Effects of Financial Inclusion On The Economic Growth of Nigeria 1982 2012

International Journal of Business and Management Review
Vol.3, No.8, pp.11-28, September 2015

___Published by European Centre for Research Training and Development UK (www.eajournals.org)
EFFECTS OF FINANCIAL INCLUSION ON THE ECONOMIC GROWTH OF
NIGERIA (1982-2012)
Onaolapo A. R. Ph.D
Department of Management and Accounting,
Faculty of Management Sciences Ladoke Akintola University of Technology,
Ogbomoso,Nigeria.
ABSTRACT: Inclusive financial arrangement is becoming a policy issue in both developed

and developing nations of the world as it has been perceived as a veritable tool for poverty
alleviation and economic development. This paper examines the effects of financial inclusion
on the economic growth of Nigeria (1982-2012). Data for the study are collected mainly from
secondary sources such as Statistical Bulletins of the Central Bank of Nigeria (C.B.N.),
Federal Office Of Statistics (F.O.S.) and World Bank. Employed data consist of such bank
parametric as Branch Network, Loan to Rural Area, Demand Deposit, Liquidity Ratio,
Capital adequacy, and Gross Domestic Product. Extracted data spanning about thirty-year
period; 1982 to 2012 were related using the Ordinary Least Square (OLS) method (STATA
10). Tested hypothesis on Poverty Reduction found Loan to Rural Areas(LRA)Agric.
Guaranty Fund (ACGSF)significant to Per Capital Income(PCI) (@5%)given t-
stat2.82,p>t=4.85 while Financial Deepening(FDI) and Broad Money(FD2) also
significantly influenced Economic Growth(Using GDP)with t-stats=3.61, 4.85 p>t=0.0013
and 0.000 respectively. Deposits From Rural Areas(DRA)as surrogate for financial inclusion
is influenced by Loans to Rural Areas (LRA) and Small Scale Enterprise (LSSE)as surrogates
for financial intermediation given t-stats=2.2 and2.9with p-values=0.03 and 0.007. The
overall results of the regression analysis show that inclusive Bank financial activities greatly
influenced poverty reduction(R2=0.74) but marginally determined national economic growth
and Financial Intermediation through enhanced Bank Branch Networks, Loan To Rural
Areas, and Loan To Small Scale Enterprise given about 50% relatedness between variables
on either sides of the equations. Policy recommendations are made on the basis of these
findings.
KEYWORD: Financial Inclusion, Economic Growth, Bank Branch Network, Loan to Rural
Area, Liquidity Ratio, Agricultural Guarantee Scheme Fund.
INTRODUCTION
Financial inclusion refers to a process that ensures the ease of access, availability and usage
of the formal financial system by all members of an economy. Martinez (2011) identified
financial access as an important policy tool employed by government in fighting and
stimulating growth given its ability to facilitate efficient allocation of productive resources,
thus reducing the cost of capital. This process otherwise referred to as an inclusive financing
system can significantly improve the day-to-day management of finances, as well as reduce
the growth of informal sources of credit (such as money lenders), which are often found to be
exploitative. An inclusive financial system is now widely recognized as a policy priority in
many countries with initiatives coming from the financial regulators, the government and the
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ISSN: 2052-6393(Print), ISSN: 2052-6407(Online)

