ABSTRACT
The term savings refers to the
part of income immediately spent or consumed but reserved for future consumption,
investment or unforeseen contingencies. This study examines the determinants of
savings in Nigeria between 1985-2011, which will enable us to proffer solution
for the improvement of savings in the economy, since it is an important
component of the economic development of any country. The method of analysis
used in testing the hypothesis are coefficient of multiple determination {R2},
T –test,F-statistics. Data for the study was obtained from the central bank of
Nigeria statistical bulletin, the major findings was that per capita disposable
income{pdy} has a positive and significant impact on aggregate savings in
Nigeria. Based on the findings, some recommendations of policy and suggestions
have been made.
CHAPTER ONE
1:1 BACKGROUND OF THE STUDY
Capital
formation is an important factor of an economy growth. For a country like
Nigeria to attain economic growth, serious effort should be geared towards
capital formation by encouraging savings.
The financial
institution markets, regulators and instrument interact within an economy to
provide financial services such as foreign exchange transaction, financial
intermediation and resources mobilization and allocation.
The financial system in
Nigeria can be categorized into two, the formal (organized) and informal
(unorganized) financial system. The formal financial system is categorized into
capital and money market institutions and these comprises of the banks and non
banks financial institution, while the informal sector is made up of the local
money lenders (Esusu), the thrifts and savings associations, merchants,
shopkeeper or traders, friends and relatives etc. here the system is poorly developed,
limited economic information, defective system of accounting and not integrated
into the formal financial system. But it is very important and plays a major
role in the Nigerian financial system.
Miracle and Cohen (1980) noted that a great bulk of the
African population makes little or no use of formal saving and lending
institutions, because they offer relatively low returns, savers are reluctant
to use formal institutions.
The crucial
role played by the financial system in the economic development of an economy
was recognized by Gold Smith (1955), Cameron (1967), McKinnon (1973), and Shaw
(1973), they demonstrated that the financial sector could be a catalyst of
economic growth if it is well developed and healthy. Over the past decades, the
declining rends in saving rates in Nigeria have been of great concern to the
policy makers and researchers. This is due to the critical importance of
savings for the maintenance of strong and sustainable growth in the world
economy especially in Nigeria. A sound, developed, healthy and reliable
financial system relate to saving mobilization efficient financial
intermediaries roles, is first to reduce hoarding and help spread the risk
between household and firms.
Secondly, hey
create liquidity in the economy by borrowing short term and lending long term
loan. Thirdly disseminate information between ultimate lenders and ultimate
borrowers there by mobilizing savings from surplus units and channeling them to
deficit units through the help of financial techniques, instruments, and
institution. Fourth, lower interest rate by bringing about stability in capital
market. Fifth, the intermediaries promote development in the financial
transaction. Gibson and Isiaka Lobos (1994). The Nigeria financial system
comprises he regulatory/supervisory authorities, bank and non bank financial
institution.
As at the end of 2007, the system comprised of the
regulatory/supervisory authority. The Central bank of Nigeria (CBN), the Nature
Insurance Commission (NAICOM), the Nigeria Deposit Insurance Corporation
(NDIC). The Securities and Exchange Commission (SEC) and finally the Federal
Mortgage Bank of Nigeria (FMBN). The CBN is the principal regulator and
supervisor in the money market followed by deposit money banks (DMBS), Discount
Houses, the people bank of Nigeria and Community Banks. The CBN exclusively
regulates the activities of the finance companies and promotes the
establishment or specialized or development financial institution.
The
security and exchange commission (SEC) is the apex regulatory authority in the
capital market. The Nigeria stock exchange (NSE) is a self regulatory or user
regulatory institution. The issuing house, registrars and stock brokers, who
also interact with the money market, complete the chain the capital the NAICOM
is the regulatory authority in the insurance industry while FMBN regulates
mortgage finance activities in Nigeria.
Saving
refers to the part of income not immediately spent or consumed but reserved for
future consumption, investment or unforeseen contingencies, it is considered as
an indispensable weapon for economic growth and development. Its role is
reflected in capital formation through increase in capital stock and the impact
its makes on the capacity to generate more and higher income.
Savings can also be known as a sacrifice of current consumption that
provides for the accumulation of capital, which in turn, provides additional
output that can potentially be used for consumption in the future(GERSOVIZ
1988).in other words savings is the different between current earnings and
consumption. We can also define savings as he deposit and saving ability
acquired by the organized financial institution including bank and non banking
financial intermediaries or it is described as a financial accumulated by the
public, both government and private agents in the organized financial channels.
These financial assets include savings and time deposit in the banking
institution provident funds, insurance premium stocks and bonds etc.the
intermediation process involves moving funds from surplus sectors of the
economy to deficits sector units(Nnann and Englama 2004).To expand financial
savings involves shifting of fund from the personal and household sector to the
business or corporate sector which in turn leads to greater investment, income
growth, employment and capital formation, which cannot be achieved without
increasing the rate of savings.
Nigerians savings still falls below the requirement of its financial
system due to low per capital income, under investment in productive
instruments, and investment in unproductive channels e.g. Glod, jewel, income inequalities and
demonstration effects, etc.to remedy this problem depend on the level of
development of the financial sector mentioned above as well as the saving habit
of the citizens. The availability of investible funds can be a starting point
for all investment. In the economy which will eventually translate to economic
growth and development (Uremadu 2006).
