investment growth. Secondly, investment follows the standard accelerator theory. Furthermore, growth in the stock of money is positively related with investment but statistically insignificant. Lastly, there is a considerable deepening in the banking sector, however, the capital market does not positively impact on the allocation of credit in the economy. Perhaps investment in the market is more of speculation that crowd out investment in the real sector thereby retrogressing the economic growth. The study recommends that government intervention is necessary for rapid and sustainable economic growth in the country especially policies like income policies and interest rate regulations as well as policies that smoothen consumption in the economy. Also, policy makers should focus on stabilising the economy to reduce the macroeconomic uncertainties especially exchange rate and inflation volatility, that impede the growth of private investment.
How to Cite: Ahmad, D., & Premaratna, S. P. (2019). Effect of Financial Liberalization on Savings and Investment in Nigeria. Colombo Journal of Multi-disciplinary Research, 4(1), 101–132. DOI: http://doi.org/10.4038/cjmr.v4i1.38
Published on 01 Nov 2019.
Peer Reviewed

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