THE DETERMINANT OF SAVINGS IN A DEREGULATED ECONOMY (THE NIGERIAN CASE)
ABSTRACT
This paper examine the determinants
of savings in a deregulated economy in the light of the Nigeria
experience during the period 1986-1993 and 1994- 2004. That is during
SAP and Post SAP era respectively. The methodology involves the use of
survey method for data collection and utilized simple and multiple
Regressions for analysis. These techniques were used to test the impact
of the SAP policies on savings habit of Nigerians DURING and AFTER SAP
era. The study also utilized the correlation analyses to establish the
extent and nature of relationship between the following: Real Per Capita
Income and Savings; Investment and Saving; Total Domestic credit, Real
Interest Rate and Savings; and consumption and savings in a deregulated
economy. Secondary data used were from official sources such as central
Bank of Nigeria (CBN); Annual Reports, the CBN. Statistical bulletin for
various years and Nigeria Deposit Insurance Cooperation
(NDIC).Meanwhile, it is found that
the saving rate rises with both the level and the rate of growth of
deposable income and the magnitude of the impact of the former is
smaller than that of the latter. The real interest rate on bank deposits
has a significant positive impact, but the magnitude of the impact is
modest. Also, it was found that the magnitude of the impact and foreign
Domestic investment actually contributed significantly to the savings
rate of Nigeria’s economy. Consumption on the other hand, did not have
significant impact on the savings rate of Nigerians during the period
1986- 2004Moreover, in the course of the study, it is noticed that
public saving seems to crowd out private saving but less than
proportionately suggesting that public policy can influence the national
saving rate. Among the other variables considered, the spread of
banking facilities in the economy seem to have a positive impact on
savings and with the Foreign Domestic Investment as proxy for economic
liberalisation having a wide impact on the savings habit of Nigerians.
We observed that there was a low trend rate of savings during the SAP
era as against the positive feedback in Post SAP era. How ever,
government should avoid drastic policy reversal but rather, it should
concentrate efforts in fine-tuning the existing policy measures which
will not only compel prudence on the part of the major operators in the
financial market but also will stimulate savings behaviour of all
economic agents. This will go a long way at enhancing funds’
mobilization in the country.
CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Banks are statutorily vested with the
primary responsibility of financial intermediation in order to make
funds available to all economic agents. The intermediation process
involves moving funds from surplus sectors/units of the economy to
deficit sectors/units (Uremadu, 2002;Nnanna, Englama and Odoko, 2004).
The extent to which this could be done depends on the level of
development of the financial sector as well as the savings habit of the
populace. The availability of investible funds is therefore regarded as a
necessary starting point for all investments in the economy which will
eventually translate to economic growth and development (Uremadu, 2006).
In Nigeria, Nnanna, Englama and
Odoko(2004) are of the view that the level of funds mobilisation by
banks is quite low due to a number of reasons, ranging from low savings
deposit rate to the poor banking habit or culture of the people.
According to them, another disincentive to funds mobilisation is the
attitude of banks to small savers and this depends on the interest rate
policy of the government.
Interest rate policy is among the
emerging issues in current economic policy in Nigeria in view of the
role it is expected to play in the deregulated economy in inducing
savings, which can be channeled to investment and thereby increasing
employment output and efficient financial resource utilization.
According to Okorie (1993), in his review of interest
rate policy in Nigeria stated that performance of interest rate policy
is to directly stimulating investment on the one hand, and in mobilizing
financial savings and their utilization in investment on the other.
Moreover, McKinnon and Shaw (1973), view
administered low interest rate as detrimental to increases savings and
hence investment demands. They argued that high interest rates induce
savings, which can be utilized in investment.
Thus, there are two transmission channels through which interest rates affect investment.
They relate to investment as cost of
capital. Also, interest rate increases per capita income, according to
Uremadu(2006b), increase in per capita income will impact positively or
encourages financial savings, which can be invested (self financed) or
lent out to borrowers as loans (external finance).
Many studies have investigated these
transmission mechanisms, which tallies with interest rate policy regimes
articulated in Nigeria prior to and after the 1986 economic
deregulation.
Rama (1990) investigated
the theoretical and empirical determinants of private investment in
developing countries and identified macroeconomic and institutional
factors, such as financial repression, foreign exchange shortage, lack
of infrastructure, economic instability, aggregate demand, public
investment, relative factor prices and credit availability as important
variables that explained private investment, Rama(1990) noted that
empirical results were diminished by errors in measurement of economic
variables and research methodology. Balassa (1989) made
similar observations in his review of the effects of interest rates on
savings in developing countries. In an effort to examine the response of
investment to interest rate changes during stabilization programmes, Hall (1977)
discussed the view that stabilization policies affect short term
interest rates while long-term rates are more responsive to investments.