banking industry. Legislative measures have also been initiated in some countries leading to
such regulatory frameworks as the United States Community Reinvestment Act (1997),
which requires banks to offer credit throughout their entire area of operation and prohibits
them from targeting only the rich neighbourhoods. In France, the Law on Exclusion (1998)
emphasises an individuals right to have a bank account ,while government of the United
Kingdom constituted, a Financial Inclusion Task Force in 2005 in order to monitor the
development of financial inclusion. Regulations have also been enacted in developing nations
such as the Reserve Bank of India Financial Inclusion initiative and the Central Bank of
Nigeria (CBN) Micro-finance banking policy (2005). In South Africa, a low cost bank
account called Mzansi was launched for financially excluded people in 2004 by the South
African Banking institutions and Self-help Groups in order to extend financial services to the
excluded. Many of these regulatory frameworks were designed as mediums for improving
economic welfare of low income groups such as rural women being able to buy serving
machine and establish small businesses artesian having access to wider financial services
with capacity to increase or stabilise income and thus build resilience against economic
shocks. Besides income benefits of a safe place to make deposits and access to affordable
credit assistance, access to financial services through micro-savings and micro-credit has
resulted in positive outcomes such as a reduction in child-labour and increases in agricultural
productivity (Robinson, 2001).
In essence financial inclusion is complementary to economic growth as the two contribute
toward poverty alleviation. For instance, Demirgue-Kunt, Beck and Honohan, (2008)
(Johnson and Murdoch, 2008) Hannig and Jansen (2010) noted that financial sector
development is a driver of economic growth which indirectly reduces poverty and inequality
while appropriate financial services for the poor can improve their welfare Such inclusive
financial system is therefore a veritable avenue for economic development and growth given
its capacity to ensure improvement in the delivery of efficient services, creation of saving
opportunities and facilitation of capital formation among the poor (Ahmed, 2006).
Furthermore, academic literatures abound on the nexus between financial development and
economic growth (Odedokun, 1989; Ayadi et al, 2008; Ighodaro and Oriaki, 2011). Emphasis
of these studies focus on the relationship between financial aggregates, financial sector
development and economic growth. Studies on the likely impacts of financial inclusion as
means for including the excluded poor in the scheme for economic development and growth
are relatively scarce and the extent to which an enhanced bank intermediation activities can
support economic development in the Nigerian case as not been exhaustively addressed. This
study is an attempt to bridge the gap in this essential area and thus complement existing
researches designed to achieve adequate financial inclusion by the CBN. The aim of the study
is to undertake an in-depth review of the effect of financial inclusion on Nigerian economic
growth in the thirty (30) year period 1982-2012. Specific focus of the paper is to examine the
effects of financial inclusion on Nigerian bank intermediation activities, poverty reduction as
well as provide an explanation of the nature of predictive relationship between elements of
financial inclusion and Nigerian economic growth. The study also evaluates effectiveness of
policies aimed at encouraging financial inclusion in commercial banks in about thirty year
period of Nigerian banking history 1982-2012.A priori expectations of the study are
presented in the hypotheses stated below:
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H01: There is no significant relationship between financial inclusion and poverty
eradication in Nigeria over the thirty one year study period (1980-2010).
Ho2: There is no significant relationship between financial inclusion, economic growth and
development in Nigeria in the study period.
Ho3: Commercial banks intermediation activities have not induced financial inclusion in
Nigeria within the study period.
The present section constitutes an introduction. The next two sections (i.e. sections two and
three) review relevant literatures and present methodology for the study. Sections four and
five present and analyse collected data as well as provide summary, conclusion and
recommendations.
REVIEW OF RELATED LITERATURE

Concepts and Definitions
Previous researches on financial exclusion define it among others as those processes that
serve to prevent certain social groups and individuals from gaining access to the formal
financial system (Leyshon and Thrift, 1995), Hannig & Jensen (2010) B.I.S. (2010) or as the
inability of some societal groups within an economy to access the financial system (Caro et
al, 2005). Similarly, Conroy (2005) identified the process that prevents the poor and the
disadvantaged social groups from gaining access to formal financial systems of their
countries as a form of financial exclusion, while Mohan (2006) opined that lack of access by
certain segments of the society to appropriate, low-cost, fair and safe financial products and
services from mainstream providers are measures of financial exclusion. On the other hand, a
Government Committee on Financial Inclusion in India defines inclusion as the process of
ensuring access to financial services as well as timely and adequate credit where needed by
groups at an affordable cost (Rangarajan Committee, 2008) and Nirupam et al (2009).
Development economic literatures on the nature of relationship between financial deepening
and economic growth as well as strategies and models to achieve their complementarities
abound in the advanced economies. However the need to examine the nature of predictive
relationship between financial inclusion and economic development is recent attraction
among researchers especially in the developing countries. Generally the simplest way to
measure financial access is through the number of functional bank accounts held by
individuals. With regard to this, Chain et al (2009) and CGAP (2009) observed that between
2.1 billion and 2.7 billion adults, or 72 per cent of the adult population in developing
countries do not even have a basic bank account. Sureshander (2003) even argued that merely
having a bank account may not be a good indicator of financial inclusion, rather that the ideal
definition should focus on people who want to access financial services but are often denied
the same due to one incapacitation or the other.
While several definitions of financial inclusion exist with focus on the extent of individuals
involvement in banking activities, it may sometimes be necessary to point out that financial
inclusion involves more than mere banker-customer relationship. Chakraborty (2011) defines
financial inclusion as the process of ensuring access to appropriate financial product and
services needed by vulnerable groups such as weaker societal sections and low income
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groups at an affordable cost in a fair and transparent manner by mainstream institutional
players, thus making an inclusive financing arrangement critical aspects in the context of
economic growth and development of any economy.
An alternative definition of Financial Inclusion is the perception which views inclusion as a
progression inculcating some elements of hierarchy of needs with higher levels of financial
inclusion achieved as more needs are fulfilled. This perception views Inclusive financing as
an "hierarchy of financial needs" syndrome that starts by promoting non-cash methods of bill
payment, advancing business through borrowing and fund investment Amit Jain, and Gidget
in Master Card Advisors; (2012). The hierarchy of needs as presented in Figure 2.1 begins
with the most basic foundational needs such as securing a bank account for savings, making
payment for transaction physical/electronic bill payment, and moving to more complex needs
like borrowing, fund investment, and purchasing an insurance policy through a bank.
Degree of
Financial
Inclusion Access to
Insurance
Investment and Saving

