An Empirical Analysis of Real Deposits in Nigeria

Abstract

(ProQuest: ... denotes formulae omitted.)IntroductionA requisite component of economic growth and development is a well-functioning financial system characterised by a banking sub-sector that efficiently intermediates between surplus and deficit holders of funds. In a developing economy like Nigeria where the non-bank component of the financial sector is limited, problems in deposit money banks (DMBs) are instantly transmitted to the rest of the economy (Olofin and Afangideh, 2008). This is in view of the fact that commercial banks facilitate a bulk of financial transactions. Nevertheless, banking dominance of the Nigerian financial system has, however, dropped as controlled financial system assets fell from 90.5% in 2006 to 78.6% in 2011 (IMF, 2013).The main sources of the banking liquidity in Nigeria are public and private sector deposits which DMBs transmit to deficit holders of funds. However, growth rate of deposits have been lopsided in recent times as the rate fell from 65% in 2008 to -11.3% and -1.6% in 2010 and 2012, respectively (International Monetary Fund, 2013). It follows therefore that a negative shock to the depositary base will inhibit the flow of credit, constrain development of domestic industries and adversely affect economic growth. Therefore, factors influencing savings' decisions of households and firms become important determinants of a stable banking sector with particular reference to its intermediation role.iAn assessment of real deposits has gained ample attention in the literature (See Tvalodze and Tchaidze, 2011 for Georgia; Kibet, Mutai, Ouma, Ouma and Owuor, 2009 for Kenya; Dadkhah and Rajen, 1988 for India; Felmingham and Qing, 2001 for Australia; Hasan, 2001 for China; Mutluer and Yasemin, 2002 for Turkey; Lucas, 1988 for US; Vega, 1998 for Spain). Similarly, the behaviour of real deposits has been analysed within the context of currency deposit ratio. In this regard, Khaskeli, Ahmed and Hyder (2013) analysed the behaviour and determinants of the currency deposit ratio in Pakistan based on the notion that an increase in currency in circulation reduces deposits and invariably, loanable funds. This is because an increase in the volume of currency in circulation implies that deposits are being withdrawn from the banks, which restrict their ability to meet investors' credit demand.Research on the factors affecting real deposit creation in Nigeria is scanty, as inadequate attention has been given to the behaviour of real deposits with specific reference to the dynamic interaction of money supply and currency in circulation. The dominant strand of literature has focused on estimating the determinants and behaviour of real deposits (See Nwachukwu and Odigie, 2009; Odemero, 2012; Uneze, 2013; Nwachukwu and Egwaikhide, 2007, Nwachukwu, 2011) while some others have inferred real deposit behaviour on the basis of money demand models (See Aschani, 2010; Kumar, Webber and Fargher, 2010; Chukwu, Agu and Onah, 2010; Omotor, 2010; amongst others). It is against this background that this study departs from the literature by examining the behaviour of the real deposits in Nigeria by considering the difference between estimated broad money balance (money supply) and currency deposit ratio.iiAn investigation of the behavioural patterns of real deposits in Nigeria is expected to play a pivot role in formulating and fine-tuning financial sector and monetary policies, respectively. Notably, a major component of such policy considerations is increased transmission of funds to the real sector; particularly geared towards stimulating non-oil sector growth that has remained at the forefront of government's policy objectives over the years. For an emerging economy like Nigeria with high savings and investment gaps, enhanced real deposit is critical for sustained "trickle-down" growth. This is further exacerbated by the crucial role of domestic saving mobilisation in the sustenance of domestic saving-investment-growth chain in developing economies (Nwachukwu, 2011). …