Financial Sector Issues
and
Economic Development 
in Nigeria
Edited by:
Olanrewaju Olaniyan 
Akanni Olayinka Lawanson 
Babatunde Alayande
IBADAN UNIVERSITY LIBRARY
Ibadan University Press 
Publishing House 
University of Ibadan 
Ibadan, Nigeria.
© Health Policy Training and Research Programme,
Department of Economics, University of Ibadan, Nigeria 2012
First Published 2012
All Rights Reserved
No part of this publication may be reproduced, stored in a retrieval 
system or transmitted in any form or by any means, electronic, 
photocopying, recording or otherwise, without permission in writing 
ffom the Publisher.
ISBN: 9 7 8 - 9 7 8 - 8 4 1 4 - 9 9 - 5
Printed by :
Deleprints
08060328997. 07029081708
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Contributors
Adeolu O. Adewuyi, Senior Lecturer, Department of Economics, 
University of Ibadan, Nigeria
Babatunde A. Alayande, Senior Manager, National Pension 
Commission, Abuja, Nigeria
Lloyd Amaghionyeodiwe, Senior Lecturer, Department of 
Economics and Development Studies, Covenant University, Ota, 
Nigeria
Omo Aregbeyen, Lecturer, Department of Economics, University 
of Ibadan, Nigeria
M. Adetunji Babatunde, Lecturer, Department of Economics, 
University of Ibadan, Nigeria
Abiodun Bankole, Senior Lecturer, Department of Economics, 
University of Ibadan, Nigeria
‘Tayo Fakiyesi, is Professor of Economics, Department of 
Economics, University of Lagos, Nigeria
Abiodun O. Folawewo, Lecturer, Department of Economics, 
University of Ibadan, Nigeria
Babajide Fowowe, Lecturer, Department of Economics, 
University of Ibadan, Nigeria
Oluseun Ishola, Research Officer, Centre for Management 
Development, Shangisha, Lagos State, Nigeria
Akanni O. Lawanson, Lecturer, Department of Economics, 
University of Ibadan, Nigeria
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E. Olawale Ogunkola, Professor, Department of Economics, 
University of Ibadan, Nigeria
Solomon A. Olakojo, PhD student, Department of Economics, 
University of Ibadan, Nigeria
Olanrewaju Olaniyan, Senior Lecturer, Department of 
Economics, University of Ibadan, Nigeria
Wumi Olayiwola, Principal Programme Officer, Economic Policy 
Analysis Unit, ECOWAS Commission Abuja, Nigeria
Philip Chimobi Omoke, Senior Lecturer, Department of 
Economics and Development Studies, Covenant University, Ota, 
Nigeria
Evans Stephen Osabuohien, Lecturer, Department of Economics 
and Development Studies, Covenant University, Ota, Nigeria
Olugboyega A. Oyeranti, Senior Lecturer, Department of 
Economics, University of Ibadan, Ibadan, Nigeria
M. Abimbola Oyinlola, Lecturer, Department of Economics, 
University of Ibadan, Nigeria
Efobi Rapuluchukwu, Lecturer, Department of Accounting, 
Covenant University, Ota, Nigeria
Afees Adebare Salisu, Lecturer, Department of Economics, 
University of Ibadan, Nigeria
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UNIVERSITY LIBRARY
Foreword
I consider it a great privilege to write the foreword of this second 
volume of the two books written in honour of my good friend for 
over three decades, Professor Adedoyin Soyibo who retired 
formally from the University of Ibadan on 30th September 2011 
although he is still in active service to the national and global 
academic community. As a well deserved way of paying tribute to 
an academician who has been a colleague, friend, and mentor to 
many in the Department of Economics, University of Ibadan, this 
book was put together. I am of a strong persuasion that this is a 
worthy tribute to someone who has contributed tremendously to 
the field of economics and entrepreneur in Nigeria, and Africa at 
large, through his teaching, research, and community service.