Access to Borrowing
Other Electronic Payments
Electronic Bill Payments
Secure account for Holding Payment Transaction Funds
Hierarchy of Needs
Fig.2.1 Hierarchy of Financial Needs Satisfaction showing Improved Financial Inclusion
with Higher Degree of Inclusion
A demonstration of the benefits from the application of a progressive hierarchical financial
inclusion to a typical Nigerian business retailer as illustrated in figure 2.1 entails
The retailer is encouraged to opens a bank account in his locality and obtains a
prepaid card ATM Point of Sale (POS).
The retailer pays all store bills regularly using his prepaid card and receives payments
through the POS terminal.
Given the convenience of the prepaid card; the retailer starts using the prepaid card
for other personal purchases.
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The Central Bank of Nigeria announces a credit facility through say Small and
Medium Scale Association (SMEDAN); an association in which the retailer is a
member.
The retailer through his bank applies for the facility based on the history of his
transaction (turnover of his bank Account) and creditworthiness qualifies him for the
loan.
The concessionary loan received affords the retailer an opportunity to expand his
business which generates greater income thus he starts investing more, increases his
saving, and possibly open an investment account.
The retailer can now afford to secure his familys financial future and buys life
insurance.
Financial Inclusion, Economic Growth, and Roles of Mainstream Financial Institutions

Theoretical evidences suggesting that well developed financial system have strong positive
impact on economic growth over a long period; Levine(2005) and Demirguc-Kunt and
Levine(2008).Many academic literatures have also found a robust positive relationship at the
country level between financial depth(deepening),income level and poverty reduction
;Beck,Demirguc-Kunt and Levine (2007). The ineffectiveness of the two previously
administered stylized financial sector policy reforms in Nigeria in the nature of state led
industrial and agricultural development (e.g. the Agricultural Credit Guaranty Scheme in
Nigeria and the Market development (using liberalization and deregulation) made
institutional building approach that focused on the performance of financial institutions in
delivery services to the segment of the population with little or no access to finance
imperative.
Inclusive finance that affords availability and usage of formal financial system for all
members of an economy especially vulnerable and financially excluded group at an
affordable cost will ultimately influence economic activities. In urban areas, low-salaried
employees or self-employed in such positions as shopkeepers, street vendors, foreign
exchange officers as well as small-scale farmers, small gold and diamond mine operators in
rural areas and others who are engaged in subsistent income-generating activities such as
food processing and petty trade, especially women and children of banking age will benefit
from such financing activities. Consequently, Ogunleye (2009) links financial inclusion to
financial stability, stating that the former promotes the later by facilitating inclusive growth.
Financial inclusion is important for ensuring economic inclusion as financial sector
development drives economic growth by mobilizing savings and investment in the
productive sector; Johnson and Nino-Lazarawa (2009). This is premised on institutional
infrastructures that a financial system afford which contribute to a reduction in information
and transaction cost as well as indirectly enables lowering of poverty, promote pro-poor
growth and lessen income inequality; Honohan and Beck (2007) and Collins et al. (2009).
The AT&SG Report(2010) links financial inclusions to economic growth through an

inclusive financial access as represented in Figure 2.2 below:
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Mobilization of savings enhances financially excluded have access to financial savings

