The study investigates relative impact of financial sector reforms on agricultural and manufacturing sector growth in Nigeria. To guide the study, Ordinary Least Square technique was adopted and Eviews 8.0 econometric software was utilized for the analysis. A time series quarterly data sourced from Central Bank of Nigeria Statistical Bulletin 2009 and 2013and it covered the period 1970-2013 was used for the analysis. After carrying out necessary pre- and post diagnostic test, the result shows that gross fixed capital formation and credit to private sector ratio to GDP has positive but insignificant relationship with agricultural and manufacturing sector output. While real interest rate, manufacturing capacity utilization and financial sector reform dummy were positive and significant, interest rate spread, real exchange, average annual rainfall and money supply ratio to GDP displayed negative relationship with agricultural and manufacturing sector output. Upon comparison of impact of key financial indictors on agricultural and manufacturing sector output, the result revealed that impact of real interest rate and financial sector profitability index (SINR) in the pre- and post-financial sector reform were significant in each sector. In contrast, while impact of real exchange rate does not significantly influence agricultural sector output, it subsequently became significant in the model for manufacturing sector output. The study however concludes that domestic investment on infrastructure and credit facility to the sectors was sub-optimal. Secondly, participants in the sectors were made worse-off by the reform. Extensive review of existing policies, provision of incentives, accessible and affordable funding was recommended by the study.


Approval page ii

Certification iii

Dedication iv

Acknowledgement v

Table of contents vi

List of Tablesx

Abstract xi



Background to the study1

State of the problem4

Research Questions6

Research Objectives6

Research Hypotheses6

Significance of the Study6

Scope of the Study7


2.1 Financial Sector Reforms in Nigeria8

2.2 Reform of Financial Sector and Links with Agricultural and Manufacturing  

Sector in Nigeria 8  

2.2.1 Trend in Agricultural Sector Growth and contribution to GDP 8

2.2.2 Trend in Manufacturing Sub-Sector Growth and contribution to GDP 13



3.1   Conceptual Literature 15

3.2 Theoretical Literature 16

3.2.1 Financial Repression Theory 16

3.2.2 Financial Liberalization Theory 17

3.2.3 The Post Keynesian Theory 17

3.2.3 Neo –Structuralist Theory 18

3.3 Empirical Literature 19

3.4 Limitation of Previous Studies 26



Theoretical Framework28

Model Specification29

Variable Description31

Estimation Procedure32

Justification of the Model33

Data Sources33




Descriptive Analysis35

Stationarity Test36

Co-integration Test36

Model One : OLS result for impact of financial sector reforms on

agricultural sector output 37

Economic Criteria (Apriori expectation)37

Gross Capital Formation38

5.53 Ratio of credit to Private sector (CPSGDGDP) 38

5.5.4 Average annual rainfall (ARR)38

5.5.5 Real interest rate (RINR) 39  

5.5.6 Interest Rate spread (SINT) 39  

5.5.7 Real exchange rate (EXRATE) 39  

5.5.8 Financial Sector reform (DUM) 40  

5.5.9 Effect of financial sector reforms on financial indicators 40

5.5.10 Agricultural Sector contribution to GDP (AGGDP) 42

5.5.11 Model fit and diagnostic check42

Model Two: OLS for impact of financial sector reforms on

manufacturing sector output 45

Gross capital formation (GCF)45

Ratio of Credit to Private sector (CPSGDP)46

Manufacturing capacity Utilization (MANCU)46

Ratio of broad money supply to GDP (M2GDP)46

Real interest rate (RINR)47

Interest rate spread (SINR)47

Real exchange rate (EXRATE)47

Financial sector reform (DUM)48

Manufacturing sector contribution to GDP (MANGDP)49

Model fit and diagnostic check49

Comparison of impact of key financial indicators on agricultural and

Manufacturing sector output 51

Evaluation of research hypotheses52



6.1 Summary54

6.2 Conclusion 55  

6.3 Policy recommendation 56  




Table 5.1Descriptive statistic34

Table 5.2 Augmented Dickey-fuller test statistics 36  

Table 5.3 Impact of financial sector reforms on agricultural sector 36  

Table 5.4 Model fit and diagnostic check for impact of financial sector reforms on  

Agricultural sector output43 

Table 5.5 Impact of financial reforms on manufacturing sector 45  

Table 5.6 Model fit and diagnostic check for impact of financial sector reforms on  

