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All content in this area was uploaded by Samuel Dibiah on Oct 20, 2023
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Financial Intermediation and Economic Growth in Nigeria
Adolphus Joseph Toby, Samuel Dibiah
Department of Banking and Finance
Rivers State University, Nigeria
samuel.dibiah@portharcourtpoly.edu.ng
samueldibiah838@gmail.com
Abstract
The aim of this study is to examine the relationship between financial intermediation and
economic growth in Nigeria. The study examined the Central Bank of Nigeria quarterly data
from 1981Q1 to 2017Q4 with the E-views software package (version 9.0). The Vector Auto
Regression (VAR) methodology was used to analyse the data, while Block Exogeneity Wald test
was used to test the hypothesis. The specified models included stationarity tests, reduced form
VAR estimate and structural analysis. The Augmented Dickey Fuller Test indicates that the study
variables are stationary at first difference or I(1). The VAR roots plot in relation to unit circle
indicates that our specified reduced form VAR models are stable. The Lagrange Multiplier (LM)
diagnostic tests indicate that our specified VAR models are correctly specified. The results show
that financial intermediation measures such as bank deposit, commercial bank loans to rural
customers, commercial bank deposits from rural customers and gross national savings jointly
have no causal effect on real GDP growth, but individually, only the effect of bank deposit ratio
is significant. The study therefore recommends that the Central Bank of Nigeria should persuade
deposit money banks to reduce the current interest rate margin by reducing the lending rate and
increasing the deposit rates. This would significantly reduce the current high financial exclusion
rate as cost of borrowing would decrease while the level of domestic savings would increase.
Keywords: Financial Intermediation, Real Gross National Savings, Commercial Bank Deposit
from Rural Customers, Commercial Bank Loan to Rural Customers, Bank Deposit and Economic
Growth
1. INTRODUCTION
1.1 Background to the study
The major role of financial intermediation is channelling funds from surplus to deficit units
which is facilitated by mobilizing resources and ensuring that there is efficient transformation of
these funds into real productive capital, creating adequate liquidity in the economy by mobilizing
the funds in the short-term and making them available in the long-term. According to Levine et
al (2000), financial intermediaries perform the task of lowering the costs of researching potential
investments, exerting corporate controls, managing risks, mobilizing savings and conducting
exchanges. Financial intermediaries while rendering these services in the economy, exert
1
influence on savings and allocation decisions in ways that may affect long-run growth rates.
Banks play effective roles in the economic growth and development of a country. This role they
perform excellently by helping to mobilize idle savings from the Surplus Unit (SUs) for onward
lending to the Deficit Units (DUs), thus helping in the capital formation of a nation (Ujah and
Amaechi, 2005). It is in understanding of the importance of bank’s role in financial
intermediation that consecutive governments in Nigeria have been allotting deliberate roles to
them in various national development plans.
In the views of Afolabi, (1998), through the instrumentalities of financial intermediation, the
transfer of funds from the surplus sector to the deficit sector becomes very simple. The
intermediary acts as a pool, collecting deposits of millions of savers and can create forums, e.g.
interest-yielding accounts. The intermediary matches the deposit requirements of the saver with
the investment requirements of the borrower. He acts as a pool, collecting savings of different
sizes from different categories of savers and meeting the investment needs of the various types of
investors. The surplus sector therefore gains by placing his money with the intermediary since
the income to be earned does not depend on whether or not the intermediary has in fact lent the
money out or whether or not the money was profitably lent. The overall economic effect
according to Afolabi, (1988) is that financial intermediation leads to a better aggregation of
savings and therefore helps in capital formation and investment in the economy.
Nigeria is the most populous African country with a population of over 160 million people. It is
also one of the world’s top producers of crude oil and despite this; the country is still among the
comity of third world countries with majority of its population living below the poverty line.
Banks dominate the financial sector in Nigeria and therefore, given the variegated results of
empirical finding as revealed above, it is imperative to examine whether such suppositions hold
for the Nigerian economy. Again, there is detailed information about Nigerian banking history,
but little information is available on the activities of the financial sector and how they impact the
economy where they operate. Similarly, factors which motivate or drive growth within the
economy relative to the industry are largely under researched. All these stimulate and motivate
the researcher towards carrying out this study to fill this gap.
This therefore forms the major background of this study which aims at exploring based on past
trends, the extent of the relationship between financial intermediation and economic growth in
Nigeria.
