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The historical analysis broadly highlighted various retrogressive characters of the state These characters were captured as dummy variables in the econometric analysis which showed from the co-integration test that economic structures were indeed in existence between the financial development proxies and the economic growth proxy. The Granger Causality test demonstrated unequivocally that there was no causality from banking sector data or financial market data to economic growth irrespective of the fact that a steady growth in Gross Domestic Product and indeed banking and financial market data was experienced over the years. This lack of causality in the face of steady economic growth was attributed to the Nigerian economy’s over reliance on oil exports to support the prebendalistic character of successive governments a phenomena classified as the natural resource trap (Collier 2008). Following elements of grounded theory research adopted in the study, the secondary data used as the basis of the historical review was analysed in a selective process against the questionnaire data while the interpretation of the econometric analysis was also selectively analyzed against the interview data. As an outcome of these various analytical processes, a theory was grounded as a modification of the existing ontology of the finance-growth relationship stating clearly that the character of a state is a valid endogenous character in determining the direction of causality of financial development on economic growth in developing economies.

1.1.3 Limitations of Study This study is limited to the Nigerian socio-political and socio-economic environment and inductions made at the end of the study are based entirely on the findings from the Nigerian environment. The characters of the state examined in this study were ethnicity, prebendalism, civil war and military governance which the researcher considered as peculiar landmarks in the country’s political and economic history and also considered to be representative of most African nations with a history of colonial rule. A further limitation of this study is access to classified government documents in which place secondary data was employed. The results generated from this study can only be classified as being equivalent to the quality of data used in carrying out the study; data sources even though thoroughly scrutinized for validity and originality may not always be valid particularly when dealing with data from developing countries where record management remains a vital issue. As a means of overcoming this problem however, triangulation of data sources was used in the data analysis process such that data from one source was used to validate data from another source for consistency.

The data sources employed in this research may also be limited in accuracy due to the probability of distortion which is one of the main problems with secondary data (Gay and Diehl, 1992). Furthermore, in the course of the research, it was observed that most government departments do not maintain proper information management systems.

As mentioned in the section on data sampling in chapter three, the small sample set used to gather the primary data no doubt raises questions of generalizability of findings but a bigger sample of respondents was difficult to gather as questions asked both in the interview and questionnaire survey explored issues of Nigerian identity which had emotional and legal restrictions such as the civil war and use of law enforcement agents by government agencies to rebuff opposition as portrayed in the historical review. In spite of this limitation, opinions expressed in the questionnaires by the respondents were personal but formed the basis of a national pulse balanced across geopolitical/ethnic zones. A very positive aspect of the small sample size was that the researcher was able to relate more closely with the respondents which had the advantage of making them relaxed and more committed to the data gathering process thereby improving the quality of the data gathered and providing a basis to eliminate any potential or anticipated bias from the respondents. Furthermore, the process of triangulation of three data sources (historic case review, primary data (interview and questionnaire) and econometric analysis) served as a cross reference validation of sources of data and findings.

1.1.4 Delimitation Without making reference to particular authors, it can be said that the problem of ethnicity in Nigeria and Africa has no doubt affected writers of African economic and political history in remaining critical of negative developments within their native ethnic groups when such critique could ultimately enhance the existing body of knowledge.

1.1.5 Assumptions A major assumption embodied in this study is that the population selected for the questionnaire survey and interview reveals the true Nigerian identity. The Nigerian community is multi-ethnic comprising of fifty two ethnic groups scattered around various religious, educational and social backgrounds. A further assumption is that the various choices of secondary data were written without ethnic bias, the reason why the secondary data sources were selected from writers across different ethnic groups to enable the minimization of ethnic bias.

1.2 RESEARCH QUESTIONS/HYPOTHESIS 1.2.1 Research Questions

1. Is the Finance-Growth theory as normally applicable relevant to developing economies?

2. What impact does the essence or character of the state have on causality of financial development on economic growth?

1.2.2 Sub-Questions

1. Is there evidence of causality between financial intermediary and financial market proxies on economic growth from the Nigerian economy as a prototype of a developing economy, the focus of this study?

2. Is there a skewed preference for investment capital between financial intermediaries and financial markets in Nigeria?

3. What has been the role of financial intermediaries and financial markets in allocation of capital to areas of deficit funding?

4. Has ethnicity been a factor hindering the development of a strong financial system in Nigeria?

5. What impact has the military had on the development of financial systems and overall economic growth?

1.2.3 Sensitizing Propositions Is there evidence that the Finance-Growth theory is only applicable in developed economies run by stable democratically elected governments supported by advanced political and economic institutional structures? What role does the character of the state therefore play in applying the theory to developing economies particularly those with a history of ethnic politics and military governance? Evidence from Galbis (1977:59) and King and Levine (1993) suggests that governments in less developed countries often play a role which is prone not only to destabilize financial markets but also to truncate their growth by fostering the growth of parallel financial institutions which render financial development policy further redundant.