Manufacturing sector output49

Table 5.7Wald coefficient restriction test51



1.1 Background to the Study

The financial sector is central to any economy of the world, and the ripples of the sector’s downturn are usually felt in all other sectors of the economy. Lin, Sun, and Jiang (2009) hinted that the structure of the financial sector reveals the nature of the productive activities in such economy. It is therefore not surprising that Nigeria like most developing economies, has adopted various forms of policy and institutional reforms since independence to ensure that the sector remains in good health. The success story is not the same everywhere though, while some countries have been successful in eliminating underlying distortions and restructuring their financial sectors in the beginning of the new millennium, in some cases financial sectors remains underdeveloped (Dileep, Rambabu, & Bhisma, 2007). Financial sector reforms, especially a comprehensive one, would be a turnaround approach to cope up with the threats of global competitiveness in carrying out the financial services. The country has witnessed a wave of reform in the financial sector. It is pertinent to point out at this juncture that financial sector is comprised of banks and non-bank financial institutions (money and capital markets) along with other financial system that supports them.

As the financial reform phenomena advances, so do the understandings of it advance. Financial reform as Gencalo (2011) puts it “is a multifaceted phenomenon”. According to Ebong (2006), they are deliberate policy response to correct perceived or impending financial crises and subsequent failure. In other words, the different interventions of the federal government through the central bank of Nigeria and other financial institutions regulators to enable the financial sector and the economy recover from actual or impending disaster is what is here referred to as financial reform. On the expectations on financial reforms, Edirisuriya (2008) reported that financial sector reforms are expected to promote a more efficient allocation of resources and ensure that financial intermediation occurs as efficiently as possible. By implication, financial sector reforms brings competition in the financial markets, raises interest rate to encourage savings, thereby making funds available for investment, and hence lead to economic growth (Asamoah, 2008). The different ways in which these competitiveness have been kindled includes deregulation of interest rates, exchange rate, entry/exit into the banking business, establishment of the Nigeria Deposit Insurance Corporation (NDIC), strengthening the regulatory and supervisory institutions, upward review of

capital adequacy, sectoral credit guidelines, capital market deregulation and the introduction of direct monetary policies instruments (Nnanna, Englama, & Odoko, 2004, and Iganiga, 2010).

Specifically, financial sector reforms began in Nigeria with the deregulation of interest rates in 1987 (Ikhide & Alawode, 2001). The reforms were initiated to enhance competition, reduce distortion in investment decisions and evolve a sound and more efficient financial system. The reforms which focused on structural changes, monetary policy, interest rate administration and foreign exchange management, encompass both financial market liberalization and institutional building in the financial sector (CBN June 2009).

Since the deregulation of interest rate, far reaching policy measures had been initiated and implemented, amongst these measures includes licensing of new banks, the capital market reforms, and the direct to indirect monetary controls have been undertaken (Mike & Lawal, 2012). Economists believe that the link between financial sector and the real sector of the economy can be explored from two perspectives, namely: the intermediation role of the financial institutions and the monetary policy perspective (i.e. the transmission mechanism of monetary policy impulse) (Levine, 2005). In whichever case, Harvey (1993) believes that the motive for the establishment of financial institutions is primarily to extend credit access to local businesses. In the words of Sanusi (2012) on the imperative of reforms, he said “there is a need for periodic reforms in order to foster financial stability and confidence in the system. In line with this primary objective, Enang and Francis (2011) observed that the banking system’s credit to the private sector improved significantly during the first few years of the reforms, although bulk of the credit was mainly a short term investment. According to Mbutor (2007), the impetus for the reforms follows from the understanding that a sound financial system will render monetary policy more effective and also support growth in the real sector of the economy. He therefore suggests that if the financial sector is healthy, it will certainly reflect in the activities of the real sector of the economy. Prominent among these sectors where the effect of these reforms could be manifest is the manufacturing and the agricultural sectors.

A vibrant agricultural and manufacturing sectors activity creates more linkages in the economy than any other sector and thus would reduce the economic pressures on the external sector. One may ask, why these sectors? According to Ogwuma (1995), the manufacturing sector has a wider and more effective linkage among different sectors. Loto, (2012) refers to manufacturing sector as an avenue for increasing productivity in relation to import replacement and export expansion, creating foreign exchange earning capacity, raising employment and per capita income which causes unrepeatable consumption pattern. This sector also creates investment capital at a faster rate than

any other sector of the economy. The manufacturing sector is therefore an important component of the real sector. In terms of its contribution to GDP, manufacturing in Nigeria however is still at an infant stage. It accounted for only about 5.02 percent of the Gross Domestic Products in 1998 in Nigeria, and the subsector is responsible for an average of about 10 percent of total GDP annually. Manufacturing in Nigeria includes: cement, oil refining and other manufacturing, although the industrial base is small, there is great scope for expansion which is believed could have been possible if there were a level playground for the industries to compete given a reliable financial system (NBS, 2010).

