Monetary Policy Reforms and Financial Deepening in Nigeria (1970 – 2004)

This study show by means of robust statistical analysis, the magnitude of the changes which occurred in the Nigerian financial system right from the period of regulation and since the introduction of structural change reforms in 1986. Using the ordinary least squares method, data from 1970 to 2004 which covered the two policy thrusts regulation and deregulation are examined. To ascertain whether monetary policy reforms had significant impact on financial deepening during the period under study, three regression test were run. One covered the period of regulation (1970 – 1985), the second covered the period of deregulation (1986 – 2004), while the third covered the period of regulation and deregulation (1970-2004). The empirical analysis carried out in this study showed 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. Past policies of financial repression aimed at encouraging domestic investment by suppressing interest rate produced a negative effect on the financial system. Negative real interest rate regimes did not encourage greater domestic investment rather they influenced banks to be more risk averse. From empirical findings, it was observed that when interest rate regimes tended to be more market driven and less negative in real terms, bank lending increased, National Income increased and national saving expanded. The conclusion from our findings is that monetary policy reforms have achieved great success in deepening the financial system. This finding represents sufficient evidence that if and when the CBN is granted legal and operational autonomy, it can, given the flexibility, strike a happy medium between financial liberalism and occasional intervention aimed at correcting marked failures arising from information asymmetry.