Technology Changes and the Impact on Accountancy Profession
Technology Changes and the Impact on Accountancy Profession
Adebayo Paul Adejola, PhD.
Professor of Accounting, Finance and Information Technology,
Department of Accounting,
Bingham University, Karu, Nasarawa State.
E-Mail: padejole@yahoo.com
and
Daniel K. Emmanuel
Department of Accounting,
Bingham University, Karu, Nasarawa State.
E-Mail: emmyfordaniel@yahoo.com
Abstract
We are in a world of Information and Communication Technology (ICT), where virtually all activities are no longer
done manually, but electronically. The enormous advantages ICT has accrued to the delivery of information and
communication around the world, as well as the central role of ICT in the new global economy, means that ICT is
shaping the dynamics of the new millennium. The role of and potential for ICTs in private and public sector
accounting, auditing, investigation and reporting is enormous and cannot be over emphasized. Some years ago,
most financial accounting was done manually, leading to a great deal of paperwork. Currently, most accounting
information is recorded via computers and wide area networks. Technology has certainly changed the face of
accounting over the years. While people have diverse views as to whether technology’s impact on accounting has
been positive or negative, it is clear that technology has drastically changed the accounting profession. This paper
examines technology changes and its impact on accountancy profession. It successfully looked at the changing
landscape in technology; the benefits of information technology based accounting and auditing; technology trends
that will impact the accountancy profession and practically applied Interactive Data and Extractive Analysis
(IDEA) software to carry out investigation electronically. The outcome revealed that technology application will not
only provide reliable and sufficient evidence but the information will be made available on time. The paper
recommends that Professionals should think ahead to take a more proactive than reactive response to digital
technologies. By embracing the new normal, the profession can actively reshape it, rather than simply being
reshaped by it.
Keywords: Accountancy Profession, Information Technology, Interactive Data and Extractive Analysis,
Professionals.
Introduction
There are no questions that the role of Information Technology (IT) is pervasive across the economy; it is
a central issue that dominates short, medium and long-term strategic discussions across all businesses.
The best businesses have their technology radars consistently switched on, scouring and weighing new
and up and coming technologies that can achieve competitive value. The very notion of human nature is
to improve processes and efficiency gains, and technology has in history proven it can. But can it still
deliver in the future? Why do technological advances matter? Firstly, they play a fundamental role in the
creation of wealth, improve the quality of life, have an impact on economic growth, and can even
transform societies. Secondly, guaranteed revenue streams are diminishing and so companies need to
continuously innovate and experimenting and nothing is risk-free. Finally, technology is evolving really
quickly and consumer and business strategies need to keep up.
Bingham University Journal of Accounting and Business (BUJAB)
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Technology Changes and the Impact on Accountancy Profession
The Changing Landscape: Changes in Information Technology
The world has entered what some regard as an era of ‘digital Darwinism’ where technology is evolving
too fast for many individuals and organisations to adapt to the changes. As the rate of change accelerates,
people, businesses and entire countries are struggling to stay aware of the latest technological
developments, let alone understand them well enough to exploit them – and the rapid rate of change is
unlikely to slow down.
The pace and nature of change in the environment has had a profound influence on business organizations
and the way in which they are managed. Some authors in Management Theory even suggest that a
paradigm shift has taken place in the way in which companies are managed. Accounting, as the language
of business, and its accounting information system, as a subsystem of the business organisation has also
been affected by these changes.
Technology has been one of the most pervasive forces in shaping the accounting profession. In fact, when
professionals were asked as part of a technology survey what three trends have had the biggest impact on
the accounting industry; two of the top three trends were related to technology. They reported the greatest
impact from:
i.
Regulatory complexity;
ii.
Workflow automation; and
iii.
Mobile / remote connectivity.
Looking to the future, regulatory complexity will continue to affect the profession, but high on the list for
most professionals are many technology-related trends.
Where once there was technology advancement followed by a period of stabilization, we are now in an
era of pervasive change — where advancements quickly follow one another or even happen
simultaneously. And, the importance of technology and the velocity of change is only expected to
increase. In this era, technologies that once seemed a “fad” quickly become the way people work. In fact,
accounting professionals reported that smartphones were among the top three technologies they once
thought were irrelevant and now find indispensable. Today, given the importance of mobile devices and
capabilities, it’s hard to imagine that just a few years ago people thought these devices were irrelevant to
their work.
The obvious advantage of technology is in the various tools that it has provided. Examples of these tools
include computer-integrated manufacturing, communications technology, image processing, the Internet,
and expert systems. These are a few examples of the many tools of technology whose purpose is to
provide more detailed and accurate information in a timely manner.
Computer-integrated manufacturing, Communication Technology and The Internet
Computer-integrated manufacturing has had a significant positive impact on the financial world and
especially on cost accountants. With automated manufacturing, computers collect and report information
almost simultaneously, this results in ‘an operational information system that fully integrates
manufacturing with marketing and accounting data’, increasing both the quantity and timeliness of the
information (Hansen & Mowen, 2007, p. 8). This detailed information has been significant in cost
accounting, allowing accountants to develop activity-based costing systems. These new costing systems
allow accountants to allocate overhead more efficiently. These systems can also distinguish non-value
added costs providing cost accountants the opportunity to convert them to value added costs.
Technological tools work to promote efficiency in the transferring of data between corporations and their
different divisions, offices, customers, and even their accounting firms. Communications technology
utilizes a combination of technologies to transmit data in a variety of forms to each of these recipients.
This particular form of technology is of considerable importance for large accounting firms, because its
Bingham University Journal of Accounting and Business (BUJAB)
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Technology Changes and the Impact on Accountancy Profession
enhanced communications capabilities allow for easier expansion into the worldwide market. This global
aspect of technology is necessary for accounting firms to maintain their international competitiveness
(Journal of Accountancy, 1996).
The Internet or World Wide Web (WWW), has become the newest location for conducting business.
Internet transactions are a prime example of how to obtain timely, accurate information. Electronic
commerce leads the way in providing the information for Internet transactions by linking multiple firms
through both computers and communications technology (Journal of Accountancy, 1996). This speeds up
the transfer of information between an entity and its accounting firm. For accountants, this means getting
the most current information to work with. For the smaller business, services provided by the Internet
include on-line banking and automatic bill paying which eliminate many clerical duties of today’s
accountant.
Technology is progressively working to eliminate paper work almost entirely. Paper work slows down
transaction time and burdens entities with maintenance needs. Image processing was voted by the Journal
of Accountancy as the top technology affecting accountants in 1996. This process uses scanning to
convert important paper images into electronic documents. These electronic documents are easier to
transfer both internally and externally, resulting in more efficient, timely information.
A web-based accounting package is a complete accounting system that resides on a web server. Anybody
in the world can access that accounting system with a simple browser to set up and run their own
company. Instead of paying large sums of money up front for hardware and software, the user pays a
smaller monthly rental fee. It is an interesting concept and there are many inherent benefits, some of
which are: Need for only a browser, lower up-front costs for Software, lower up-front costs for hardware,
lower administration costs, shorter implementation time frame, lower costs for multiple locations, work
from home, high-end databases, no more backup worries, and up-to-date application code. Examples are
Xero, Kashoo, Clear Books, and Sage 50 accounting software.
Expert systems and advanced accounting software that have recently been designed could be perhaps one
of the greatest assets of technology to accountants. Users of this recent development in technology range
from the smallest proprietorships to the largest of corporations. Expert systems are a type of artificial
intelligence that assists accountants in their decision-making. These systems are especially useful in both
auditing and tax decision-making but can be developed to aid users in many different areas including
inventory control and financial statement preparation.
Bingham University Journal of Accounting and Business (BUJAB)
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Technology Changes and the Impact on Accountancy Profession
Source: www.catalog.flatworldknowledge.com
A new, innovative approach to completing projects within the business world is group work via
computers. Workflow technology and collaborative computing are examples of technologies that promote
group-work. Workflow technology is designed to transfer information between designated workgroups.
Collaborative computing and groupware is a type of software that allows an entire group of people to
view and update documents from different sites. These types of software increase the number of
participants, and therefore input and knowledge, on a project (Journal of Accountancy, 1996). In
accounting, group work can be especially useful in the audit side of the practice. The auditing team that is
working in the field can touch base with the corporate office and exchange information. Group work
software is also useful for companies that have divisions nationally or abroad.
Completely Integrated Business Environment and Extensible Business Reporting Language
The Completely Integrated Business Environment (CIBE) is an example of a data-based relationship
accounting system. The CIBE system works to organize the major outflow of information produced by all
of these technologies without eliminating any important details in the process. These data based
relationship accounting systems are of great value to management accountants. This CIBE system is
completely integrated allowing all financial and management information to be controlled by a single
corporate database. This single control point will allow the business to operate more efficiently and
effectively. CIBE collects and analyzes data automatically. For management accountants, this means that
specific factors contributing to the health of the entity can be monitored on a continual basis. Information
becomes a ‘strategic resource’ to the entity. Information from all sources can be combined when
necessary. This provides management accountants with a very effective and efficient method of analysis,
management reporting, and control.
Extensible business reporting language (XBRL) on the other hand, is the financial and operational
business reporting offshoot of Extensible Markup Language (XML), which is a freely-licensable, open
technology standard used to electronically exchange business information. XML is a universally preferred
data description language used to describe the storage, manipulation and exchange data via the Internet.
Bingham University Journal of Accounting and Business (BUJAB)
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Technology Changes and the Impact on Accountancy Profession
The idea behind XBRL is simple. Instead of treating financial information as a static text — as in a
standard internet page or a printed document, XBRL provides an identifying tag for each individual item
of data, whether numeric or textual. This tag is computer readable and allows the information to be used
interactively.
For several years now, momentum has been building towards a single electronic financial reporting
standard which would allow more efficient retrieval and analysis of financial information. Some of the
key objectives of this movement towards digital financial reporting are to provide more consistent
financial information, which is delivered better, faster and cheaper. In addition, a digital format supports
more informed business and investing decisions, including greater comparability within and across
enterprises.
XBRL regulatory report benefits includes: Reduce reporting burden, Drive down costs, Improve data
timelines, Improve data accuracy, Increase transparency, Increase accurate and Improve flexibility.
Benefits of Information Technology Based Accounting and Auditing
The following are the benefits of appropriate usage and application of technology based accounting and
auditing in an organization:
i.
Quicker information on financial position of the organization by just pressing / touching a button.
ii.
Ascertain with accuracy the revenue generated in an organization on daily, weekly, monthly,
quarterly etc within a second.
iii.
Provide detailed expenditure information to aid the management in cost control and facilitate
decision-making.
iv.
Budget and forecast e.g. annual budget etc.
v.
Reduce clerical and administrative overheads.
vi.
Project monitoring and variance analysis
vii.
Prevent frauds.
viii.
Eliminate drudgery in financial planning
ix.
Get timely report and financial statement after every transaction
x.
Audit trail and alarm for use as security proof to deter an unauthorized user.
xi.
The data processing system help expedite the audit work on the final accounts through their
ability to provide for more immediate and effective recording control over assets and liabilities.
For example, reconciliation between various accounts can easily be achieved.
xii.
Via the use of information technology, debts of doubtful value are highlighted without delay for
prompt action.
xiii.
Information technology enables quick controls over slow-moving and obsolete stocks and regular
reconciliation carried out between physical and book records of stock. With most manual
systems, these controls and tests are not easily carried out.
Effects of Technological Changes on Accounting Profession
Technology has had many effects on the accounting profession. Not all of these effects can be labelled as
positive or negative. Many outcomes of the interaction of technology and accounting are simply changes
to the profession. Some of these changes include the hiring pattern of enterprises, the education and
training of accountants, and the changing of the profession as a whole.
An increased need for education results from advancements in technology. Accountants must be familiar
with these new software programs, expert systems, and communications systems to utilize them
efficiently (Journal of Accountancy, 1996). Accountants in the 21st century should expect to be involved
in continuing education. Software systems can become obsolete within months of their creation. For
accountants, this means the need for continued education.
Bingham University Journal of Accounting and Business (BUJAB)
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Technology Changes and the Impact on Accountancy Profession
Technology in accounting affects the hiring patterns of accounting firms. Fewer entry-level positions will
be needed as these responsibilities are taken over by computers. Consulting already makes up a large
portion of business for accounting firms, and this area will continue to grow in the 21st century with the
expansion of technology consulting. A major component of this consulting is network management.
Consultants in this field will be responsible for the implementation of many of the new technologies
already discussed. Internet access requires consultants to be responsible for the education of their clients
on how to make their own companies more efficient through the use of the WWW. Research capabilities
and security issues will need to be addressed. The introduction of Intranets in the last couple of years has
broadened the options for businesses and their consultants. Businesses can create their own version of the
Internet on a smaller, personal scale called an Intranet. These Intranets resolve some of the security issues
associated with the Internet, because they cannot be accessed by users outside the company. With this
onslaught of technology, many businesses can be overwhelmed by the numerous decisions in selecting
software packages.
The accounting profession has definitely been influenced by the recent bombardment of technology
within the industry. Some ‘business thinkers’ believe the accounting profession should be entirely
revamped. It is true that some technological changes have made many of the current accounting practices
no longer relevant. An example is the ledger account. Previously, this account was very important as a
historical record of transactions and was used to expedite the preparation of financial statements. With
today’s timely information, the ledger account becomes less important. Computers have taken over as the
record keeper for this type of information. With the changes in technologies witnessed today, if the
accounting profession doesn’t reinvent itself, it easily could be replaced by a profession that has yet to
emerge with an entirely different vision of how information, analysis and attest services should be
provided. Competitors of traditional accountants include consulting firms, financial advisors, computer
companies, and more.
Case Study – Application of Information Technology in Accounting and Auditing
Fact
You have been offered an appointment to investigate the Account Receivable of Ayomide Plc following a
tip off that:
1. The Value of the Account receivable of N55,000,000 as stated in the Statement of Financial
Position for the year 2014 was overstated;
2. The transaction of the customer on Serial No 170 requires special attention;
3. The transactions of the customer with ID 2204 were suspicious;
4. There are cases of transactions duplicated on same day.
Below is the copy of the Account receivable report of the company presented to you in soft- copy
prepared via Microsoft Excel.
AYOMIDE PLC
ACCOUNTS RECEIVABLE
S/
N
1
2
3
4
DATE
2/1/2014
1/3/2014
6/11/2014
1/1/2014
JOURNAL
J1
J2
J1
J1
CUSTOMER
2201
2202
2203
2204
ACCOUNT
2000
2000
2000
2000
Bingham University Journal of Accounting and Business (BUJAB)
CREDI
T
0.00
0.00
0.00
0.00
DEBIT
4,195.00
4,185.00
5,413.00
129.00
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Technology Changes and the Impact on Accountancy Profession
5
6
7
8
9
4/23/2014
2/22/2014
4/5/2014
9/30/2014
12/3/2014
J2
J3
J4
J4
J6
2234
2214
2243
2256
2267
2000
2000
2000
2000
2000
0.00
0.00
0.00
0.00
0.00
4,570.00
13,342.00
3,340.00
7,642.00
234.00
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
1/14/2014
1/16/2014
7/17/2014
5/10/2014
9/29/2014
8/14/2014
6/15/2014
6/6/2014
4/26/2014
7/12/2014
11/11/2014
12/13/2014
6/17/2014
7/10/2014
4/25/2014
11/13/2014
4/14/2014
12/6/2014
9/12/2014
11/15/2014
1/3/2014
11/17/2014
7/9/2014
3/14/2014
4/4/2014
5/19/2014
10/22/2014
8/14/2014
11/11/2014
12/13/2014
6/17/2014
7/10/2014
4/25/2014
11/13/2014
4/14/2014
12/6/2014
9/12/2014
J1
J2
J2
J2
J3
J4
J6
J6
J6
J7
J7
J1
J1
J2
J1
J1
J1
J1
J1
J1
J3
J3
J3
J3
J3
J4
J5
J5
J5
J6
J6
J3
J3
J3
J3
J2
J1
2244
2231
2230
2290
2280
2281
2245
2248
2234
2214
2265
2267
2289
2209
2265
2237
2265
2243
2289
2209
2208
2201
2205
2204
2234
2265
2262
2272
2282
2292
2202
2232
2242
2212
2211
2222
2265
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
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0.00
0.00
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0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
7,000.00
7,689.00
45,532.00
523.00
76.00
1,387.00
1,245.00
879.00
90.00
6,534.00
89,764.00
8,976.00
7,655.00
67.00
341.00
61.00
64.00
6,342,327.00
85.00
7,634,732.00
651,324.00
7,645.00
52.00
54,345.00
4,254.00
36.00
3,463.00
1,243.00
134.00
34.00
6.00
6,796.00
3,254.00
12.00
344.00
1,324.00
413.00
Bingham University Journal of Accounting and Business (BUJAB)
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Technology Changes and the Impact on Accountancy Profession
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11/15/2014
J2
2275
2000
0.00
48
49
50
51
52
53
54
55
56
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58
59
60
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62
63
64
65
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67
68
69
70
71
72
73
74
75
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77
78
79
80
81
82
83
84
85
86
87
88
1/3/2014
1/14/2014
1/16/2014
7/17/2014
5/10/2014
9/29/2014
8/14/2014
6/15/2014
6/6/2014
4/26/2014
7/12/2014
11/11/2014
12/13/2014
6/17/2014
7/10/2014
4/25/2014
11/13/2014
4/14/2014
12/6/2014
9/12/2014
11/15/2014
1/3/2014
6/17/2014
7/10/2014
4/25/2014
11/13/2014
4/14/2014
12/6/2014
9/12/2014
11/15/2014
1/3/2014
1/14/2014
1/16/2014
7/17/2014
5/10/2014
9/29/2014
8/14/2014
6/15/2014
6/6/2014
4/26/2014
7/12/2014
J2
J1
J1
J1
J2
J1
J1
J2
J3
J4
J4
J6
J1
J2
J2
J2
J3
J4
J6
J6
J6
J7
J7
J1
J1
J2
J1
J1
J1
J1
J1
J1
J3
J3
J3
J3
J3
J4
J5
J5
J5
2285
2295
2250
2253
2253
2275
2284
2294
3000
3001
3002
3006
4001
2201
2202
2203
2204
2234
2214
2243
2256
2267
2244
2231
2230
2290
2280
2281
2245
2248
2234
2214
2265
2267
2289
2209
2265
2237
2265
2243
2289
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
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0.00
0.00
0.00
0.00
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0.00
0.00
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0.00
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0.00
0.00
Bingham University Journal of Accounting and Business (BUJAB)
32.00
23.00
342.00
346.00
324.00
5.00
534.00
346.00
8,678.00
346.00
34.00
5,342.00
677.00
467.00
5,252.00
312.00
5,467.00
8,332.00
6,868.00
6.00
67.00
75,413.00
325.00
67.00
79,543.00
346,547.00
5,476.00
878.00
1,345.00
647.00
746.00
67,967.00
12,312.00
89.00
8.00
324.00
89.00
342,523.00
6,243.00
32,413.00
75.00
42,234.00
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129
130
131
11/11/2014
12/13/2014
2/1/2014
1/3/2014
6/11/2014
1/1/2014
4/23/2014
2/22/2014
4/5/2014
9/30/2014
12/3/2014
1/14/2014
1/16/2014
7/17/2014
5/10/2014
9/29/2014
8/14/2014
6/15/2014
6/6/2014
4/26/2014
7/12/2014
11/11/2014
1/14/2014
1/16/2014
7/17/2014
5/10/2014
9/29/2014
8/14/2014
6/15/2014
6/6/2014
4/26/2014
7/12/2014
11/11/2014
12/13/2014
6/17/2014
7/10/2014
4/25/2014
11/13/2014
4/14/2014
12/6/2014
9/12/2014
11/15/2014
1/3/2014
J6
J6
J3
J3
J3
J3
J2
J1
J2
J2
J1
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J2
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J1
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J3
J3
2209
2208
2201
2205
2204
2234
2265
2262
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2282
2292
2202
2232
2242
2212
2211
2222
2265
2275
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2295
2250
2253
2253
2275
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3000
3001
3002
3006
4001
2201
2202
2203
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2234
2214
2243
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2267
2244
2231
2000
2000
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2000
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2000
2000
2000
Bingham University Journal of Accounting and Business (BUJAB)
0.00
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0.00
0.00
0.00
0.00
0.00
2,134.00
675.00
87.00
644.00
86,809.00
32,342.00
3,123.00
656.00
878.00
5,467.00
678.00
89.00
89.00
8.00
324.00
89.00
342,523.00
6,243.00
32,413.00
75.00
42,234.00
2,134.00
675.00
87.00
644.00
86,809.00
32,342.00
3,123.00
656.00
878.00
5,467.00
678.00
89.00
6.00
6,796.00
3,254.00
12.00
344.00
1,324.00
413.00
32.00
23.00
342.00
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Technology Changes and the Impact on Accountancy Profession
132
133
134
135
136
137
138
139
140
141
142
143
144
145
146
147
148
149
150
151
152
153
154
155
156
157
158
159
160
161
162
163
164
165
166
167
168
169
11/17/2014
7/9/2014
3/14/2014
4/4/2014
5/19/2014
10/22/2014
8/14/2014
11/11/2014
12/13/2014
6/17/2014
7/10/2014
4/25/2014
11/13/2014
4/14/2014
12/6/2014
9/12/2014
11/15/2014
1/3/2014
1/14/2014
1/16/2014
11/11/2014
1/14/2014
1/16/2014
7/17/2014
5/10/2014
9/29/2014
8/14/2014
6/15/2014
6/6/2014
4/26/2014
7/12/2014
11/11/2014
12/13/2014
6/17/2014
7/10/2014
4/25/2014
11/13/2014
4/14/2014
J3
J3
J3
J4
J5
J5
J5
J6
J6
J3
J3
J3
J3
J2
J1
J2
J2
J1
J1
J1
J2
J1
J1
J2
J3
J4
J4
J6
J1
J2
J2
J2
J3
J4
J6
J6
J6
J7
2230
2290
2280
2281
2245
2248
2234
2214
2265
2267
2289
2209
2265
2237
2265
2243
2289
2209
2208
2201
2205
2204
2234
2265
2262
2272
2282
2292
2202
2232
2242
2212
2211
2222
2265
2275
2285
2295
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
170
171
172
173
12/6/2014
9/12/2014
11/15/2014
1/3/2014
J7
J1
J1
J2
2250
2253
2253
2275
2000
2000
2000
2000
0.00
0.00
0.00
0.00
Bingham University Journal of Accounting and Business (BUJAB)
346.00
324.00
5.00
534.00
346.00
8,678.00
346.00
34.00
5,342.00
677.00
467.00
5,252.00
312.00
5,467.00
8,332.00
6,868.00
6.00
67.00
75,413.00
325.00
4,195.00
4,185.00
5,413.00
129.00
4,570.00
13,342.00
3,340.00
7,642.00
234.00
7,000.00
7,689.00
45,532.00
523.00
76.00
1,387.00
1,245.00
879.00
90.00
7,634,7
32.00
89,764.00
8,976.00
7,655.00
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Technology Changes and the Impact on Accountancy Profession
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175
176
177
178
179
180
181
182
183
184
185
186
187
188
189
190
191
192
193
194
195
196
197
198
199
200
11/17/2014
7/9/2014
3/14/2014
4/4/2014
5/19/2014
10/22/2014
8/14/2014
11/11/2014
12/13/2014
11/15/2014
10/15/2014
5/16/2014
6/18/2014
6/17/2014
6/13/2014
9/9/2014
5/6/2014
12/12/2014
8/9/2014
9/7/2014
8/5/2014
4/13/2014
4/3/2014
8/16/2014
11/17/2014
2/1/2014
12/31/2014
J1
J1
J1
J1
J1
J1
J3
J3
J3
J3
J3
J4
J5
J5
J5
J6
J6
J3
J3
J3
J3
J2
J1
J2
J2
J1
J1
2284
2294
3000
3001
3002
3006
4001
2201
2202
2203
2204
2234
2214
2243
2256
2267
2244
2231
2230
2290
2280
2281
2245
2248
2234
2201
2265
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
0.00
0.00
0.00
0.00
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0.00
0.00
0.00
0.00
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0.00
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0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
67.00
341.00
61.00
64.00
6,342,327.00
85.00
6,534.00
651,324.00
67.00
79,543.00
346,547.00
5,476.00
878.00
1,345.00
647.00
746.00
67,967.00
12,312.00
89.00
3,234.00
324.00
89.00
342,523.00
6,243.00
32,413.00
4,195.00
42,234.00
55,000,000
Required:
How will you go about this assignment using the Audit & Investigation Software – Interactive Data
Extraction and Analysis (IDEA)?