With a first class in Mathematics background at first degree, 
Professor Soyibo had his Masters in Management, and doctoral 
degrees from Massachusetts Institute of Technology, Cambridge, 
Massachusetts, USA, and University of Ibadan, respectively in 
1979, and 1983. For more than 31 years, in the course of his 
service at the University of Ibadan, he had the privilege of serving 
as lecturer to more than 5,000 students at both the undergraduate 
and postgraduate (M.Sc. Economics, Business Administration, and 
Banking and Finance) levels. He supervised more than 30 PhD 
students, serving as chairman in more than half of their thesis 
committees. He also pioneered the training of PhD students in the 
field of Health Economics, and was a founding member of the 
Health Policy Training and Research Programme (HPTRP) in the 
Department of Economics, where he acted as director for more 
than 14 years. His contribution to the convergence of health, 
finance and development in Nigeria and Africa cannot be 
overestimated. During his tenor as the director of HPTRP, he led 
the estimation processes of the first two-rounds of National Health 
Accounts for Nigeria. He is also one of the two foremost African 
professionals in the less than a decade old newly emerging 
research area of National Transfer Accounts (NTA). He contri­
buted to the formation and establishment of the Entrepreneurship 
and Innovation Centre of the University of Ibadan, where he 
served as the pioneering director of the center before moving to
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Durham as a Distinguished Visiting Professor at Duke University, 
USA. He, at various times served as the Dean of the Faculty of the 
Social Sciences, and Head, of Department of Economics, 
University of Ibadan.
While this book cannot adequately express the warmth and 
closeness of the students of Doyin, it is symbolic of the impact of 
his interaction and influence he has over the years had on them. 
The book represents a collection of the various parts of Doyin’s 
contribution to academics. Given the high quality of the collection 
of articles in the book, it will satisfy a range of academic interests 
especially in the field of Financing Sector Development and 
Economic Growth.
Professor Olu Ajakaiye
Former Director General,
Nigerian Institute of Social and Economic Research (NISER) and 
Former Director of Research,
African Economic Research Consortium (AERC), Nairobi, Kenya
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INTRODUCTION AND OVERVIEW
Olanrewaju A. Olaniyan and Akanni O. Law a ns on
This book is the second volume of essays in honour of Professor 
Adedoyin Soyibo who retired from the University of Ibadan on 
September, 2011 after 31 years in service. Given the diverse areas 
of economics that Prof Soyibo had conducted research, it became 
necessary to have two volumes with each volume focusing on 
specific area of economic research. The first volume contains 
papers on health economics where his research has affected both 
policy and practice of health planning in Nigeria. This volume 
contains papers addressing financial sector issues and their 
implication for economic growth. This is because apart from being 
an area o f research by Prof Soyibo, sustainable economic growth 
of any country depends on a virile financial sector management 
and performance. The topics covered in this book, as in the first 
volume, were self-determined by the authors and focus on different 
aspects of the financial sector and how its performance has shaped 
the rate of Nigeria’s economic growth. One of the chapters was 
even derived from a project which he was the principal 
investigator. Following this overview and an introductory article 
on Professor Adedoyin Soyibo, the articles are then presented.
The articles in this book address issues of finance sector and 
growth in Nigeria. In recent years, Nigeria’s financial sector has 
proven to be a major driver of the country’s economic growth. This 
has been traced to the liberalization and deregulation that have 
been introduced in the sector over the years. Fowowe in Chapter 3 
throws more light into the sector by developing quantifiable 
measures of financial liberalization in Nigeria. While most o f the 
earlier studies have examined the effects of financial liberalization 
policies, and these studies typically employ proxies such as interest 
rates to measure liberalization, the chapter develops alternative
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2 0. Olanivan and A. Lawanson
financial liberalization indexes for Nigeria, and gives a summary 
measure of eight liberalization measures and these types of indexes 
will be able to give a more robust result of the effects of financial 
liberalization on macroeconomic variables.
Chapter 4 by Olayiwola, Osabuohien and Rapuluchukwu was 
motivated by the quest for making contribution based on empirical 
evidences in Nigeria with respect to inflation and financial 
development. Long-run dynamics and the short-run phenomena 
were assessed in the study given political and financial episodes 
the Nigerian economy has witnessed. It employed Vector Error 
Cointegration technique within the framework of Autoregressive 
Distributed Lags-ARDL in estimating the formulated model. The 
study found financial maturity, openness of the financial 
intermediaries, stock market development and interest rate to have 
positive effects on the inflation rate in the long-run. It was 
established that inflation has been quite burdensome on Nigeria’s 
financial development. Some implications for both policy and 
research were made in the study.