1.2 Statement of the problem
The Nigerian economy has not really experienced impressive performance such as attraction of
foreign investment and halting of capital flight. The banking sector seems not to have made a
significant effort in addressing the financial gaps in the system. This is evident to the fact that
neither domestic savings nor investments in the country have increased appreciably as the sector
still remained largely oligopolistic and uncompetitive, with few large banks controlling the
greater segment of the market in terms of total assets, total liabilities and total credit in the
banking system.
Financial resources are basic ingredients for the growth of an economy provided they are not
idle. These resources become active through financial intermediation. Financial intermediation is
2
the process whereby financial resources are mobilized by banks in the form of savings and
transformed into credit. It is the root institution in the savings-investment process (Clorton and
Winton, 2002).
Mostly, banks act as conduit for financial intermediation and they are regarded as financial
intermediaries but there are other institutions that perform the activities of financial
intermediation such as pension fund scheme, insurance firms, investment banks etc. Onoh (2002)
observed that, the Nigerian financial sector comprises various segments including the ‘regulatory
and. supervisory authorities for banks and non-bank financial institutions, others are the money
market and its institution, the capital market and its players. Sulaiman, Migiro and Yeshihareg
(2015) opine that financial intermediaries play a significant role within a nation’s financial
system by mobilizing funds from the surplus economic units and channeling to the deficit
economic units of the economy.
It becomes imperative therefore to determine the effectiveness of these reforms by looking at
their contribution to economic growth.
1.3 Objectives of the Study
The objectives of this study are as follows: (1) To evaluate the relationship between bank deposit
ratio and economic growth in Nigeria. (2) To evaluate the relationship between commercial bank
loan to rural customers ratio and economic growth in Nigeria. (3) To evaluate the relationship
between commercial bank deposit from rural customers ratio and economic growth in Nigeria.
(4) To evaluate the relationship between real gross national savings ratio and economic growth in
Nigeria.
1.4 Research Hypotheses
Ho1: There is no significant relationship between bank deposit ratio and economic growth in
Nigeria.
Ho2: There is no significant relationship between commercial bank loan to rural customers ratio
and economic growth in Nigeria.
Ho3: There is no significant relationship between commercial bank deposit from rural customers
ratio and economic growth in Nigeria.
Ho4: There is no significant relationship between real gross national savings ratio and economic
growth in Nigeria.
2. Literature Review
2.1 Conceptual Framework
2.1.1 Financial Intermediation and Economic Growth
3
Financial intermediation refers to the pooling of financial assets in order to channel such assets
from the surplus units to the deficit units. It is a productive activity in which institutional units
suffer liability on its own, engaging in financial transactions in the market. Thus, the role of
financial intermediaries is to channel funds from lenders to borrowers by intermediating between
them.
Since economic growth has a linear relationship with productivity and productivity is propelled
by liquidity in the financial system, it can be safely inferred from the face of it that financial
intermediation which usually occurs in the financial system will impact economic development.
Andrew and Osuji (2013) assert that financial intermediation involves the transformation of
mobilized deposits liabilities by banks into banks assets or credits such as loans and overdraft.
This means that financial intermediation is the process of taking in money from depositors and
lending same to borrowers for investments which in turn support the economy to grow. Efficient
financial intermediation causes high level of employment generation and income which
invariably enhances the level of economic development. Gorton and Winton (2002) define
financial intermediaries as firms that borrow consumers/savers and lend same to investors that
need resources for investment.
2.2. Theoretical Framework
2.2.1 Asymmetric Information Theory
This is one of the theories of financial intermediation. The leading proponent of the theory of
asymmetric information was George Akerlof in 1970. This theory was developed as a plausible
explanation for common singularities that conventional general symmetry economics couldn't
explain. In simple terms, the theory proposes that an imbalance of information between buyers
and sellers can lead to unproductive outcomes in certain markets. Two other economists that
were also particularly prominent in developing and writing about the theory of asymmetric
information were Michael Spence (1973) and Joseph Stiglitz (1980). George Akerlof first
argued about information asymmetry in a 1970 paper titled "The Market for Lemons: Quality
Uncertainty and the Market Mechanism." In that paper, Akerlof indicated that car buyers see
dissimilar information than sellers, thereby giving sellers an inducement to sell used cars that are
less than average market quality. He used the idiomatic term "lemons" to refer to bad cars. He
puts up a belief that buyers cannot effectively differentiate lemons from good cars, thus sellers of
good cars cannot get better than average market prices.
