The impact of globalization on the nigerian financial sector

Thesis Abstract

The study examines the effect of globalization on the Nigerian financial sector. It is also aimed at ascertaining the impact of globalization on the Nigerian commercial banks and the stock exchange. Assets of the Nigerian financial sector and commercial banks were used as performance indicators of the Nigerian financial sector and the commercial banks. Market capitalization was used as performance indicator of the Nigerian stock exchange. The data used are Nigerian yearly data from 1985 to 2006 converted to rate and interpolated to 88 data points. The data were analyzed using descriptive statistics, Ordinary Least Squares statistical technique, Johansen’s co-integration and error correction mechanism. We used Augmented Dickey-Fuller statistics to test for stationarity and Granger causality test to test for the causal relationship of the variables used. We proxy globalization with degree of openness (measured by total trade divided by gross domestic product), foreign direct investment, portfolio investment flows, external debt flows, nominal exchange rate and gross capital formation. Three null hypotheses were formulated and tested. They were all rejected based on the overall significance of the models using F statistics at five percent level of significance. The results of our estimate show that the Nigerian financial sector as a whole has benefited from globalization. The globalization proxy variables conformed to the a priori signs for the overall Nigerian financial sector model. However, the openness variable, foreign direct investment flows and external debt flows negatively affected the performance of the commercial banks. This shows that Nigerian commercial banks have not benefited from trade openness, foreign direct investment and external debt flows. We also observe that gross capital formation and external debt flows affected the Nigerian stock exchange negatively. We therefore recommend that for the Nigerian commercial banks to benefit from globalization, the recent re-capitalization and debt recovery exercise and monitoring of macroeconomic stability be encouraged to gain confidence by investors in the financial sector.