Following from Chapter 4 above, Folawewo and Olakojo in 
Chapter 5 revisit the empirical investigation of the sources of 
inflation persistence in Nigeria, using a simple accommodating 
monetary policy framework. The model is estimated using the 
ECM technique and quarterly data covering 1970:1 to 2009:4. The 
study showed that the current level of inflation is significantly 
affected by its past levels and real interest rate, while the nominal 
effective exchange rate, imported inflation (measured by US 
inflation) and real GDP have little effect on inflation. An important 
finding of the study is that, like most other studies, inflation 
persistence in Nigeria is more pronounced with floating exchange 
rates.
In Chapter 6, Oyinlola and Fakiyesi note that the 2007/2008 
global financial crisis was triggered by the turmoil in the financial 
sector of the United States, spreading swiftly to other developed 
and developing countries with severe effects that almost halted the 
global output growth. Estimating the effect of the crisis is the 
objective of their study and they found that the effect on Nigeria 
was devastating. The price of crude oil crumbled by about 71% 
between July 2008 and January 2009; the stock market crashed
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Introduction and Overview 3
with a fall in market capitalization and All-Share Index by 67% 
and 62% respectively, between March 2008 and March 2009. The 
external reserve also dropped from $67 billion in June 2008 to $43 
billion in October 2009 while the exchange rate depreciated from 
N118/S to N145/$ between November 2008 and February 2009. 
The crisis entered the economy through two main channels: the 
financial and real sector channels. The channels tended to suggest 
that depreciation of exchange rate and higher-than-target inflation 
rate might persist till the end of 2009. The study suggested that 
government policy should focus on the reform that could diversify 
the foreign exchange inflow base of the economy.
In Chapter 7, Salisu’s attempts to provide a framework for 
modelling and forecasting volatility in the Nigerian stock market. 
The chapter first evaluates the probable incidence of volatility in 
the stock market returns over the period 1985:01 to 2010:12 using 
the pre-tests suggested by Engle (1982). It finds evidence of 
volatility, and consequently subjects the returns to both symmetric 
and asymmetric GARCH modelling. The latter appears superior to 
the former and specifically, the EG ARCH (1,1) model gives the 
best fit using appropriate model selection criteria. Negative shocks 
have the potentiality of increasing volatility of the Nigerian stock 
returns more than the positive shocks of the same magnitude. In 
addition, based on the MAE, MAPE, RMSE and TIC, the 
EG ARCH (1,1) generates the best forecasting perform-ance at best 
for 12-month ahead forecast. Therefore, ignoring the EG ARCH 
framework in the modelling and forecasting of stock returns in 
Nigeria may yield inefficient results and misleading policy 
prescriptions.
In Chapter 8 Amaghionyeodiwe and Omoke investigate the 
effect of corporate governance on bank performance in Nigeria. 
Using a panel data analysis for the period 2000 to 2009 for some 
selected banks, the study found that the board size of a bank and its 
performance was inversely related. Also, a statistical inverse 
relationship was found between the composition of the audit 
committee and the banks’ performance. There was also a positive 
relationship between the independence of the board and the 
firms' performance. These results suggest that firms with a larger
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4 O. Olaniyan and A. Lawanson
proportion of ordinary shareholders on their board will experience 
declining performance, and by implication, it is not just sufficient 
for shareholders to be appointed to the audit committee, they must 
be appointed based on merit and qualifications, and not by 
political, biased, processes. Furthermore, the larger the 
percentage of outside directors, the more likelihood for a non­
performing CEO to be dismissed; hence, it can be concluded 
that for a firm to experience growth, it should have more 
independent directors. Thus, we advocate that structures and 
agencies are set up to ensure that corporate laws, and standards 
set in place, are strictly complied with to achieve effective 
governance of financial firms.
