Structural reform, monetary policy and financial deepening: the Nigerian experience

Abstract

An attempt has been made in this study to gauge by means of robust statistical analyses, the magnitude of the changes which have occurred in the Nigerian financial system since the introduction of structural reforms in the mid 1980s. The empirical analyses carried out in this study have confirmed that the monetary authorities have largely succeeded in their objective to deepen the Nigerian financial system despite the emergence of distress in the banking industry and the consequent liquidation of 31 banks. Contrary to dominant public belief, past policies of financial repression aimed at encouraging domestic investments by suppressing interest rate produced the opposite result. Negative real interest rate regime did not encourage greater domestic investment. Rather it influenced banks, to be more risk averse, Conversely, when interest rate regime tended to be more market oriented and less negative in real terms, bank lending increased and domestic investments and national savings expanded. Overall, the reform measures have been largely successful. This finding represents sufficient evidence that, if and when, the Central Bank of Nigeria is granted legal and operational autonomy, it can, given the flexibility, strike a happy medium between financial liberalism and occasional intervention aimed at correcting market failures arising from information asymmetry.