Solution to Case Study
Task 1 – Import the Excel File - Account Receivable
1. On the Home tab, in the Import group, click Desktop to begin the import process.
The Import Assistant wizard appears. From the first screen you can select the file
to
import.
2. Select Microsoft Excel
3. Click the Browse button adjacent to the File name field to select the Microsoft Excel file to be
imported.
4. Select Account Receivables
Bingham University Journal of Accounting and Business (BUJAB)
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Technology Changes and the Impact on Accountancy Profession
5. Click Open.
The file name and path appear in the Import Assistant wizard.
6. Click Next
The Microsoft Excel screen appears. It displays a preview of the Microsoft Excel File.
IDEA determines the field types and widths by scanning all rows in the spreadsheet.
7. If the first row of the spreadsheet contains column names, select the First row is field names
check box.
8. In the Select sheets to import box, select all worksheets to be imported.
If you select multiple worksheets to import, each worksheet will be imported as a
separate database.
9. In the Output file name field, accept the default database name.
The default database name is the file name plus the worksheet name.
10. Click Ok.
The file is imported into IDEA and displayed in the Database window.
Task 2 – Reconciling Data by Using Control Total
1. Ensure that Account Receivable is the active database.
2. In the Properties window, click Control Total
The Select Control Total dialog box appears.
3. Select DEBIT as the Control Total field.
4. Click Ok
You may be prompted to calculate the Control Total now.
5. Click Yes
The total of the DEBIT field is N32,610,942.00. Ensure that you have the correct total displayed
beside the Control Total link in the Properties window.
Task 3 – Locating a Specific Record with Go To
1. Ensure that Account Receivable is the active database.
2. On the Data tab, in the Search group, click Go To.
The Go to record dialog box appears.
3. In the Go to record field, enter 170
4. Click Ok
Record number 170 is highlighted in the active database.
Task 4 – Locating a Specific Record with FIND
1. Ensure that Account Receivable Database is the active database.
2. On the Data tab, in the Search group, click Find and then click Find a Record.
The Find Record dialog box appears.
3. In the Search criteria field, enter CUSTOMER = 2204.
4. Click Ok
IDEA will automatically select and display the first record that meets the criteria.
5. Click Find Next to go to the next record that meets the criteria.
Task 5 – Performing Duplicate Key Detection
Using the duplicate key detection, you will verify if there have been any multiple invoices issued.
1. Ensure that Account Receivable-Database is the active database and that the Data property is
selected in the Properties window.
2. On the Analysis tab, in the Explore group, click Duplicate Key and then click Detection.
The Duplicate Key Detection dialog box appears.
3. Click Key.
Bingham University Journal of Accounting and Business (BUJAB)
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Technology Changes and the Impact on Accountancy Profession
The Define Key dialog box appears.
4. Select DATE in Ascending order and then select CUSTOMER in Ascending order.
5. Click Ok
6. Accept the default selection of the Output duplicate records option.
7. In the File name filed, enter Duplicate Customer on Same Day.
8. Click Ok
The new database, containing all transactions with Debits/Sales to the same customer more than once on
the same day, is created and opened in the Database window.
Technology Trends that will impact the Accountancy Profession
The top 10 technologies with the potential to reshape the accountancy profession and business landscape
considerably are:
1. Mobile: Anywhere, anytime access to broadband connectivity from a range of devices, wireless
networks, operating systems, and applications.
2. Big Data: The massive quantity and variety of structured and unstructured data from internetconnected systems, devices and physical objects.
Transactions will record themselves, using logical and database references to assign account
numbers; with all transactions being automated and aggregated into accounting software. As the
recording of transactions becomes more automated, the focus of accounting software will shift to
analyzing trends and improved reporting.
3. Artificial Intelligence and Robotics: The broad range of machines and computer systems that
demonstrate limited characteristics of intelligence. It is extremely easy to program taxation law,
ethical principles, and account recognition guidelines into a robot.
4. Cyber Security: Protection from new forms of cyber risk, attack, crime and terrorism caused by
increased reliance on personal and professional digital devices and data.
5. Educational: Trends and tools that are changing and enhancing educational achievements,
developments, techniques and possibilities.
Bingham University Journal of Accounting and Business (BUJAB)
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Technology Changes and the Impact on Accountancy Profession
6. Cloud: Internet-based technology resources – such as software applications, computing power
and data storage – provided remotely as a service.
The cloud and mobile devices (phones, tablets, ultrabooks, etc. will continue to help further
integrate technology into all aspects of an accountant’s daily duties. With pervasive computing,
accountants increasingly will use mobile devices to access cloud-based applications,
communications, and data. This connectivity will help accountants work more efficiently and
exchange information with clients more effectively.
7. Payment Systems: New, evolving and emerging internet-enabled software applications,
currencies, payment platforms, devices and services.
8. Virtual and Augmented Reality: Technologies that use computer modelling to simulate,
overlay and supplement reality and enable people to interact.
9. Digital Service Delivery: New technologies used to provide online, interactive, self-service,
business processes, software and services.
Bingham University Journal of Accounting and Business (BUJAB)
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Technology Changes and the Impact on Accountancy Profession
10. Social: Technologies that support social interaction and are enabled by communications
technology, such as the internet.
Facebook, Twitter, and LinkedIn is an essential parts of the accountant’s work tool kit.
Accountants looking to grow their firms and engage clients have no choice but to embrace social
media.
Conclusion and Recommendations
We have seen that technology is an asset to all businesses because of the enhanced communications skills
it has provided. Technology has provided many tools that increase efficiency in any business, including
accounting. Examples of these technological tools include computer-integrated manufacturing, image
processing, the Internet, and expert systems (Journal of Accountancy, 1996). This enhanced efficiency
within businesses allows accounting information to become dynamic, reflecting the current state (Journal
of Accountancy, 1996). This helps to fulfil management accountants’ objective of providing the most
accurate and timely information.
Overall, technology has caused change in the accounting profession. Hiring trends, education needs, and
the rise of the consulting side of accounting are just some of the impacts that technology has had on the
accounting profession. These cannot necessarily be labelled as benefits or disadvantages. It is clear,
however, that these impacts, as well as the advantages and disadvantages, are forcing a change in the
accounting profession. In response, the accounting profession needs to conform to these changes, or the
profession could be replaced by a rising generation of competitors. As one author for the Journal of
Bingham University Journal of Accounting and Business (BUJAB)
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Technology Changes and the Impact on Accountancy Profession
Accountancy says, it is clear that the accounting profession ‘needs to upgrade its practices and skills to
reflect where the world is going, not where it has been’ (Journal of Accountancy, 1996).
Advances in technology will also demand new skills and competencies from accountants and finance
professionals, from change management to knowledge of data extraction tools in the mining of business
intelligence. The direction of travel is clear; the details less so. The profession must anticipate the
changing needs of business.
Accountants must supplement its technical expertise with a broad understanding of the application of
existing and emerging technologies and the new skills that they demand. Accountants and finance
professionals must be open to the changes created by big data, cloud, mobile and social platforms, and
face up to the demands of cybercrime, digital service delivery and artificial intelligence. Key response
strategies are:
i.
Explore new ways of establishing costs
ii.
Prepare for changing working patterns
iii.
Keep watching brief on many emerging technologies
iv.
Assess risks and address security
v.
Plan timing for adoption and implementation
vi.
Develop change management skills
vii.
Enhance data analysis and interpretation skills
viii.
Recruit digital natives
ix.
Establish a broader and more strategic remit for finance
x.
Understand technology market conditions / planning/risks
xi.
Explore potential of process automation
xii.
Introduce better controls and education to enforce governance
xiii.
Use technology to add value
xiv.
Anticipate new regulation
xv.
Learn enough to know which questions to ask to gain insights
xvi.
Adapt to meet changing business needs
xvii.
Apply human brakes and overrides
xviii.
Manage expectations of internal and external customers.
By thinking ahead, the profession can take a more proactive than reactive response to digital technologies.
By embracing the new normal, the profession can actively reshape it, rather than simply being reshaped
by it.
Accountants and finance professionals must be open to the changes created by big data, cloud, mobile and
social platforms, and face up to the demands of cybercrime, digital service delivery and artificial
intelligence. The future will not be like the past and we will all need to adapt.
Looking to the future, there are challenges ahead for the profession. The profession needs to shape their
technological future rather than be shaped by it. The profession needs to be proactive; the changes ahead
are an opportunity to redefine roles and the extent to which the profession is involved in short and longterm technology related decisions. They need to adapt to survive.
References
Adekunle, O. E., Oduronke, T. E. and Olufunmilayo, M. A. (2014) Computer Studies for Professionals,
2nd edition, Bounty Press Limited, Ibadan. Nigeria.
Adejola, P.A (2015). Accounting Information Technology: Application of Electronic
Spreadsheets in
the Preparation and Presentation of Financial Reports, Arogbodo Publishers, Abuja, Nigeria.
Bingham University Journal of Accounting and Business (BUJAB)
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Technology Changes and the Impact on Accountancy Profession
Adejola, P.A (2014). Electronic Auditing- Arogbodo Publishers, Abuja, Nigeria.
Byrne, P. (2009). Auditing in a computer based environment. Student Accountant. London: United
Kingdom: Association of Chartered Certified Accountants.
Get Through Guides. (2013). Paper p7 advanced audit and assurance (international) study text
(5th ed.). Surrey, United Kingdom: Author.
Hansen, D.R. and Mowen, M.M., 2007. Cost Management: Accounting & Control, South Western
College Publishing.
Kituyi, M. and Victor, M (2013) Accounting Information Technology, ICT -University, Louisiana,
USA.
Pincus, K.V. (1997). In: CORE: Concepts of accounting information vol. III, McGraw–Hill, pp. 3–31.
Technology: Top 15 technologies CPAs should know about in 1996. Journal of Accountancy.
(1996) 25–28. www.catalog.flatworldknowledge.com
January
Technology: Top 15 technologies CPAs should know about in 1996. Journal of Accountancy.
January (1996) 25–28. http://www.sciencedirect.com
Bingham University Journal of Accounting and Business (BUJAB)
Page 17
Relationship between Inflation and Unemployment in Nigeria: Evidence from VAR-Granger
Causality
Relationship between Inflation and Unemployment in Nigeria:
Evidence from VAR-Granger Causality
Awujola Abayomi
Department of Economics,
Bingham Univeristy,
Karu, Nasarawa State.
Email: jolayomi@yahoo.com, Phone No: 08036233958
Bagaiya Rachael Sannai
Department of Economics,
Univeristy of Abuja,
FCT - Nigeria.
and
Ugbaka Malachy
Department of Economics,
Univeristy of Abuja,
FCT - Nigeria.
Abstract
The paper examined Nexus between Unemployment and Inflation in Nigeria using A VAR-Granger causality test
examine the direction causal relationship between unemployment and inflation in Nigeria. Also, a multivariant
regression model was adopted with ordinary least squares (OLS) estimator. Before the VAR-Granger causality test
and model estimation were carried out, trend analysis of variables, unit root test and cointegration test were first
reported. Findings from the unit root test results revealed that the time series used integrated of order one, i.e., they
are stationary after first differencing, while the cointegration test results showed that the variables under study have
long-run relationship.The VAR-Granger causality test results revealed that unemployment rate had statistically
significant impact on inflation rate during the period under investigation. Findings from the regression estimates
showed that unemployment rate impacted negatively but insignificantly on inflation rate while broad money supply
had positive and significant impact during the period under consideration.
Keywords: Unemployment, Inflation, Broad Money.
1.
Introduction
Nigeria is endowed with diverse and infinite resources, both human and material. However, years of
negligence and adverse policies have led to the under-utilization of these resources. These resources have
not been effectively utilized in order to yield maximum economic benefits. This is one of the primary
causes of unemployment and poverty in Nigeria (Onwioduokit, 2006; Zaman et al., 2011).
Unemployment in Nigeria is a major problem both economically and socially. It has adversely affected
the purchasing power of the people. With less consumption leading to lower production, economic
growth has been hampered. Unemployment also has social consequences as it increases the rate of crime.
In Nigeria, the secondary school graduates consist of the principal fraction of the unemployed accounting
for nearly 35% to 50%. The rate of unemployment within the age group of 20 to 24 years is 40 % and
between 15 to 19 years it is 31 % (NBS, 2016).
There is a high level consensus among many economists, central bankers, policy makers and practitioners
that one of the fundamental objective of macroeconomic policies in both the developed and developing
Bingham University Journal of Accounting and Business (BUJAB)
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Relationship between Inflation and Unemployment in Nigeria: Evidence from VAR-Granger
Causality
economies is to sustain high economic growth together with low, one-digit inflation. This is because a
high level of inflation disrupts the smooth functioning of a market economy (Lucas, 2003). At the
individual level, inflation exerts a heavy toll on those with fixed income; inflation relatively favours
debtors at the expense of creditors, at the firm level; the effect of inflation is called the ‘menu cost’, and
because it affects output when firms have to incur costs as they adjust to the new price level e.g.,
changing their price lists for customer (Guerrero, 2004). The conventional view in macroeconomics holds
that moderate and stable inflation is necessary to foster economic growth. Low inflation levels promote
economic growth by making prices and wages more flexible. On the other hand, high price level may
create uncertainty and hamper economic performance due to the adverse impact on efficient distribution
of resources by changing relative prices (Lucas, 2003).
In the Nigerian economy, inflation has become one of the intractable problems. Having registered low
rate of inflation in the years immediately after independence, the country experienced double-digit
inflation in 1970. Ever since, the rate has continued to move at an upward trend (Omoke, 2010). Thus,
inflation has been seen as the problem of the slow pace of economic growth and development in Nigeria
and its solution does not seem to be easily realizable. Over the years, there have been a number of
economists trying to interpret the relationship between the concepts of inflation and unemployment.
There are two possible explanations of this relationship – one in the short-term and another in the longterm (Alfred and King 2011, Hussein 2014, Tang and Lean 2007; Walker 2012, Omoke 2010; Umaru
2012, Saaed 2007etc), but this paper is set to empirically examine the causal relationship between
unemployment and inflation in Nigeria.
2.
Literature Review
2.1
Conceptual Framework
There are a plethora of empirical studies on the relationship between unemployment and inflation both in
developed and developing countries. Swane and Vistrand (2006) examined the GDP-employment growth
relationship in Sweden. Using the employment-population ratio as a measure of the extent of employment
generation, the study found a significant and positive relationship between GDP and economic growth.
This finding supports the strand of theory suggesting that the positive relationship between GDP and
employment is normal through regression analysis and that any observed jobless growth might just be a
temporary deviation. They however make useful suggestion for further research on the causal relationship
between unemployment and GDP.
2.2
Empirical Review
Furuoka (2007) applied the Vector Error Correction Model (VECM) analysis to test the existence of the
Phillips curve in Malaysia for the period from 1973-2004. The findings confirmed the Phillips ‟ theory theory in
Malaysia. The study of Carlos (2010) examined if the Phillips curve is a relevant tool to conduct
monetary policy in African countries wishing to adopt an inflation targeting regime. Using Nigeria as a
case study, he estimated the model by using Bayesian econometric technique. The study concluded that
there was evidence that central banks could control the inflation rate through a Phillips curve, the
sterilization of the resources from oil exports and a Taylor rule that includes the exchange rate. Hansen
and Pancs (2001) examined the existence of the Phillips curve in Lativa. They also found out that there is
a significant correlation between the unemployment rate and the actual inflation rates. Arratibel et al.
(2002) analyzed the New Keynesian Phillips curve with forward-looking expectations by using panel
data. They found that the unemployment rates have significant relationship with non-tradable inflation
rates. By contrast, Masso and Staehr (2005) used the dynamic panel data method and failed to identify a
significant relationship between unemployment rate and inflation rates.
Bingham University Journal of Accounting and Business (BUJAB)
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Relationship between Inflation and Unemployment in Nigeria: Evidence from VAR-Granger
Causality
Furthermore, Faridul Islam et al. (2003) examined the hypothesis of Philips curve through US economic
data from 1950 to 1999. They found out a weak long-run co-integrating relationship and long-run
causality between unemployment and inflation. They argued that “the U.S stabilization policy should still
be able to exploit the trade-off relationship between the unemployment rate and the inflation rates”.
However, Hart (2003) tested the Phillips hypothesis by employing the hourly wage earning. He concluded
that during the inter-war period (1926-66) in Britain, the Phillips curve was “not supported by our data”.
Ola-David and Oluwatobi (2012) investigated the existence of an Okun-type relationship for the Nigerian
economy during the period 1970 to 2009. The results showed that a long run inverse relationship exists
between unemployment and output in Nigeria. The Okun coefficient was 1.75 percent indicating that a
one percent decrease in unemployment rate is accompanied by a 1.75 percent increase in GDP.
Aminu and Anono (2012), using the Augmented Dickey-Fuller technique, revealed that there is a longterm relationship that exists between the two. Also, the study revealed a negative relationship between
unemployment and inflation and a minimal applicability of various theories of unemployment and
inflation in Nigeria. Chukwudi (2012), in his studies on the impact of unemployment on economic
growth, found that for GDP to grow, unemployment and inflation must be reduced. This entails
employment of material and human resources in the production process. Also, it may not achieve the
desired result if government expenditure is not adjusted as well. Erbaykal and Okuyan (2008) examined
the relationship between the inflation and the economic growth in Turkey from 1987-2006. The existence
of a co integration relationship between the two series was detected following the test results. Whereas no
statistically significant long term relationship was found using the ARDL models, a negative and
statistically significant short term relationship was found. The causality relationship between the two
series was examined in the framework of the causality test developed by Toda and Yamamoto (1995).
Whereas no causality relationship was found from economic growth to inflation, a causality relationship
was found from inflation to economic growth.
Oladeji (2007) investigated the issue of graduate unemployment in Nigeria while Borisade (2001)
examined the structure of educationalsystem and employment relationship in Nigeria. Both conclude that
a re-orientation of the educational system towards the employment needs of the economy would go a long
way towards promoting productive employment in Nigeria. Saaed (2007) explored the relationship
between inflation and economic growth in the context of Kuwait, using the annual data set on real GDP
and CPI for the period of 1985 to 2005. The estimated result of the relationship shows a long-run and
strong inverse relationship between CPI and GDP in Kuwait. Onwioduokit (2006) examined the link
between unemployment and several macroeconomic variables in Nigeria. He analysed the study through
cointegration test and unit root test techniques and concluded that the shift in the composition of
unemployment in Nigeria since 2000 is very instructive as it has brought to the fore the inadequacies of
the received theory towards explaining the unemployment phenomenon in the country.
Williams and Adedeji (2004) examined price dynamics in the Dominican Republic by exploring the joint
effects of distortions in the money and traded-goods markets on inflation, holding other potential
influences constant. The study captured the remarkable macroeconomic stability and growth for period
1991 to 2002. Using a parsimonious and empirically stable error-correction model, the paper found that
the major determinants of inflation were changes in monetary aggregates, real output, foreign inflation,
and the exchange rate. However, there was an incomplete pass-through of depreciation from the exchange
rate to inflation. The authors established a long-run relationship in the money and traded-goods markets,
observing that inflation was influenced only by disequilibrium in the money market.
2.3
Theoretical Framework
Theoretically, prior to the emergence of what became to be known as the unemployment and inflation
trade-off or Phillips curve in 1958, unemployment and inflation were considered and treated in economics
Bingham University Journal of Accounting and Business (BUJAB)
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Relationship between Inflation and Unemployment in Nigeria: Evidence from VAR-Granger
Causality
as distinct subjects. Keynes for instance described inflation as the excess of expenditure over income at
full-employment level. He contended that the greater the aggregate expenditure, the larger the inflationary
gap and the more rapid the inflation. As for unemployment, the Keynesian economists hold that an
increase in unemployment reduces income, which reduces consumption, and reduces aggregate output. As
a result, employment can be increased by increasing consumption or investment. The monetarist on the
other hand, explained inflation in terms of excessive growth of the money supply relative to real output.