Chapter 9 by Babatunde is based on the assumption that 
African economies have been characterized by weak growth in the 
productive sectors. This is coupled with the fact that the initial 
spurt of industrial growth has been faltering as shown by poor 
export performance and reflected in the falling share of African 
exports in Kworld trade and the unchanged export structure, and by 
increasing debt, a deteriorating economic and social infrastructure 
and increasing environmental degradation. This crisis has 
important implications for the prospects of transforming- African 
economies, as envisaged by African governments. Africa’s 
development challenges go deeper than low income, falling trade 
shares, low savings, and slow growth. They also include high 
inequality, uneven access to resources, social exclusion, and 
insecurity. The stagnation of the African continent has been linked 
to the set of economic reforms imposed by the BWIs irrespective 
of the structural characteristics of economies in Africa. Con­
sequently, it is imperative for a new development policy agenda 
that focuses on domestic demand-led growth in Africa.
In Chapter 10, Aregbeyen further investigates the factors that 
influence the growth rate of private firms in Nigeria with a sample 
of 94 firms, publicly listed on the Nigerian Stock Exchange (NSE) 
during the period 1994-2005. The motive is to provide empirical 
support for policy formulation and implementation with regards to 
government avowed commitment to private firms/sector 
development in Nigeria. The theoretical/analytical framework for
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Introduction and Overview 5
the study is the optimal firm size growth theory. The choice of the 
optimal firm size theory is justified by the fact that it offers us the 
most practical approach. The empirical methodology combines 
descriptive/statistical analysis with econometric analysis. The 
descriptive/statistical analysis was used to characterize the firms’ 
growth rates, while the econometric analysis was deployed to 
identify the firms’ growth determinants. The findings show that the 
significant determinants of the firms’ growth rates are the previous 
year growth rate of the firms, their size, age, capital intensity, 
financial constraints, management efficiency, and the extent of 
vertical integration. However, the significance of these factors 
depends on how growth of firm is defined and/or measured as well 
as the estimation methods.
The objective of Chapter 11 by Oyeranti and Ishola is to 
examine the direction and strength of the relationship between 
taxation, public expenditure and economic growth in Nigeria, 
using time series data from 1970 to 2008. Endogenous growth 
theory as extended by Marrero (2007) forms the theoretical 
framework for the work, while OLS served as the estimation 
technique. The study examines the unit root problem and 
cointegrating properties of the data. The unit root problem was 
tested for by using Augmented Dickey Fuller (ADF) and Philip 
Perron tests. Diagnostic tests employed for cointegration are the 
Engel granger OFS approach and the Johansen and Jeselius test. 
Then the speed of adjustment of the error generated by each of the 
endogenous variables is explored using Vector Error Correction 
(VEC) model; also Granger causality test was carried out. Taxation 
and public expenditure were disaggregated into distortionary and 
non-distortionary taxes, recurrent and capital expenditure 
respectively. Results show that while the recurrent component of 
public expenditure, total distortionary taxes, private capital and 
technology impact positively on economic growth, capital 
expenditure and non-distortionary taxes have a growth inhibiting 
effect. The study recommends that privatization and public-private 
partnership will boost growth, thus the Nigerian government needs 
to come up with more friendly economic policies and business
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6 O. Olaniyan and A. Lawanson
environment, which will make its business climate more 
conducive.
Also Bankole in Chapter 12 sought to determine the potential 
implications of the adoption of the CET on Nigeria’s 
manufacturing sector, by analysing the evolution of the CET in 
Nigeria, the costs and benefits of CET and the performance of 
manufacturing over time. Analysis suggests that the CET resulted 
in substantial reduction of the simple average import tariff rate of 
the manufacturing sector, with all the types of imports have 
exceptionally and substantially increased after the adoption of 
CET; while the upward trends of inputs such as raw materials, 
intermediate and capital goods imports have been unstable. In the 
case of intermediate goods, tariff rate increased faster than for 
consumer goods at first but lost momentum to the latter by 2010; 
exports have also responded to CET-induced import liberalization 
and appears to confirm economists age-long dictum that a ‘tax on 
imports is also a tax on exports’. It is expected that a streamlining 
of the procedural aspects of doing business in Nigeria be combined 
to achieve excellent results in the manufacturing sector. So also, 
the establishment of mitigating measures will be needed, if not for 
the CET regime, obviously for the impending economic partner­
ship agreement with the EU. Government needs to be proactive in 
establishing or strengthening, where applicable, certain elements of 
mitigating measures and safeguards.
