Full Project – Determinant of savings and investment in Nigeria

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CHAPTER ONE

INTRODUCTION

1.1 Background to the study

Aggregate saving and investment in any economy are dependent on a number of interdependent variables. For economic planning purposes, it is important that economic planners have a true and fair idea about the quantum of saving and investment, the behavior of people towards saving and investment and the method by which saving can be improved for investment decisions.

Economic planners also need to know about the motives of saving and investment in order to frame appeals accordingly. Understanding saving and investment preference would also help design and implement saving instruments which effectively stimulate saving. Given the present weight of the household sector in total saving, to step up the saving in the economy would require a stepping up of the saving rate in the household sector. Hence, there is the need to carefully understand the determinants of both the household saving rate and the saving pattern.

Savings and investment have  been emphasized by Economists as a precondition for the growth and development of countries. There has been increasing awareness that the faster the rate of investment, the greater the rate of capital formation, which ultimately promote growth and development (Thilwal, 1979). Saving is normally considered in economics as disposable income minus personal consumption expenditure. In other words, it is regarded as income that is not consumed by immediately buying goods and services. For the purpose of this study, it is be emphasized that “saving” refers to deposits in saving accounts. Thus, the studies focus on financial saving of households held by banks, microfinance institutions, Esusu groups and other saving avenues.

Saving can therefore be vital to increasing the amount of capital available. Meanwhile increased saving is a necessary but not a sufficient condition for investment. Of course Savings is a strategic variable in the theory of economic growth hence its role as a determinant of economic growth has been emphasized by classical economists like Adam Smith and David Ricardo. In many developing economies like Nigeria, saving and investment are necessary engines for capital formation hence economic growth.

Funding investment required for economic growth, the economy needs to generate sufficient saving or it should borrow abroad. Nevertheless, borrowing from abroad may not only have adverse effects on the balance of payments as these loans will have to be serviced in the future but it also carries a foreign exchange risk. So, sufficient domestic saving is necessary for economic growth because it also forms part of the most important issues in development economics, and for developing countries, are how to stimulate investment, and how to bring about an increase in the level of saving to fund increased investment. In fact, the crucial role of domestic savings mobilization to the sustenance and reinforcement of the saving-investment-growth chain in developing countries has preoccupied development economists for decades (Lewis, 1970). Given this, the main thrust of this study is to empirically investigate the determinants of savings and investment in the Nigerian economy.

Despite the above awareness, the situation in Nigeria is such that the saving ratio is so low. This situation has affected productivity growth in Nigeria. According to Iyoha (1998), he maintained that the negative growth in real GDP in the mid-1980s could be attributed to a host of factors of which decline in investment and savings are a major factor. Nnanna (2003) also maintained that savings and investment culture in Nigeria is very poor relative to most economies of the world. Nnanna indicated that the domestic savings which averaged 15.7 percent of GDP during the period 1986-1989 declined significantly to 6.0 per cent between 1990-1994 while in 1996 and 1999, this ratio stood at 13.2 per cent and 14.5 percent respectively. Is there a relationship between Savings and Investment in Nigeria economic growth? What determines savings and investment in the Nigeria economic growth? What are their effects on the Nigerian economic growth? In the light of this, the main research questions, which this study intends to investigate, include: What are relevant variables affecting aggregate savings behavior in the Nigerian economy? What are the determinants of aggregate investment in Nigeria? How could saving and investment culture be promoted in the Nigerian economy? Providing empirical evidence on the above questions becomes necessary in the light of the need to promote the growth and development of the Nigerian economy.

1.2 Statement of Problem

Saving is a macro-economic variable used to attain economic growth and development, and investment is the act of committing money or capital to and endeavor with an expectation of obtaining an additional income or profit. In Nigeria, there is lasting need to further step-up efforts in mobilizing small savings in both urban and rural areas, given the poor savings culture of the Nigerian people and the theoretical link between saving and investment which underscore the importance of savings on the growth of every economy. When savings are low, interest rate increases and investments becomes low there will be low income and decrease in the Gross National Product (GNP) and Gross Domestic Product (GDP) of the nation which leads to the poor living standard of the people and hinders the depositors from savings. One of the problems of investment is low capital stock flow. An investment can never be successful if capital is low. The poor level of capital stock has been as a result of poverty which decreases domestic saving resulting from decline in real pre-capital inadequate infrastructure entrepreneurial activities is discouraged more by the absence of basic infrastructure like electrify, good roads and communication (Green 1991).

1.3 Research Question

The study is to answer the following questions:

1. What is the determinant of savings and investment in Nigeria?
2. What are the impact of savings and investment in Nigeria?

1.4 Objective of study

The broad objective of this study is to empirically examine the determinants of savings and investment in Nigeria. The specific objectives, which this study intends to pursue, are to;

1. to ascertain the determinant of savings in the Nigerian economy
2. To know how savings and investment help to improve the Nigerian economy

1.5 Statement of hypothesis

H01: There are no factors that determines savings and investment in Nigeria.

H02: There are no impacts of savings and investment in Nigeria.

1.6 Scope and Significance of study

The importance of this study is to help provide relevant data and information for further research and study on savings and investment in Nigeria, the research will also be of great benefit to the government so that the government will know important areas to focus on in the financial sector. The study will also be of great benefit to secondary and tertiary institutions by providing them with a wider and broader view about savings and investments. The scope of this study is to estimate and evaluate the determinants of savings in Nigeria (1985-2015).

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Full Project – Determinant of savings and investment in Nigeria