Their view on unemployment, however, is framed within the context of Milton Friedman’s permanent
income hypothesis. Based on the Permanent Income Hypothesis (PIH), a reduction in employment and
current receipts only affects output to the extent that the anticipated income declines.
3.
Methodology
Data from both Central Bank of Nigeria and Nigerian Bureau of Statistics were used covers the period
between 1980 to 2015 this is hinged on data availability and employed the VAR-Granger causality test
which is based on vector autoregression (VAR) modelling framework. The 3-dimention VAR
specification for the study is given as follows:
p
p
p
j=1
k=1
p
UNM t =α 0+ ∑ α 1 i UNM t−i + ∑ α 2 j INF t − j + ∑ α 3 k M 2t−k +¿ ε 1t ¿
i=1
p
p
INF t=β 0 + ∑ β 1 i INF t−i + ∑ β 2 j UNM t− j+ ∑ β3 k M 2t −k +¿ ε 2 t ¿
i=1
p
j=1
p
k=1
p
M 2 t=φ+ ∑ φ1 i INFt −i+ ∑ φ2 j UNM t− j+ ∑ φ3 k M 2t −k +¿ ε 3 t ¿
i=1
j=1
k=1
Where UNM is unemployment rate; INF is inflation rate; α 0 , α 1 , α 2 , α 3 , β0 , β 1 , β 2 , β 3 , α 3 , φ0 , φ1 , φ2and
φ 3are parameters of the VAR model; ε 1t , ε 2 t and ε 3t are white noise (stationary) error terms;t is time; and
p is the lag order which is determined using the sequential modified LR test statistic, Final Predictor Error
(FPE), Akaike Information Criterion (AIC), Schwarz-Bayesian Information Criterion (SIC), and
Hannan-Quinn (HQ) Information Criterion.
In the above VAR specification, we test whether coefficient of laggedvariables equals zero in the
following null hypotheses:
H 0 :α 1 =α 2 =α 3 =0
H 0 : β 1=β 2=β 3=0
H 0 :φ1=φ2=φ3=0
The null hypotheses are that inflation rate does not Granger-cause unemployment rate in the first
equation; and that unemployment rate does not Granger-cause inflation rate in the second equation.
Equation (1) postulates that the current unemployment rate (UNM) is related to its immediate past value
as well as the past value of inflation rate (INF) and broad money supply (M2); equation (2) indicates that
current inflation rate (INF) is related to its immediate past value as well as the past value of
unemployment rate (UNM) and broad money supply (M2); while equation (3) indicates a similar
behaviour for broad money supply (M2).
4.
Data Results and Interpretation
4.1
Trend Analysis of Variables
The trend line for each variable considered in this study is as presented in figure 1. The trend analysis
covers the sample period 1980 to 2015. Being macroeconomic variables, most of the series exhibit an
unstable trend during the period under consideration. This is largely due to the domestic and external
shocks that hit the economy as well as the general developments in the macroeconomy. From the graphs,
Bingham University Journal of Accounting and Business (BUJAB)
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Relationship between Inflation and Unemployment in Nigeria: Evidence from VAR-Granger
Causality
it can be seen that UNM and INFhad pronounced fluctuations (ups and downs), most especially INF. The
implication is that unemployment and inflation rates have not been stable overtime. On the other hand,
broad money study has been a bit stable, as it steadily rises at constant rate from the 1980s to early 2000s
but has been rising faster since 2008. This could partly explain the rising level of inflation in the
economy.
UNM
70
60
50
40
30
20
10
1980
1985
1990
1995
2000
2005
2010
2015
2000
2005
2010
2015
2000
2005
2010
2015
INF
36
32
28
24
20
16
12
8
1980
1985
1990
1995
M2
10, 000,000
8,000,000
6,000,000
4,000,000
2,000,000
0
1980
1985
1990
1995
Source: Computed using E-Views 9 Software.
Figure 1: Trends of Variables
4.1.1
Unit Root Test Results
From the ADF unit root test results in table 2 in appendix, observed that the timeseries variables (UNM,
INF and M2) werenon-stationary at level. Howeverafter first differencing, they became stationary. This
implies that the series are integrated of order 1.
4.1.2
Cointegration Test Results
Bingham University Journal of Accounting and Business (BUJAB)
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Relationship between Inflation and Unemployment in Nigeria: Evidence from VAR-Granger
Causality
From tables 3 and 4 in appendix ii, shows that both the trace and maximum Eigenvalue test statistics
indicate 5 cointegrating equation(s) at the 5% level of significance. Based on this evidence, we can safely
reject the null hypothesis of no cointegrating vectors and conveniently accept the alternative hypothesis of
the presence of cointegrating vectors among all the variables in the specified error correction model. This
implies that a long-run relationship exists between the variables under study.
The Granger causality test results are as presented in the appendix. The VAR-Granger causality test
reveals that inflation rate (INF) and broad money supply (M2) do not Granger-cause unemployment rate
(UNM) since the coefficients on INF and UNM are statistically insignificant. Similarly, unemployment
rate (UNM) and broad money supply (M2) do not Granger-cause inflation rate (INF) since the
coefficients on UNM and M2 are statistically not different from zero. Lastly, while unemployment rate
(UNM) does Granger-cause money supply (M2) since the coefficient on UNM is statistically significant,
on the other hand, inflation rate (INF) does Granger-cause money supply (M2) since the coefficient on
INF is statistically .significant Hence, we can conclude that there was no causality between
unemployment and inflation rates during the period under investigation.
4.2
Interpretation of Regression Results
From the regression results, we observed that the coefficients of the explanatory variable (UNM) was
negative; indicating that a unit change in unemployment rate, on average, reduced inflation rate (INF)
absolutely by 0.178515 unit holding M2 constant. On the other hand, the positive coefficient of M2
implies that, a unit change in broad money supply, on average, increased inflation rate (INF) by 5.567034
units holding UNM constant. The low t-statistic value with high probability value greater than 0.05 (i.e.,
5%) of UNM suggests that the impact of unemployment rate on inflation rate was statistically
insignificant at 5% level of significance. On the other hand, the high t-statistic value with low probability
value less than 0.05 (i.e., 5%) of M2 implies that the impact of broad money supply on inflation rate was
statistically significant at 5% level of significanceduring the period under consideration.
The coefficient of determination (R2) of the estimated multiple linear regression model shows that about
88% of the variation in INF was explained by changes in the explanatory variables. This implies that the
estimated model has a good fit. The adjusted coefficient of determination (R 2) (i.e., adjusted R2=84%)also
shows that the estimated model has a good fit, after taking into account the loss of degree of freedom
resulting from the addition of explanatory variable into the model. The high value of the F-statistic of the
estimated model (i.e., F= 16.46817) with low probability value of 0.000004 which is less than 5% (=0.05)
level of significanceindicates that the parameters are jointly or simultaneously statistically significant.
The implication is that the estimated model is good for forecasting, predicting and policy purposes.
The Durbin-Watson (d) statistic value suggests the absence of autocorrelation in the estimated model.
This is based on the decision rule which state that Durbin-Watson value close to or around 2 indicates the
absence of autocorrelation. The observed Durbin-Watson value of each estimated model is close to 2 (i.e.,
D.W= 1.84). Thus, the predicting and forecasting power of the estimated model is reliable.
5.
Conclusion and Recommendation
A VAR-Granger causality test was conducted to examine the causal relationship between unemployment
and inflation in Nigeria. Also, a multiple linear regression model was estimated using the ordinary least
squares (OLS) method. Before the VAR-Granger causality test and model estimation werecarried out, the
results of descriptive statistics, trend analysis of variables, unit root test and cointegration testreported
first. Findings from the unit root test results revealed that the time series used integrated of order one, i.e.,
Bingham University Journal of Accounting and Business (BUJAB)
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Relationship between Inflation and Unemployment in Nigeria: Evidence from VAR-Granger
Causality
they are stationary after first differencing, while the cointegration test results showed that the variables
under study have long-run relationship. The VAR-Granger causality test results revealed that
unemployment rate had statistically significant impacted on inflation rate (INF) during the period under
investigation. Findings from the regression estimates showed that unemployment rate impacted
negatively but insignificantly on inflation rate while broad money supply had positive and significant
during the period under consideration. The coefficient of determination showed that the estimated model
has good fit. The F-statistic value indicates that the parameters of the estimated multiple linear regression
models are jointly significant. Lastly, the Durbin-Watson statistic value revealed absence of first-order
autocorrelation.
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Appendices
Appendix I: Augmented Dickey-Fuller (ADF) Unit Root Tests Results using E-Views 9 Software
ADF Unit Root Test on UNM at Level
Null Hypothesis: UNM has a unit root
Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=1)
Augmented Dickey-Fuller test statistic
Test critical values:
1% level
5% level
10% level
t-Statistic
Prob.*
0.512452
-3.632900
-2.948404
-2.612874
0.9848
*MacKinnon (1996) one-sided p-values.
Augmented Dickey-Fuller Test Equation
Dependent Variable: D(UNM)
Method: Least Squares
Date: 03/13/17 Time: 11:31
Sample (adjusted): 1981 2015
Included observations: 35 after adjustments
Variable
Coefficient
Std. Error
t-Statistic
Prob.
UNM(-1)
C
0.033899
0.357494
0.066150
2.031233
0.512452
0.175999
0.6117
0.8614
R-squared
Adjusted R-squared
S.E. of regression
0.007895
-0.022169
4.575462
Mean dependent var
S.D. dependent var
Akaike info criterion
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1.320000
4.525574
5.934738
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Relationship between Inflation and Unemployment in Nigeria: Evidence from VAR-Granger
Causality
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
690.8502
-101.8579
0.262607
0.611748
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat
6.023615
5.965418
1.618557
ADF Unit Root Test on UNM at First Difference
Null Hypothesis: D(UNM) has a unit root
Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=1)
Augmented Dickey-Fuller test statistic
Test critical values:
1% level
5% level
10% level
t-Statistic
Prob.*
-4.600600
-3.639407
-2.951125
-2.614300
0.0008
*MacKinnon (1996) one-sided p-values.
Augmented Dickey-Fuller Test Equation
Dependent Variable: D(UNM,2)
Method: Least Squares
Date: 03/13/17 Time: 11:32
Sample (adjusted): 1982 2015
Included observations: 34 after adjustments
Variable
Coefficient
Std. Error
t-Statistic
Prob.
D(UNM(-1))
C
-0.812763
0.971436
0.176665
0.798689
-4.600600
1.216287
0.0001
0.2328
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.398106
0.379297
4.510236
650.9514
-98.42918
21.16552
0.000063
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat
0.055882
5.724761
5.907599
5.997384
5.938218
1.980286
ADF Unit Root Test on INF at Level
Null Hypothesis: INF has a unit root
Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=1)
Augmented Dickey-Fuller test statistic
Test critical values:
1% level
5% level
10% level
t-Statistic
Prob.*
-2.226581
-3.632900
-2.948404
-2.612874
0.2009
*MacKinnon (1996) one-sided p-values.
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Relationship between Inflation and Unemployment in Nigeria: Evidence from VAR-Granger
Causality
Augmented Dickey-Fuller Test Equation
Dependent Variable: D(INF)
Method: Least Squares
Date: 03/13/17 Time: 11:33
Sample (adjusted): 1981 2015
Included observations: 35 after adjustments
Variable
Coefficient
Std. Error
t-Statistic
Prob.
INF(-1)
C
-0.264106
4.972928
0.118615
2.459211
-2.226581
2.022164
0.0329
0.0513
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.130610
0.104265
5.226799
901.5411
-106.5161
4.957665
0.032915
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat
-0.137143
5.522632
6.200920
6.289797
6.231601
1.896779
ADF Unit Root Test on INF at First Difference
Null Hypothesis: D(INF) has a unit root
Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=1)
Augmented Dickey-Fuller test statistic
Test critical values:
1% level
5% level
10% level
t-Statistic
Prob.*
-6.258881
-3.639407
-2.951125
-2.614300
0.0000
*MacKinnon (1996) one-sided p-values.
Augmented Dickey-Fuller Test Equation
Dependent Variable: D(INF,2)
Method: Least Squares
Date: 03/13/17 Time: 11:34
Sample (adjusted): 1982 2015
Included observations: 34 after adjustments
Variable
Coefficient
Std. Error
t-Statistic
Prob.
D(INF(-1))
C
-1.098866
-0.309105
0.175569
0.960821
-6.258881
-0.321709
0.0000
0.7498
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.550395
0.536345
5.595647
1001.960
-105.7609
39.17359
0.000001
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat
Bingham University Journal of Accounting and Business (BUJAB)
-0.011765
8.217747
6.338877
6.428663
6.369497
2.041758
Page 27
Relationship between Inflation and Unemployment in Nigeria: Evidence from VAR-Granger
Causality
ADF Unit Root Test on M2 at Level
Null Hypothesis: M2 has a unit root
Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=1)
Augmented Dickey-Fuller test statistic
Test critical values:
1% level
5% level
10% level
t-Statistic
Prob.*
0.150967
-3.632900
-2.948404
-2.612874
0.9652
*MacKinnon (1996) one-sided p-values.
Augmented Dickey-Fuller Test Equation
Dependent Variable: D(M2)
Method: Least Squares
Date: 07/11/17 Time: 06:01
Sample (adjusted): 1981 2015
Included observations: 35 after adjustments
Variable
Coefficient
Std. Error
t-Statistic
Prob.
M2(-1)
C
0.009668
235479.3
0.064043
215203.5
0.150967
1.094217
0.8809
0.2818
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.000690
-0.029592
1125723.
4.18E+13
-536.3209
0.022791
0.880921
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat
250655.3
1109427.
30.76119
30.85007
30.79187
1.909711
ADF Unit Root Test on M2 at First Difference
Null Hypothesis: D(M2) has a unit root
Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=1)
Augmented Dickey-Fuller test statistic
Test critical values:
1% level
5% level
10% level
t-Statistic
Prob.*
-5.361935
-3.639407
-2.951125
-2.614300
0.0001
*MacKinnon (1996) one-sided p-values.
Augmented Dickey-Fuller Test Equation
Dependent Variable: D(M2,2)
Method: Least Squares
Bingham University Journal of Accounting and Business (BUJAB)
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Relationship between Inflation and Unemployment in Nigeria: Evidence from VAR-Granger
Causality
Date: 07/11/17 Time: 06:03
Sample (adjusted): 1982 2015
Included observations: 34 after adjustments
Variable
Coefficient
Std. Error
t-Statistic
Prob.
D(M2(-1))
C
-0.945793
244262.6
0.176390
200682.6
-5.361935
1.217159
0.0000
0.2324
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.473254
0.456793
1141026.
4.17E+13
-521.4262
28.75034
0.000007
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat
5602.285
1548149.
30.78978
30.87956
30.82040
1.999131
Appendix III: Johansen–Juselius Cointegration Test Results
using E-Views 9 Software
Date: 07/11/17 Time: 06:07
Sample: 1980 2015
Included observations: 36
Trend assumption: Linear deterministic trend
Series: UNM INF M2
Lags interval (in first differences): 1 to 1
Unrestricted Cointegration Rank Test (Trace)
Hypothesized
No. of CE(s)
Eigenvalue
Trace
Statistic
0.05
Critical Value
Prob.**
None *
At most 1 *
At most 2 *
At most 3 *
At most 4 *
At most 5
At most 6
At most 7
At most 8
0.996879
0.993997
0.887688
0.799967
0.643064
0.496291
0.412808
0.286783
0.045073
484.7668
323.2219
179.9896
118.7683
73.70861
44.86305
25.66183
10.75452
1.291382
197.3709
159.5297
125.6154
95.75366
69.81889
47.85613
29.79707
15.49471
3.841466
0.0001
0.0000
0.0000
0.0005
0.0237
0.0930
0.1391
0.2270
0.2558
Trace test indicates 5 cointegrating eqn(s) at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values
Unrestricted Cointegration Rank Test (Maximum Eigenvalue)
Hypothesized
No. of CE(s)
Eigenvalue
Max-Eigen
Statistic
0.05
Critical Value
Prob.**
None *
At most 1 *
At most 2 *
At most 3 *
0.996879
0.993997
0.887688
0.799967
161.5448
143.2323
61.22132
45.05969
58.43354
52.36261
46.23142
40.07757
0.0000
0.0000
0.0007
0.0127
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Relationship between Inflation and Unemployment in Nigeria: Evidence from VAR-Granger
Causality
At most 4*
At most 5
At most 6
At most 7
At most 8
0.643064
0.496291
0.412808
0.286783
0.045073
28.84556
19.20121
14.90731
9.463139
1.291382
33.87687
27.58434
21.13162
14.26460
3.841466
0.1772
0.3991
0.2954
0.2496
0.2558
Max-eigenvalue test indicates 5 cointegrating eqn(s) at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values
Bingham University Journal of Accounting and Business (BUJAB)
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Impact of Macro-Economic Policy on Manufacturing Sector Output in Nigeria
Impact of Macro-Economic Policy on Manufacturing Sector Output
in Nigeria
Ademu, Wada Attah, Ph.D
Department of Economics,
University of Jos, Jos, Plateau State
E-Mail: Ademuw2001@yahoo.com
Dabwor, T. Dalis, Ph.D
Department of Economics,
University of Jos, Jos
E-Mail: tongnandalis@yahoo.com
and
Ezie Obumneke
Department of Economics
Bingham University, Karu,
Nasarawa State,Nigeria
E-Mail: eobumneke@yahoo.com, Phone No. 08069430911
Abstract
In most modern economies, the manufacturing sector has been identified as an important engine of growth, an
antidote for unemployment, a creator of wealth, and a channel for sustainable development capable of promoting
industrialization in an economy. However, there has been a growing concern on the decline of the outputs of the
manufacturing sector in Nigeria in recent times, despite the fact that the government embarked on several strategies
aimed at improving industrial production and capacity utilization of the sector. The study thus examines the impact
of selected macro-economic policies on manufacturing sector output between 1986 and 2016. The study adopted
break-point- Auto Regressive Distributed Lag (ARDL) technique in carrying out the empirical analysis. Findings
from the study revealed that broad money supply has a significant and positive effect on manufacturing sector
outputs in Nigeria. However, total government expenditures had no significant impact on manufacturing sector
outputs in Nigeria within the period under review. Lastly, it was discovered that trade openness had a significant
influence on manufacturing sector outputs in Nigeria. It showed that trade liberalization had a positive impact on
technological advancement of the manufacturing sector. The study thus recommends the need for proper monitoring
and control of government expenditures especially public spending on capital projects which has a direct impact on
manufacturing sector outputs. This is to ensure that revenues set aside for infrastructural development are fruitfully
spent and did not end up in private pockets. The government should create a congenial environment where there
will be ready markets for industrial goods such that when expansionary monetary policy is implemented,
industrialist will be more open to borrow and expand production.
Keywords: Manufacturing outputs, Total government expenditures, Broad money supply, Degree of openness, and
Macro-Economic Policy
I.
INTRODUCTION
Macroeconomic stability has been identified as a key concern for policy institutions, policymakers and
the government in both developed and developing countries. Sustainable economic growth with relatively
stable price level and substantial improvement of the welfare of the society has been the drive of policy
institutions. In this respect, both monetary and fiscal policies are used as major tools for macroeconomic
stabilization, economic growth and management. However, in the last five decades, the effectiveness of
the two policies has been a major concern of economists and policy makers with advocacy ranging from
monetarists, fiscalists and both policy coordination. Monetarists are those economists who believe that
monetary policy is a more powerful tool when used for macroeconomic stabilization. They include
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Impact of Macro-Economic Policy on Manufacturing Sector Output in Nigeria
(Friedman and Meiselman, 1963: Elliot, 1975; Rahman, 2005 and Senbet, 2011). On the other hand, are
the fiscalists/Keynesians whose policy faith is much in government expenditure and tax changes than in
monetary policy. This group is led by Keynes. These policy stands have motivated extensive research on
the relative effectiveness of fiscal and monetary policy (Ajisafe and Folorunso,. 2002; Adefeso, and
Mobolaji,. 2010).
In most modern economies, the manufacturing sector has been identified as an important engine of growth, a major
driving force; an antidote for unemployment, a creator of wealth, and a channel for sustainable development capable
of promoting industrialization in an economy (Jide, 2012). The sector also serves as the vehicle for the production of
goods and services, and the enhancement of incomes. Hence, the manufacturing sub-sector can be described as the
heart of the economy. The sector further acts as a catalyst that accelerates the pace of structural transformation and
diversification of the economy, which enables a country utilize its factor endowments and depend less on the foreign
supply of finished goods or raw materials (Adediran & Obasan, 2010). In recognition of these potential roles of the
sector, successive governments in Nigeria have continued to articulate policy measures and programme to achieve
industrial growth incentive and adequate finance. It is important to state here that there has been a growing concern
on the decline of the outputs of the manufacturing sector in Nigeria in recent times, despite the fact that the
government embarked on several strategies aimed at improving industrial production and capacity utilization of the
sector. As rightly asserted by Obamuyi, Edun and Kayode (2013), the growth rate of manufacturing sector in
Nigeria has been constrained over the years due to inadequate funding, either due to the inefficient capital market or
the culture of the Nigerian banks to finance mainly short term investment. The long-term funds from the banking
sector are not easily accessible as a result of the stringent and restrictive credit guidelines to the sector. Lack of
funds has made it difficult for the Nigerian industries to make investment in modern machines, information
technology and human resources development which are critical in reducing production costs, raising productivity
and improving competitiveness. Low investment has also been traced largely to banks unwillingness to make credits
available to manufacturers, owing partly to this mis-match between the short-term nature of banks funds and the
medium to long-term nature of funds needed by Nigerian industries (Toby and Peterside, 2014).