institution credit delivery and reduces poverty services through investment in productive
sector and welfare improvement
Figure 2.2 Linkages between Financial Inclusion, Finance for Economic Growth and
Financial Sector Development
Source: Innovative Financial Inclusion; Expert Group AT&SG Report, G.20; 25 May, 2010
Studies that linked financial system activities to economic growth and poverty reduction
abound. According to Levine (2005) institutional infrastructure of the financial system
contributes to reducing financial information asymmetry, contraction in transaction costs,
which in turn accelerates economic growth . Effective financial inclusive policies impact
economies as it contribute to reduction in poverty, pro-poor growth and accelerated economic
growth. In a study tracking the financial diaries of poor people in Bangladesh, India and
South Africa, Collins (2009) found causality between access to a range of appropriate and
affordable financial services and improvement in poor peoples welfare & income.
Demirguc-kunt et al (2008) also observed that inclusive access to finance is not only pro-
growth but also pro-poor as well as reducing income inequality and improving welfare.
In a wider context, financial inclusion contributes to economic growth through value creation
of small businesses with positive spill-over effects on improvements in human development
indicators - like health, nutrition and education and reduction in inequality and poverty
(CIMP, 2011)and Obstfield (1994) and Ghali (1999).
Alper (2008) examined the relationship between financial development and economic growth
in Middle East countries as a group by employing panel co-integration for a dynamic
heterogeneous panel over a 14-year period (1990-2003). A positive and statistically
significant equilibrium relation between financial development and economic growth was
established for the Middle East countries. Other components of the model used found
control variables such as human capital, gross fixed capital, international trade and
government spending on growth to be significant. Calderon and Liu (2002) examined
whether all financial developments leads to economic growth naturally. The study found that
a mutual Granger causality exists between financial development and economic growth, but
financial developments share in causing economic growth is higher in developed countries
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than in developing countries. Another study of interest is Christopoulos et al (2004) which
verified whether long-run relationship exists between financial development and economic
growth in a multivariate framework for ten developing countries over a 30-year period (1970-
2000). A panel unit root tests and co-integration analysis in a panel-based Vector Error
Correction Model, for the sampled developing countries, found unidirectional causality from
financial development to economic growth.
Academic work on Nigeria has been relatively scarce and where available somewhat
unconvincing. One of such is Ayadi et al (2008) which investigated the relationship between
financial system development and economic growth in post- Structural Adjustment
Programme (SAP) economy. The result indicates lack of consistency in the relationship
between major variables. Similarly, Onwioduokit (2007) found evidence of a causal
relationship going from financial sector variable to economic growth but with no evidence of
a feedback on how financial sector development indicator impacts positively on economic
growth in Nigeria.
Empirical evidences exist attesting to financial inclusion as having positive effects on growth
and development within an economy as it raises the asset base; (BFA, 2009, Sajeev and
Thangavel, 2012). In order to achieve the objective of inclusive growth with equality, it is
highly essential that commercial banks drive the financial inclusion through cost effective
and affordable technology like no-frills (or near-zero balance) bank accounts, Point of Sale
technology, mobile banking and Automated teller Machines (Basant, 2011).
Strategies and Models to Achieve Adequate Financial Inclusion

Innovative financial inclusion refers to the delivery of financial services outside conventional
branches of financial institutions (banks and MFIs) by using information and
communications technologies and non-bank retail agents (including post offices) as well as
new institutional arrangements to reach those who are financially excluded. Besides
traditional banking services, this concept includes alternatives to informal payment services,
insurance products, savings schemes, etc (Lyman, et al 2008). Delivery mechanisms under
such financing system include both mobile phone-based systems and systems where
information and communications technologies, such as Point-Of-Sale (POS) device networks,
are used to transmit transaction details between the financial service provider, the retail agent,
and the customer in a branchless banking regime. Noticeable reforms adopted by many
developing countries in the last decade to open up the financial sector to the hitherto
financially excluded populace entails the use of interest rate liberalization, the switch from
other direct monetary instruments, recapitalization, closure of some state-owned banks, and
restructuring of commercial banks. The establishment in 1988 of the Agricultural Credit
Support Scheme (ACSS) by the CBN was one of the early attempt for creating access to
loans for practicing farmers and agro-allied entrepreneurs are encouraged to approach their
banks for loan with large scale farmers allowed under the scheme to apply directly to the
banks in accordance with the stipulated guidelines (CBN Special Report, 2011).The scheme
afford financial assistance to farmers and agro-allied entrepreneurs at a single-digit interest
rate of 8.0 percent. For instance banks grant loans to qualified applicants at 14.0 percent
interest rate who enjoy a rebate of 6.0 percent for prompt repayment in subsequent
applications thus reducing the effective rate of interest to be paid by farmers to 8.0 percent
and a means for influencing financial inclusion. Recent reform attempts in the Nigeria case
has also led to the repackaging of community banks into microfinance institutions and the
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restructuring of commercial banks into universal and regional categories. The establishment
of framework for mobile services in 2009 further marked a significant watershed in financial
inclusion policies in Nigeria. Subsequent policies such as the revised MFB policies and
guidelines on non interest-window in 2011 culminated in the National Financial Inclusion
Strategy; Literacy Framework and Cashless policies in 2012.Recently a new regime for
Tiered Know Your Customer, bank Charges and Regulation of Agent Banking Relation are
part of policies designed to enhance the supply side of financial services delivery.
Literatures have further furnished us with numerous suggestions on how to bridge the gap
between the rural poor and financial inclusion. Some of these suggestions presented in form
of models attempted to identify clearly the problems of financial exclusion and strategies to
be applied in order elevate the poor and unbanked to full financial inclusion. One of such
models is the Sustainable Financial Model by Porteous (2014) which identified three basic
propositions for creating a sustainable long term inclusion within an economy; namely
customers needs proposition, business case proposition and a compliant ecosystem. Another
model tagged Social Development model represents the society as a three-segment pyramid
with the peak representing the financially included, the base unbanked bankable, and the
middle the under-banked bankable.
Need Access to Financial