Theoretically, he concluded that since short-term interest rates are
the appropriate rate used in calculating cost of capital in investment
decisions, the relationship between term structure of interest rates and
investment needs empirical classification.
The observed level of savings in most
developing economies especially Nigeria which is a manifestation of low
productive base, may have become endemic due to the prevailing high
degree of repressiveness of their respective financial sectors. With
financial repression, a country will experience a shortfall amongst
domestic savings, consumption and desired level of investment. In order
to remove that bottleneck, Nigeria embarked upon the reformation of her
economy, which is witnessed in the introduction of the Structural
Adjustment Programme (SAP) in 1986. This point will be better highlighted.
1.2 STATEMENT OF PROBLEM
Saving is one of the most important
macroeconomic variables in any economy because of its effect on the rate
of capital accumulation as well as productivity and its impact on the
degree of dependency of a nation on foreign capital and foreign
ownership of domestic assets.
In recent time, economic analysts have
been using a country’s absolute level of saving and its level relative
to that found in other countries as a yardstick for measuring the
capability of a country to achieve sustainable growth and development on
the one hand, and for measuring the difference between the rate of
growth in one country and the other.
“Raising our personal savings rate is
important if we are again to enjoy rapid productivity growth and success
in international competition. It is no accident that Germany and
France, with national savings rate twice that of the United States, have
had twice as rapid productivity growth while the Japan with a savings
rate three times that of Nigeria has enjoyed three times as great a
productivity growth rate over the last fifteen years.
Meanwhile, the basic reasons for the
introduction of SAP are to improve saving behaviour of the people
through deregulation of interest rate and exchange rate liberalization.
These two principles are related and also affect the decision to
consume, save and invest. Thus, the reform of the financial sector is
given greater attention in the economic adjustment programme because of
the critical role these variables play in “stimulating and sustaining
economic growth. However, the natures of the policy and institutional
reform processes have created serious repercussions (negative or
positive) on the nation’s economy. Afolabi and Mamman (1994) investigate
the impact of deregulation on the marginal propensity to save in
Nigeria. The broad objective of the study is to determine the
composition effect of structural adjustment policies including
deregulation on saving behaviour and hence estimates the extent to which
adjustment reforms have promoted or reduced savings in Nigeria. Using
the error correction model, the authors estimate the equilibrium value
of the marginal propensity to save before the implementation of SAP at
0.12 and 0.23 during the SAP period, giving an increase of 0.11. Afolabi
and Mamman (1994) therefore concludes that the policies perused under
the structural adjustment programme particularly those related to funds
mobilization have had positive effect on savings behaviour in Nigeria.
In a subsequent study by Nyong (1997)
following the Afolabi and Mamman (1994) paper, Nyong’s findings
contradict the authors’ results since these results are mixed. It
behooves on academics and policy makers to know the exact behaviour of
savings during the SAP period and Post SAP period extending to 2004. In
particular, Nyong finds that the savings rate had not increased during
SAP but rather fell by 0.26% during the SAP period. This study will
extend the previous studies to 2004 to know whether the available
results are still correct.
1.3 OBJECTIVE OF STUDY
The broad objective is to show the
composite effect of the various policies pursued under SAP on saving
attitudes of the economic agents in the country. Based on the
aforementioned above, the objective of this study in specific terms
includes:
- To determine the impact of National Income, interest rate and Bank Branches on the Savings habit of Nigerians within the period 1986-1993 and 1994-2004.
- To determine how savings contributed towards economic growth in Nigeria within the period 1986-1993 and 1994-2004.
- To find out if national saving contribute to investment and ultimately economic growth (1986-1993) and (1994-2004).
- (iv)To find out if Consumption have significant impact on the savings habit of Nigerians within the period 1986-2004.
1.4 RESEARCH QUESTIONS
A research question is a statement that
identifies the phenomenon to be studies. This research work will be
based on those research questions which will help in creating an insight
into the problem under study, these question’s given the objective(s)
of the study are:
- Of what significance is interest rate on the saving habit of Nigerians?
- What is the impact of National Income and Bank Branches on saving behaviour of people within the period 1986-1993 and 1994-2004?
- What is the impact of Foreign Direct Investment and Total Domestic Credit on the economic growth in Nigeria within the period 1986-1994 and 1994-2004?
- Does national saving contribute towards investment and ultimately economic growth?
- Is there significant impact of consumption on savings of Nigeria within the period 1986-2004?
1.5 STATEMENT OF RESEARCH HYPOTHESES
The following working hypotheses will
serve as aid jointly in answers to the questions raised above, and on
which basis data will be collected, analysed and interpreted. These
hypotheses in specific form are:
HYPOTHESIS ONE:
Ho: There is no significant impact of
Real Per Capita Income, Real Interest Rate and Bank Branches on the
National Savings habit of Nigerians within the period 1986-1993 and 1994
– 2004.