Aremu and Adeyemi (2011), Sokoto and Abdullahi (2013) also noted that manufacturing firms in Nigeria are
generally characterized by inadequate capital base, low managerial skills, and high levels of technical inefficiency,
which reduce their potential output levels significantly. They further articulated the challenges of these enterprises to
include inadequate access to credit; lack of decision-making skills, sound management and accounting practices; and
inability of lenders, especially deposit money banks, to objectively assess the risk profiles of manufacturing sector in
Nigeria. Sokoto and Abdullahi (2013) further observed that the manufacturing industry in Nigeria suffer the
crowding out effect as a result of the unfair competition from foreign investors; and this relegated most of the
manufacturing industries in Nigeria to the informal sector. Manufacturers’ Association of Nigeria (MAN, 2011)
observed that the manufacturing sector in Nigeria has been experiencing stunted growth and its contribution to
Gross Domestic Product (GDP) has remained low. Accordingly, the highest manufacturing sector output growth rate
was recorded during the Structural Adjustment Programme (SAP) period in 1988 where manufacturing sector was
found to have contributed 34.94% to Gross Domestic Product (GDP) after the adoption of the SAP. Between 1990
and 1995, it had declined to 22.84% and 10.17% respectively. The contribution of the Nigerian manufacturing sector
to Gross Domestic Product (GDP) remained relatively insignificant between 1996 and 2015. The production indices
(using 1990 as the base year) indicated that, while agriculture and services experienced modest growth from 101.5%
to 297.0% between 1991 and 1999 respectively, manufacturing sector recorded a decline from 109.4% to 92.3% in
the same period. Negative growth rates were also experienced in 2002, 2003 and 2004. The year 2000, 2005, 2012,
2013, 2014 and 2015 recorded 6.97%, 2.80%, 1.88%, 9.03%, 9.75% and 9.53% growth rates respectively (CBN,
2012; CBN, 2015).
Furthermore, as at 1986, the average value of manufacturing capacity utilization was 38.8% and later increased to
40.3% in 1990. It was observed to decrease to 29.29% and 36.1% in 1995 and 2000 respectively. The value of the
average capacity utilization in 2005, 2009, 2010, and 2012, however varied between 54.8%, 48.0%, 56.44%, and
55.82% respectively (CBN, 2013). Nigeria’s Capacity Utilization was also observed to have decreased to 50.70% in
the second quarter of 2016 from 53.70% in the fourth quarter of 2015. It averaged 56.39% from 2009 until 2016,
reaching an all-time high of 60.50% in the first quarter of 2015 and a record low of 50.70 percent in the second
quarter of 2016 (Tradingeconomics, 2017). This implies that there were no growth propelling resources at the
disposal of manufacturing firms in Nigeria over the years which tend to deteriorate their growth mechanisms. The
study thus examines the impact of macro-economic policy on manufacturing sector outputs in Nigeria by adopting
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Impact of Macro-Economic Policy on Manufacturing Sector Output in Nigeria
break-point Auto Regressive Distributed Lag (ARDL) approach. Answers were provided for the following research
questions:
i.
How has broad money supply impacted on manufacturing sector outputs in Nigeria?
ii.
What impacts does total government expenditure have on manufacturing sector outputs in Nigeria?
iii.
To what extent has trade openness influenced manufacturing sector outputs in Nigeria?
In-line with the stated research questions, the following hypotheses were tested:
H01: Broad money supply have no significant effect on manufacturing sector outputs in Nigeria
H02: Total government expenditures has no significant impact on manufacturing sector outputs in Nigeria
H03: Trade openness has no significant influence on manufacturing sector outputs in Nigeria.
The other sections of the paper are structured into literature review; section three captures the methodology, sections
four is the results and discussion and lastly, conclusion and recommendation is in section five.
2.
LITERATURE REVIEW
2.1
Concept of Manufacturing (Sector Output)
Manufacturing refers to the value-added production of merchandise for use or sale using labour and machines, tools,
chemical and biological processing, or formulation. The term may refer to a range of human activity, from
handicraft to high tech, but is most commonly applied to industrial production, in which raw materials are
transformed into finished goods on a large scale. However, manufacturing sector refers to those industries and
activities which are involved in the manufacturing and processing of items and indulge in either the creation of new
commodities or in value addition (Falade & Olagbaju, 2015). Mbelede (2012) opined that manufacturing sector is
involved in the process of adding value to raw materials by turning them into products.
The final products can either serve as finished goods for sale to consumers for final use or as intermediate goods
used in the production process. Activities in the manufacturing sector cover a broad spectrum which includes; agro
processing, metal/plastic, ICT/electrical, textile, clothing, footwear, cement and building. These activities contribute
to the economy as a whole in terms of output of goods and services; provide a means of reducing income disparities;
develop a pool of skilled and semi-skilled labour for the future industrial growth; improve forward and backward
linkages within the value chain and between socially and geographically diverse sectors of the country; offer an
excellent breeding ground for entrepreneurial and managerial talent and serve as a source of foreign exchange for
the economy (Imoughele and Ismaila, 2014). Apart from laying solid foundation for the economy, it also serves as
the import substituting industry, provides ready market for intermediate goods and contributes significantly to
government revenue generation through tax (Aderibigbe, 2014).
2.2
Empirical Review
Empirically, various studies have highlighted the significance of the manufacturing sector in contributing to the
growth of an economy and how it is influenced by macro-economic policy. Tkalec and Vizek (2010) used quarterly
data from 1998:1Q to 2008:3Q to explore the impact that macroeconomic policies have on the production of the
manufacturing sector in Croatia. They applied multiple regressions to find out how foreign demand, government
consumption, investment, interest rates, the real effective exchange rate, fiscal deficit and personal consumption
affected the production of 22 manufacturing sectors. The study brought to the fore that low technologically intensity
industries are affected by the variations in the real effective exchange rate, fiscal conditions, and personal
consumption. The study established on the other hand that output in high technological intensity industries is highly
responsive to changes in fiscal policy, foreign demand and investments. It was further established in the study that
manufacturing output is highly influenced by fiscal policy with regards to the degree of elasticity. The study also
found that production in contracts in medium- high technological intensity industries contracts in periods where
there is exchange rate depreciation while production in low technological intensity industries on average increases
with the exchange rate depreciation.
In an attempt
manufacturing
manufacturing
measured by
to find out the inter-temporal and inter-industry comparison of total factor productivity of the
sector in the Indian State of Haryana, Sehgal and Sharma (2012) adopted diverse categories of
industries pooled data for the time period 1981-1982 and 2007-2008. Total factor productivity was
the Malmquist productivity index. The study revealed that total factor productivity in the
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Impact of Macro-Economic Policy on Manufacturing Sector Output in Nigeria
manufacturing sector was highly influenced by technical efficiency change during pre-reforms period. In addition,
trade liberalization had a positive impact on technological advancement of the manufacturing sector of the state.
The extent to which firms exited in the Nigerian manufacturing sector prompted Sangosanya (2011) to investigate
the dynamic behaviour of firms' growth in Nigeria's manufacturing sector. He employed panel regression analysis
for this study. In carrying out the work, he surveyed about forty-five manufacturing firms that were listed on the
Nigerian Stock Exchange (NSE) between the period 1989 and 2008 by means of multi-stage sampling technique.
The results of the study brought to the fore that utilization of assets, manufacturing firms finance mix, abundance of
funds reserve and government intervention, efficiency of operation, capital reserve and government policies are
significant determinants of manufacturing firm's growth in Nigeria.
Ukoha (2000) conducted a study in Nigeria to ascertain what determines capacity utilization in the manufacturing
industry of Nigeria between the period 1970 and 1998. The study made some thought provoking revelations in his
study. Government capital expenditure on manufacturing, per capita real income and exchange rate based on the
findings demonstrated positive impacts on manufacturing capacity utilization. On the other hand, loans and
advances to manufacturing as well as inflation exhibited negative relationship with the capacity utilization of the
manufacturing sector. A concluding note was made that enhancing the capacity utilization of the manufacturing
sector will inure to a substantial growth of the industrial sector and eventually lead to industrial development in
Nigeria.
Adebiyi and Babatope (2004) used the cointegration technique in analyzing interest rate policy and the financing of
the manufacturing sub sector. Their analysis however suggests cointegration or an acceptance of the alternative
hypothesis among the variables CMS (Credit Manufacturing Sub-sector), ER (Exchange Rate), IMP (Index of
Manufacturing Production), INF (Inflation), IRS (Interest Rate Spread) and DGF (Deficit Government Financing)
Nneka (2012) in a conscious effort to find out the extent to which monetary policy affect the performance of the
manufacturing sector in Nigeria employed econometrics test procedures to carry out the study. The result of the
study showed that money supply has a positive impact on manufacturing index performance while company income
tax rate, lending rate, inflation rate and exchange rate have a negative impact on the performance of manufacturing
sector output in Nigeria.
Loto (2012) assessed the major determinants of output expansion in the manufacturing sector of Nigeria over the
study period 1980 and 2010. He used the OLS method and discovered that the rate of inflation is crucial in
explaining manufacturing output expansion in Nigeria as at the sample period. The research found a direct
relationship between output expansion and real GDP as well as GDP per capita, while gross domestic capital
formation, inflation, capacity utilization had a negative effect on output expansion in the manufacturing industry.
Eze and Ogiji (2013) Utilized an error correction analysis to ascertain the impact that fiscal policies have on the
output of the manufacturing sector in Nigeria. The findings showed that a negative significant relationship exist
between government tax revenue and manufacturing sector output in Nigeria. The findings also revealed an
insignificant and negative relationship between Government expenditure and the output of the manufacturing sector
in Nigeria. A level relationship also existed between fiscal policies and manufacturing output based on the results. A
recommendation was made that the government should embark on expansionary fiscal policies because such
policies have the propensity to accelerate manufacturing production in Nigeria.
In trying to know the influence that macroeconomic factors have on manufacturing production in Nigeria, Odior
(2013) conducted a study on this by choosing the time span 1975 to 2011. Before the actual estimation was carried
out, the stationarity properties of the variables were explored by using the Augmented Dickey Fuller Test. The study
examined the stochastic characteristics of each of the time series variables by testing their stationarity using
Augmented Dickey Fuller test. The error correction mechanism model was also estimated. Manufacturing sector
credit and foreign direct investment based on the results have the potential to enhance production in the
manufacturing sector of Nigeria, while broad money supply demonstrated a minimal impact on manufacturing
production in Nigeria. A strong recommendation was made in the study that monetary authorities should ensure a
cut margin between lending and deposit rates. In summary, the role of macroeconomic variables in development of
the Nigerian manufacturing sub-sector has not been fully addressed and impact has not been fully felt. Most
empirical studies relied on error correction method and ordinary least square method of analysis, neglecting the
effects of break-point dates in a model which could affect the outcome of their results and findings. This study thus
filled these gaps that exist among these literatures.
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Impact of Macro-Economic Policy on Manufacturing Sector Output in Nigeria
2.3
Theoretical Discourse
2.3.1 The IS-LM Framework
Hicks (1937) IS-LM model framework has been widely used in gauging macro-economic policy
effectiveness. It emphasizes on the interaction of the money and expenditure markets (Dwivedi, 2015).
However, the macro-economic policy has been aggregately divided into monetary and fiscal policy
effectiveness. The empirical macro-model which captures various policy components indicates that
consumer price index and reward for labour are constant in the interim. It revealed that the equation
consists of two schedules that generally reflects the equilibral condition in the asset and consumer market.
The LM (which represents the liquidity preference money supply model) and IS which represents fiscal
policy system (captured by aggregate government expenditure).
2.3.2
Endogenous Growth Theory
The endogenous growth models focus on the relationship between financial development and long-run economic
growth and emphasizing that productivity growth is most likely due to the channel of transmission of financial
development to economic growth. The argument is that financial markets activities and operations raises saving,
investment and hence the growth rates. The endogenous growth model of King and Levine (1993) focuses on the
connections between finance, entrepreneurship and economic growth. Financial institutions in this model play an
important role in both the monitoring and financing of potential entrepreneurs, in their initiation of innovative
activities, and launching of new products. The model further identified the following potential relationships between
finance and growth; first, finance supports innovations and hence increases the productivity which is positively
correlated with growth. Second, efficiency improvements in the financial sector, such as a decrease in the cost of
monitoring, will increase the real rate of return and thus lead to a higher future growth rate. Third, the model also
suggests a reverse channel of causation where a distortion in the innovative sector lowers the demand for financial
services and retard financial development.
3.
METHODOLOGY
The research design adopted for this work is the non-experimental ex-post facto research design. Ex-post facto
research design according to Onwumere (2009) is the type of research involving events that have already taken place
research design. The reason is that non-experimental ex-post facto research design combines the theoretical
exposition with empirical observation. Annual time series data (1986-2016) on manufacturing sector outputs, money
supply, total government expenditures and degree of trade openness for Nigeria used in this study have been
obtained from CBN Statistical Bulletin and Annual Reports (for various years)
The Pre-testing the time series properties of the data was carried out using the Zivot and Andrews (1992) and
Vogelsang and Perron (1998) unit root test technique. The Zivot and Andrews (1992) and Vogelsang and Perron
(1998) technique provides a more robust result than the usual Augmented Dickey Fuller (ADF) test and also
accounts for structural break. To examine the long run as well as short run relationship between macro-economic
policy and manufacturing sector outputs in Nigeria, an appropriate econometric model is required for empirical
analysis such as the ARDL error correction model. The paper tested the IS-LM theoretical framework on the
manufacturing sector outputs by employing the Autoregressive Distributed Lag (ARDL) modelling approach.
This study thus uses Bounds testing approach to Co-integration employed within the framework of Autoregressive
Distributed Lag model (ARDL) developed by Pesaran, et al. (1997), as it can be applied without considering the
same order of integration of all variables i.e. either they are integrated of order I(0), I(1) or of mixed order. The
ARDL bounds test is based on the F-statistic, which has a non-standard distribution. Two critical bounds are given
by Pesaran and Pesaran (1997). for Co-integration test. The lower critical bound assumes that all the variables are
I(0), while the upper bound assumes all the variables to be I(1).
Pesaran, Shin and Smith (2001) unrestricted ARDL
i
j
i 1
j 1
( p, q1 ,....qk ) model by means of OLS is specified as:
yt  0  1 yt  1   2 X t  1   1i yt  i    2i X t  i   t                       (1)
Where;
yt =
dependent variable (manufacturing sector output) at time t
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Impact of Macro-Economic Policy on Manufacturing Sector Output in Nigeria
Xj
=
money supply, total government expenditure and degree of trade openness at time t
1 =
coefficient of parameter estimates of lagged manufacturing sector outputs at time t
Equations (1) can be extended to include endogenous structural breaks. The model is specified as:
i
j
k
i 1
j 1
r 1
yt  0  1 yt  1   2 X t  1   1i yt  i    2i X t  i    r Drt   t                  (2)
k
 D
r
rt
Drt is a dummy variable
D 1 for t TDr , otherwise Drt 0 . The time period is represented by t ;
for each of the breaks defined as rt
TDr are the structural break dates; where r 1, 2,3,..., k and  r is the coefficient of the break dummy. All the
As shown in equation (2), the breaks are captured with the inclusion of
r 1
, where
other parameters have been previously defined.
As a tradition, the test for null hypothesis of no Co-integration against alternative of the existence of a long run
relationship is tested by using F-test such as;
H 0 1  2 .........  n 0
H1 1  2 .........  n 0
If the computed F-statistic falls above the upper bound critical value of F-tabulated developed by Pesaran, the null of
no Co-integration is rejected which implies that long run relationship exists among the variables of interest. On
contrary, if it falls below the lower bound, then the null of no Co-integration cannot be rejected. Finally, if it lies
between these two bounds, the result seems inconclusive.
The IS-LM model framework has been widely used in gauging macro-economic policy effectiveness. The macroeconomic policy is aggregately divided into monetary and fiscal policy effectiveness. The LM (which represents the
liquidity preference money supply model) and IS which represents fiscal policy system (captured by aggregate
government expenditure).
Theoretically, aggregate manufacturing sector outputs is a function of aggregate money supply and aggregate level
of government expenditure. Thus, in order to examine the macro-economic policy impact on manufacturing sector
output, the following relationship is examined:
MSOt  f ( MSt , TGEt , DTOt , DUM t )         (3)
Where;
MSOt =
MSt
=
TGEt =
DTOt =
DUMt =
fitted model.
Manufacturing sector outputs
Broad money supply
Total government expenditures
Degree of trade openness
Dummy. The dummy was introduced in the model to capture the break dates so as to achieve a
The study now represents macro-economic policy and manufacturing sector output relationship of equation (3) in
(linear or symmetric) ARDL model with endogenous structural break as:
m
n
p
o
 ln MSOt  0     ln MSOt  i     ln MSt  j     ln TGEt  k    4i DTOt  l  1 ln MSOt  1 
i
1
i 1
i
2
j 0
i
3
k 0
l 0
2 ln MSt  1  3 ln TGEt  1  4 DTOt  1  5 DUM t   t      (4)
In equation (4), the terms with the summation signs represent the error correction dynamics while the second part
[terms with Ws in equation] correspond to the long run relationship between the variables.
Where;
ln
= natural logarithms
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Impact of Macro-Economic Policy on Manufacturing Sector Output in Nigeria
0
= Intercept or drift operator
1   4 = coefficients of short run dynamics
1  5 = Long run multipliers

k
t
t
DUM
= First difference operator
= Respective specific optimum lags orders of the variables entering ARDL-ECM
= Error term
= time
= Dummy (break point dates)
Once a cointegration relationship is established between the variables, the study would proceed to examine the longrun effect and the short-run dynamics using unrestricted error correction term (ECT) estimator following position of
Odior (2013), the relationship between manufacturing sector output and macro-economic policy is specified as:
m
n
p
o
q
 ln MSOt  0     ln MSOt  i     ln MSt  j     ln TGEt  k    DTOt  l    5i DUM t  m   ECTt  1   t   (5)
i
1
i 1
i
2
i
3
j 0
k 0
i
4
l 0
m 0
Hendry’s (1987) methodology of “general-to-specific was employed via stepwise regression procedure (through the
elimination of those variables and their lags that are highly not significant), before finally arriving at an
interpretable model or parsimonious model. The elimination process was carried out until the coefficient of the error

correction term, t have the expected negative sign, less than unity and it is highly significant at the 10 per cent
level of significance. ECTt-1 is the lagged Error correction term. It is the residual obtained from the long run
estimation.
4.
EMPIRICAL RESULTS AND DISCUSSION
4.1
Descriptive Results
Table 1 captures the descriptive results of the link between macro-economic policy and manufacturing sector
outputs in Nigeria
Table 1: Descriptive Results of the Link between Macro-economic policies and Manufacturing Sector
Outputs in Nigeria
Mean
Median
Maximum
Minimum
Std. Dev.
Skewness
Kurtosis
Jarque-Bera
Probability
Sum
Sum Sq. Dev.
Observations
LOG(MSO)
6.637479
6.806718
9.102062
3.654554
1.630964
-0.296197
2.027268
1.621421
0.444542
199.1244
77.14122
31
LOG(MS)
6.815745
6.962203
9.846986
3.169954
2.163116
-0.159138
1.754030
2.067174
0.355729
204.4723
135.6930
31
LOG(TGE)
13.28493
13.79758
15.58311
9.694228
1.831352
-0.498810
2.009276
2.470976
0.290693
398.5480
97.26161
31
TO
0.417367
0.398400
0.687665
0.110727
0.134601
-0.075717
2.663296
0.170378
0.918339
12.52101
0.525403
31
Source: Authors’ Computation, 2017
The descriptive results indicate that manufacturing sector outputs in Nigeria during the period of 31 years (19862016) has minimum and maximum values of 3.65 percent and 9.10 percent respectively. The average value of
manufacturing sector outputs during the period is 6.63 percent with standard deviation of 1.63percent, implying that
the data deviate from the both sides of mean by 5percent. This suggests that manufacturing sector outputs in Nigeria
Bingham University Journal of Accounting and Business (BUJAB)
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Impact of Macro-Economic Policy on Manufacturing Sector Output in Nigeria
is not widely dispersed during the period under study as the standard deviation was found to be less than the mean
value. The coefficient of skewness of -0.29 suggests that the data on manufacturing sector outputs is negatively
skewed and didn’t comply with the symmetrical distribution assumption. The probability value of Jaque-bera of 0.44
also implies that the Gausian distribution assumption of the normal data on manufacturing sector outputs was met.
This indicates that the data on manufacturing sector outputs did not follow the normal curve, since the null
hypothesis of not normally distributed is accepted at 10 percent level of significance
Table 1 shows that the broad money supply during the period has minimum and maximum values of 3.16 percent
and 9.84 percent respectively. The average value of broad money supply during the period is 6.81percent with
standard deviation of 2.16 percent, implying that the data deviate from the both sides of the mean by 4.02percent
This suggests that the data from the broad money supply variable is not widely dispersed from the mean during the
sample period, as the standard deviation was found to be low. The coefficient of skewness of -0.15 suggests that the
data is also negatively skewed and also did not comply with the symmetrical distribution assumption. However, the
p-value of 0.005 for Jarque-Bera implies that the Gausian distribution assumption of normal data was met not at
5percent
Furthermore, the total government expenditures during the period under study has minimum and maximum values
of 9.69percent and 13.28percent respectively. The average amount of total government expenditures during the
period is 13.28percent with standard deviation of 1.83percent, implying that the data deviate from the both sides of
mean by 11.45percent. This suggests that the data on total government expenditures is not widely dispersed from the
mean during the sample period, as the standard deviation was also found to be relatively low. The coefficient of
skewness of -0.49 suggests that the data on total government expenditures is negatively skewed and did comply with
the symmetrical distribution assumption. The p-value of 0.29 for Jarque-Bera implies that the Gausian distribution
assumption of normal data is was met at 5%.
Finally, the degree of trade openness during the period also has minimum and maximum values of 0.11percent and
0.68percent respectively. The average level of trade openness during the period is 0.41percent with standard
deviation of 0.13percent, implying that the data on degree of trade openness deviate from the both sides of mean by
0.28percent. This suggests that the degree of trade openness was widely dispersed from the mean during the sampled
period, as the standard deviation was also found to be relatively high. The coefficient of skewness of -0.07 suggests
that the data is negatively skewed and had not complied with the asymmetrical distribution assumption. More so, the
p-value of 0.17 for Jarque-Bera implies that the Gausian distribution assumption of normal data was met.
4.2
Unit Root Test Result
Table 2: Results of Zivot-Andrews Unit Root Test on Macro-economic policy and Manufacturing
sector output in Nigeria
Order of
Variable
t-statistics
integration
Break date
Lag Length
MSO
-10.02149(-5.175710)**
I(1)
2005
3
MS
-5.016860(-4.893930)***
I(0)
2003
0
TGE
-7.921001(-5.175710)**
I(0)
2004
0
DTO
-5.330637(-5.175710)**
I(0)
2009
0
Note: *, ** and *** indicate asymptotic critical values of Zivot-Andrews (F-test) test at 1percent,
5percent and 10percent levels respectively.