Access:
Need Social Devt:
Govt Grant Micro credit/Financial
Employment scheme Insurance
social Benefits Multiple Product
[Health/Edu] Delivery platform
Banking transactions
Figure 2.3: Social Development Financial Inclusion Model

The base of the pyramid represents the larger portions of the society which is absolutely
excluded financially with little or no prospect for financial inclusion. To progress into the
under-banked bankable sphere, this group needs social development through government
grants, employment scheme, social benefits such as health, education, etc. Similarly, to move
into the financially included region, the under-banked bankable needs access to financial
services through banking transactions (deposits, savings, etc), micro-credit/micro-finance,
micro insurance, and multiple product delivery platforms and suitable ecosystem support by
the government.
A third model is the financial Ecosystem model which focuses on how economic growth can
be achieved by financially integrating the under-banked bankable group. The model
recommends an articulated business case by financial institution based on customers needs
for products such as no-frills (zero or near-zero balanced) accounts, micro-insurance,
government benefits, micro-credits, crop loans and micro-enterprises finance and similar
financial services which encourage better management of funds and opportunities for
stability and growth.
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Figure 2.2: Financial Inclusion Ecosystem indicating Reasons for financial Exclusion
Why What How

(Why Financial (What are the possible solutions (How Solutions can be applied)
Inclusion) For financial inclusion?)
Under-developed - Accessible network in - Data connectivity
infrastructure in the interiors of the country - Shared access
interiors of the country - Micro-banking products - Well connected delivery
- Sharable technology platform channel for real time
aimed at reducing cost and transaction
improving efficiency
Higher cost of funds - Influx of technology products - Lower cost technology
and administrative to scale products
expenses - Better usage of data - Lower cost data management
- Reduction in cost of delivery system
of service - Shared access and self-
service solution
Population and poverty - Literacy campaign - Corporate pursuit of mass
- Social development literacy
programme - Government initiatives and
- Involvements of Non- support for NGOs and Self-
governments Organisations Help Groups (SHGs)
(NGOs) and agents - Development of MFIs. SHGs
and NGOs
Illiteracy (also - Use of technology where - Corporate drive for financial
financial illiteracy) possible literacy
- Customization of product for - National alliance pioneered
excluded populace by MFIs, SHGs, NGOs and
- Financial literacy campaign even technology vendors
- Literacy campaign
Source: Congo, 2009

The fourth model otherwise called financial inclusion lifecycle model is more comprehensive
and precise. It identifies reasons for financial exclusion, sets out the basic needs of the
affected groups and suggests strategies of achieving the much desired financial inclusion.
This model is built on the premise that opening a bank account for a poor individual is a
necessary but not a sufficient step towards becoming financially included. It focuses on a
three-step approach which must be applied to bring financially underserved individuals into a
financially inclusive category. The thrust of the model is that after improving financial
literacy and opening an account, the usage of that account, linkage with other financial
services and access to all the financial instruments are required to complete the financial
inclusion lifecycle.
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Chart 2.3: Financial Inclusion Lifecycle
(When
Financially Financial Opening Bank Financial Service accounts are Financially
Excluded Literacy Account Delivery optimally Included
Individual Financial Service utilized):
op
Outreach Mechanism:
Group/Institution Information delivery - Access to
Self service solution multiple
- Cooperative through providers: financial
- Mobile banking services
Societies - Banks
- Agents/Business Creates
- Microfinance - Cooperatives Product
correspondent Delivery
National Platform: - Self Help Group - Platform
Technology providers
- Self Help Group Technology Service Accessibility
- Bank Provider: to credit
- Airtel
- GLO Self service
- MTN solution
- etc
Voice Enable
Kiosk
Regulatory Support (Accounts

Underutilized)
Source: Frost and Sullivan, 2009)
Myriads of researches on the opportunities for deepening financial inclusion in Nigeria
through the supply side have been extensively undertaken by EFinA2012, 2013, and
2014.Findings of some of these surveys found more adults( about 91.2%) maintaining
deposits with commercial banks with a paltry 8% with Microfinance Banks(MFB); thus
making evaluation of the effects of financial inclusion in Nigeria a deposit money bank
dominance. Based on the review of relevant literatures and a priori expectations of the
present study, a noticeable trend can be assumed regarding consistency of relationship
between an inclusive financial system, poverty alleviation, bank intermediation, and
economic growth. The present study therefore conceptualise a framework of interconnectivity
between study variables of the form in figure 2.4 to establish whether financial inclusion exist
in Nigeria or not.
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Economic Growth
Financial Inclusion
Bank Intermediation Poverty Reduction
Financial Exclusion &