1.3 BACKGROUND TO STUDY My main motivation for pursuing this research stems from my desire to understand the key driver of the Nigerian Economy as a means of alleviating the crunching poverty faced by many Nigerians today in the midst of so much natural and intellectual capital the country is endowed with. My intention is to produce high quality research that will filter into public policy debates as a means of laying the ground work for a future career in the Nigerian public sector.

The principle of free markets is a direct consequence of democratization and is applicable in its true sense only under democratically elected governments (Friedman, 1962:8-9). Under military governance, there is therefore concern as to how markets can grow and function effectively. The Central Bank of Nigeria (CBN) under the headship of Professor C.C. Soludo its former Governor decided to follow a path of financial development to economic growth. It tagged the programme “The Financial Systems Strategy 2020”. The fundamental aim of the programme was to restructure and enhance the financial services industry by the year 2020 to be able to deliver growth oriented returns to investors. Professor Soludo delivered several lectures to members of the Central Bank of Nigeria and Senators of the Federal Republic of Nigeria in which he cited evidence of the potential of financial development to drive economic growth using published works particularly of Joseph Schumpeter and Ross Levine. As an initial step, the banking sector was reformed by raising the minimum capital requirement of Nigerian banks ten fold leading to a wave of mergers and acquisitions directed at increasing the capital base and financial liquidity of these banks.


This study is significant because it examines the socio-political and socioeconomic trends in the Nigerian society from independence to date. These trends studied both quantitatively and qualitatively have the advantage of revealing issues and trends that were not in the original scope of this research. The overall advantage of this study is that a clearer understanding of the causal nature of financial development on economic growth in SubSaharan Africa offers the probability of alleviating the continent from poverty as well as tying it into other financial markets around the world bringing the benefits of globalization and economic well being to Africans in general (Collier 2008).

The scope of this study is restricted to the Nigerian Social, Political and Economic arena from independence in 1960 to 2007.

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2.1 FINANCE AND GROWTH 2.1.1 Existing Views An enormous wealth of literature exists relating financial development indicators to economic growth from two varied points of view. Some economists are of the view that financial development leads to economic growth while others are of the view that economic growth brings about financial development. Early pioneers of the literature like Bagehot (1873), Schumpeter (1911), Gurley and Shaw (1955) and Goldsmith (1969) strongly belief that the former is the case while more recent researchers like Robinson (1952) and Lucas (1988) queue behind the latter opinion Lucas indicating that the entire dialogue has received too much attention. McKinnon (1973) presents an economic development hypothesis that upholds the use of domestic capital markets as drivers of economic development in developing economies rather than inflow of foreign capital. His analysis details the need to use interest rates as an indicator of the actual volume of capital available in an economy for investment, implying an inverse relationship between interest rate and volume of capital. Levine (2004) further cites the views of other researchers such as Bagehot (1873), Gurley and Shaw (1955) and Goldsmith (1969) supportive of the fact that financial development leads to economic growth. Lucas (1988:41) clearly stands out in his position that different economies require different patterns of growth thereby implying that either of the two views above could be applicable to different economies. Greenwood and Smith (1997) are of the view that financial development spurs economic growth and economic growth leads to further financial development. Miller (1998) warns of the dangers inherent in depending on traditional bank loans to finance growth due to depositor’s free will to draw on their bank balances;

he cites the example of financial crisis in Southeast Asia as an underdependence on financial markets to fund growth initiatives against a preference for bank funds. This view of Miller’s incidentally constitutes another key division in the literature; some proponents strongly believe that a banking sector based financial system is superior to a financial market based system while others such as Alam and Hassan (2003) unequivocally uphold the reverse, arguing that stock market development granger causes growth in GDP (a proxy for economic growth). The United States and The United Kingdom due to properly dispersed and efficiently run financial markets it can be argued are able to manage pockets of financial crisis in their financial systems due to the alternative role markets play relative to traditional bank capital.

Goldsmith (1969) employs a three tier approach to investigate the relationship between financial structure and economic development. Goldsmith’s first case was to establish the potential of change in nature of financial instruments, markets and institutions in a country as the country experiences economic growth; evidence from his research demonstrates that banks had the tendency to grow much faster than other non-banking financial institutions and the stock market. Secondly Goldsmith attempted with limited success to show that financial development imposes a causal effect on economic growth. To demonstrate this relationship he employed a graphical method to show that the movement of indicators representing these two variables (using time series data from thirty five countries) were indeed positively correlated. Due to a lack of data, he was unable to draw a strong conclusion on his third case which was to establish how the nature of a country’s financial structure affects the speed of economic growth; Goldsmith sought to use direct evidence from Germany and the United Kingdom, The United States and Japan to argue that increased financial development had a positive impact on the speed of economic growth. Loayza (2004) however argues that financial development has the tendency to impede economic growth by bringing with it the propensity for financial crisis. He draws his argument from existing literature such as Caprio and Klingebiel (2003) amongst others to show that financial development in the short term leads to negative consequences of volatility and crisis resulting in stunted and often negative growth but as the system further matures in terms of credit control and management, faster and more rapid economic growth may be experienced.

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