THE IMPACT OF FINANCIAL MARKET DEVELOPMENT ON ECONOMIC GROWTH IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

Financial markets play a vital role in shaping the economic setting of nations, influencing resource allocation, investment decisions, and overall economic growth (Levine, 2005). In Nigeria, the development of financial markets has been a focal point for policymakers and economists alike, as the country seeks to strengthen its economic foundations and enhance long-term sustainability (Oseni and Adelegan, 2018). Understanding the relationship between financial market development and economic growth is therefore of paramount importance. In Nigeria's current context, achieving sustainable growth and development is paramount, with the financial market playing a central role. Serving as the compound for capital allocation, risk management, and promoting investment and entrepreneurship, the financial market's impact on Nigeria's economic growth demands thorough investigation (World Bank, 2020). Despite Nigeria's standing as Africa's largest economy, sustaining inclusive growth has proven to be a tough task. Nevertheless, the financial market holds promise as a crucial driver of economic strength. Globally, scholars and policymakers are increasingly acknowledging the difficult link between financial market dynamics and economic growth. Various authors have also articulated different perspectives on financial development. According to the World Economic Forum (2012), it encompasses the components, regulations, and institutions facilitating efficient financial intermediation and markets, alongside widespread access to capital and financial services. Noureen (2013) regards it as key to economic advancement and is widely endorsed by experts in both monetary and development economics. Garba (2014) sees it as the expansion of financial services offering a wider range of options aimed at fostering growth across all sectors of the economy. Theoretical frameworks indicate that a well-functioning financial market, backed by strong regulation and a various range of financial instruments, can stimulate economic growth by channeling savings into productive investments and fostering innovation. Nigeria, as Africa's largest economy, has experienced significant fluctuations in economic performance over the years, influenced by various internal and external factors (Imoisi, 2020). The development of its financial markets, including the banking sector, capital markets, and non-bank financial institutions, has emerged as a key determinant of economic stability and growth. This research aims to explore the economic growth indicators such as GDP growth, investment levels, and impact of financial market development on economic growth in Nigeria. By examining the evolution of Nigeria's financial markets, assessing their current status, and analyzing empirical data, this study seeks to uncover the mechanisms through which financial market development influences employment opportunities.

The impact of financial market development on economic growth in Nigeria has been a subject of considerable interest and research in recent years. Financial markets play a crucial role in mobilizing savings, allocating capital, and facilitating investment, all of which are essential for economic growth and development. As such, understanding the relationship between financial market development and economic growth is of great importance for policymakers, economists, and investors alike. In Nigeria, a developing economy with a diverse set of challenges and opportunities, the role of financial markets in driving economic growth is particularly significant. The period from 2019 to 2024 has seen various initiatives and reforms aimed at enhancing the efficiency and effectiveness of Nigeria's financial markets, including measures to improve market infrastructure, strengthen regulatory frameworks, and promote financial inclusion. Several studies conducted within this timeframe have examined the relationship between financial market development and economic growth in Nigeria. For example, a study by Akpan and Isihak (2019) analyzed the impact of stock market development on economic growth in Nigeria, finding a positive and significant relationship between the two variables. Similarly, Ogunbiyi et al. (2020) explored the effects of financial market deepening on economic growth in Nigeria, highlighting the role of improved access to finance in driving productivity and investment.

However, it is essential to recognize that the relationship between financial market development and economic growth is complex and multifaceted. Factors such as financial stability, institutional quality, and macroeconomic conditions can all influence this relationship. Moreover, the effectiveness of financial market policies and interventions may vary depending on the specific context and implementation.

In this chapter, we will delve into the existing literature on the impact of financial market development on economic growth in Nigeria, drawing on empirical evidence and theoretical insights from recent studies conducted between 2019 and 2024. We will examine the key mechanisms through which financial market development can affect economic growth, identify the main channels of transmission, and assess the policy implications for fostering sustainable and inclusive growth in Nigeria's economy.

1.2 statement of the problem

Considering a feedback effect from financial markets to firms’ real decisions generates a display of implications for the study of financial markets and corporate finance. Often, phenomena that are believed to be confusing can be reorganized in a model in which financial markets have real effects. There is a distinction with the “traditional” view of security prices, in which cash flows affect prices, but prices have no effect on cash flows. Our focus here is on models that exhibit endogenous feedback, i.e., via learning or incentives. Several papers in the literature generate related implications based on models with exogenous feedback, i.e., where firm value or the firm’s investment decision is assumed to be mechanically tied to the price; Hanna and Sonti (2004) and Ozdenoren and Yuan (2008). Nigeria's limited access to finance, particularly in rural areas, is well-documented. According to the World Bank's Global Findex database (2017), only 40% of adults in Nigeria have access to formal financial services. This limitation is attributed to factors such as inadequate banking infrastructure (Ajayi, 2019), high transaction costs (World Bank, 2019), and stringent lending criteria by financial institutions (Ogundipe and Lawal, 2019). The reliance on informal financial channels like rotating savings and credit associations (ROSCAs) is highlighted in studies such as Adegbite et al. (2018), which underscore the challenges faced by individuals and businesses in accessing affordable and reliable financial services. Nigeria's financial markets are susceptible to volatility and instability due to various internal and external factors. Internal challenges such as political uncertainty and weak governance are well-documented (Economic Intelligence Unit, 2020), while external factors such as fluctuations in global oil prices impact Nigeria's economy significantly (World Bank, 2020). Security challenges, including insurgency and civil unrest, further exacerbate economic uncertainty (Osemene and Uwubanmwen, 2021). These issues are extensively discussed in academic literature and reports from organizations such as the International Monetary Fund (IMF) and the Nigerian Stock Exchange (NSE). Weaknesses in Nigeria's regulatory framework have been widely acknowledged in academic literature and policy reports. Studies by Adegbite and Ayadi (2019) and Ezejiofor et al. (2020) highlight regulatory gaps and loopholes that allow for fraudulent activities and market manipulation. The need for regulatory reforms to strengthen oversight and enforcement mechanisms is emphasized in reports by the Securities and Exchange Commission (SEC) and the Central Bank of Nigeria (CBN). Nigeria's underdeveloped capital markets have been extensively studied by researchers and financial analysts. Reports from institutions such as the African Development Bank (AfDB) and the Nigerian Economic Summit Group (NESG) discuss challenges related to limited liquidity, inadequate market infrastructure, and a narrow investor base. Studies by Olawale& Dada (2019) and Uchenna et al. (2020) highlight the importance of deepening capital markets through regulatory reforms and investment in market infrastructure. The issue of financial inclusion in Nigeria is well-documented in academic research and policy reports. Studies by Alimi et al. (2018) and Ogunleye and Olatunji (2020) explore barriers to financial inclusion, including limited physical access to banking infrastructure and low levels of financial literacy. Reports from the World Bank and the Alliance for Financial Inclusion (AFI) emphasize the importance of enhancing financial literacy and expanding digital financial services to promote financial inclusion.

1.3: Objective of the study

The general objective of this study is to examine the impact of financial market development in economic growth in Nigeria. However, the specific objective is to:

To examine the impact of financial market access on gross domestic product in Nigeria.
To examine the impact of financial market depth on gross domestic product in Nigeria.
To examine the impact of financial market efficiency on gross domestic product in Nigeria.

1.4: Research questions

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