Hi: There is Significant impact of Real
Per Capita Income, Real Interest Rate and Bank Branches on the National
Savings habit of Nigerians within the period 1986-1993 and 1994 – 2004
HYPOTHESIS TWO:
Ho: Savings determinant did not contribute significantly towards investment within the period 1986 – 1993 and 1994 – 2004
Hi: Savings did contribute significantly towards investment within the period 1986 – 1993 and 1994 – 2004.
HYPOTHESIS THREE
H0: Total Foreign Domestic Investment and
Total Domestic Credit did not have a positive impact on saving habit of
Nigeria within the period SAP and Post SAP.
H1: Total Foreign Domestic Investment and
Total Domestic Credit did have a positive impact on savings habit of
Nigeria within the period, SAP and Post SAP.
HYPOTHESIS FOUR
H0: Consumption did not have significant impact on the savings habit of Nigerians within the period 1986 – 2004
Hi: Consumption did have significant impact on the savings habit of Nigerians within the period 1986 – 2004
1.6 SIGNIFICANCE OF THE STUDY
Saving is an important part of any
sustainable economy development and growth. Countries which have high
savings rate automatically will have a rapid economic growth and
development. Historical evidence and empirical analysis indicates that a
high level of domestic saving will accelerate the rate of capital
formation, enhance productivity and consequently improve the standard of
living of the general populace. Meanwhile, this study will provide
resource materials to all students of Banking and Finance,
Administrators, practicing consultants etc.
By the time this study is completed,
adequate awareness would have been created as to the effects of
deregulation on the savings habit of Nigerian. It is hoped that the
project will assist the policy makers of the nation-The Executives
council, the legislators and the judiciary, including the financial
institutions to accurately fix their interest rate level that will not
be too strong to the saving behaviour of the Nigerian economy.
Meanwhile, the study will be concluded
with a result about whether there is a composite effect of savings in a
deregulated economy, a case of Nigeria economy.
Finally, on completion, the study will
serve as a fulfilment of a requirement for the award of Master of
Science (M.Sc) Degree in Banking and Finance.
1.7 LIMITATIONS OF THE STUDY
The study of this research topic is
limited to sample size of 19 years i.e. 8years SAP and 11years post-SAP
(1986-1993 and 1994-2004). Data were presented in tabular, bars and
graphic forms and analysed using the simple and multiple linear
regression models. Data were run using the Microsoft Excel packages-the
Statistical Package for Social Science (SPSS).
1.8 SCOPE OF THE STUDY
The scope of this research work covers
the Nigerian economy-National saving rate comprising the public and
private domestic savings. Public savings include savings by general
government and savings by the public sector corporations.
1.9 DEFINITION OF TERMS
Terms as used here imply those key words,
which in the course of the research work are employed by the researcher
in conveying the technical/operational meaning of what is intended.
Prominent among these as contained in this study include:
- SAVING: The portion of disposable income not spent on consumption goods but accumulated or invested directly in capital equipment or in paying off a home mortgage or indirectly through purchase of securities. According to Umoh,2003 and Uremadu, 2005),”saving is that part of the disposable income of the porie which has not passes into consumption”. Savings = Income-Consumtion.
- INTEREST RATE: It is defined according to Lipsey, Courant, Doughas and Steiner (1993. 473) as “the price that is paid to borrow money for a stated period of time and is expressed as a percentage amount per dollar borrowed. For example, an interest rate of 12 percent per year means that the borrower must pay N0.12 per year for every one naira (N1.00) that is borrowed.
- TERMS OF TRADE: Lipsey et al (1993.779) opined that “the terms of trade measures the quantity of imported good that can be obtained per unit of goods exported and are measured by the ratio of the price of exports to the price of imports.
- NOMINAL INTEREST RATE: It means the amount of money paid for making loan available. Example if you pay someone else N108 in one year’s time, N100 will be repayment of the amount of the loan (which is called the principal) and N8 will be payment of the interest.
- REAL RATE OF INTEREST: This measures the real return on a loan, in terms of purchasing power. If the price level remains constant over the year, then a real rate of interest that your friend earns would also be 8 percent, because she can buy 8 percent more goods and services with the N108 that you repay her than with the N100 that she lent you. However, if the price level rises by 8 per cent, the real rate of interest would be zero, because the N108 that you repay her buys the same quantity of goods and services as the N100 that she originally gave up.
- MARGINAL PROPENSITY TO CONSUME (MPC): It relates the change in consumption to the change in disposable income that brought it about, that is MPC = Change in C/Change in Yd. Change in C = Change in consumption while change in Yd = change in disposable income.
- MARGINAL PROPENSITY TO SAVE (MPS): This relates the change in total desired saving to the change in disposable income that brought it about: MPS = Change in S/ Change in Yd. Change in S = change in saving. Note APC = C/Yd, C = consumption.
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