The relationship among savings, investment
and growth has historically been very close, hence the unsatisfactory growth
performance of several developing countries, example Nigeria, has been
attributed to poor savings and investment. This poor growth performance has
generally led to a dramatic decline in investment. Domestic savings rates have
not better, thus worsening the already uncertain balance of payment position,
the role of savings in the economic growth of any country cannot be
overemphasized (Cheta 1999). Conceptually, savings represent that part of
income not spent on current consumption.
Institutions in financial sector like deposit money banks
(DMBS) commercial Banks mobilize savings in an economy, the deposit rate must
be relatively high and inflation rate stabilized to ensure a high positive real
interest rate which motivates investors to save from their disposable income.
In Nigeria
Odoko and Englama (2004) are of the view that the level of funds mobilization
by financial institution is quite low due to a number of reason, ranging from
low savings deposits rates of the poor banking habit or culture of people.
According to them another impediment to funds mobilization is the attitudes of
banks to small savers.
Another limitation of saving mobilization is the fact that
the concentrations of banks are heir offices are based in favour of urban
areas. Among the reasons for this, is the fact that the established banks under
rate the volume of savings seeking to be mobilized and channeled into productive
investment in the rural areas. It is often argued that since the rural economy
operates at a near subsistence level, there is very little that can be squeezed
out of income and consumption. Because of this, it has not been realized that
the large volume of idle funds, through is small units per individuals exist in
the rural areas.
In
Nigeria there is basically lack of incentives to savings which had adversely
affected savings. Some of these factors include poor banking habits, attitude
of banks to small savers, poor orientation, unemployment, instability in the
political system etc, corrupt taxation system, instability in banking system
etc. one of the problems of mobilizing savings and deposits has always been a
major problem for economic growth and development in Nigeria.
According to Friedman (1952) the impact of health on saving
has been long recognized in theory, but its effect on the aggregate savings
have been considered to be over shadowed by another factor, inflation causes
price of tangible assets to rise sharply and changes in net worth based on
rising market value giving the illusion of well being the magnitude of the
impact of wealth on saving rate may have the reassured experiences of economic
crisis have highlighted the fact low and declining saving rate have contributed
to generate unsustainable current account deficits in many countries.
The above arguments underscores the fact that there exist a
link between savings and the growth performance of the economy, both in Nigeria
and in the world over. This necessitates the need to carry out a detailed study
of what actually determines the rate of savings in the contexts of Nigeria
economy.
1.2 STATEMENT OF THE PROBLEM
Saving is a
macro-economic variable used to attain economic growth and development
(Wikipedia encyclopedia, 2009). In Nigeria, there is lasting need to further
step-up efforts in mobilizing small savings in both urban and rural areas,
given the poor savings culture of the Nigerian people and the theoretical link
between saving and investment which underscore the importance of savings on the
growth of every economy. When savings are low, interest rate increases and
investments becomes low there will be low income and decrease in the Gross
National Product (GNP) and Gross Domestic Product (GDP) of the nation which
leads to the poor living standard of the people and hinders the depositors from
savings.
This research work would attempt to examine the magnitude
and nature of such variable as interest rate, inflation, income, urbanization
on savings in Nigeria.
1.3 RESEARCH QUESTION
Important
research question that arise include what are then the determinant of saving in
Nigeria economy? Could it be that there are few dominant determinants of saving
due to our poor economy? Could these dominants be consumption rather and
interest or many more? Why is the rate of savings in Nigeria very low? Is it as
a result of saving in Nigeria very low? Is it as a result of policies requiring
further review to make if effective the study intends to answer these
questions?
1.4 OBJECTIVES OF THE STUDY
The broad
objectives of the study are to examine the determinant of savings in Nigeria
economy. However, the specific objectives are as follows.
1. To
determine the impact of savings on the economic growth
2.
To determine whether consumption expenditure is a major
determinant of savings in Nigeria economy.
3.
To determine the magnitude and nature of the
elasticity’s of the savings functions in Nigeria.
1.5 SIGNIFICANCE OF THE STUDY
The findings
and subsequent proposal would be useful to policy makers in policy formations.
This study as believed by the researchers would go a long way in contributing
to the academic development of the theories of determinant of savings in
Nigeria, student of economics and other related fields, would find the study
very useful and would serve as a reference point to future researches who might
want to research further on the topic.
1.6 STATEMENT OF THE HYPOTHESES
H1:
the determinant of savings in Nigeria cannot be ascertained
H2: the magnitude and
nature of the elasticities of the savings functions in Nigeria cannot be
determined.
H1:
the factor that influence savings have no significant determinant in
Nigeria.
H2:
saving has no significant impact on economic growth.
1.7 SCOPE AND LIMITATION OF THE
STUDY
The scope of
this study is to estimate and evaluate the determinants of savings in Nigeria
(1980-2008). The research has been contained by lack of fund, human error and
limited time frame which imposed difficulties when serious attempt to effect a
general in depth towards the study of the determinants of saving in
Nigeria.