Factors that reduce savings in nigeria (1980-2010)

Thesis Overview

<p> 1.0 INTRODUCTION<br>1.1 BACKGROUND OF THE STUDY<br>Financial institution, market, regulator and instrument all<br>comprises a set of complex and closely interconnected financial<br>system, proving financial services in an economy, such services<br>includes mobilization and allocation of resources, distribution of<br>investment funds among firms, financial intermediation and foreign<br>exchange transactions.<br>The Nigeria financial system can be categorized into two via: the<br>formal or organized and informal or unorganized financial system,<br>the banks and non banks financial institutions make up the<br>organized financial system while the unorganized sector comprises<br>of indigenous bankers local money lenders‟ (ISUSU), shop-keepers<br>or traders, merchants, landlords, saving associations, friends and<br>relatives etc. the system is poorly developed, limited economics<br>information, defective system of according are not integrated into<br>the formal financial system, but very important to the Nigerian<br>financial system. Capital formations, buying and selling of bonds<br>and securities, creation of new assets and liabilities, executing<br>monetary and credit policies of the central bank etc.<br>10<br>Are the roles and functions of financial system geared towards<br>economic development of an economy? Patriotic researchers and<br>policy makers have observed a declining savings rate in Nigeria over<br>the past decades; this is due to the critical importance of saving for<br>the maintenance of strong and sustainable growth in the world<br>economy particularly in Nigeria.<br>A sound, healthy and reliable financial system relates to savings<br>mobilization and efficient financial intermediation roles:<br>First, reduces hoarding and help spread the risk between<br>household and firms.<br>Second, lowers interest rates thereby bringing about stability in<br>capital market.<br>Third, they create liquidity in the economy by borrowing short-term<br>and lending long-term.<br>Fourth, disseminate information between ultimate lenders and<br>ultimate borrowers thereby mobilizing savings from surplus units<br>and channeling them to deficit units through the help of financial<br>techniques, instruments and institutions. Fifth the intermediaries<br>promote development investment.<br>11<br>The Nigerian financial system comprise the regulatory /supervisory<br>authorities, bank and non- bank financial institutions. As at the<br>end of 2007, the system comprised of the Regulatory/ Supervisory<br>authority, the Central Bank of Nigeria (CBN), the Nigerian Deposit<br>Insurance Corporation (NDIC), the Securities and Exchange<br>Commission (ESC), the national Insurance Comedienne (NAICOM),<br>the National Pension Commission (NPC), and the Federal Mortgage<br>Bank of Nigeria (FMBN).the CBN is the principal regulate and<br>supervisor in the money market, consisting of a Deposit Money<br>Banks (DMBs), Discount Houses, the Peoples Bank of Nigeria and<br>Community Banks.<br>The CBN exclusively regulates the activities of finance Companies<br>and promotes the establishment of specialized or development<br>financial institutions. The SEC is the apex regulatory/ supervisory<br>authority in the capital market. The Nigerian Stock Exchange (NSE)<br>is a self-regulatory or user-regulatory institution. The issuing<br>Houses, Registrar and stock brokers, who also interact with the<br>money market, complex the chain in the capital. The Federal<br>Ministry of Finance, together with the CBN constitutes the<br>monetary authorities and share control over Bureau de change. The<br>NAICOM is the regulatory authority in the insurance industry, while<br>12<br>the FMBN regulates mortgage finance activities in Nigeria. Saving is<br>a sacrifice of current consumption that provides for the<br>accumulations of capital, which in term provides additional output<br>that can potential be used for consumption in the future<br>(Gersovitz1988). In other words, savings is the difference between<br>current earnings and consumption. It has also been defined as<br>“deferred consumption” or part of income, which is not spent.