Financial Sector Liberalization and Performance of the Nigerian Economy
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This study examined the relationship between financial sector liberalization and performance of the Nigerian economy following the McKinnon and Shaw (1973) thesis by developing two models with modifications.Increase in savings through real interest rate and credit to the private sector are the two channels through which financial liberalization impacts on economic growth in the McKinnon and Shaw (1973) thesis. All the variables used in this study were sourced from CBN statistical bulletin. The study adopted Engel-Granger cointegration/error correction mechanism as analytical method. The result of the unit root and cointegrtaion test showed that the variables were integrated of order one, I(1) and evidence of long run relationship respectively. The parsimonious error correction results revealed that in the first model, with the exception of prime lending rate (PLR), real deposit rate (RDR), market capitalization as a ratio of GDP (MCGDP) and broad money supply as a ratio of GDP (MSGDP) all impacted on savings. However, while RDR and MCGDP impacted positively on SAGDP, the impact of MSGDP was negative on SAGDP. The results of the second model on the other hand revealed that while RDR, MCGDP and MSGDP maintained significant impact on credit to the private sector as a ratio of GDP (CPGDP) with PLR negative and insignificant, MSGDP impacted positively on CPGDP. Consequently, the study concluded that the impact of financial sector liberalization on the performance of the Nigerian economy is mixed. That is, while the significant positive impact of RDR on SAGDP indicates that financial liberalization stimulates growth in savings, the insignificant negative impact of prime lending rate on credit to the private sector indicates that financial liberalization does not stimulate credit to the private sector. The study thus recommended thatmonetary authorities particularly the Central Bank should determine an appropriate monetary policy rate that will keep both real deposit rate and the prime lending rate moderate. This will ensure that the prime lending rate is not too high to discourage borrowing for productive investment by the private sector and at the same time the real deposit rate is kept not too low to encourage saving.