Measuring the deepening Impact of Financial Policy Framework on Nigeria’s Banking and Financial System

Abstract

This study examined a broadened impact of financial policy structure on Nigeria’s banking/financial system as an as indicator of economic growth and development. Some key benchmarks of ‘financial deepening’ were employed to investigate this impact (using 1975 – 2016 data). An insight into our definitive content of ‘financial deepening’ has revealed the dominance of banking elements in the entire financial system and upon which most effect on the entire economy rests. By this notion, ratios [M2/GDP (Broad Money as a ratio of GDP); CPS/GDP (Credit to the Private sector as a ratio of GDP); DINV/GDP (Domestic Investment as a ratio of GDP); COB/M2 (Currency Outside Bank as a ratio of Broad money), etc.] were employed to test the deepening impact of financial policy on the Nigerian Financial System’. The OLS regression result showed positive but low relationship between credit to the private sector as a ratio of GDP and financial deepening. However, gross domestic investment as a ratio of GDP is robust and significantly deepens the financial system despite inadequate credit to the private sector. Interest rate spread (margin between lending and deposit rate) constitutes another issue in the financial system as the margin is outrageously diverging and worsens financial deepening effect on the overall economy. Quite symptomatic of a developing economy as Nigeria, the paper has further helped to reiterate the (evergrowing) need to monitor some other key (real sector) variables that transcends the ordinary financial system dispensations; but which could manifest in far more obstructing manner than does the conventional financial challenges.