Poverty
Fig 2.4: A Conceptualized Framework of Relationship between Financial Inclusion &

Economic Growth
METHODOLOGY
The study adopts three separate econometrics models for capturing and testing for
significance in the stated objectives. The focus of the first model is to determine whether
financial inclusion improve the financial well-being off the Nigerian poor or low-income
earners in the study period. The second investigates the impact financial inclusion has on the
performance of the Nigerian economy and the last model evaluates the extent to which
elements of financial intermediation improves financial inclusion of the hitherto financially
excluded. Each of the models was subjected to the Box-Cox regression to determine the
appropriateness of models to be estimated, and the results favoured the use of normal
estimation (Box and Cox 1964).
Financial Inclusion and Poverty Reduction

PCI= +1BBranch+ 2LR+ 3DRA+ 4 ACGSF+t...................Eq.3.1
This model tests for relationship between financial inclusion and poverty. Per capita income
(PCI) has been a consistent variable for measuring the economic well-being of the inhabitants
of a country. Rising PCI indicates that the citizens are better off whereas a declining PCI is
indicative of slide towards poverty. Consequently, PCI was used as a proxy of poverty in the
model. On the other hand, financial inclusion is in this context defined as the extent of
involvement or participation in financial activities, especially as it affects the low-income
earners or rural dwellers. To this end, the number of Commercial bank branches
(CBBRANCH), Bank loan to rural areas (BLRA), Demand deposits from rural areas (DRA)
and the Central Bank Agricultural credit guarantee scheme fund (ACGSF) of 1978 were used
as proxy for financial inclusion.
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Financial Inclusion and Economic Growth
GDP = + 1FD1 + 2FD2 + 3LDR + 4LQRT + t.....................Eq.3.2
Economic growth refers to sustained rise in the value of economic activities within a country
over a period of time. The Gross Domestic Product (GDP) often comes in handy in
measuring the aggregate worth of an economy. In like manner, the second model incorporates
a broader view of financial inclusion by employing two financial deepening indicators (FD1
and FD2). FD1 represents the ratio of Broad Money to GDP (M2/GDP), while FD2 is the
ratio of Credit to Private Sector to GDP (CPS/GDP). According to Nwagwugwu (2008)
financial deepening refers to the increase provision of financial services with a wider choice
of services geared towards the development of all levels of society. The World Bank (1992)
further notes that financial deepening encompasses increase in the stock of financial assets.
From this perceptive, financial deepening implies the ability of financial institutions in
general to effectively mobilize financial resources for growth and development. This is
affirmed in Okeke (2009) which observes that a high level of financial deepening is a
necessary condition for accelerating growth in an economy.
Additionally, the model includes other important financial ratios as loan-to-deposit ratio
(LDR) and Liquidity ratio (LQR) of commercial banks. The justification is that a financial
system with good or rising LDR and LQR is indicative of an expanded platform for financial
inclusion. Generally, this model is an improvement from Ighodaro and Oriakhi (2011) which
defines financial development in terms of Loan-to-Deposit ratio and Broad Money income
only.
Financial Intermediation and Financial Inclusion

DRA = + 1CAPt + 2LRAt + 3LDRt + 4LSSEt + t.......................Eq.3.3
The provision of credit facilities to a wider segment of the society is an avenue of financial
inclusion. This however is greatly influenced by the financial health of the bank or financial
institution. Owing to this fact, the third model captures financial intermediation using Loan to
rural area (LRA), Loan-to-deposit ratio (LDR) and Loan to small scale enterprises (LSSE).
Capital adequacy of the financial institutions to a large extent affects their lending and this is
the reason it was incorporated into the model. Overall, the model takes an investigation into
the effect financial intermediation may have on financial inclusion. The focus again is on the
hitherto financially excluded; hence the model uses an aspect of financial inclusion namely,
Deposit from Rural Area (DRA) as a good indicator of financial inclusion because an
economy with a very low level of rural bank deposits is indicative of a serious case of
financial exclusion.
Data Description and Sources