Source: Authors’ compilation (2017)
As indicated in Table 2, broad money supply, total government expenditures and degree of trade openness
were stationary found stationary at levels and as such integrated at order zero {that is I(0)}. Money supply
test statistics of -5.016860 was found to be greater than the critical value put at -4.893930 at 10percent
level of significance. The break period of Money supply was found to have taken place in 2003. Total
government expenditures also had its test statistics valued at -7.921001 which is greater than the critical
value put at -5.175710 but at 5percent significant level. The break period for this variable was however
found to have occurred in 2004 the exact date when National Economic Empowerment and Development
Strategy (NEEDS) was introduced to restructure the Nigerian economy.
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Impact of Macro-Economic Policy on Manufacturing Sector Output in Nigeria
Degree of trade openness which was also found to be stationary at levels has its break period to have occurred in
2009; and its test statistics value of -5.330637 was found to be greater than the critical value of -5.175710 also at
5percent significance level. However, manufacturing sector output was found to be stationary at first difference
within the period under study. At its order of integration (at one), the test statistics value put at -10.02149 was found
to be greater than the critical values put at -5.175710 and at 5percent significance level. Manufacturing sector
outputs break periods was found to have occurred in 2005 which was the exact date when banking consolidation
reforms were introduced.
Since all the variables were found to be integrated at different orders, they all satisfied the ARDL-bound
testing approach which necessitates every variable in the equation to be static either at level or at first
modification. The study adopted a break point date of 2005 when financial sector reform and economic
policy reform (such as banking consolidation and NEEDS policy) were carried out.
4.3
Results of Co-integration Test
Table 3 presents the result of the co-integration test using the ARDL bound test approach to Co-integration. The
result revealed that there is an existence of co-integration among the variables. The F-statistics value at 5.94 is
greater than the lower and upper bound values put at 5percent level of significance. Hence, there is a sufficient proof
of the existence of a long-run equilibrium relationship between macro-economic policy and manufacturing sector
outputs in Nigeria between 1986 and 2016. The result thus shows that macro-economic policy has long run
sustainability on manufacturing sector outputs growth within the period under study.
Table 3: Results of ARDL-Cointegration Test on Macro-Economic Policies and Manufacturing sector output
in Nigeria
Wald Test (ARDL Long-Run Equilibrium Condition)
Test Statistic
F-statistic
Significance
10percent
5percent
2.5percent
1percent
Value
5.945657
Critical Value Bounds Values by Pesaran(2001)
K
4
I0 Bound
I1 Bound
2.45
2.86
3.25
3.74
3.52
4.01
4.49
5.06
Notes: ***, ** and * significant at 10%, 5% and 1%, respectively.
Source: Authors’ compilation (2017)
ARDL-ECM and Statistical Test of the Hypothesis on Macro-Economic Policies and
Manufacturing Sector outputs in Nigeria
To determine the appropriate lag order of the ARDL model, the study utilized Akaike Information
Criterion (AIC) in selecting the appropriate lag length. The AIC is often preferred to Schwartz Bayesian
Criterion (SBC), Hannan-Quinn Criterion (HQC) and Final Predictor Error (FPE) as it gives the heaviest
penalties for loss of degree of freedom and also imposes a larger penalty for additional coefficients
(Ogwumike & Ofoegbu, 2012). From the VAR lag length selection criteria presented in Table 4, AIC
recommended a lag length of three (3). Therefore, a lag length of three (3) was adopted for the ARDL
model.
Table 4: VAR Lag Order Selection Criteria
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Impact of Macro-Economic Policy on Manufacturing Sector Output in Nigeria
Lag
LogL
LR
FPE
0
-809.6102
NA
1.78e+22
1
-694.1454
186.5201
8.63e+18
2
-670.9364
30.35023
5.48e+18
3
-622.0612
48.87517*
5.75e+17*
4
-606.6021
10.70246
1.13e+18
* indicates lag order selected by the criterion
Source: Authors’ compilation (2017)
AIC
62.58540
54.93426
54.37972
51.85086*
51.89247
SC
62.77895
55.90203
56.12170
54.36705*
55.18287
HQ
62.64113
55.21294
54.88135
52.57543*
52.83999
The ARDL-ECM results examine how the equation (4) changes to the long-run equilibrium. Hendry’s
(1987) methodology of “general-to-specific was employed to eliminate all insignificant lags.
Accordingly, this led to an initial estimation of an ECM with three lagged differences of the explanatory
variables, a constant term and error correction term lagged one (ECT t-1) The dimensions of the parameter
space were then reduced to a parsimonious ARDL-ECM specification by using omitted and redundant
variable test to exclude the statistically insignificant lags. The results of the reduced short-run dynamic
policy model are presented in Table 4.
Table 5: Results of Parsimonious ARDL (3,3,1,2,1) and ECM on Macro-Economic Policy and Manufacturing
Sector Outputs in Nigeria
Variables
Constant
DLOG(MSO(-1))
DLOG(MSO(-2))
DLOG(MS)
DLOG(MS(-1))
DLOG(MS(-2))
DLOG(TGE)
D(TO)
D(TO(-1))
D(DUM)
ECT(-1)
R-Squared
R- Bar-Squared
D.W
F-Stat
Coefficients
-0.678192(0.744879)
0.777533*(0.205041)
0.987487*(0.224176)
0.652503*(0.172076)
0.413588***(0.217597)
-0.758255*(0.190959)
0.023231(0.01443)
-0.3862*(0.14223)
-0.463246**(0.191671)
0.341512*(0.098192)
-0.599265*(0.115638)
0.9793
0.9686
1.91
1380.949*
Notes: ***, ** and * indicate statistical significance at 10%, 5% and 1% levels, respectively. Figures in parenthesis
are standard errors.
Source: Authors’ compilation (2017)
As expected, the lagged error correction terms is negative, less than unity and statistically significant at 1 percent.
The coefficient revealed that once there is disequilibrium in the system, it takes an average (annual) speed of
59.92percent to restore the long-run relationship between the macro-economic policy and manufacturing sector
outputs. The break point date (of 2005) was found to be highly significant at 1 percent level which showed that
structural reforms (especially banking sector consolidation in 2005 and the adoption of NEEDS policy in 2004) has
Bingham University Journal of Accounting and Business (BUJAB)
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Impact of Macro-Economic Policy on Manufacturing Sector Output in Nigeria
had a great influence on manufacturing sector outputs. The adjusted coefficient of determination (R-Bar-square),
which was used to measure the goodness of fit of the estimated model, indicates that the model is reasonably fit in
prediction. It showed that 96.86 percent changes in manufacturing sector outputs were collectively due to money
supply, total government expenditures, degree of trade openness and structural break date while 3.14 percent
unaccounted variations were captured by the white noise error term. It showed that money supply, total government
expenditures, degree of trade openness and structural break date had strong significant impact on manufacturing
sector outputs within the period under study. The F-statistic which is used to examine the overall significance of
regression model equally showed that the results are significant, as indicated by a high value of the F-statistic,
1380.9 which is highly significant at 1.0 per cent level.
4.4
Statistical Test of Hypothesis
The three hypotheses formulated in this paper were tested using Wald test and the associated p-value. The level of
significance for the study is 5percent (for the two-tailed test). The Wald test computes a test statistic based on the
unrestricted regression and tests for the joint significance of the coefficients. It is used to denote whether the joint
impact of the explanatory (exogenous/ independent variables) actually have a significant influence on the dependent
variable. The decision rule for accepting or rejecting the null hypothesis the hypothesis was be based on the
Probability Value (PV). If the PV is less than 5% or 0.05 (that is, PV < 0.05), it implies that the regressor in question
is statistically significant at 5% level; otherwise, it is not significant at that level.
H01: Money supplies have no significant effect on manufacturing sector outputs in Nigeria
Table 6: Results of Wald Test on Money Supply And Manufacturing Sector Outputs In Nigeria
Test Statistic
F-statistic
Chi-square
Value
df
Probability
8.287767
24.86330
(3, 12)
3
0.0030
0.0000
Source: Authors’ compilation (2017)
The Wald-test in Table 6 indicated that the calculated F-value for Money supply is 8.28 and its probability value is
0.0030. Since the probability value is less than 0.05 at 5percent level of significance, it thus falls in the rejection
region and hence, the first null hypothesis (H01) was rejected. The result thus shows that broad money supply has a
significant effect on manufacturing sector outputs in Nigeria between 1986 and 2016.
H02: Total government expenditures has no significant impact on manufacturing sector outputs in Nigeria
Table 7: Results of Wald Test on Total Government Expenditures and Manufacturing Sector
Outputs In Nigeria
Test Statistic
t-statistic
F-statistic
Chi-square
Value
df
Probability
-1.900708
3.612692
3.612692
12
(1, 12)
1
0.0816
0.0816
0.0573
Source: Authors’ compilation (2017)
The Wald-test in table 7, indicated that the calculated F-value for total government expenditures was found to be
3.61 and its probability value is 0.08. Since the probability value is greater than 0.05 or 5percent level of
significance, which fell in the acceptance region and hence, we accepted the second null hypothesis (H02) and
conclude that total government expenditures had no significant impact on manufacturing sector outputs in Nigeria
between 1986 and 2016.
H03: Trade openness has no significant influence on manufacturing sector outputs in Nigeria
Table 8: Results of Wald Test for Trade Openness and Manufacturing Sector Outputs In Nigeria
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Impact of Macro-Economic Policy on Manufacturing Sector Output in Nigeria
Test Statistic
F-statistic
Chi-square
Value
df
Probability
7.934751
15.86950
(2, 12)
2
0.0064
0.0004
Source: Authors’ Compilation (2017)
The Wald-test in Table 8, the indicate that the F-value for trade openness was found to be 7.93 and its probability
value is 0.006. Since the probability value is less than 0.05 or 5percent level of significance, which fell in the
rejection region and hence, we reject the third null hypothesis (H03) and conclude that trade openness had a
significant influence on manufacturing sector outputs in Nigeria between 1986 and 2016.
Stability Analysis of Macro-Economic Policy and Manufacturing sector outputs in Nigeria
The study conducted various post estimation diagnostic tests to ascertain the appropriateness and stability of the
model as well as the robustness of the results. Thus, for reliability of estimates, we obtained series of residual and
stability tests such as the serial correlation Lagragian Multiplier test (for higher order autocorrelation), the
heteroscedasticity test, normality test and the Ramsey RESET specification test. Both the F-statistic and product of
observation with the square coefficient of correlation (NR2) were obtained. The decision rule for accepting the null
hypothesis for any of these diagnostics tests is that the probability-value (p-value) of each has to be greater than 0.05
or 5percent level of significance.
Table 9 thus presents the residual test results;
Table 9: Results of Residual Test of Macro-Economic Policy and Manufacturing sector outputs in
Nigeria
Tests
Outcomes
Coefficient
Probability
Heteroscedasticity-Breusch-Pagan-Godfrey
F-stat.
1.202196
0.3786
2
Test
Obs.R
15.76200
0.3281
Breusch-Godfrey-Serial-Correlation Test
F-stat.
1.819295
0.2119
2
Obs.R
7.203232
0.0273
Normality Test
Jarque-Bera
3.189380
0.0214
Ramsey Reset
F-stat.
0.135881
0.7194
Source: Authors’ Compilation (2017)
The result as presented in Table 9 revealed that there were no evidences of serial correlation and
heteroskedasticity in the estimated ARDL-ECM model as the p-values of both (0.2119 and 0.3786) were
found to be greater than 0.05 or 5percent. More so, the Ramsey Regression Specification Error Test
(RESET) specification error test showed that the model was well mathematically specified as the p-value
of 0.7194 was found to also be greater than 0.05. Furthermore, Jarque-bera test for normal distribution
revealed that the result attained a normal distribution with a bell shaped symmetrical distribution at
5percent significance level. Lastly, the cumulative sum (CUSUM) stability tests (CUSUM and
CUSUMSQ) in figure 1 and figure 2 revealed that the model is stable and the regression equation is
correctly specified as the plots of the charts lie within the critical bounds at 5percent significant level.
Fig. 1: CUSUM Stability Tests of Macro-Economic Policy and Manufacturing sector outputs in
Nigeria
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Impact of Macro-Economic Policy on Manufacturing Sector Output in Nigeria
8
6
4
2
0
-2
-4
-6
-8
2010
2011
2012
2013
CUS UM
2014
2015
2016
5% S ignific anc e
Source: Authors’ Compilation (2017)
Fig. 2: CUSUM Square Stability Tests of Macro-Economic Policy and Manufacturing sector
outputs in Nigeria
1.6
1.2
0.8
0.4
0.0
-0.4
2013
2014
CUSUM of Squares
4.5
2015
2016
5% Signific anc e
Discussion of findings and Policy Implications
Findings from the study revealed that broad money supply has a significant effect on manufacturing sector outputs
in Nigeria between 1986 and 2016. This is in agreement with the findings of Nneka (2012) whose study revealed
that that money supply has a positive impact on manufacturing index performance while company income tax rate,
lending rate, inflation rate and exchange rate have a negative impact on the performance of manufacturing sector
output in Nigeria. More so, the findings of Sangosanya (2011) who brought to the fore that utilization of assets,
manufacturing firms finance mix, abundance of funds reserve and government intervention, efficiency of operation,
capital reserve and government policies are significant determinants of manufacturing firm's growth in Nigeria.
However, total government expenditures had no significant impact on manufacturing sector outputs in Nigeria
between 1986 and 2016. This aligned with the findings of Eze and Ogiji (2013) who also revealed that a negative
and insignificant relationship exists between government tax revenue and manufacturing sector output in Nigeria. A
recommendation was made that government should embark on expansionary fiscal policies because such policies
have the propensity to accelerate manufacturing production in Nigeria. However, a contrary result was found in the
work of Ukoha (2000) whose empirical analysis showed that government capital expenditure on manufacturing, per
capita real income and exchange rate demonstrated positive impacts on manufacturing capacity utilization in
Nigeria. Lastly, it was discovered that trade openness had a significant influence on manufacturing sector outputs in
Bingham University Journal of Accounting and Business (BUJAB)
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Impact of Macro-Economic Policy on Manufacturing Sector Output in Nigeria
Nigeria between 1986 and 2016. This is in-line with the findings of Sehgal and Sharma (2012) whose study revealed
that trade liberalization had a positive impact on technological advancement of the manufacturing sector.
5.
CONCLUSION AND RECOMMENDATIONS
This paper provided empirical evidence showing that expansionary monetary policy (through increased broad
money supply) and openness to trade are important factors for determining manufacturing production in Nigeria.
This shows that expansionary policies and adequate trade openness to trade with other economies are vital for the
growth of the manufacturing sector in Nigeria which in turn would lead to economic growth. However, increased
government total expenditures have not translated into an increased manufacturing sector outputs in Nigeria.
Manufacturing outputs has been on the decline over the years, which had a negative impact on the growth and
development of the nation. The conclusion however is that capital and recurrent government expenditures in Nigeria
has not been achieved fruitful results as expected, thus there is a need for a review of government spending and
other expansionary fiscal policies.
Based on the findings, the following recommendations were suggested:
i.
There is the need for proper monitoring and control of government expenditures especially expenditures on
capital projects which has a direct impact on manufacturing sector. This is to ensure that revenues set aside
for development and infrastructural projects are fruitfully spent and did not end up in private pockets.
ii.
The government should create a congenial environment where there will be ready markets for industrial
goods such that when expansionary monetary policy is implemented, industrialist will be more open to
borrow and expand production.
iii.
Organization of trade fairs and restriction of imports will further help to provide ready markets for
industrial goods. Reduction in trade tariff and customs/excise duties will help boost industrial productions
and investments through inter-regional trade.
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Journal of Economics and Social Studies;42(2):121-129.
The
Vogelsang, T. J., & Perron, P. (1998). Additional Test for Unit Root Allowing for a Break in the
an Unknown Time. International Economic Review, 39, 1073–1100.
Trend Function at
Nigeria
Zivot, E., & Andrews, D. (1992). Further Evidence of the Great Crash, the Oil-Price and the Unit Root Hypothesis,
Journal of Business and Economics Statistics, 10, 251-270.
Bingham University Journal of Accounting and Business (BUJAB)
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Empirical analysis of Parental age on Child Nutritional status in Nasarawa State
Empirical analysis of Parental Age on Child Nutritional Status in
Nasarawa State
Agum Charles
Department of Economics
Nasarawa State University, Keffi
Nasarawa State, Nigeria
Email: agumcharles@gmail.com
and
Emma Nwankego Collins
Department of Economics,
University of Jos, Jos
Plateau State, Nigeria
Email: eobeya@yahoo.com
Abstract
Nutritional status of children in any society is an indicator of good health and standard of living in any society. This
study empirically examined the influence of parental age on child nutritional status in Nasarawa State, Nigeria. A
cross-sectional survey design was employed, 200 participants were randomly selected from various health centers
in the 13 Local Government areas in the state for the study. Collection of data was done by distributing
questionnaires and collecting Mid Upper-Arm-Circumference (MUAC) measurements the best way to measure
severe acute malnutrition. Pearson product moment correlation was used to analysed the data collected. The
results r (200 = .863, p = .000) indicated that there is a significant positive relationship between parental age and
children nutritional status in Nasarawa state. The implications of these findings for policy are, preventing child
marriage and reducing teenage pregnancy , empowering girls with information, skills, and support networks, and
educating and mobilizing parents and community members among others recommendation were made
Keywords: Parental age, Child Nutritional Status, Malnutrition, Anaemia, Mortality
1.
Introduction
Malnutrition among children in developing countries is a major public health concern since it places a
heavy burden on already disadvantaged communities. Poor physical growth, an indicator of poor
nutritional status, is high in sub-Saharan countries, where approximately 21.9% of children are
underweight and 40.1% are stunted (Black, Allen, Bhutta, Caulfield, de Onis, Ezzati, Mathers, & Rivera,
2008). The most vulnerable group of children are those under 5 years of age. Anaemia, another indicator
of poor nutritional status, is also widespread, with estimates indicating prevalence rates of 40–70% in
Sub-Saharan countries. Both growth restriction and anemia in the early years of life increase the risk of
mortality and morbidity, and are associated with developmental and cognitive impairment (De Onis,
Blossner, Borghi, Morris & Frongillo; 2004).
The link between poverty and poor nutritional status among children has been widely reported. Varying
indicators of social economic status (SES) such as maternal and paternal educational level, parental
income, and family assets such as the ownership of land, quality of housing, and foods harvested among
many SES indicators have all been associated with children’s nutritional status. Regardless of the method
by which SES was estimated, its influence on child’s nutritional status was significant and consistent. It
was observed that children from less advantaged families were more likely to experience growth
restriction (i.e., stunting and being underweight) compared to their peers from more advantaged
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Empirical analysis of Parental age on Child Nutritional status in Nasarawa State
backgrounds . Despite this link several factors give compelling reasons to carry out further investigation
into the relationship between parental age and nutritional status of children. One of the most salient
reasons for this is the fact that the prevalence of stunting and being underweight has been found to show
both between- and within-country variation in sub-Saharan Africa in general and in Nigeria in particular.
There is thus a need examine the effects of parental age on nutritional status of children in Nasarawa State
Nigeria.
Worldwide, malnutrition is seen as a lack of access to highly nutritious foods, especially in the present
context of rising food prices. Children and infants aged under-five are highly vulnerable when it comes to
undernutrition. Poor breastfeeding practices, offering unsuitable foods and not ensuring that the child gets
enough nutritious food are factors that contribute to malnutrition. Other health consequences such as
infections – diarrhea, pneumonia, measles and malaria – affect the child’s nutritional status (WHO, 2014).
In developing countries, malnutrition is one of the most important risk factors for high child mortality
rates (WHO, 2014) Pregnant women and children are highly vulnerable for the consequences of
malnutrition. Children in sub-Saharan Africa are 15 times more likely to die before the age of five than
children in developed regions. One out of six children in developing countries show signs of being
underweight, this points out a total number of 100 million children in the developing world (WHO, 2014).
In almost every part of the world cases of malnutrition are declining, except for African countries. In
large parts of Africa, the amount of malnutrition rates does not change (Kikafunda & Tumwine, 2006). In
rural and urban Uganda, research from Kikafunda, Walker, Collet and Tumwine (1998) showed that
many children, aged under-five, have to deal with consequences of malnutrition such as diminished
mental and physical capabilities.
Malnutrition is an overarching term that includes three different factors; stunting, wasting and
underweight. These three factors all have the same cause in common; they are induced by a deficiency of
certain nutrients such as proteins and micronutrients (Caulfield, Richard, Rivera, Musgrove & Black,
2006). A more recent study of Engebretsen, Tylleskär, Wamani, Karamagi and Tumwine (2008) showed
evidence for different determinants of malnutrition that are related to child growth. Distal factors such as
wealth, land ownership, parental age, marital status, employment of both parents and education of both
parents are associated with (un)healthy growth of the child. Results of the study showed that wealth is the
most important factor to predict malnutrition in children. Parental age, play a significant role in the
nutritional status of child, Children from under age parents and older parents suffer malnutrition. There is
high rate of under- age marriage in Nasarawa State. It is against this background that this study will
empirically investigate the impact of parental age on child nutritional status in Nasarawa State, Nigeria.
The following research questions were posed to guide this study;
i.
What is the impact of parental age on children nutrition status in Nasarawa State?
ii.
What is the impact of parental education level on children nutrition status in Nasarawa State?
The following hypotheses were formulated and were tested at 0.05 Significance levels.
i.
Parental age in Nasarawa state does not have significant relationship with the nutrition status of
children.
ii.
The parental education level in Nasarawa state does not have significant relationship with the
nutrition status of children.
2.