2.2.2 Financial Service Theory
This theory was made popular by Levine in 2002. The financial services view stress the role of
banks and markets in research firms, exerting corporate control, creating risk management
devices, and mobilizing society’s savings for the most productive endeavors. This view
minimizes the bank-based versus market-based debate and emphasizes the quality of financial
services produced by the entire financial system.
2.3. Empirical Review
4
Tonye and Andabai (2014) examine the relationship between financial intermediation and
economic growth in Nigeria using Vector Error Correction Model. The study found a long run
relationship between financial intermediation and economic growth for the period under review
and concluded that about 89 per cent of the variations in economic growth in Nigeria are
explained by changes in financial intermediation variables.
Basher (2013) examine the relationship between open markets, financial sector development and
economic growth to find out if the joint effects of markets and financial sector development
affect economic growth in Nigeria using Granger Causality Test, Johansen cointegration test and
vector error correction model. The study found a weak and insignificant relationship between
open markets, financial sector development and growth in Nigeria and as such, cannot be used to
forecast economic growth in Nigeria.
Haruna (2012) investigates the determinants of cost of financial intermediation in Nigeria's Pre-
consolidated banking sector using 13 banks quoted on the Nigerian Stock Exchange using panel
data regression models. The study found out that operating expense and loan loss provision
accounts for greater variation in commercial banks financial intermediation.
Idries (2010) investigated the cost of financial intermediation in Jordan from 2000 to 2008. The
study used random effects estimation approach and found out that high and increasing financial
intermediation cost are derived from efficiency level complimented by capital adequacy ratio and
loan to total asset ratio.
Beck and Hesse (2006) investigate why financial intermediation cost is high in Uganda. The
study made use of a unique bank level data set on the Uganda banking system over the period
1999 to 2005. The study found that bank level characteristics, such as bank size, operating costs
and composition of loan portfolio affects financial intermediation cost. The study also found that
financial intermediation costs have no robust and economic significant relationship with foreign
bank ownership, market structure and bank efficiency in Uganda. This study does not consider
effects of financial intermediation on economic development using credit to
private sector, lending rate and interest rate margin as independent variables in the country.
3. Research Methods
3.1 Research Design
This research uses the ex-post facto design for the data analysis. It is a combination of theoretical
thoughts with the empirical observation and extracts maximum information from the available
data. It allows us to observe the effects of descriptive variables on the dependent variables.
3.2 Nature/Sources of Data
In examining the effects of financial intermediation on economic growth in Nigeria, we used
secondary data consisting of quarterly time series data covering the period from 1981Q1 to
2017Q4. Thus, the data consisting of a total of 148 observations is considered adequate enough
to produce dependable results. The data is obtained from secondary sources from the Central
Bank of Nigeria database.
5
3.3 Method of Data Analysis
The study adopts vector autoregressive (VAR) methodology. VAR models are mostly suitable
for establishing the dynamic behaviour of most macroeconomic and financial time series data. It
can also be used for prediction according to Ouliaris, Pagan and Restrepo, (2016). The use of
VAR as a modelling system of autoregressive time series has several advantages which includes
its flexibility nature (Brooks, 2008), forecast generated is highly dependable (Ouliaris, Pagan and
Restrepo, 2016), and VAR models provide window for analysing causal effects of policy shocks
through impulse response function, variance decomposition and Granger causality. This is
consistent with the aim of this study which is to examine the effect of financial intermediation on
economic growth.
