The study examined the determinants of private domestic savings in Nigeria from 1981 to 2015 using secondary data obtained from central bank of Nigeria statistical bulletin 2015 and ordinary least square estimation technique. The empirical findings of the study provided evidence that in the long run, real interest rate (RINR), financial deepening (M2GDP), Gross domestic product per capita (GDPPC) and population growth (POP) are the major determinants of savings in Nigeria since they all exerted significant effects on private domestic saving. In short run however, M2GDP was the found to be the only major determinant of private domestic savings in Nigeria. The study therefore recommended that if the federal government wants to improve the level of private domestic savings in Nigeria, they should pay close attention to the above determinants as they significantly influenced the level of private domestic savings. 



















1:1 Background To The Study

Capital formation is an important factor of an economy growth. For a country like Nigeria to attain economic growth, serious effort should be geared towards capital formation by encouraging savings.

The financial institution markets, regulators and instrument interact within an economy to provide financial services such as foreign exchange transaction, financial intermediation and resources mobilization and allocation.

Savings mobilization and management is at the core of financial intermediation. In Nigeria, formal banking activities began in 1894 with the establishment of a branch of a foreign bank. The developments since then have resulted in extensive network of bank branches in various locations in the country, with most of them concentrated in the urban centers, as in other developing countries. The post office savings outlets that were inherited from the colonial era could not be efficiently operated to meet the aspirations of the population. In addressing this problem, Central Bank of Nigeria initiated a number of policy actions to encourage growth in domestic savings, especially among the rural and the urban poor. The institutional arrangement for the mobilization of savings in Nigeria is discussed under two main broad headings: the formal sector and the informal arrangement. Formal Institutional Framework, Formal institutions that have been established to encourage financial savings include the deposit money banks, insurance companies, pension funds and the capital market, as well as innovative institutions like the Peoples Bank and the Community Banks. The ratio of institutional savings relative to Gross Domestic Product (GDP) was 10% in 2001. (i) Deposit Money Banks, The deposit money banks constitute the main formal channels through which financial savings are mobilized in Nigeria. Currently, there are 89 banks with 2,965 branches located all over the country. The banks provide services and offer various types of products which give some returns to savers. Of the total amount of institutional savings in Nigeria more than 95 per cent was accounted for by banks. Attempts were made in the past through the rural banking scheme to encourage banks to locate in the rural areas. However, with progress 7 made in financial sector reform other innovative institutions have been promoted to encourage rural savings. (ii) Insurance Companies and Pension Funds, Insurance companies and pension funds have contributed to savings mobilization. There are 118 insurance companies currently in operation. Life insurance premium constituted the main channel through which resources are pooled by insurance companies to finance economic development. Pension funds represent money set aside to provide for employees when they retire from service. The funds which are largely contributory provide an avenue for making resources available to enhance economic development. (iii) The Capital Market, The Lagos Stock Exchange, established in 1961, is the prime operational institution in the Nigerian capital market. It has six trading floors located in various parts of the country, on which equities and government stocks are traded. As at the end of 2001, market capitalisation amounted to N662.6 billion. A commodity exchange was commissioned in Abuja in 2001. (iv). Innovative Financial Institutions. Following financial reforms since 1986 and the need to expand the scope of financial intermediation to meet the developmental aspirations of the Nigerian economy, community banks and the Peoples Bank were established to operate at the community level in the urban and rural areas. A community bank is a unit bank, which is established through the efforts of the various groups in the community. The performance of the community banks, however, suffered a 8 setback following the distress in the financial sector in the recent past. At the end of 2001, there were 747 community banks in operation. With the current involvement of the CBN in the regulation and supervision of community banks, the institutions are being strengthened to perform their expected functions of financial intermediation in the rural economy. The Peoples Bank of Nigeria was established in line with the Bangladesh’s Grameen Bank experience, with branches located in both the urban and rural areas of the country. The Peoples Bank accepted deposits from clients who were mainly self-employed, artisans and traders who did not have access to conventional banking facilities. It also extended credit to its clients and provided advisory services that could help in the development and expansion of such trades. The recent restructuring and recapitalisation of development financial institutions (DFIs) led to the merger of the Peoples Bank with the Nigerian Agricultural and Cooperative Bank (NACB) and the Family Economic Advancement Programme (FEAP) to form the Nigerian Agricultural Cooperative and Rural Development Bank (NACRDB). The main objective was to streamline the institutional arrangement within the development finance sub-sector and enhance the performance. (v) Finance Companies and Primary Mortgage Institutions 15. These institutions operate within the financial sector to provide various services to their clients. Finance companies are time-deposit taking institutions that contribute to the deepening of the financial system. They were, however, not regulated or supervised until recently. Most of the institutions, therefore, collapsed during the 9 banking crisis of the early 1990s. The primary mortgage institutions operate at the retail end of the housing finance sub-sector. Their operations are targeted towards mortgage financing and they take deposits of various maturities in furtherance of the objective of housing financing. At the end of 2001, 98 finance companies and 74 primary mortgage institutions (PMIs) were in operation in Nigeria. Informal Institutions in Savings Mobilization There are still various institutional arrangements in the informal credit market in spite of the progress that has been made in the liberalization of the financial sector. These include the Cooperative Societies, the Rotating Savings and Credit Associations (ROSCAS), otherwise called Esusu, Credit and Town Unions, which serve as a vehicle for pooling small savings. The shortcomings of these arrangements notwithstanding, they provide veritable sources of investible funds for their members. The challenges facing the monetary authorities are not only that of integrating these institutions into the formal financial system, but largely that of ensuring adequate monitoring of their activities in order to plug the leakages, which their operations constitute to the monetary policy framework.