2.1
Literature Review
Conceptual Issues
Nutritional status is defined as the evident state of nutrition of an individual. A person is said to have a
good nutritional status if he shows no evidence of malnutrition, whether open or latent. Nutrition is the
aspect of science that interprets the relationship of food to the functioning of living organisms. It includes
the uptake of food, liberation of energy, elimination of wastes and the biochemical synthesis that are
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Empirical analysis of Parental age on Child Nutritional status in Nasarawa State
essential for maintenance of normal growth and development (Laditan, 1983). The nutritional status of
any person is his/her health as dictated by the quality of nutrients consumed, and the body’s ability to
utilize them for its metabolic needs. Thus, being nutritionally vulnerable, under-5 children’s nutritional
status is generally accepted as an indicator of the nutritional status of any particular community
(Davidson Passmore, Brock & Truswells 1975). This is due to their easy susceptibility to malnutrition and
infection (Uppal Kumari & Sidhu, 2005). Children in this age group require a high supply of nutrients
since they are usually very active and their growth is rapid. Also during this period, under-nutrition in the
form of kwashiorkor, marasmus, anaemia and xerophthalmia are not uncommon (Ene-Obong, 2001). It
has been estimated that approximately one out of every three Under-5 children is chronically
malnourished and thereby subjected to a pattern of ill health and poor development in early life (UNICEF,
1998), with malnutrition being associated with more than half of all deaths of children worldwide (Sobo
& Oguntona, 2006).
2.2
Empirical Review
Yu, Mason, Crum, Cappa, and Hotchkiss (2016) investigated differential effects of young maternal age
on child growth in a sample of developing countries in Africa, Asia, and Latin America. Cross-sectional
data from Demographic Health Surveys from 18 countries were used, to select the first-born child of
mothers aged 15_24 years and a range of potential confounding factors, including maternal height. Child
length/height-for-age z-scores (HAZs) was estimated in age bands of 0_11, 12_23, 24_35, 36_47, and
48_59 months; The effect of low maternal age on child height restriction from 0 to 11 months occurred in
half the countries studied after adjusting for confounders. Poorer growth continuing after 24 months in
children of younger mothers was observed in all regions, but needs further research to determine the
causes. The effects were about double (in stunting prevalence terms) in Africa, where there was an
increase in 10 ppts in stunting for children of young mothers.
Novella (2013) studied Parental Education, Gender Preferences and Child Nutritional Status: Evidence
from Four Developing Countries in Ethiopia, India (Andhra Pradesh state), Peru and Vietnam. By
adopting a methodology to disentangle gender differences produced by technology and preferences, the
study find evidence that the allocation of household resources varies with the gender of the child and the
gender of the parents.it further showed that maternal power has larger effects on girls’ health than on
boys’ health in Peru and Vietnam. In contrast, in India, maternal bargaining power has a negative effect
on girls’ health, whereas in Ethiopia no differential effect is found. Umapathi (2008) examined Maternal
education, childcare and nutritional program in Madagascar. The studied reveals that the height-for-age of
children (a measure of chronic under-nutrition) with the most educated mothers in the participating
villages improves by 0.141 SD and by 0.323 SD after five and eight years of program operation,
respectively. The heterogeneity in effects on weight-for-age is less stark, but statistically significant:
impacts are greatest for the most educated subgroup. For the group with no schooling, the impact is not
statistically significant for any time period. The above studies reviewed were carried out in foreign
countries, the methodology used in carrying the research and the methods of data analysis used are
established gaps that this present study will fill.
2.3
Theoretical framework
Becker (1965) was responsible for putting “family” on the map of academic research in economics in the
1960s. The simplicity and applicability of his models demonstrate the practicality of research at the
household level (Grossman, 2003). Most studies on health and nutrition employ the Beckerian model of
household utility where utility is derived both from purchased and home-produced goods (Arif, 2004;
Chen & Li, 2006). According to theory, households purchase goods and combine them with time into a
household production function to produce commodities. The purpose of purchased goods and time is to
serve as inputs to the acquisition of commodities, which, in turn, enter the household’s utility function.
For example, if “quality of children” is a commodity, then related inputs might include food,
vaccinations, schooling, and parental time. Another example of a commodity is “sleep,” which would
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Empirical analysis of Parental age on Child Nutritional status in Nasarawa State
depend on the availability of a bed, house, and time. Information on inputs is thus essential to estimate
the parameters of the production function. Inputs and outputs can often be jointly determined. For
example, unobserved—i.e., to researchers—sick individuals are more prone to using health-related inputs,
which could cause the estimated results of health inputs to be biased downward. The simultaneity bias
caused by joint input-output demands can be removed by implementing instruments such as prices into
the function.
3.
Methodology
This research was based on a cross-sectional survey design. Surveys were used to gather information in
all the 13 Local government of Nasarawa State in different health centers within the state. The target
populations in this study were all infants and children aged under-five years and their parents in Nasarawa
State. The study Sample 200 participants from various health centers in the state (N = 200). To determine
whether or not parental age influences the nutrition status of the target population, both malnourished and
non-malnourished children were incorporated in this study. Parents were asked to provide information
about the determinants (parental age) and nutritional status of children. These two populations, children
and their parent(s) are involved in the study. Exclusion criteria are used for children who are suffering
from infectious diseases that are a cause for malnutrition. These are diarrhea, fever, measles, skin
infection and cough (Kikafunda Walker, Collett, & Tumwine, 1998). Based on the fact that these
children may induce bias because of their medical conditions, they were excluded from this study.
3.1
Data collection
To set up a database, collection of data was done by conducting questionnaires and collecting Mid UpperArm-Circumference (MUAC) measurements. Assessment of malnutrition took place by measuring the
Mid Upper-Arm-Circumference (MUAC) of the child. This method was used because it was impossible
to obtain weight and height information through health cards of the children. Most of the time, mothers
forgot their child health cards or the information was not up-to-date. The quick and easy way of assessing
MUAC by using a tape-measure, and based on the arguments mentioned in the introduction, consistent
MUAC assessment appeared to be the best way to measure severe acute malnutrition. According to WHO
standards, a cutoff point of 115 mm for MUAC was used to determine severe acute malnutrition (WHO,
2009). Malnutrition was dichotomized and defined as YES or NO in cooperation with assistant
researchers, who were needed for translation; questionnaires have been carried out in the different health
clinics in Nasarawa State. Participants who were able to speak English were interviewed according to the
same questionnaire by assistant researchers. The dependent variable of this study is children nutritional
status. The independent variables is the parental age, it was categorized in three groups (1) low-level , (2)
mid-level and (3) high-level . Paternal age level was measured by asking the last completed level of age
via the mother. Ages between 12-18 are low level, 19-35 middle level 36 and above High level. There
were several possible confounding variables that might influence the association between parental age
and child nutrition status, such as household income, employment of the mother, employment of the
father, child’s age in months, education of the mother/father.
3.2
Method of Data Analysis
When all data was collected, both the categorized determinant ‘the parental age’ and the dichotomized
variable ‘nutritional status of the children’ was analyzed by a Pearson product moment correlation. This
analysis was done with SPSS version 23.
4.
4.1
Data analysis and presentations
Results of Hypotheses Testing
Hypothesis One: Parental age in Nasarawa state does not have any significant effects on the nutrition
status of children.
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Empirical analysis of Parental age on Child Nutritional status in Nasarawa State
Table 1: Pearson Product moment Correlation (r) of the relationship between parental age and
children nutritional status
Variable
X
SD
N
r-cal.
Α
P
Decision
Parental age
2.30
1.190
200
.863
0.05
.000
Significant
Children nutri. Status
1.36
0.48
p< .05
The findings from Table 1 indicated that there is a significant positive relationship between parental age
and children nutritional status in Nasarawa state. Thus, the Ho has been rejected since r (200 = .863, p
= .000) which implies also that the probability value (p) is less than the level of significance (0.05) used
for statistical decisions. The positive nature of the relationship here implies that most parents that married
early were not adequately prepared for parenthood hence they could not provide the nutritional
requirements for their children.
Hypothesis Two: The parental education qualification in Nasarawa state does not have any significant
effects on the nutrition status of children.
Table 2: Pearson Product moment Correlation (r) of the relationship between parental
education qualification and the nutrition status of children
Variable
Parental edu.quali.
X
1.8
SD
1.06
Children nutri.Status
p< .05
1.43
0.425
N
200
r-cal.
.693
Α
P
0.05
.000
Decision
Significant
Table 2 showed that r (200 = .693, p = .000), which means that p<.05 and Ho has been rejected. This
implies also that there is a significant positive relationship between parental educational qualification and
the nutritional status of children in Nasarawa State ,Nigeria. That as parents acquired more educational
qualification, the more he or she gets aware of food and their nutritional values that can provide good
balance diet for children. Educated parents are also aware of the benefits of balance diet for children
growth and development.
4.2
Discussions of major Findings
From the results above, it was discovered that the nutritional status of children in Nasarawa state is very
low in rural areas compared to urban areas. The recent economic recession has contributed to the fall in
nutritional status in most household. The study reveals that there is a significant positive relationship
between parental age and children nutritional status in Nasarawa state. These findings agreed with the
work of Yu, Mason, Crum, Cappa, and Hotchkiss (2016)
which concluded that the effect of low
maternal age on child height restriction from 0 to 11 months occurred in half the countries studied after
adjusting for confounders. Poorer growth continuing after 24 months in children of younger mothers was
observed in all regions, but needs further research to determine the causes. The effects were about double
(in stunting prevalence terms) in Africa, where there was an increase in 10 ppts in stunting for children of
young mothers. Most parents that had early marriage were not financially buoyant to provide the adequate
nutritional requirement for the` children especially in rural areas. Hypothesis two shows that that there is
a significant positive relationship between parental educational qualification and the nutritional status of
children in Nasarawa State, Nigeria. This findings agreed with the work of Umapathi (2008) which
concluded that the height-for-age of children (a measure of chronic under-nutrition )with the most
educated mothers in the participating villages improves by 0.141 SD and by 0.323 SD after five and eight
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Empirical analysis of Parental age on Child Nutritional status in Nasarawa State
years of program operation, respectively. The heterogeneity in effects on weight-for-age is less stark, but
statistically significant: impacts are greatest for the most educated subgroup. For the group with no
schooling, the impact is not statistically significant for any time period.
5.
Conclusion and Recommendations
With regard to the main question of the research: “What is the impact of parental age on children nutrition
status in Nasarawa State?”, and the hypothesis, which states that Parental age in Nasarawa State does not
have significant relationship with the nutrition status of children. Low maternal age was associated with
low children nutritional status An increased maternal age level, mid and high age level, decreases the
chance of child malnutrition. This association is influenced by income, educational level of the father and
age of the child. Paternal education cannot be related to child malnutrition based on the results of this
research because only few were involved. The results suggest that the infants of mothers below 18years of
age should receive particular attention, in Nasarawa State
The implications of these findings for policy can be viewed in several ways. First, preventing child
marriage and reducing teenage pregnancy is important for many reasons. Among the strategies that
should be considered and that have been found to be effective are:
i) Empowering girls with information, skills, and support networks;
ii) Educating and mobilizing parents and community members;
iii) Enhancing the accessibility and quality of formal schooling for girls;
iv) Offering conditional cash transfers economic and other types of incentives for girls and their families
to remain in school; and
v) Fostering an enabling legal and policy framework to check early marriage.
References
Arif, G. M. (2004). Child Health and Poverty in Pakistan. Pakistan Development Review, Vol.
pp. 211–238.
Black, R. E., Allen, L. H., Bhutta, Z. A., Caulfield, L. E., D. E. Onis, M.; Ezzati, M., Mathers,
Rivera, J. (2008) Maternal and child undernutrition: Global and regional exposures
and
consequences: Lancet, Vol. 371, pp. 243–260.
43(3),
C., &
health
Caulfield, L. E., Richard, S. A., Rivera, J. A., Musgrove, P., & Black, R. E. (2006). Stunting,
wasting, and micronutrient deficiency disorders.
Chen, Y., & Li, H. (2006). Mother’s education and child health: Is there a nurturing effect.
Journal
of Health Economics, Vol. 28(2), pp. 413–426.
Davidson, S., P., Passmore, J. F. Brock, Truswells, A. S. (1975). Human Nutrition and Dietetics. ELBS
Church Living Stone Publishers, Great Britain.
DeOnis, M., Blossner, M., Borghi, E., Morris, R., & Frongillo, E. A. (2004). Methodology for
estimating regional and global trends of child malnutrition. Int. J. Epidemiol. Vol. 33, pp. 1260–
1270.
Ene-Obong, H. N., 2001. Eating right (A Nutrition Guide) The University Press, Calabar.
Engebretsen, I. M., Tylleskär, T., Wamani, H., Karamagi, C., & Tumwine, J. K. (2008). Determinants of
infant growth in Eastern Uganda: a community-based cross-sectional
study. BMC Public Health, Vol.
8(1), pp.418.
Grossman, M. (2003). Household production and health. Review of Economics of the
Household,
1(4), 331–342. doi:10.1023/B:REHO.0000004793.86020.75
Kikafunda, J. K., & Tumwine, J. K. (2006). Diet and socio-economic factors and their
association with
the nutritional status of pre-school children in a low-income suburb of Kampala City, Uganda. East
African medical journal, Vol. 83(10), pp. 565-574.
Bingham University Journal of Accounting and Business (BUJAB)
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Empirical analysis of Parental age on Child Nutritional status in Nasarawa State
Kikafunda, J. K., Walker, A. F., Collett, D., & Tumwine, J. K. (1998). Risk factors for early
childhood malnutrition in Uganda. Pediatrics, Vol. 102(4), pp. e45-e45.
Laditan, A. A., (1983). Nutrition and physical growth in children Nigeria. J. Nut. Sci., Vol. 4, pp. 5-10.
Umapathi, N. (2008) Maternal education, childcare and nutritional program. Retrieved from
www.unicollondon.com
Uppal, M., Kumari K. & Sidhu, S. (2005). Clinical assessment of Health and nutritional status of
scheduled caste children of Amristar. Anthropologist, Vol. 7 (3), pp. 169-171.
WHO Children: reducing mortality (2014). Retrieved from: http://www.who.int/mediacentre/
factsheets/fs178/en/
Yu, S. H., Mason, J., Crum, J., Cappa, C. & Hotchkiss, D. R. (2016) Differential effects of young
maternal age on child growth. Global Health Action, Vol. 2(2)
APPENDIX: Questionaire
INSTRUCTION:
Please tick ( ) as appropriate to indicate your choice of answer to each of the following questions as
required:
SECTION A: Socio-Demographic Characteristics of Respondents
1. Age
(a) 12 – 18
[
]
(b) 18 – 28
[
]
(c) 29 – 35
[
]
(d) 36-45[ ] (e) 46 and Above
[
]
2. Sex
(a) Male
[
3. Educational qualification
(a) SSCE [
] (b) ND/ NCE [
[ ]
4. Marital status
(a) Widow/widower
[
5. Numbers of Children ( a)
1-2 [
]
(b) Female
] (c) B.sc/B.A/B.ED [
] (b) Married
[
] ( b) 3-4 [
] (c) 5-6 [
]
(d) M.sc [
] (c) Divorced [
]
[
]
] (e) Others
]
(d) 7 and above [ ]
SECTION B
Please tick ( ) as appropriate to indicate your choice of answer to each of the following questions as
required:
S/N ITEMS
YES
NO
1
Do you skip meals?
2
Do you always have enough money to buy food?
3
Do you buy the type of food you desire?
4
Do you have enough food you require?
5
Do you always have enough but not always the kind you desire?
6
Do you always buy food in bulk?
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Empirical analysis of Parental age on Child Nutritional status in Nasarawa State
7
Whenever the food in the house finishes, do you always have enough
money to buy more?
8
Can you afford to provide a balanced diet?
9
Do you go for low cost/cheap food items?
10
How often were meals skipped
11
Is your child malnourished?
Descriptive Statistics
Std.
Mean
Deviation
Parental Age
2.3000
1.19041
Children Nutritional
1.3600
.48120
status
N
200
200
Correlations
Age
Pearson
1
Correlation
Sig. (2-tailed)
N
200
Children Nutritional
Pearson
.863**
status
Correlation
Sig. (2-tailed)
.000
N
200
**. Correlation is significant at the 0.01 level (2-tailed).
Is your child
malnourished
?
Parental Age
Descriptive Statistics
Std.
Mean
Deviation
Educational
qualification
Children Nutritional
status?
.863**
.000
200
1
200
N
1.8500
1.06450
200
1.4250
.49558
200
Correlations
Educational
qualification
Bingham University Journal of Accounting and Business (BUJAB)
Can you
afford to
provide a
balanced
diet?
Page 54
Empirical analysis of Parental age on Child Nutritional status in Nasarawa State
Educational
qualification
Pearson
1
Correlation
Sig. (2-tailed)
N
200
Children Nutritional
Pearson
.693**
status t
Correlation
Sig. (2-tailed)
.000
N
200
**. Correlation is significant at the 0.01 level (2-tailed).
Bingham University Journal of Accounting and Business (BUJAB)
.693**
.000
200
1
200
Page 55
Foreign Capital Inflows and Economic Growth Nexus: Empirical Evidence from Nigeria
Foreign Capital Inflows and Economic Growth Nexus: Empirical
Evidence from Nigeria
Ademu Wada Attah, Ph.D
Department Of Economics
University of Jos, Plateau State,
Email: Ademuw2001@yahoo.com
Adeyi Emmanuel Ola, Ph.D
Department Of Economics
Gombe State University,
Email: Emmaadeyi@Gmail.Com
and
Miapwap Kangrot Dorcas
National Veterinary Research Institute, Vom
Planning Department
Email: Kangydewa@yahoo.com
Abstract
It is no longer news that there is gap between the domestic capital resources available and desired investment
needed for growth that must be filled. Therefore the role of foreign capital inflows in supplementing domestic
investment particularly in developing countries cannot be over emphasized. This paper attempted to empirically
examine the causal link between foreign capital inflows and economic growth in Nigeria. With the proper utilization
of annual time series data spanning from 1972 to 2016.The study employed granger causality test, co-integration
and error correction mechanism as the major tools of analysis. Empirical results revealed that there is long-run
relationship between foreign capital components and economic growth in Nigeria. Granger causality test shows a
unidirectional causality among the variables except remittances and RGDP. The paper then recommends amongst
others that government should ensure proper channelling of foreign capital into productive sectors of the economy,
create enabling environment and macroeconomic stability and encourage domestic savings and investment in the
country.
Keywords: Economic Growth, Foreign Capital, Error Correction Mechanism, Co-integration
1.
Introduction
The concept of foreign capital inflows has attracted the attention of most developing countries because of
its perceived role of promoting economic growth and development. It also appears to be a substitute for
domestic capital as a source of investment in many third world economies of Asia, Africa and Latin
America and these countries offer incentive packages to external investors ranging from fiscal incentives
(such as grants, credits or equity), to subsidized infrastructural facilities, market preferences, labour
training, and research and development. Majority of less developed countries are financially deficient and
handicap couple with their huge demand for funds to finance developmental projects like road, bridge,
schools, and industries for the overall development of their economies.
Therefore, the need for foreign capital become necessary which prompted most less developed countries
to adopt economic and social reforms which include structural adjustment, financial liberalization,
incentive packages, and other related policy measures like conducive business environment and sound
macroeconomic policies to improve the inflow of overseas capital. Unfortunately, the result have not
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Foreign Capital Inflows and Economic Growth Nexus: Empirical Evidence from Nigeria
yielded up to expectation as statistics from World Investment Report (2011) shows that between 1991 and
2010 only 30.6% of world capital inflows goes to LDCs, out of which Africa received mere 2.8%, and the
developed countries received 66.5%.
It is therefore pertinent to study the trend, impact and behaviour of various components of capital inflows
so as to guide policy makers in their desire to create visible and more robust policies toward enhancing
the inflow of overseas capital.
Although, there is plethora of empirical studies on foreign capital inflows and growth nexus, which
resulted to two conflicting views. The first proponents assert that external capital inflow is pre-requisite
and necessary for the overall growth and development of poor income countries (see: Gupta, 1970; Nkoro
and Uko, 2013; Narayan, 2014; Adebogye et al, 2014; Fambon, 2013; Chigbu et al, 2015). According to
them, there exist a strong positive and significant correlation between the flow of foreign capital and the
level of economic growth because it support and supplements domestic resources and savings. For
instance, Fambon (2013) stressed that foreign capital inflows and other financial resources that manifest
themselves through externalities, are not only the adoption of new technologies and innovations, but also
their complements with domestic sources of finance that affect major macroeconomic variable such as
domestic investment, job creation, the acquisition of technical knowhow by workforce and business
environment, as well as the competitiveness of developing countries’ exports.
The second proponents are related to the emergence of the view that external capital exerts significant
negative effects on the economic growth of recipient countries. According to this view, foreign capital
mostly consumed and substitutes rather than compliments domestic resources. Furthermore, foreign
capital inflows assists to import inappropriate technology, distort the domestic income distribution, and
encourages a bigger, inefficient and corrupt government in developing countries (Griffin and Enos, 1970;
Levine and Carcovic, 2002; Durham, 2003; Quatarra, 2006; Asien and Oriavwote, 2013). Based on the
foregoing it shows that the debate is not clearly resolved. Besides that, most of the studies on foreign
capital inflows and growth nexus are cross-sectional, (see: Bowen, 1998; Chigbu, 2015; Ndambendia,
2010; De Mello, 1999) such results obtained by cross-country studies must be carefully treated as they are
subject to extreme limitations. Such lapses include; a common economic structure and similar production
technology across different nations which appears not to be true in reality. Therefore, this study will
contribute to the existing body of literature on capital inflows and growth nexus and as well it will add
knowledge to the field of international finance.
However, to the best of our knowledge, our study stands to be the first empirical attempt investigating the
impact of foreign capital flows into Nigeria using a large sample covering the period between 1972 and
2016 with econometric analysis and decomposing capital inflows into four distinct and relevant
components. The remaining part of the paper is divided into seven sections. After the introduction
(section 1), Section 2 presents trend analysis of various components of foreign capital flows into Nigeria.
Section 3 offers theoretical and empirical review of previous studies on the impacts of foreign capital
flows. Section4 discusses foreign capital inflow and growth nexus. Section 5describes the data and
methodology. Empirical results and discussion of the findings are treated in section 6 accompanied by
conclusion and recommendations in the last section
2.
2.1.
2.1.1
Literature Review
Concept of Foreign Capital Inflow Components and Economic Growth
Foreign Aid
Foreign aid plays a fundamental role in stimulating economic growth as an additional source of domestic
finance which include savings and domestic as well as foreign borrowing (Fambon, 2013). Therefore, it is
expected that foreign assistance in form of aids will generates a lot of economic benefits through transfer
of resources, skills and technology to less developed countries. The role of foreign aid has been globally
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Foreign Capital Inflows and Economic Growth Nexus: Empirical Evidence from Nigeria
recognized as an effective tool and mechanism for accelerating growth and reducing poverty in third
world economies. This generated numerous empirical studies analysing the impact of foreign aid on
economic growth of developing economies. Morrissey (2001) pointed out that foreign aid may contribute
to economic growth by increasing investment in physical and human capital, as well as in the capacity of
the country to import capital goods and technology.
