RESEARCH PROPOSAL

Financial Development and Economic Growth: An Empirical Evidence of Nigeria Case

[Name of Student]

Financial Development and Economic Growth: An Empirical Evidence of Nigeria Case

Introduction

The economies of developing countries are plagued by a number of problems, such as a lack of financial capital and skilled human resources among other things, which impede their overall development. Especially, insufficient capital for investments often stifles efforts towards economic expansion and entrepreneurship. Financial development plays an important role in this context; the term has been defined by Goldsmith (1969) as a change in the financial structure. It has also been suggested that financial development consists of two dimensions: ?financial deepening and ?financial widening. Financial deepening involves increased availability and use of financial instruments, such as securities and capital. The financial assets accumulate at a pace that is faster than that of the accumulation of non-financial wealth (Shaw, 1973). On the other hand, financial widening implies the increased use of financial markets viewed in terms of the number of available industries.

The issue of financial development serving as a catalyst for economic growth in these countries has been widely examined by scholars. The Policy Division working paper of the United Kingdom's Department for International Development (UK DFID, 2004) suggested that the financial sector could be developed by improving the efficiency and competitiveness of the sector, increasing the range of financial services, increasing the diversity of institutions of operation, increasing the amount of money and capital allocation, and through better regulation and more stability (U.K. Department for International Development, 2004). The issue of the causal relationship between financial development and economic growth of a nation has been subject to extensive debate but the specific nature of the causality is still unresolved. However, there is a general consensus that financial development plays a pivotal role in economic growth.

Financial development necessitates and facilitates savings and investment. For Sub- Saharan Africa, for example, a U.S. Treasury report (2003) stated that in order to provide its growing population with enough food and employment opportunities, the economy must grow by at least 4-5% per year. Therefore, the region must improve productivity, and increase investment and domestic savings. However, over the last two decades savings have remained at a dismally low level of about 12% of GDP. In addition, state governments have been repeatedly urged to reform property ownership laws, create business incentives, promote private sector development, improve the investment climate, and open up access to credit (U.S. Treasury, 2003).

The U.S. Treasury report (2003) also states that banking sector penetration in a typical Sub-Saharan Africa country is around 1% of GDP, and banks are still heavily controlled and owned by the governments. The external shocks from the fluctuation in oil prices experienced in the 1980s as well as lending to weak borrowers such as government institutions led to widespread bank failures. These weak borrowers put pressure on the banking institutions not to recover debts. In addition, the governance of financial institutions in African developing countries suffers from inadequate enforcement tools ...