Deposit Mobilization, Credit Financing and Nigerian Capital Formation

Abstract

A huge difference between savings and investments shows that there isn't enough financial mediation, especially in developing countries. But it's evident that these countries' real industries need funds to expand. This study investigates the impact of bank deposits and credit financing on capital formation in Nigeria using a time series. The data was extracted from the CBN bulletin and WDI for the period ranging from 1980–2019 (40 years). The effects of total deposit liabilities, total loans and advances to all sectors, credit to the private sector, and total investment on capital formation were investigated using descriptive and inferential statistics, the stationarity test, and the error correction model. Post-estimation tests were also conducted. The results revealed that total deposit liabilities have a significant positive impact on capital formation in Nigeria; total loans and advances to all sectors have a significant positive impact on capital formation in Nigeria; bank credit to the private sector has a significant positive impact on capital formation in Nigeria; and total investment has a significant positive relationship with capital formation in Nigeria. The study recommends that governments should empower banks in their credit allocation decisions, such as by loosening rules that put credit ceilings on banks, thereby reducing lending volume. Additionally, banks should ensure that any credit extended to the private sector is used to finance more productive investments and high-yielding ventures. Banks could accomplish this by closely monitoring the use of investment-related credit. All interest rates should be set by the market so that the banking sector can get more deposits and use money more efficiently.

Keywords: capital formation, total deposit liabilities, total loan and advances to all sectors, credit to private sector

JEL Classification: E22, G21, G30