<br>Savings is described as a financial assets accumulated by the<br>public- both government and private agents in the organized<br>financial system. To expand financial savings involves shifting of<br>funds from the personal and household sector to the business or<br>corporate sector which in turn, leads to greater investment, income<br>growth, employment and capital formation: which cannot be<br>achieved without increasing the rate of savings, Nigeria‟s saving<br>still falls below the requirements of its financial system due to low<br>per capital income, under- investment in productive instruments,<br>and investment in unproductive channels, e.g. gold, jewelry, income<br>inequalities and demonstration effect Etc. to remedy this<br>problems depend on the level of development of the financial sector<br>mentioned above as well as the savings habit of the citizenry. The<br>availability of investible funds can be a starting point for all<br>13<br>investments in the economy, which will eventually translate to<br>economic growth and development (Uremadu, 2006). The<br>relationship among saving, investment and growth has historically<br>been very close; hence, the unsatisfactory growth performance of<br>several developing countries. Example: Nigeria has been attributed<br>to poor saving and investment. This poor growth performance has<br>generally led to a dramatic decline in investment. Domestic saving<br>rates have not fared better, thus worsening the already uncertain<br>balance of payments position (Chete, 1999). The role of savings in<br>the economic growth of any country cannot be overemphasized.<br>Conceptually, savings represents that part of income not spent on<br>current consumption. Instructions in financial sector like deposit<br>money banks (DMBs)/commercial banks mobilize savings in a<br>economy, the deposit rate must be relatively high and inflation rate<br>stabilized to ensured a high positive real interest rate, which<br>motivates investors to save from their disposable income. In Nigeria<br>Nnann, Odoko and Englama (2004) are of the view that the level of<br>funds mobilization by financial institutions are quite low due to a<br>number of reasons, ranging from low savings deposits rates of the<br>poor banking habit or culture of the people.<br>14<br>According to them, another impediment to funds mobilization is the<br>attitudes of banks to small savers. Another Limitation to savings<br>mobilization is the fact that the concentration of banks and their<br>offices are biased in favor of urban areas. Among the reasons for<br>this, is the fact that the established banks under- rate the volume<br>of saving to be mobilized and channeled into productive investment<br>in the rural areas. It is often argued that since the rural economy<br>operates at a near subsistence level, there is very little that can be<br>squeezed out of income and consumption. Because of this, it has<br>not been realized that large volume of idle funds, though in small<br>units per individual exist in the rural areas. In Nigeria, there is<br>basically lack of incentives to savings which had adversely affects<br>savings. Some of these factors include; poor banking habits,<br>attitudes of banks to small savers, poor orientation, unemployment,<br>instability in the political system, corrupt taxation system,<br>instability in the banking system, etc. one of the economic growth<br>and development in Nigeria.<br>1.2 STATEMENT OF THE PROBLEM<br>In Nigeria, there is lasting need of further efforts especially in<br>mobilizing small savings in both urban and rural areas, and the<br>process of financial intermediation itself, knowing fully well the<br>15<br>saving culture in Nigeria is very poor relative to other developing<br>economics (Uremadu, 2006). In this respect, Commercial banks in<br>performing their roles, was found to have potential scope and<br>prospects for mobilizing financial resource and allocating them to<br>investment. But given the problems inherent in the formal sector,<br>the informal savings associations, if properly developed would not<br>only facilitate the financing of economics development but would<br>also contribute to the development of incomes, and that<br>necessitates the need to put in place a coherent economics policy<br>that will be capable of providing the much needed enabling<br>environment and also there is an urgent need to encourage<br>Nigerians to change their current attitude towards savings, thereby<br>placing the right saving culture by institutions and regulatory<br>agents who influence the decisions of households, firms and<br>government.<br>As pointed out earlier, since national policy is it macroeconomic or<br>microcosmic generates variables which could influence the<br>propensity of economics and financial actors to save. This research<br>work could attempt to examine from policy perspectives, the<br>magnitude and direction of such variables as: interest rate, income,<br>16<br>growth, urbanization, foreign (aid) sector, fiscal policy etc, on<br>savings in Nigeria.<br>Therefore, this research question will try and answer the following:<br>1. What are the factors that reduce savings in Nigeria?<br>2. What impact does factors reducing saving have on aggregate<br>savings in Nigeria? <br></p>