Besides that, it is worthy to know that aids do not have any of those indirect effects that reduce
investment and saving rates. Hansen and Tarp (2000) provide strong support to other studies which find
that foreign aid has not only led to an increase in aggregate savings and investment, but also has a
positive impact on economic growth. McGillivray (2005) also posited that foreign aid granted to Africa
has significantly reduced their poverty level. Levey (1988), Gomanee et al, (2005), Ekanayake and
Chatrnas (2010) also present some evidence according to which foreign aid has contributed positively to
economic growth in SSA countries by financing public investment and reducing poverty level. Even
though some scholars like Boone (1996) find evidence that foreign aid does not increase the rate of
economic in developing countries but others like Burnside and Dollar (2000) are of the opinion that in
poor countries where sound economic policies are implemented, foreign aid fosters economic growth and
reduce poverty level substantially.
2.1.2 Remittances
Remittances are the portion of international migrant workers’ earnings sent back from the country of
employment to the country of origin, and play a central role in the economies of many labour-sending
countries. Workers’ remittances consist of goods or financial instruments transferred by migrants living
and working abroad to residents of the home economies of the migrants. It is limited to transfer made by
workers who have stayed in foreign countries for at least one year, while workers who are self-employed
are excluded (IMF, 1999). As mentioned above, whether remittances promote economic growth or not is
an important issue of debate amongst economists. Those that believe remittances do not contribute to
economic growth point to their expenditure on conspicuous consumption (Rahman et al, 2006) and that
any savings are being spent on consumption rather than for the accumulation of productive assets (Stahl
and Arnold, 1986), and the theoretically low marginal propensity to consume out of transitory income.
Those that argue for the positive developmental effects of remittances focus on the multiplier effects of
consumption (Stahl and Arnold, 1986), development of the financial institutions that handle remittance
payments (Aggarwal et al, 2006), use of remittances as foreign exchange (Ratha, 2005), and the role of
remittances as an alternative to debt that helps alleviate individuals’ credit constraints in countries where
micro-financing is not widely available (Guilamo and Ruiz-Arranz, 2006).
2.1.3 Foreign Direct Investment
An agreed framework definition of foreign direct investment (FDI) exists in the literature. That is FDI is
an investment made to acquire a lasting management interest (normally 10% of voting stock) in a
business enterprise operating in a country other than that of the investor defined according to residency
(World Bank, 1996). Foreign Direct Investment (FDI) generally refers to long-term participation by one
country in another country. It usually involves participation in capital transfer, transfer of technology and
expertise. There are two types of FDI: inward foreign direct investment and outward foreign direct
investment, resulting in a net FDI inflow (positive or negative) and stock of foreign direct investment.
FDI plays a major role in developing countries like Nigeria. They act as a long term source of capital as
well as a source of advanced and developed technologies. The investors also bring along best global
practices of management. As large amount of capital comes in through these investments more and more
industries are set up. This helps in increasing employment opportunities. FDI also helps in promoting
international trade. This investment is a non-debt, non-volatile investment and returns received on these
are generally spent on the host country itself thus helping in the development of the country. Some of the
sectors that attract high FDI inflows in Nigeria are the extractive industries, insurance sector,
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Foreign Capital Inflows and Economic Growth Nexus: Empirical Evidence from Nigeria
telecommunication, real estate, hotel, power, drugs, financial services, infrastructure etc. Empirical
studies have support the positive effect of FDI on economic growth. For instance, Jenkin and Thomas
(2002) assert that FDI is expected to contribute to economic growth not only by providing foreign capital
but also by crowding in additional domestic investment. By promoting both forward and backward
linkages with the domestic economy, additional employment is indirectly created and further economic
activity stimulated.
According to Adegbite and Ayadi (2010) FDI helps fill the domestic revenue-generation gap in a
developing economy, given that most developing countries’ governments do not seem to be able to
generate sufficient revenue to meet their expenditure needs. Other benefits are in the form of externalities
and the adoption of foreign technology. Externalities here can be in the form of licencing, imitation,
employee training and the introduction of new processes by the foreign firms (Alfaro, 2006). Caves
(1996) observe that the rationale for increase efforts to attract more FDI stem from the belief that FDI has
several positive effects. Among these are productivity gain, technology transfers and the introduction of
new processes like managerial skills and know how in the domestic market, employee training,
international production networks, and access to market. Carcovic and Tevine (2002) notes that the
economic rationale for offering special incentives to attract FDI frequently derives from the belief that
foreign investment produces externalities in form of technology and spill-over. FDI provides much
needed resources to developing countries such as capital, technology, managerial skills, entrepreneurial
ability, brand and access to market which are essential for developing countries to industrialize, develop,
create jobs, and attack the poverty situation in their countries.
Dauda (2007) argues that FDI is generally believe to propel in developing countries as it makes
significant contribution to the host country’s development process especially through easing of
constraints of low levels of domestic savings and investment as well as foreign exchange shortage, he
further argues that FDI increases the GDP and generates a streams of real incomes in host country. The
increased productivity benefits local income groups through higher wages and expanded employment,
lower product prices paid by customers, rent to local resource owners and high tax revenue or royalties to
government.
2.1.4 External Debt
It is generally assumed that developing countries are facing scarcity of capital and other financial
resources needed to finance their large developmental projects, this make them vulnerable to external
borrowing to supplement domestic revenue. Also, most poor income countries prefer external borrowing
to domestic debt because the interest rates charged by international financial institutions like International
Monetary Funds (IMF) is about half to the one charged in the domestic market. However, whether or not
external debt would be beneficial to the borrowing nation depends on whether the borrowed money is
used in the productive sectors of the economy or for consumption. Adepoju et al, (2007) stated that debt
financed investment need to be productive and well managed enough to earn a rate of return higher than
the cost of debt servicing.
The main lesson of the standard “growth with debt” literature is that a country should borrow abroad as
long as the capital thus acquired produces a rate of return that is higher than the cost of the foreign
borrowing. In that event, the borrowing country is increasing capacity and expanding output with the aid
of foreign savings. The debt, if properly utilised, is expected to help the debtor country’s economies by
producing a multiplier effect which leads to increased employment, adequate infrastructural base, a larger
export market, improved exchange rate and favourable terms of trade. But, this has never been the case in
Nigeria and several other developing countries where it has been misused, and the management of the
debt by way of service payment, which is usually in foreign exchange, has also affected their
macroeconomic performance (Aluko and Arowolo, 2010).
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Foreign Capital Inflows and Economic Growth Nexus: Empirical Evidence from Nigeria
2.2. Empirical Review
This section gives the review of numerous empirical studies on the impact of foreign capital inflows on
developing economies. For instance, Adegboye et, al (2014),in their paper analyse the impact of external
capital flows on economic growth of Nigeria using time series data spanning from 1981 to 2012.They
employed vector error correction mechanism. Results from the empirical analysis show the categorization
of foreign capital inflows into direct and portfolio has significant relevance in terms of their effects on
economic growth of Nigeria. Asien and Oriavwote (2013) examine the impacts of foreign capital inflow
on Nigerian economy using time series data covering the period between 1982 and 2012. They employed
error correction mechanism and found a negative association between inflation and capital inflows to
Nigeria. The short run of dynamic results suggests that domestic credit to private sector, real growth rate
of GDP and market capitalization have been beneficial to foreign capital inflows to Nigeria.
In their paper, Nkoro and Uko (2013) examine the impact of capital inflows on Nigerian economy using
time series data between 1981 and 2010. The study employed co-integration, variance, and impulse
response analysis and block exogeneity tests. The results reveal that causality relationship exists between
foreign capital inflows and economic growth in Nigeria.
Fambon (2013) investigates the impact of foreign capital inflows on economic growth of Cameroon using
annual time series data between 1980 and 2008. The study employed augmented dickey fuller, Peterperron tests and cointegration techniques. The results of the analysis show that the domestic capital stock
and foreign direct investment have positive and significant impacts on economic growth in the short and
long terms, while labour force shows a significant negative impact on economic growth. In decomposing
foreign capital inflows into its various components, Aurangzeb and Haq (2012) examine the impact of
foreign capital inflows on the economy of Pakistan for the period between 1981 and 2010. Multiple
regression techniques were employed to identify the significance of different factors. Their result shows
that three capital inflows used in the model have positive and significant effect on economic growth. The
result also shows that the granger causality test reveals a bi-directional relationship between remittances
and external debt, RGDP and external debt, FDI and external debt and remittances and RGDP.
Using a set of data for WAMZ countries between 1981 and 2010, Orji et al (2014) examine the impact
foreign capital components on economic growth. They used four components of capital inflows namely;
foreign direct investment, official development assistance, foreign private investment and remittances.
They employed SURE techniques and the result shows that more than one form of capital inflows
contributed positively to the economic growth of Nigeria. Again, the result reveals that official
development assistance positively contribute more to output growth of Ghana and Sierra Leon, whereas,
FDI foster more output growth in Nigeria and Gambia. Also, from the result, remittances have the highest
contribution in Liberia and none of the components have positive impact on guinea’s economy.
Chigbu et al, (2015) investigate the impact of foreign capital inflows of developing countries of Nigeria,
India and Ghana using set of data spanning from 1986 to 2012. They employed co-integration test,
augmented dickey fuller test, granger causality and ordinary least square method. The results reveal that
capital inflows have significant positive impact on the economies of the three countries. Narayan (2013)
examine the causal relationship between foreign capital inflows and economic growth in India. The study
tests the long run relationship using co-integration test. The result indicates that there is long run
equilibrium between economic growth and capital inflow components used in the model.
This section presents empirical literature on some of the relevant components of capital inflows. For
instance, Lensink and Morrissey (2001) examine the effect of aid on by controlling aid uncertainty for a
number of developing aid recipient countries. The study posits that the impact of aid on growth depends
fundamentally on the effect of aid on the level efficacy of investment. The study showed that aid
uncertainty is consistently and significantly have negative effect on growth and controlling for uncertainty
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Foreign Capital Inflows and Economic Growth Nexus: Empirical Evidence from Nigeria
has a negative robust effect on growth via the level of investment. The study by Karras (2006) examines
the correlation between foreign aid and growth in per capita GDP, using annual data for the period 196097 and sample of 71 developing countries recipient of foreign aid. The author finds the impact of foreign
aid on economic growth is positive, permanent, statistically significant, and non-negligible.
Bowen (1998) carried out a study to measure the direct and indirect relationship between foreign aid and
economic using a cross sectional data for 67 developing countries. He observed an indirect foreign aid
growth relationship through its interaction with domestic savings and is found significant and negative.
Ezeabasili, Isu and Mojekwu (2011) investigate the relationship between Nigeria’s external debt and
economic growth, between 1975 and 2006. The choice of period was guide by data availability and
escalation of Nigeria’s external debt; they found that external debt has negative relationship with
economic growth in Nigeria. For example on per cent increase in external debt resulted in a decrease of
0.027 per cent in growth domestic product, while a per cent increase in total debt service resulted to0.034
per cent (decrease) in growth domestic product. These relationships were both found to be significant at
the ten per cent level. In addition, the pairwise granger causality test reveals that unidirectional causality
exist between external debt service payment and economic growth at the 10 per cent level of significance.
In addition, external debt was found to granger cause external debt service payment at the 1 per cent level
of significance, while statistical interdependence was however found between external debt and economic
growth.
Omankhanlen (2011) examines the impact of foreign direct investment on Nigerian economy. The study
employed OLS regression techniques using time series data spanning from 1980 to 2009. Base on the data
analysis it was discovered that significant impact on current account balance in balance of payment.
While inflation was seen not to have significant impact on foreign direct investment inflows. The
exchange rate has positive effect on foreign direct investment. Therefore it is recommended that for
Nigeria to attract the desired level of FDI, it must introduce sound economic policies and make the
country investor friendly. There must be a political stability, sound economic management and well
developed infrastructural facilities. Folorunso (2009) examines the impact of foreign direct investment on
economic growth of Nigeria. He employed granger causality and spearman’s rho in the analysis. Time
series data was utilized spanning from 1980 to 2007. The study reveals that the link between FDI and
economic growth in Nigeria is very weak. However, FDI is found to be related with export growth while
human capacity building is found to be related to FDI flow. The endogeneity theory of FDI was found to
be unrealistic for Nigeria. The study therefore, recommends infrastructural development, human capacity
building and strategic policies towards attracting FDI flow.
Akinlo (2004) investigates the impact of direct foreign investment (DFI) on economic growth in Nigeria
using data for period 1970-2002. The result from error correction model (ECM) shows that both private
capital and lagged foreign capital have small significant impact on export and economic growth. Financial
development, which measured as M2/GDP has significant negative impact on growth. This he attributed
to capital flight. Also, the results showed labour force and human capital have significant positive effect
on growth. These findings suggest for labour force expansion and education policy to raise the stock of
human capital in the country.
Okon et al, (2011) investigates the impact of foreign direct investment on economic growth in Nigeria.
They employed econometric model using time series data spanning between 1970 and 2010. The study
reveals that there is endogeneity that is, bi-directional relationship between FDI and economic growth in
Nigeria. They finding shows that FDI and economic growth are jointly determined in Nigeria and there is
positive feed-back from FDI to growth and from growth to FDI. The overall policy implication of the
result is that policies that attract more foreign direct investment to the economy, greater openness and
increased private participation will need to be pursued and reinforced to ensure that the domestic
economy captures greater spill over from FDI inflows and attains higher economic growth rate.
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Foreign Capital Inflows and Economic Growth Nexus: Empirical Evidence from Nigeria
Oke, Uadiale and Okpala (2011) investigated the impact of workers’ remittances on financial
development in Nigeria from 1977 to 2009 using ordinary least square estimation (OLSE) technique as
well as the Generalized Method of Moments (GMM) estimator. With the indicators of the ratio of money
supply to GDP (M2/GDP) and the ratio of private credit to GDP (CPS/GDP), they found that remittances
positively and significantly influence financial development in Nigeria. Motelle (2011) studied the role of
remittances in financial development in Lesotho vis-à-vis other alternative measures of financial
development. The method of Error Correction Model was used for this purpose and the stationarity test
was done using the conventional methods, such as Augmented Dickey-Fuller (ADF) and Phillips-Perron
(1988) (PP), and Kwiatkowski, Phillips, Schmidt and Shin (1992) KPSS for robustness sake and
eliminating the size and power problems associated with the traditional methods. He found out that
remittances tend to have a long run effect on financial development; however, they do not cause financial
development. The Granger causality test revealed that financial development causes more remittances.
Nyeadi and Atiga (2014) investigated the link between remittances and economic growth in Ghana using
time series data spanning from 1980 to 2012. They employed granger causality and co-integration tests
under the vector error correction model. The result reveals that there is a unidirectional causality between
remittances and economic growth in Ghana. Feeny et al, (2014) examined the impact of remittances on
economic growth in Small Island Developing States (SIDS). Results from variants of an empirical model
suggested that while, on average, there is at best no association between remittances and growth in
developing counties, the is positive association between these variables in SIDS. This finding holds for
SIDS in sub-Sahara Africa and the pacific but not for those in Latin America and the Caribbean.
2.3
Theoretical Literature
2.3.1 The Two-Gap Model
The argument for foreign capital inflows are usually founded on the need to supplements the level of
domestic savings that can supply the required resources (financial, technical and managerial) for domestic
economic growth (Anthony et al, 2014). The benchmark for the analysis of foreign capital inflows can be
dated back to the two-gap model developed by Solow (1956) which is an extension of the Harrod-Domar
growth model in which growth is driven by physical capital formation. In the Harrod-Domar Model,
output depends upon the investment rate and the productivity of investment. A savings gap exists if
domestic savings alone are insufficient to finance the investment required to attain a target rate of growth.
In addition to the savings gap, there is also a trade or foreign exchange gap which is based on the
assumption that not all investment goods can be produced domestically.
2.3.2 Push- Factor and Pull- Factor Theories
The movement of foreign capital flows into various countries is further explained by two pairs of theories,
namely; push-factor and pull-factor theories. Thus, push- factor theory looks into direction and behaviour
of capital flows components in the international arena such as falling international interest rates, cyclical
fluctuation in advanced countries and the increasing trend toward international diversifications and
economic changes. On the other hand, pull-factor theory traces the causes of capital flow components to
such domestic factors as autonomous increases in the domestic money demand function, changes in the
domestic productivity of capital, and increasing integration of domestic capital markets into world
capitalist market making it vulnerable to fluctuations and other economic changes.
3.
Methodology
3.1
Sources and Type of Data
The data utilized in this paper were collected from secondary sources. It include annual time series data
for Nigeria on real gross domestic product which was taken as proxy for economic growth, while foreign
capital inflows components include foreign direct investment, foreign aids, workers’ remittances and
external debt, collected for the period spanning between 1972 and 2016. The data were obtained from
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Foreign Capital Inflows and Economic Growth Nexus: Empirical Evidence from Nigeria
World Bank data on economic indicators, Global Development Finance Statistics, International
Development Statistics and Central Bank of Nigeria Statistical Bulletin.
3.2
Model Specification
In attempting to establish a relationship between foreign capital inflows components and economic
growth in Nigeria, the model is specified as follows:
RGDPt=f(FDIt,FAt,RMCt,EDt,μt)--------------------------------------------------(1)
Where RGDP represent real gross domestic product and was taken as proxy for economic growth and
FDI, FA, RMC AND ED represents foreign direct investment, foreign aid, remittances and external debt
respectively. Equation 2 can also be estimated in econometric form as:
RGDPt= β0+ β1FDIt+ β2FAt+ β3RMCt+ β4EDt----------------------------+…+μt(2)
β0 denote the constant term, and β1, β2, β3 and β4are slope of coefficients representing coefficient to be
estimated and μt is the stochastic error term which represent all other variables that are not captured in the
model.
Our apriori expectations will be the following. The coefficient of foreign direct investment is expected to
be positive, as a rise in FDI inflows should potentially increase the level of economic activities in a
country. A positive sign is also expected for the coefficient of foreign aid in line with the existing
literature. Worker’s remittances are hypothesized to positively influence economic growth. The expected
coefficient of external debt is ambiguous; it depends on how the funds are being used in the country. We
can expressed it in econometric form as β0, β1, β2, β3>0 and β4><0
3.3
Estimation Procedure
In view of the fact that this study used time series data and inherently it might exhibit some strong trends,
the non-random disposition of the series might undermine the use of some of econometrics tests such as F
and t-tests. This is because they can cause rejection of a hypothesis which would have otherwise not been
rejected. This study conducted stationery test to mitigate such situations. Also, test for causation and long
run relationship between foreign capital inflow components and economic growth in Nigeria was
conducted using relevant econometric tools.
3.3.1 Testing for Stationarity
In empirical analysis, non-stationarity of time series data is a perennial problem. To avoid estimating and
getting spurious results, the study employed Augmented Dickey Fuller (ADF) and Peter-Perron (PP) tests
and established the order of integration.
3.3.2 Testing for Co-integration
The study employed co-integration to test for long run relationship between the variables by using
Johansen Co-integration test method. Co-integration is a technique used to test for existence of long-term
relationship (co-movement) between variables in a non-stationary series. Before testing for co-integration,
it is important to determine the order of integration of the individual time series. A variable Xt is
integrated of order d (1d) if it becomes stationary for the first time after being differenced d times.
3.3.3 Granger Causality Test
One of the major objectives of this study is to examine the causal relationship between foreign capital
inflow components and economic growth for the period 1970 to 2014. In this study, we employed the
Granger (1969) causality test. Granger (1969) causality method of investigating whether A cause B is to
see how much of current B can be explained by past values of B and then to see whether by including
lagged values of A we can improve the explanation of B. B is said to be Granger-caused by variable A if
A helps in the prediction of B, or if the coefficients on the lagged A’s are statistically significant (EViews User’s Guide 1994-1997).
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Foreign Capital Inflows and Economic Growth Nexus: Empirical Evidence from Nigeria
3.3.4 Error correction mechanism
After determining that the variables of the model are co-integrated, an error correction model (ECM)
would be estimated. The error-correction model arises from the long-run co-integration relationship. To
check for the speed of adjustment of the model from the short run to the long run equilibrium state, then
we also consider the error correcting term (ECM). The greater the coefficient of the error correction term,
the faster the speed of adjustment of the model from the short run to the long run.
4.
Data Analysis of Results
In this section, the basic results will be supplied ranging from stationery test and to a more robust and
comprehensive results of co-integration and granger causality tests.
4.1
Descriptive statistics of the variables
Table 1: Descriptive statistic table
Statistic
RGDP
FDI
Mean
379713.7
2.33E+09
Median
293745.4
1.19E+09
Maximum
950114.0
8.84E+09
Minimum
27365.50
3620.100
StdDev
242583.3
2.78E+09
Skewness
0.806972
1.175496
Kurtosis
2.684743
2.988185
JarqueBera
3.943629
8.060645
Probability
0.139204
0.117769
Source: Computed by the authors using E-views 7.0
FA
1.88E+09
2.86E+08
1.35E+10
12243000
3.50E+09
2.252292
7.009359
53.03410
0.000000
RMC
8198750
1933211.
69125081
9.700000
13805515
2.720124
11.86416
157.7474
0.000000
ED
168499.3
53047.50
679278.0
256.9500
212892.6
1.068547
2.813517
6.711173
0.134889
From table 1 above, it can be seen that the first two descriptive statistics that is mean and median are
measures of central tendency for all the variables. Remittances has the highest standard deviation
(deviation from the mean) while FDI has the lowest standard deviation. The JarqueBera is a test for
normality of distribution where the null hypothesis is that the distribution of the sample is a normal one. If
the probability value of the JarqueBera test is significant, then the null hypothesis is rejected and
alternative hypothesis is accepted which says that the sample is not normally distributed. If each variables
is statistically significant (indicated by a zero), then the series is not normally distributed. Therefore, the
farther the probability statistics of a variable to zero, the lower the value of its JarqueBera statistics and
the more normally distributed it is (and vice versa). From the result above the JarqueBera test shows that
the null hypothesis is strongly accepted for all the distribution. Hence, the variables can be described to be
normally distributed in the following order (from the highest to the lowest) RGDP, ED, FDI, FA, and
RMC.