3.4 Empirical Model Specification
The empirical analysis in this study would be based on the model below:
RGDPG=f
(
BDR , CLR , CDRR , RSAVR
)
(3.1)
Where;
RGDPG = Real Gross Domestic Product
BDR = Bank Deposit Ratio to GDP
CLR = Commercial Bank Loan to Rural Customers ratio to GDP
CDRR = Commercial Bank Deposit from Rural Customers Ratio to GDP
RSAVR = Real Gross National Savings Ratio to GDP
The econometric representations of the above functional models are given by:
RGDPGt=θ01 +θ11 RGDPGt−1+θ21 BDR t−1+θ31 CLRRt−1+θ41 CDRRt−1+θ51 SAVRt−1+ϵ1t
(3.2)
BDRt=θ02 +θ12 RGDPGt−1+θ22 BDRt−1+θ32 CLRRt−1+θ42CDRR t−1+θ52 SVARt−1+ϵ2t
(3.3)
CLRRt=θ03 +θ13 RGDPGt−1+θ23 BDRt−1+θ33 CLRRt−1+θ43 CDRRt−1+θ53 SVARt−1+ϵ3t
(3.4)
CDRRt=θ04+θ14 RGDPGt−1+θ24 BDRt−1+θ34 CLRRt−1+θ44 CDRRt−1+θ54 RGNSt−1+ϵ4t
(3.5)
SAVRt=θ05+θ15 RGDPGt−1+θ25 BDR t−1+θ35 CLRR t−1+θ45 CDRRt−1+θ55 SAVRt−1+ϵ5t
(3.6)
3.5 Apriori Expectations
Apriori, bank deposit ratio to GDP is expected to have positive and significant relationship with
real economic growth. Similarly, commercial bank loan to rural customers ratio to GDP is
expected apriori to have positive relationship with real GDP growth. Further, deposit mobilized
from rural sector as a ratio of GDP is also expected apriori to have positive relationship with real
6
GDP growth. Real gross national savings ratio to GDP is expected apriori to have positive
relationship with real GDP growth.
4. Results and Discussion
4.1.1 Descriptive Analysis for Financial Inclusion Variables
Table 4.5 shows the descriptive statistics for Bank Deposit Ratio, Commercial Bank Lending to
Rural Customers, Commercial Bank Deposits from Rural Customers and Gross National
Savings.
Figure 4.1: The time series plots of the log of BDR, CLRR, CDRR and SAVR (1981Q1 - 2017Q4)
Source: EViews output based on Research Data
7
From figure 4.1, we can see that all the variables appear to be moving randomly with no clear
direction, except Gross National Savings ratio which has trended upward, especially, from 1995.
Table 4.1: Descriptive statistics for BDR, CLRR, CDRR and SVAR (1981Q1 – 2017Q4)
Statistic BDR CLRR CDRR SVAR
x
6.940573 1.884167 0.961871 36.47600
Max
19.43169 10.41906 5.867262 98.40726
Min
-0.185358 0.013808 9.58E-05 12.67794
σ
4.801863 2.366059 1.358909 15.19572
S
0.826602 2.089853 2.290005 1.480628
K
2.579643 6.797468 7.372491 6.686975
JB
17.94367 190.0155 238.9004 137.9041
p
-
value(JB)
0.000127 0.000000 0.000000 0.000000
Source: EViews output based on research data
From table 4.1, BDR, CLRR, CDRR and SVAR averaged 6.94%, 1.88%, 0.96% and 36.47%,
respectively over the sample period. The standard deviation statistic shows that while Gross
National Savings
(σ=15.19)
is the most volatile, Cash Deposits from Rural Customers
(σ=1.35)
recorded the lowest volatility. All the skewness coefficients are positive
(S>0)
,
showing that the variables all have a distribution that is skewed to the right. However, while
Bank Deposits from Rural Customers
(K=2.57)
has a distribution that is slightly flatter than
normal distribution, Loans to Rural Customers
(K=6.79)
, Cash Deposits from Rural Customers
(K=7.37)
and Gross National Savings
(K=6.68)
all have a distribution that is much taller than
normal distribution. The JB statistic (p-value < 0.01) is highly significant for all variables, hence,
clearly rejecting the normality hypothesis. Thus, all the measures of financial inclusion would
enter our growth model in their logarithmic form for a more meaningful empirical analysis.
4.2.1 Estimation and Analysis of the Empirical Model
4.2.1.1 Stationarity test for the Model
The model seeks to establish whether economic growth in Nigeria can be explained by changes
in financial intermediation, measured by total commercial bank deposit, commercial bank loan to
rural areas, commercial bank deposit from rural area and gross national savings, all as a ratio of
nominal GDP. The results of the ADF test are presented in table 4.2
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Table 4.2: ADF tests for the RHS variables in the model
Variable
tau-statistic
Conclusion
Level First difference
BDR -3.3507
(0.0624)
-15.0326
(0.0000)
Difference Stationary
I(1)
CLRR -3.4427
(0.0499)
– Level Stationary
I(0)
CDRR -1.6606
(0.7635)
-10.4817
(0.0000)
Difference Stationary
I(1)
SAVR -2.6019
(0.0949)
-17.3618
(0.0000)
Difference Stationary
I(1)
Source: EViews output based on research data; parenthesis contains p-values
From table 4.2, the tau-statistic for the test on level data has a probability of 0.0499 for
Commercial Bank Lending to Rural Customers, indicating that the test is significant at 5% level.
