Abstract
One of the most challenging debates of modern history is whether financial development causes economicgrowth or a consequence of economic activity. There are on-going reforms in the sector in Nigeria, thus theimportance of a review of the various reforms. Evidence as to whether and how reforms are remedying thetraditional weaknesses of the Financial Sector is so far limited in Nigeria. Ongoing reforms to improve banks’corporate governance and internal systems suggest that the prospects for the financial sector to performprofitably and prudently, while reducing volatility in the system exist. The paper adopts an empirical reviewapproach for its analysis. Paper suggests therefore, that the present reforms be reviewed and sustained in anorderly manner, for appropriate channeling of resources for investment and productive purposes. Efforts shouldbe concentrated on the linkages of the sector with macro accounts and where financial development appears tohave been the weakest. Furthermore, advancement of the financial sector vis-a-vis instruments should be theprimary focus for the authorities. A counterfactual feedback mechanism should also be integrated within thefinancial sector for an appropriate signaling for the economic productive base.
Highlights
In a developing economy, such as Nigeria, financial sector development has been accompanied by structural and institutional changes
The Asian crisis has provoked a new wave of financial sector studies, which confirm that macroeconomic shocks to output, exports, prices and the terms of trade, asset price booms, and inappropriate monetary and exchange rate policies, all result in financial pressure and contribute to crises in financial systems that are inherently fragile (Obadan, 2004)
In Nigeria, the financial system is made of financial institutions, such as banks, insurance companies, specialized banks, capital market, finance companies, discount houses, bureau de change, mortgage institutions, community banks, and the development finance institutions (DFIs), each covering a particular area of activity or activities (Mordi, 2004)
Summary
In a developing economy, such as Nigeria, financial sector development has been accompanied by structural and institutional changes. According to Mc-kinnon (1973) and Shaw, (1973), the financial sector could be a catalyst for economic growth. According to the McKinnon-Shaw hypothesis, financial repression arises mainly when a country imposes ceilings on nominal deposit and lending interest rates at a low level relative to inflation. While the low and negative interest rates facilitates government borrowing, they discourage saving and financial intermediation, leading to credit rationing by the banking system with negative impacts on the quantity and quality of investment and on economic growth (Mwega et al 1990). The global financial system has witnessed rapid growth and substantial structural change during the last ten years leading to globalization of financial markets. The Nigerian financial sector has to be abreast with reforms that should be sustained in an orderly manner, for appropriate channeling of resources for investment and productive purposes
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