The data used are mainly annual time series data covering a thirty-one year period from 1982
to 2012. Most of them were extracted from the Statistical Bulletin of Central Bank of Nigeria
(CBN), 2013. The Per capita income data was obtained from the website of Nigerian bureau
of statistics (www.nigerianbureauofstatistics.org) while that of level of bank capitalization
(CAP) was gleaned from CBN and Nigeria Deposit Insurance Corporation (NDIC) Statement
of Account and Annual Reports, various issues.
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There are different financial inclusion variables as literature suggests. These include, but are
not limited to, number of bank branches per 10,000km2, number of Automated Teller
Machines (ATMs) per 10,000km2, access to credit, number of bank accounts held by a
particular segment of the economy, and elements of financial intermediation. The choice of
the variables however is inhibited by paucity of data for Nigeria. Hence, the paper takes two
measures of financial inclusion: the narrow measure and the broad measure. The first
measure is evident in the first and the third models where financial inclusion is strictly
defined in terms of the involvement of the poor or low-income earners in the financial system
while the second is exemplified in the second model which expands the concept of financial
inclusion to include aggregate financial deepening indicators as well as selected financial
ratios of commercial banks.
In the view of Ighodaro and Oriakhi (2011), the aforementioned indicators measure the
degree of monetization in the economy. They are designed to show the real size of the
financial sector of a developing economy in which money provides savings services and
determines the size of financial intermediation or certain facilities which may target the non-
banked bankable.
Empirical Results
The econometric models were estimated by the Ordinary Least Square technique. The results
shown below were obtained using the STATA 10. The first model examined the relationship
between financial inclusion and poverty reduction in Nigeria.
MODEL 1: PCI = f (BBRANCH, LRA, DRA, ACGSF)
Dependent Variable: PCI
Method: Least Squares
Date: 10/10/14 Time: 15:52
Sample: 1982- 2012(Incl. Observations 31)
Table 4.1: Regression Result 1
Variable Coefficien Std. Error t-Statistic Prob. t
C 668.2430 192.6962 3.467858 0.0018
BBRANCH 0.178246 0.116044 1.536018 0.1366
LRA 0.026324 0.009342 2.817707 0.0091
DRA -0.012548 0.007588 -1.653701 0.1102
ACGSF 0.000116 4.44E-05 2.612683 0.0147
R-squared 0.773955 Mean dependent var 1263.859
Adjusted R-squared 0.739178 S.D. dependent var 532.1173
S.E. of regression 271.7560 Akaike info criterion 14.19438
Sum squared resid 1920135. Schwarz criterion 14.42566
Log likelihood -215.0128 F-statistic 22.25528
Durbin-Watson stat 1.856367 Prob(F-statistic) 0.000000
The result shows that within the study period, the number of bank branches (BBRANCH),
Loan to the rural area (LRA) and the Agricultural Credit Guarantee Scheme Fund (ACGSF)
havea positive impacts on the dependent variable, with those of LRA and ACGSF being
significant. Additionally the R-Squared of about 77% shows a strong relationship and the
23

estimated Durbin Watson value of 1.86 clears any doubts as to the existence of positive first
order serial correlation in the estimated model.
The first model was constructed to test the null hypothesis that there is no significant
relationship between financial inclusion and poverty eradication in Nigeria. Judging from the
estimated F-statistic we observe that the overall regression plane is statistically significant
and we reject the null hypothesis.
The second model that test whether a significant relationship exist between financial
inclusion and economic growth in Nigeria, the study findings are presented below:
MODEL 2: GDP = f (FD1, FD2, LDR, LQR)
Dependent Variable: GDP
Date: 10/10/14 Time: 17:16
Sample: 1982- 2012( Incl. Observations 31)
Variable Coefficien Std. Error t-Statistic Prob.t
C 169728.5 7464219. 0.022739 0.9820
FD1 -1458876. 403520.5 -3.615371 0.0013
FD2 2078705. 428406.2 4.852183 0.0000
LDR 2196.500 9551.547 0.229963 0.8199
LQR 142665.6 131885.6 1.081738 0.2893
R-squared 0.528001 Mean dependent var 5971026.
Adjusted R-squared 0.455386 S.D. dependent var 8695059.
S.E. of regression 6416779. Akaike info criterion 34.33342
Sum squared resid 1.07E+15 Schwarz criterion 34.56471
We observe in Table 4.2 that the second element of financial deepening (FD2), Loan-to-
deposit ratio (LDR) and Liquidity ratio (LQR) all have a positive impact on the nations
economic growth whereas the first element of financial deepening (FD1) does not. Both
estimates of the financial deepening indicators are however significant. Also, the extent of the
relationship between the dependent and independent variables is fairly good (about 53%)
although a case of autocorrelation is unavoidably present.
Specifically, the essence of the second model is to test the null hypothesis that there is no
significant relationship between financial inclusion and economic growth. Again the F-
statistic shows a statistical significant relationship result hence the null hypothesis is rejected.
The third model relates selected financial intermediation variables to an aspect of financial
inclusion itself deposit from rural areas (DRA).
24