On the contrary, the tau-statistic has a probability of 0.0624 for Bank Deposits ratio, 0.7635 for
Commercial Bank Lending to Rural Customers and 0.0949 for Gross National Savings,
indicating that the test is not significant. However, the test is significant at 10% level for both
Bank Deposits ratio and Gross National Savings. For the first difference unit root test, the tau
statistic (p-value = 0.0000) is associated with zero probability for all variables, indicating that the
test is highly significant. Therefore, at 5% level of significance, while Commercial Bank
Lending to Rural Customers is stationary at level series or I(0), Bank Deposits ratio, Commercial
Banks Deposits from Rural Customers and Gross National Savings ratio all are stationary at first
difference or I(1). The implication is that both Real Gross Domestic Product and Commercial
Banks Lending to Rural Customers would enter our VAR model in their level form while Banks
Deposit Ratio, Commercial Banks Deposits from Rural Customers and Gross National Savings
Ratio would be modelled in their first difference form.
4.2.1.3 Reduced Form VAR Estimation for the Model
Tables 4.3 and 4.4 present the VAR lag length selection and the residual diagnostic test for
reduced form VAR for the empirical model. Again, the VAR order selection is based on the three
commonly used information criteria; AIC, SIC and HQC, and the decision rule is to select the lag
order that corresponds to the minimum value of each information criterion. Also, a rebase
dummy variable, DUMREBASE, is included in the model to capture the effect of the structural
break observed in the first quarter of 2010 real GDP growth plot in figure 2.
Table 4.3: VAR order selection for the model
Lag AIC SC HQ
0 11.57567 11.82694 11.67751
1 9.410331 10.28977* 9.766772*
2 9.627009 11.13462 10.23805
3 9.745619 11.88140 10.61126
9
4 9.127119 11.89107 10.24736
5 8.576105 11.96822 9.950948
6 8.720824 12.74111 10.35027
7 8.461837 13.11029 10.34588
8 7.867332* 13.14396 10.00598
Source: EViews output based on research data; *indicates the selected lag order
Table 4.4: VAR LM serial correlation test for the Model
LM statistic p-value
16.22564 0.9079
Source: EViews output based on research date
Figure 4.2: VAR roots plot in relation to unit circle
Source: EViews output based on research data
From table 4.3, as indicated by the asterisk (*), while AIC has its maximum value at lag 8, SIC
and HQC both are maximized at lag 1. However, we consider 8 lags for our VAR specification
for our empirical model because we believe that would be sufficient to make the residuals white
noises.
10
From table 4.4, the serial correlation LM statistic is not significant (p-value = 0.9079) at all
conventional levels. Thus, we fail to reject the null hypothesis that the fitted VAR residuals are
serially correlated and conclude that the fitted VAR (8) model is correctly specified.
Figure 4.2, which plots the inverted roots of the estimated VAR(8) in relation to unit circle,
shows that all the roots lie inside the unit circle. Thus, the estimated coefficients are stable. This
therefore implies that a structural analysis can be conducted to meaningfully interpret the fitted
VAR results and test the relevant hypotheses.
4.2.1.4 Structural Analysis for the Model
Figures 4.3 and 4.4 show the impulse response function (IRF) and variance decomposition for
real GDP growth for the model. The IRF helps to evaluate the impact on the Nigerian economy
of unexpected changes in bank deposit, commercial bank credit to rural areas, commercial bank
deposit from rural sector and gross savings, all expressed as a ratio of nominal GDP. The
variance decomposition shows the contribution of each these factors to the shock in real gross
domestic product. Again, six periods (quarters) are considered.
Table 4.5 shows the VAR Granger causality/blocked exogeneity Wald test for joint significance
of lags of each endogenous variable in our estimated VAR(8) model.
