IMPACT OF FINANCIAL SECTOR DEVELOPMENT ON SECTORIAL GROWTH IN NIGERIA: IMPLICATION FOR ECONOMIC GROWTH IN NIGERIA

SECTION ONE

Introduction

Basically, the banking sector and the non-bank institutions make up the financial system in Nigeria which is responsible for the development of economic growth in the Country. During the pre-liberalization era (from 1986 and below), government had sufficient financial resources to finance a reasonable proportion of economic activities (Adegbite, 2005). However, this era suffered from artificially low cost of commercial credit resulting in inappropriate pricing of credit and deposits, acute scarcity of loanable funds in the system and lastly low level of capital formation for economic development. Studies reveal that the flow of credit to the priority sectors did not meet the prescribed targets and failed to impact positively on output and domestic prices (Nnanna, 2001; Mordi, 2009).

In an attempt to make the financial sector buoyant, the government decided to deregulate and liberalize all the sectors of the economy as outlined in the Structural Adjustment Program introduced in1986. During this period, interest rates were low and this eased the flow of credit to the desired sectors of the economy. By 1992, the number of banks had risen from 56 in 1986 to 120 and a capacity utilization rate of 38.1%, while the GDP rate stood at 2.9%. Due to the banking distress from 1994 to 2002, the total number banks dwindled to 99. However, the capacity utilization rose to 48% with an increased growth rate of 4%. This was due to recapitalization process undertaken by the Central Bank of Nigeria (CBN) to sustain the financial sector, hence, making it competitive.