The percentage changes in the agricultural and manufacturing sector share of the GDP indicates that both sectors has not been performing well for close to two decades now, which is very alarming (CBN Statistical Bulletin 2010). As a result it has attracted the attention of researchers in recent times (Adam, 2008, Eze & Ogiji 2013) among others. On the other hand, agriculture is the dominant sector of the Nigerian economy. As a matter of fact, over 60% of the population is engaged in this sector with an average of 41% contribution to the GDP between 2006 and 2010. Despite the dominance of agriculture, the crude petroleum sub sector contributes over 80% of Nigeria’s foreign exchange. As a result governments, over the decades, initiated numerous policies and programs aimed at restoring the agricultural sector to its pride of place in the economy. This sector comprises crops, livestock, fishing and forestry (Adedepo, 2004 & Ezirim, 2010).

Furthermore, in the word of Binswanger, Townsend and Tshibaka (1999) agriculture has a backward and forward linkage with itself and other sectors of the economy. It supplies raw materials to the agro allied industries which enhance the provision of foods, job opportunities and income to those engaged in the sector as well as the government. Like the manufacturing sector, percentage growth rate of the agricultural sector contribution to GDP has also been relatively low for close to two decades now compared to its performance during the periods before the Structural Adjustment Programme (SAP).

It is again imperative to point out that period 1986-1988 correspond with the SAP during which austerity measures were introduced to remove all the bottlenecks impeding the growth of the economy. The growth in GDP responded favorably during the period when financial sector reform and economic liberalization were embarked upon. Interest rate structure was employed principally to direct cheap credit to specific sectors such as agricultural and manufacturing sector. This was done by consistently stipulating relatively lower interest rates for loans and advances of the sectors.

With the liberalization of interest rates in 1987, coupled with the abolition of the administrative sectoral allocation of bank credit, market forces were then allowed to determine the appropriate interest rate, exchange rate and credit allocation. Experience has shown that since the post-SAP market reforms, lending rate has been on the upward trend. Lending rates at present vary between

15.0 percent and 25.0 percent (excluding other ancillary charges) and are too excessive for a developing economy like ours (CBN, 2012). This is contrary to what is obtainable in developed economies of the world where lending rates are usually single digit and even tilted towards zero per cent at the peak of the global financial crisis in those countries (Mike, 2010).

To further establish a fact that finance is very crucial for these sectors, in a study conducted in mid- 2001, Nigerian Manufacturing Enterprise survey (NMES), the study covered three main regions in Nigeria: The western region (Lagos & Ibadan), the eastern region (Enugu, Onitsha, Nnnewi & Aba), and the northern region (Kaduna & Kano), (Soderbon & Teal 2002). Based on the responds gathered, the perceived main problem facing the sector were nine, out of which access to credit was identified as the second main factors militating against the sector. Also, based on the number of programmes initiated in the agricultural sector since the SAP, one plausible assumption that could be made is that finance is also identified as the major factor militating against the sector, it therefore provide opportunity to access the efficacy of these financial reforms in the agricultural and manufacturing sectors.

Statement of the Problem

Over the years, the financial sector had undergone reforms with the aim of positioning it to play a catalytic role, thereby stimulating the real sector. However, opinions abound that the period of the financial sectors reforms coincided with the economic reforms (structural adjustment programme). Again, the results arrived at by Taiwo and Anthony (2011) suggests that financial sector reform has not actually improved the performance of the Nigerian economy. Considering the contributions of the manufacturing and agricultural sectors to the country’s GDP, it becomes imperative that this relationship is investigated to ascertain the impact of the financial sector reforms on the manufacturing and agricultural sectors in Nigeria. Moreover, statistics has confirmed the low and decreasing contribution of both sectors under study to the economy’s GDP (CBN, 2012). Even the recent publication by NBS showed that the manufacturing sector’s contribution to the economy is minimal with an average of 3% which is an indication of poor performance (NBS, 2010).