In addition, Chapter 13 by Adewuyi analyses the develop­
mental implications of the recent resurgence in the economic 
relations (trade, foreign direct investment-FDI and aid) between 
China and Nigeria with a view to drawing lessons for policy 
initiatives. Analysis shows that Chinese FDI inflows are in the 
range of about 0.13% of the total inflow in 2006. Some of the 
Chinese investments and aid in Nigeria are directed at addressing 
critical gaps in the provision of basic infrastructure, but these are 
not comparable to the level at which the Chinese are seeking 
Nigeria’s oil and gas and other raw materials. The study found that 
while the share of Nigeria’s export to China has been less than 
2.0%, the share of import has risen to about 17.0%. Further, there 
exists inter-industry trade between the two countries. Thus, the
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Introduction and Overview 1
observed structure of trade pattern is inconsistent with Nigeria’s 
quest to diversify export, and export manufactured or processed 
products. Balance of payments position has consistently been in 
favour of China. This suggests the need to examine the structure of 
tariff and non-tariff barriers facing Nigeria’s exports to China and 
find out constraints facing producers and exporters in responding 
fully to market openings.
In addition, Chapter 14 Alayande examines the funded 
pension-financial sector development-economic growth nexus in 
Nigeria by employing vector error correction modelling. While 
previous studies have worked on OECD countries and emerging 
market economies, none has examined this nexus within the 
Nigerian context to our knowledge. Indeed, the existence of 
relationships between the financial sector development, funded 
pension, and economic growth has mainly been conducted within 
the cross-country framework with very few exceptions. The results 
obtained in such analyses are rarely quite easy to interpret, because 
they are based on a fragile statistical basis. In order to account 
adequately for the specificity of the Nigerian situation as well as 
provide the opportunity to analyse the effects of funded pension on 
financial sector development and economic growth, the study 
adopted a time-series analysis of the problem at hand. It found that 
dual causality between funded pension and economic growth 
cannot be rejected and therefore notes that the ongoing reform in 
the financial sector is a step in the right direction given that some 
of the indicators were not significant and came up with wrong 
signs in the growth regressions. The need for the reform is further 
underscored by the fact that causality could not be established 
between funded pension and some of the indicators of financial 
sector development adopted in the study. Generally, all the 
chapters in this book attest to the importance of human capital and 
financial sector issues in the economic development of Nigeria.
The last chapter in the book by Olaniyan and Lawanson 
addresses the issue of demographic transition in Nigeria and how 
changes in population age structure can open windows of 
opportunity for rapid increase in economic growth. The simulation 
in the paper is based on age profiles of consumption and labour
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8 O. Olaniyan and A. Lawanson
income for Nigeria for 2004. The paper found that population age 
structure is important for economic growth because it can have a 
permanent effect on consumption by influencing the accumulation 
of assets but the outcome is highly policy-dependent. This study 
has shown that the demographic transition in Nigeria is capable of 
leading to more rapid growth in output per capita if the right 
policies are put in place. The current transition being experienced 
in the country suggests that the first population dividend offers a 
positive development opportunity during the coming decades. The 
paper recommends creating policy environment, to accommodate 
the increase in working population to harness the opportunity for 
economic growth, while it is still available. This will include 
tackling increase in unemployment in the country, by providing the 
adequate infrastructure development, and improving human capital 
in the country, through the development of education (emphasising 
the right relevance entrepreneurship) and health in the country so 
as to improve the overall productivity within the country. Further­
more, the paper prescribes a right policy environment with low 
inflation, transparency, efficiency of the financial institutions and 
enforcement of the rule of law to encourage individual saving and 
investment. Social protection for the elderly must be put in place 
by increasing pension coverage by emphasising an asset-based 
pension systems and free health for the elderly.
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