The Nigerian economy comprises of the public and private sector with both engaging in investment expenditure. Both sectors borrow in order to meet their investment requirements.

The immediate source of funds is personal or own saving and others are the government which represents the public sector collects revenue from both tax and non tax sources. After meeting USA expenditure requirement on purchases of goods and services the government uses whatever surphes they gave to increase its stock of capital for investment purposes. When investment expenditure exceeds the level of savings the private and the public sectors mainly borrow from the financial institutions. The financial institutions in providing funds or credit for investment in Nigeria include deposit money banks (OMBS) mortgage institutions and development finance institutions. Other sources include non – bank financial institution like the insurance companies, the capital and equipment leasing companies (mural trust fund, pension fund). The provide the largest portion of the domestic funds for investment.

In the late 1970’s and early 1980’s Nigeria witnessed tremendous economic growth as a result of the oil boom, which gave rise to investment boom especially in the public sector. However when the oil markets collapsed in the 1980’s investment equally feel thereby resulting to fail in economic growth. Although the rise in price of oil during the 1990 – 1991 periods was supposed to spark off and investment boom but that was not the case.

The evolution of financial system Nigeria can be characterized on the basis of the following features. First the Nigerian financial system is mainly dominated by bank institution which handles more than 90% of the total financial assets.

In Nigeria, unlike the government in the developed countries where bonds are used in financing projects and acquiring assets. The government stocks contribution to the capital market had declined tremendously from 94% in 1961 to roughly 3% by 1994 and further fail in 1995.

Second, the financial system has a weak regulatory structure which stems for the fact that it originates in the preponderance of state owned banking and non – banking institution by the government. (World Bank 1994). The government uses their control of the banking system particularly to direct credit so some sectors mainly industry. Agriculturally and construction etc. the regulatory authority for the financial system in Nigeria only began to be recognized by the 1980’s in the wake of structural adjustment programmed. (SAP) up to recent years.

Thirdly, there is a significant presence of an informal financial market characterized by small – scale transactions and often based on pre – existing financial social and economic relationship.

Fourthly, there is a negative saving by the public sector. This to do with the fact that the private sector, households and firms constitute the sole sources of services in which the bulk of the capital funds of the public sector came from internal and external borrowing.

Fifth, the state borrowing through “debt instrument” does seem to present on generation of saving from private, particularly household savings, that otherwise would have been consumed through it is doubtful. This has been an explicit objective of economic policy.

Finally, financial repression, by the late 1980 financial liberalization had begun a component of the SAP Key element of this Financial Liberalization include Relaxation of direct credit allocations, removal of interest controls by the CBN etc.

1.2 Statement Of The Problem

The rapid demographic shift in Nigeria is expected to raise both micro and macro-economic issues. On the microeconomic front, health care, housing, and other related services for the purpose of improving the welfare of the elderly need to be addressed. In addition, macroeconomic issues related to saving, labor productivity, and capital flows also need to receive attention. To derive the saving implications of this economic change, the determinants of the People’s saving ratio in Nigeria are investigated using the hypothesis of saving behavior. The saving behavior hypothesis is tested with the Nigerian data. The investigation deals with an unresolved issue of the growth rate effect on the saving ratio. Nigeria has achieved remarkable growth and development since independence. Since the growth in some of these economies is often considered resource intensive rather than technology intensive (Rosegrant and Evenson (1992), The World Bank (2007), savings are likely to play a very important role in promoting real growth. Several empirical studies found a positive effect of the saving rate on the long term growth (Cardenas)

Escobar (1998), Motely (1994) and Krieckhaus (2002) though the growth theory predicted only temporary positive effect of increased saving rate on the growth rate in the economy due to corresponding negative effect on capital productivity. People’s savings, in particular, assist in smoothing out unexpected variations in income, minimizing the impact of shocks on consumption. In a country like Nigeria, where a lot of resident in rural area are engaged in agriculture and face uncertainty from weather and natural calamities, it would be helpful to understand how people deal with fluctuations in incomes. Further, savings serve as a vehicle of social mobility and of enhancing future income earning possibilities. Savings indeed have implications in the welfare of households, macroeconomic, growth and development. In Nigeria however, it has been noted that the savings rate is becomes fluctuate overtime. On the other hand, there is a possibility that Nigeria are actually saving more but not through formal financial instruments. Previous studies on savings look at differences in the saving behavior of urban and rural households. Some studies focus on the forms and determinants of rural savings. Due to the inadequacy of recent and comprehensive data and information regarding the behavior of household savers through time, the study designed to increase savings interest. Thus the research then tends to answer the research question which include;

  1. What are then the determinants of saving in Nigeria economy?
  2. What are the relative importances of the factors?

1.3 Objectives Of The Study

The broad objectives of the study is to analyse savings function of Nigeria , the specific objectives are to;

  1. Examine the determinants of savings in Nigeria
  2. Determine their relative importance.

1.4 Significance Of The Study

The findings and subsequent proposal would be useful to policy makers in policy formations. This study would go a long way in contributing to the academic development of the theories of determinant of savings in Nigeria, student of economics and other related fields, would find the study very useful and would serve as a reference point to future researches who might want to research further on the topic

1.5 Statement Of Research Hypotheses

This study will be guided with the null hypothesis:

Null hypothesis (H0); Savings in Nigeria are not influenced by budget deficit ratio, financial deepening, real interest rate, gross domestic per capita, population and inflation rate.

Alternative hypothesis (H1); There are determinants of savings in Nigeria

1.7 Scope Of The Study

The scope of this study is to estimate and evaluate the determinants of savings in Nigeria (1981-2016)