It’s no gainsaying to argue that the near total neglect of agriculture in the country has denied many manufacturers the primary source of raw materials needed in production. It has also been

postulated that the financial sector had not done well enough in providing credit to both the manufacturing and agricultural sectors. Ultimately, the rate of interest at which loans are granted to the firms in the manufacturing sector makes it almost impossible for them to access fund for expansion and entry. Consequently, a series of programmes have been drawn up to ensure that credit are made available to both sectors, among these programmes include: the Agricultural credit guarantee scheme fund, (ACGSF) 1978, interest drawback programme (IDP) 2003, agricultural credit support scheme (ACSS) 2006, Commercial Agriculture Credit Scheme (CACS) 2009 in the agricultural sector. As a way of encouragement to firms in the manufacturing sector, the Small and Medium Scale enterprise Credit Guarantee Scheme (SMECGS) was empowered with loan to the tune of N 200 billion.

Granted that the real cost of small loans is very high, the approach thus far has been to deregulate interest rates for financial activities in order to stimulate credit provision. Since the influence of monetary policy operates through the interest rate and credit, the question is then: has financial sector reforms really helped to make credit available to the manufacturing and agricultural sectors? Recent analyses of the Nigerian reforms have focused on specific reforms that emerged and its myriad consequences. The evidence leads to mixed conclusion across time periods and across reform and policy areas. And also, less attention has been given to the issue of whether; reforms notwithstanding the dramatic switch in regulatory regime generated any of the efficiency and growth benefits predicted by the literature on financial reforms.

Although it may be argued that financial sector reforms (with respect to its impact on real interest rate, interest rate spread and real exchange rate) have engendered a well developed, healthy and competitive financial system, which in turn as would be expected, impacted on the manufacturing and agricultural sectors of the economy. However, it is not convincing how these reforms have hit the real sector, specifically the manufacturing and the agricultural sectors, considering the fact that most manufacturing firm have closed up and others moved out of the country while agriculture remained at subsistence level. Nigeria, though an agrarian economy still rely on the importation of agricultural finished goods despite the plethora of financing schemes. Against this backdrop, the researcher in this work has raised a number of critical questions.

Research Questions

1. What is the effect of financial sector reforms on the agricultural sector growth in Nigeria?

2. What is the effect of financial sector reforms on the manufacturing sector growth in Nigeria?

3. Is there any difference between the impact of financial sector reforms on agricultural and that of manufacturing sector growth in Nigeria?

Objectives of the Study

The purpose of this study is to draw lessons from reforms on the financial sector in Nigeria and how the reforms have affected agricultural and manufacturing sectors in Nigeria. Specifically the study seeks to:

1. ascertain the effect of financial sector reforms on the agricultural sector growth in Nigeria

2. ascertain the effect of financial sector reforms on the manufacturing sector growth in Nigeria

3. compare the impact of financial sector reforms on agricultural and manufacturing sector growth in Nigeria

Research Hypotheses

In line with the study objectives, the following testable hypotheses emanate:

H01: The financial sector reforms do not exert positively on the agricultural sector growth in Nigeria.

H02: The financial sector reforms do not exert positively on the manufacturing sector output growth in Nigeria.

H03: The financial sector reforms do not impact differently to the agricultural and manufacturing sector growth in Nigeria.

Significance of the Study

Agriculture continues to remain the mainstay of the Nigerian economy, contributing about 40% of the GDP and main source of employment for about two-thirds of the population (CBN, 2013). On the other hand, the manufacturing sector has been identified as one of the key sectors that have growth potentials in the near future. And where there are growths potentials, finance is very crucial for goal

actualization. Whereas both sectoral growth and the supporting finance are made possible by a strong financial system, and therefore reforms of the financial sector is also important.

This research work when completed will be useful to the government as it will enable it channel the available financial resources to key sectors in the economy, and also through the central bank set an appropriate interest rate for improved credit accessibility to the entrepreneurs in agricultural as well as manufacturing sectors. Another group of individuals that will benefit from this work are the entrepreneurs in the agricultural and manufacturing sectors.

On examination of individual reform policy variables will shed more light on the impact of specific policies on the manufacturing and agricultural sector and thus result in important policy implications. This work when completed will be valuable to students and future researchers interested in knowing how the financial sector reforms have affected the agricultural and manufacturing sectors of the Nigerian Economy for the period under investigation.

Scope of the Study

This study investigates the financial sector reforms as it relates to the agricultural and the manufacturing sectors of the real sector in Nigeria. Annual time series data for this study will be generated from the Central Bank of Nigeria Statistical Bulletin of 2009 and 2013, and it will cover the period 1970-2013. The variables that will be employed in the analysis will include: ratio of Agricultural output in total GDP (as a proxy for Agricultural output), ratio of manufacturing output in total GDP (as a proxy for manufacturing output), Broad money supply (M2) to GDP ratio (Proxy for financial depth), interest rate, interest rate spread, credit to private sector, exchange rate and dummy to capture the effect of the financial reforms.




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