11
Figure 4.3: IRF for RGDPG for the model
Source: EViews output based on research data
12
Figure 4.4: Variance decomposition of RGDPG for the model
Source: EViews output based on research data
Table 4.5: VAR Granger causality Wald test for the model
Excluded Chi-sq. p-value
BDR 19.75971 0.0113
CLRR 3.150882 0.9245
CDRR 7.591683 0.4743
SAVR 9.490387 0.3026
All 30.85214 0.5245
Source: EViews output based on research data
13
As we can see, the impulse responses in figure 4.3 have a large positive effect in the first period
and almost zero effect in the subsequent periods. Also, there seems to be a cyclical effect on real
GDP growth rate of a one standard deviation shock to each of the other endogenous variables in
our model. However, while the initial effects of both Bank Deposit Ratio and Gross National
Savings Ratio are positive, the initial effect of Commercial Bank Lending to Rural Customers is
positive. The effect of Commercial Banks Deposits from Rural Customers is initially zero but
becomes positive after the second period.
From figure 4.4, own shock is the main source of error variance in real GDP growth rate,
contributing approximately 96% in the second period, approximately 86% in the fourth period
and approximately 79% and 77% in the sixth and seventh periods.
4.2 Test of Hypothesis
Ho1
: There is no significant relationship between financial intermediation and economic growth
in Nigeria
From table 4.5, the Wald test statistic is significant at 5% level for Bank Deposit Ratio (p-value
= 0.0113), suggesting evidence of a causal effect from bank deposit to real GDP growth rate. In
contrast, the Wald statistic is not significant for the rest of the variables (p-values > 0.05, 0.1),
suggesting that there is no causal impact on real GDP growth rate of Commercial Banks Lending
to Rural Customers, Commercial Banks Deposits from Rural Customers and Gross National
Savings. The variable “All” is also not significant at conventional levels (p-value = 0.5245),
suggesting that jointly, the four financial intermediation variables have no causal impact on the
real GDP growth rate.
4.3 Discussion of Findings
The results show that financial intermediation measures such as bank deposit, commercial bank
loans to rural customers, commercial bank deposits from rural customers and gross national
savings (all as ratio of nominal GDP), as parameterized in our empirical model, jointly have no
causal effect on real GDP growth, but individually, only the effect of bank deposit ratio is
significant. The evidence of the positive causal effect of bank deposit ratio further suggests that it
is liquidity that drives economic growth in Nigeria as bank or demand deposits is a liquid
component of broad money supply. Thus, narrow money supply, which comprises currency
outside banks and demand deposits, is a causal factor for economic growth. However, unlike
currency outside banks which shows a negative causal effect, the impulse response function
shows that the effect of demand deposits is positive up to the third period. An increase in bank
deposits would lead to an increase in the rate of economic growth in the next first, second and
third quarters.
Further, the effects of both currency outside banks and demand deposits are also not
contemporaneous, as it takes some lags for changes in these variables to fully transmit to the real
economy. For currency outside the banking system, the Akaike information criterion elects 4
four periods or quarters for its maximum effect while for bank deposits ratio, it elects 8 periods.
Here, the longer time lag for the effect of bank deposits ratio can be explained in the context of
the intermediating role of commercial banks in the economic growth process.
14
Nevertheless, the case is different for commercial bank loans to rural customers, commercial
bank deposits from rural customers and gross national savings, as the insignificance of their
effects, reinforces the widely held view that the exclusion rate in Nigeria is still alarming. Thus,
the provision of affordable financial services, especially in the rural areas, is still inadequate,
despite the several attempts by successive governments to include more rural adult population in
the formal banking system. This also accounts for the poor saving habit in the rural sector that
leads to the insignificance of gross national savings on economic growth. This finding however
supports the Financial Repression Theory which states that financial deregulation in a financially
repressed economy would induce higher savings, increase credit supply, encourage investment
and subsequently lead to economic growth.
5. Summary and Conclusion
The results of the study show that although, bank deposit ratio to GDP enters the economic
growth model positively and significantly, its joint effect with commercial bank loans to rural
sector, commercial banks deposits from rural sector and gross national savings is statistically
insignificant. Thus, while currency outside the banking system hinders economic growth,
demand or bank deposits promotes economic growth. Our conclusion, therefore, is that it is the
narrow money component of money supply, which consists of currency outside the banking
system and demand deposits that affects economic growth, therefore the study recommends that
the Central Bank of Nigeria should persuade deposit money banks to reduce the current interest
rate margin by reducing the lending rate and increasing the deposit rates. This would
significantly reduce the current high financial exclusion rate as cost of borrowing would decrease
while the level of domestic savings would increase.
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