MODEL 3: DRA = f (CAP, LRA, LDR, LSSE)
Dependent Variable: DRA
Date: 10/10/14 Time: 13:58
Sample: 1982- 2012(Incl. Observations 31)
Variable Coefficient Std. Error t-Statistic Prob.t
C -3964.247 4023.098 -0.985372 0.3335
CAP -0.080341 0.091629 -0.876814 0.3886
LRA 0.632959 0.287438 2.202076 0.0367
LDR 2.804026 14.47684 0.193691 0.8479
LSSE 0.367994 0.125568 2.930638 0.0070
R-squared 0.501050 Mean dependent var 10173.19
Adjusted R- 0.424288 S.D. dependent var 12539.53
squared
S.E. of regression 9514.447 Akaike info criterion 21.30570
Sum squared resid 2.35E+09 Schwarz criterion 21.53699
As the result of the third model shows, all the financial intermediation variables indicate
positive impacts on financial inclusion (the dependent variable); with Loan to rural areas
(LRA) and Loan to small scale enterprises (LSSE) being significant. The extent of the
relationship between the variables on either sides of the model is strong (about 50%) and
there is no evidence of autocorrelation in the estimated model.
The purpose of the third model is to test the null hypothesis that a significant relationship
does not exist between financial intermediation and financial inclusion in Nigeria. The F-
statistic again comes in handy. It shows that the aggregate effect of the explanatory variables
on the explained variable is statistically significant so we reject the null hypothesis.
CONCLUSION
This paper has examined the effects of financial inclusion on the Nigerian economic growth;
findings from the empirical results in model one (1) to three (3) as well as table 4.1 to 4.3
results indicate relationship between financial inclusion in Nigeria, poverty reduction,
economic growth, and financial intermediation over the thirty (30) years period of study.
The study concluded among others that model one is statistically significant since the Prob.
(F-Stat) is 0.000000 with F-Stat 22.25528. Thus, there is a significant relationship between
financial inclusion and poverty reduction in Nigeria.
Empirical finding that examines the relationship between financial inclusion and economic
growth in Nigeria also indicates that there is a significant relationship between financial
inclusion and economic growth in Nigeria in the period under study (giving Prob. (F-Stat) is
0.000454 as against F-Stat 7.271210).
25

Also, the summary of table 4.3 of this study found that there are positive relationships
between DRA and the LRA, LDR, LSSE; and there is negative relationship between DRA
and CAP. The extent of the relationship between the variables on either sides of the model is
about 50%; since the Prob.(F-Stat)therefore is 0.000892 with F-Stat 6.527357,the model is
statistically significant.
The study suggests therefore that financial inclusion will have a positive significant impact
on the economic growth of Nigeria. However, the study does have some limitations. It has
only examined the relationship between financial inclusions on Nigerian Economic growth;
emphasis on which components of financial inclusion like lending; means of payment and
investment window has been minimal thus providing a good basis for future studies to
examine this matter in greater detail. This study gives a signal to the financial regulator on
the need to have proper guidelines or regulations in place that will encourage financial
intermediation among the rural poor.
The study policy recommendation therefore centres on the need to create deposit and
borrowing windows at affordable cost to the poor and to the income group erstwhile tagged
the unbankable.
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International Journal of Business and Management Review

Vol.3, No.8, pp.11-28, September 2015

ABSTRACT: Inclusive financial arrangement is becoming a policy issue in both developed

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REVIEW OF RELATED LITERATURE

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Investment and Saving

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Financial Inclusion, Economic Growth, and Roles of Mainstream Financial Institutions

The AT&SG Report(2010) links financial inclusions to economic growth through an

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Mobilization of savings enhances financially excluded have access to financial savings

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Strategies and Models to Achieve Adequate Financial Inclusion

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Need Access to Financial

Figure 2.3: Social Development Financial Inclusion Model

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Why What How

Source: Congo, 2009

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Regulatory Support (Accounts

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Bank Intermediation Poverty Reduction

Financial Exclusion &

Fig 2.4: A Conceptualized Framework of Relationship between Financial Inclusion &

Financial Inclusion and Poverty Reduction

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Financial Intermediation and Financial Inclusion

Data Description and Sources

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ISSN: 2052-6393(Print), ISSN: 2052-6407(Online)

ISSN: 2052-6393(Print), ISSN: 2052-6407(Online)

ISSN: 2052-6393(Print), ISSN: 2052-6407(Online)

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