4.2
Unit Root Test for Stationary
The ADF result in table 2 below shows that all the variables are non-stationary at level but became
stationary at integration of order one, i.e. 1(1) at both 1,5 and 10 per cent confidence levels.
Table 2: ADF Results of the unit root test
Variables
Order
Included in Test
Equation
RGDP
1(1)
Trend & intercept
FDI
1(1)
Trend
&
intercept
FA
1(1)
Trend & intercept
RMC
1(1)
Trend & intercept
Bingham University Journal of Accounting and Business (BUJAB)
ADF
Statistic
-3.614104
-4.751482
-7.737274
-4.127826
Test
Mackinnon
Critical Value
5%= -3.552
1%= -3.670
1%= -4.296
1%= -3.639
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Foreign Capital Inflows and Economic Growth Nexus: Empirical Evidence from Nigeria
ED
1(1)
Trend & intercept
Source: Authors computation using Eviews
Table 3: Philips-Perron Results of the unit root test
Variable
Order
Included in test
equation
RGDP
1(1)
Trend
&
intercept
FDI
1(1)
Trend & intercept
FA
1(1)
Trend & intercept
RMC
1(1)
Trend & intercept
ED
1(1)
Trend & intercept
Source: Computed by the authors using E-views 7.0
-3.878218
ADF
Statistic
-3.234724
-4.997729
-2.747879
-4.232192
-22.885620
5%= -3.595
Test
MacKinnon
Critical Value
10%= -3.209
1%= -4.262
10%= -2.614
1%= -3.639
1%= -4.262
The table2 and 3 above shows that all the variables are not stationary at first different but they became
stationary after taking the first difference. This can be seen by comparing the observed value (in absolute
terms) of the Augmented Dickey Fuller (ADF) test and Phillips-Perrons test statistics with the critical
value (in absolute terms) at 1%, 5% and 10% level of significance.
4.3.
Johansen Maximum Likelihood Test of Co-integration
The major aim of this test is to find out if a linear combination of the integration variable is becomes
stationary over the long run, if it is, then it means co-integration exists among the variables, this further
implies that there exist a long run relationship among the variables. The Johansen co-integration test for
the number of co-integration relations or rank using Johansen’s maximum Eigen value and trace test. The
results are shown on table below.
Table 4: Johansen Co-integration test result
Number of
Trace Statistics
Co-integrating
Equation HO:
Statistics
0.05 Critical
Maximum Eigen Value
Statistics
value
0.05 Critical
value
None
104.6615
60.06141
63.74711
30.43961
At most 1*
40.17496*
40.91441*
24.15921*
29.03813*
At most 2
11.87629
24.27596
9.067510
17.79730
At most 3
2.808776
12.32090
2.808612
11.22480
At most 4
0.000164
4.129906
0.000164
4.129906
Source: Computed by the authors using E-views 7.0
The hypotheses are stated below:
HO: There is no co-integrating relationship among the integrated variables.
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Foreign Capital Inflows and Economic Growth Nexus: Empirical Evidence from Nigeria
H1: there is co-integrating relationship among the integrated variables.
The two tests produced the same result. The trace test rejected the null hypothesis (H O) that there is no cointegrating relationship between the variables and the test best on the maximum Eigen value also rejected
the null hypothesis. They both show that there is one co-integrating equation at the 0.05 level of
significance. Since the two tests gave the same result, it shows that there is co-integrating equation. The
result of the co-integration test showed that RGDP, FDI, FA, RMC and ED have equilibrium condition
which keeps them in proportion to each other in the long run.
The exactly identifying estimate of the Johansen maximum likelihood estimate showing the cointegrating coefficients normalized to RGDP are shown below. They are very useful in understanding the
long run relationships among co-integrating variables.
Table 5: Normalized Co-integrating Coefficients
Variables
RGDP
FDI
Coefficients
1.000000
0.020494
Standard
(0.000978)
Error
t. statistic
2.09550
Source: computed by the authors using E-views 7.0
FA
0.000882
(7.8005)
RMC
0.159999
(0.01698)
ED
-18.26818
(1.9494)
0.0001130
9.42279
9.67727
The co-efficient of estimate can be interpreted in terms of long run elasticity and t-statistic to determine
the statistical significance of each variable. Based on the rule of thumb, a variable is said to be
statistically significant if the absolute value of it t-statistic is approximately 2 or above.
From table 5 it can be seen that FDI, external debt and remittances are all elastic in relation to RGDP,
meaning that in the long run, a change in this variables will cause a more than proportionate change in
RGDP and the t-elastic of the variables show that the coefficient are statistically significant except foreign
aid.
4.4
Error Correction Model (ECM)
The ECM coefficient is known as speed of adjustment factor, it tells how fast the system adjusts to restore
equilibrium. It captures reconciliation of the variables over time from the period of disequilibrium to the
equilibrium. The result of the error correction model (ECM) is shown in the table below and the basic
criteria for analysing ECM is:
1
The ECM must lie between 0 and 1
2
It must be negative for it to be meaningful
If it positive there is no error connection and it diverges and the t-statistics must be significant.
Table 6: ECM Result
Variables
ECM(-1)
T-statistic
RGDP
-0.791795
-3.29248
FDI
-0.120231
-0.59427
FA
-0.258487
-1.58144
RMC
-0.352812
-1.19230
ED
-1.542957
-6.17310
Source: computed by the authors using E-views 7.0
The speed of adjustment co-efficient for RGDP is -0.791795. The ECM is correctly signed and in terms
of magnitude it lies between 0 and 1. This significance support co-integration and as it shows there is
exist a long run steady equilibrium between RGDP and the explanatory variables. Precisely the error
correction model in this equation means that about 79.17per cent of error generated between each period
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Foreign Capital Inflows and Economic Growth Nexus: Empirical Evidence from Nigeria
are correlated in subsequent periods. This result is sizeable and also significant judging from the value of
the t-statistics (-3.29248).
4.5.
Granger Causality test
Table 7: Results of Granger Causality test
Null Hypothesis:
FDI does not Granger Cause RGDP
RGDP does not Granger Cause FDI
FA does not Granger Cause RGDP
RGDP does not Granger Cause FA
RMC does not Granger Cause RGDP
RGDP does not Granger Cause RMC
ED does not Granger Cause RGDP
RGDP does not Granger Cause ED
Source: computed by the authors using E-views
Obs.
43
43
43
43
F-Statistic
5.33693
0.18753
2.16194
13.7744
1.10720
1.34291
41.0433
2.04897
Prob.
0.0109
0.8300
0.1339
7.E-05
0.3445
0.2774
5.E-09
0.1478
The granger causality in the table above shows the direction of causality between the variables. Therefore,
the f-statistics was used to measure the causality at 0.05 level of significant. The result shows a
unidirectional causality between the variables indicating that the causality runs from FDI to RGDP,
RGDP to FA and ED to RGDP. This can be interpreted to mean that there is causal relationship between
foreign direct investment, foreign aid, external debt and real gross domestic product proxy for economic
growth. Moreover, from the result it can be seen that there exist no causality between remittances and real
GDP in Nigeria for the period reviewed.
5.
Conclusion and Recommendations
This paper is structured to empirically examine the causal relationship between external capital inflows
and economic growth using time series data spanning from 1972 to 2016. The result of the stationarity
test presented in table 2 and 3 above shows that all the variables (RGDP, FDI, Foreign aid, remittances
and external debt) are non-stationary at level both became stationary after taking the first difference using
both the ADF and PP tests. The co-integration result depicts a long run relationship between foreign
capital inflow components and RGDP (economic growth) in Nigeria under the study period. Therefore, an
error correction was used to determine the speed of adjustment from short run disequilibrium to long run
equilibrium. From the result of the analysis, the error correction term has a statistically significant
coefficient with the appropriate negative sign and value below zero. The model also reveals that all the
variables are statistically significant except foreign aid.
Again, granger causality result reveals a causal link between the external capital components with the
exception of remittances and economic growth proxy for real GDP.Therefore, the results support foreign
capital inflows-led economic growth hypothesis which is in line with numerous empirical studies like
Nkoro and Uko (2013), Fambon (2013), Orji (2014) among other studies. The policy implication that can
be drawn from the above findings is that all the foreign capital components used in the study are very
important sources of capital for Nigeria to finance its underdeveloped infrastructural base and pave way
for growth and development of the country. Besides that, foreign capital inflows will help in setting a
turning point for the progressive structural transformation of the country’s economy from largely oil
based economy to a growing and diversified economy with expanding industrial, service and agricultural
sector, capable of creating job opportunities, reducing poverty and above overall development of Nigerian
economy. But, this can only be appreciated if the following recommendations are appropriate taken into
consideration. They include:
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a. Government should encourage the recipients of foreign capital and foreign investors to channel
such funds to productive sectors that can create job opportunities and a virile economic
environment.
b. Government should create an enabling environment and macroeconomic stability that will attract
more foreign capital inflows.
c. Domestic savings and investment should also be encouraged through adopting appropriate and
favourable fiscal and monetary policies.
d. Lastly, there is also the need to strengthen the existing economic and political institutions in order
to make them effective and efficient. The issue of insecurity need to be urgently addressed
especially north-east and oil rich regions where bombers, pipeline vandalizers, kidnappers and
arm robbers have sent away many foreign investors in the country.
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Effect of Financial Access and Poverty Reduction as Determinants of Weather Index Insurance
Take-up in Nigeria: An Ex-ante Analysis
Effect of Financial Access and Poverty Reduction as Determinants
of Weather Index Insurance Take-up in Nigeria: An Ex-ante
Analysis
Terfa W. Abraham
National Institute for Legislative Studies (NILS),
Abuja – Nigeria
Email: Lorenzcurve@yahoo.com
and
Onivehu J. Beida
Department of Accounting,
Bingham University, Karu - Nasarwa State
Email: beidang@yahoo.com
Abstract
As an innovation to cope with the risk of climate change, weather index based insurance is gaining critical attention
in research and policy space. Poverty and financial exclusion, however, can constrain the implementation of such
schemes; as huge resources invested in the design of weather index product would also be wasted if poverty and
financial exclusion are not addressed. This paper examines the effect of financial inclusion (formally and informally
defined) on the take up of weather index insurance in Nigeria. Despite the challenge of having a robust proxy for
weather index insurance in Nigeria, developing country experience with the Structural Adjustment Programme
(SAP) and a set of other poorly conceptualized and adopted policies, highlights the benefit for such analysis. Using
descriptive and regression analysis, the results showed that farmers in the richest income quintile and categorized
to be financially included in the formal sense, have higher take up for insurance with access to finance than without
it. On the other hand, farmers in the poor income quintile group are organized around informal financial inclusive
mechanisms and have low tendency for taking up insurance. Data for the study were sourced from the 2011 World
Bank financial inclusion database. The paper concludes that, understanding how rural farm household are
organized and how they use such structures to build resilience is critical to designing policies that would help them
sustain production and lift up their livelihoods. Such options should be fully explored before consideration
‘alternatives’ such as weather index insurance, which has basis risk as its typical drawback. Establishing food
processing and preservation centers across the nation as well as establishing food security advancement funds for
instance, are other plausible options to explore towards ensuring a vibrant agricultural sector in Nigeria.
Keywords: Financial Access, Poverty Reduction, Weather Index
1.
Introduction
Poor households have over the years been the victims of poorly conceptualized and adopted policies in developing
countries (Garba and Garba, 2011; Brooks, Filipski, Jonasson and Taylor, 2011; and Hildén, Jordan and Rayner
2014). The literature on climate change and risk management strategies identifies several approaches to helping
farmers adapt to the impact of climate change. Weather index based insurance and access to credit are two of such
(Botzen and van den Bergh, 2008; and Akter and Fatema, 2011). While empirical literature has focused on the
implementation of weather index based insurance to help poor farmers cope with climate shocks in developing
countries (see Mechler et al., 2006), financial exclusion and poverty in such communities could hamper its
implementation and aggravate unsustainable land use management practices (e.g. de Janvryet al., 1991 and
Nkonyaet al., 2008) hence, hampering the effectiveness of micro-insurance programmes (e.g. Chakravartya and Pal,
2010, Akter and Fatema, 2011). For a typical agricultural household community in rural west Africa, however;
where poverty is high, household are excluded and the expanding impact of climate change is increasing their need
for resources to implement adaptation and coping measures; the question is, would access to credit lead to an
increased take up of crop insurances? How would poverty affect this link? How do rural farm households organize
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Effect of Financial Access and Poverty Reduction as Determinants of Weather Index Insurance
Take-up in Nigeria: An Ex-ante Analysis
themselves to address credit constraints? And what effect does it have on their capacity to mitigate production risks
association with climate change?
Farmers had always found ways to adapt to the impact of changing weather and climate conditions, global
climate change (with its local effects), however, increases the scale for which they need to build and
implement resilient strategies (see IISD, 1995; Hess, 2003; WFP and IFAD, 2011; World Bank, 2012;
Collier, 2013). Cost effective or not, implementing these strategies require access to finance. Farm
households who are poor and financially excluded do not just have access to it hence, would have low
take up for climate risk coping measures on regional, national or community scale aimed at minimizing
the risks of their vulnerability or sensitivity to Climate Change. One aspect of such coping strategies is
through the take up of weather index insurance products: a class of insurance products that can allow
weather-related risk to be insured in developing countries where traditional agricultural insurance may not
always be feasible (WFP and IFAD, 2011). Its major shortcoming, however, is basis risk (Collier, Skees
and Barnett, 2009):
“The most challenging disadvantage of weather index insurance is basis risk, which is variability in the relationship
between the value of losses as measured by the index and the value of losses experienced on the farm. Basis risk
occurs due to spatial variation in weather variables (particularly where there are local micro-climates) as well as
differences in management practices, soil quality or crop varieties. Because no individualized loss adjustment
occurs with weather index insurance, the policy-holder must always carry the basis risk”
Collier et al (2009)
Financial inclusion on the other hand, is argued to be a critical element that makes growth inclusive as access to
finance for instance would enable economic agents to make longer-term consumption and investment decisions,
participate in productive activities, and cope with unexpected short-term shocks (Park and Mercado Jr, 2015). It has
also been argued that financial inclusion increases access to a broad range of financial services such as payments,
savings, remittances, insurance, pension and credit at affordable costs (CBN, 2012). As conceptualized by Sarma
(2008), financial inclusion is a process that ensures the ease of access, availability, and usage of formal financial
system for all members of an economy. Park and Mercado Jr (2015), however, noted the need to distinguish between
voluntary versus involuntary exclusion. Hence, referring to the World Bank (2012) that defined voluntary exclusion
as a condition where the segment of the population or firms choose not to use financial services either because they
have no need for them or due to cultural or religious reasons. In contrast, involuntary exclusion arises from
insufficient income and high risk profile or due to discrimination and market failures and imperfections (see Park
and Mercado Jr, 2015).Though this distinction is important it is still flawed in one direction. It does not consider
how rural households who are willing to access finance using their locally organized savings clubs. Hence, failing to
recognize the effect of such arrangements on a set of policy variables intended to boost the traditional agriculture.
Following the methodology of Sarma (2008), Park and Mercado Jr (2015) constructed a financial inclusion indicator
for Asia. Five measures on financial inclusion where utilized: automated teller machines (ATM) per 100,000 adults,
commercial bank branches per 100,000 adults, borrowers from commercial banks per 1,000 adults, depositors with
commercial banks per 1,000 adults, and domestic credit to GDP ratio. Household community clubs ignored. While
the first two measures pertain to availability of banking services as a dimension of financial inclusion, the last three
refers to the usage dimension of financial inclusion (Park and Mercado Jr, 2015). Hence the savings with community
clubs rural households, which could assist in exploring informal financial inclusion mechanisms in the agricultural
sector/rural communities, left out.Nigeria’s population is about 174.51 million (2013 estimate) and has a population
growth rate of 2.6 percent (NBS, 2013). Available statistics for Nigeria shows that 39.2 million or 46.3 percent of
the total adult population of 84.7 million Nigerians are excluded from financial services with women accounting for
54.4 percent of the excluded population (EFInA, 2010 and CBN 2012). About 80.4 percent of the financially
excluded population, however, resides in rural areas with over 70 percent, practicing land use agriculture (Kama and
Adigun, 2013). With the impact of climate change on rural livelihood and land use activities (IPCC 2007, 2012),
households suffer further from income shocks (World Bank, 2012) and susceptible to falling further below the
poverty line (Barbier 2015 and Hallegatte 2015). Assessing the interaction between constraints (financial exclusion
and poverty) and policy measures (agricultural insurance) is therefore important as it would help in directing the
attention of government to prioritize policy focus towards measures that are people centered.
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Effect of Financial Access and Poverty Reduction as Determinants of Weather Index Insurance
Take-up in Nigeria: An Ex-ante Analysis
This paper therefore raises the following research questions: Would financial access (formal and informally defined)
affect the take up of the agricultural crop insurance product? And would poverty across the income quintile of farm
household affect this link? Thus, the objective of this paper is to examine the effect of financial inclusion (formally
and informally defined), and poverty across the income quintile of farm households, on the take up of an agricultural
crop insurance in Nigeria.
2.
Literature Review
2.1
Conceptual Framework
Sub Saharan Africa and indeed many developing countries have experiences with the impact of received policy
prescription from more advanced economies (Goldin et al 2002, Milner 2005, Sundaram et al 2011). Particularly,
the experience with Structural Adjustment Programmes (SAP) and recurring episodes of financial and economic
crisis in advanced economies, have deepened the need for developing countries to carefully evaluate the likely
impact of received theories and policy prescription on the wellbeing on their citizens (Amin 2011, Hildén et al
2014). Until recently, however, development agenda where designed without considering climate change as they are
made under the assumptions of a stationary climate (Brooks, Anderson, Ayers, Burton and Tellam 2011). Knowing
how climate change would affect development outcomes remains critical. Brooks et al (2011) noted that most
climate change response evaluation frameworks assume that adaptation can and will ‘neutralise’ the impacts of
climate change, enabling development to meet targets that were originally set without any reference to the potential
impacts of climate change.
2.2
Empirical Literature
Climate change is changing the contexts in which development takes place by changing the nature and intensity of
climate-related risks, through the impacts of evolving climate-related risks on people’s vulnerability. Developing
countries will therefore need to consider how policies and service delivery act to support or undermine adaptive
capacity at different levels. They placed adaptation initiatives into three broad categories: addressing the existing
‘adaptation deficit’; managing incremental changes in climate-related risks; and proactively addressing the more
profound longer term manifestations and impacts of climate change by transforming or replacing existing systems
and practices. The study called for long sighted, context-specific approaches that address changing risk contexts, and
also allow for flexible responses to uncertain changes in climate as well as its unintended consequences on
development.
Like SAP, weather index based insurance is a product to be sold to help vulnerable and poor households
cope with the impact of climate change on their livelihood. To wait until the product has been
implemented in Nigeria before examining its effect on households in countries like Nigeria is to have
learned nothing from history. It would also imply that we have thrown to the air perhaps, the one thing we
have learnt from the foundations of classical economics – positive reasoning. While the alternative is to
draw lessons from cross country experiences, this option is correlated with the error of comparing apples
with oranges as the structure of these economies are built on values and cultures that are fundamentally
different.
Concentrated in the rural area, Nigeria’s agricultural sector is faced by several challenges including
climate shocks, infrastructural and institutional constraints (Kwanashie et al, 1998). Although technology
plays a role in building household resilience to food and welfare shocks, Tambo and Wünscher (2014)
argued that farmer innovation significantly improves both household income and consumption
expenditure. While some innovation (e.g. changing of planting date, having access to improved seeds
etc.), may not require access to credit to implement, their study showed that this need is higher for rural
poor farmers who are resource-constrained hence, requiring implementing their own cost-saving and
environmentally sustainable farming system innovations. Access to finance is one of such resource. This
view is highlighted by von Braun (2002) presented below:
“… There remain instances in many developing countries in which financial constraints—rather
than lack of skills, market opportunities, or supply bottlenecks—prevent poor families from
making the key investments necessary to escape poverty…. For example, investments in irrigation
might not be fully utilized when farmers are not able to afford seed or fertilizer during the cashBingham University Journal of Accounting and Business (BUJAB)
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Effect of Financial Access and Poverty Reduction as Determinants of Weather Index Insurance
Take-up in Nigeria: An Ex-ante Analysis
strapped planting season… In the uncertain world of rain-fed agriculture, food availability and
earnings vary widely from one season to the next, and the specter of harvest failure is ever
present… Without access to formal institutions offering savings, credit, or insurance services, the
poor can have difficulty in maintaining essential food consumption during lean seasons, poor
harvests, or periods of unemployment”. von Braun, on the Triangle of Microfinance IFPRI
(2002)
Since 1999, weather index-based insurance had been identified as an alternative to traditional risk
management schemes (Collier et al 2009). Hence, in 2002, donors, particularly the World Bank’s
Commodity Risk Management Group (CRMG), with funds from the Swiss and Dutch governments,
began to finance the piloting of this idea. The first index-based weather risk management transaction was
in India in June 2003. Successes in India have had significant demonstration effects providing evidence
that weather risk management for farmers in the developing world is possible through insurance-type
instruments hence, several other pilots have been tried in Ethiopia and Malawi (UN-DESA, 2007).
Thus, index-based weather insurance instruments have been argued to be a viable alternative to traditional
insurance instruments for agriculture. It also creates income smoothing opportunities for farmers, and
enables access to credit. It is also argued to be affordable. An important conclusion from UN-DESA
(2007) on the strength of index-based weather insurance programs is that, it is most effective and
ultimately more sustainable when implemented in the context of other efforts by farmers to deal with
shocks and increase farm income. Certain drawbacks have also been associated with weather-index-based
insurance. as documented in UN-DESA (2007), they include: (1) they cover only a portion of the
exogenous risks facing farmers; (2) price fluctuations and other risks such as unmanageable pests or
availability of inputs cannot be managed with such products; (3) basis risk, which must always be
considered when deciding to implement a program with scale-up ambitions; and (4) availability of good
quality weather data.
In 2005, 892 groundnut farmers purchased weather-based crop insurance policies for a total premium of
US$36,600 in Malawi (see GFDRR, 2012). As the crop insurance contracts mitigated the weather risk
associated with lending, local banks came forward to offer loans to insured farmers. The farmers used
these loans to purchase certified groundnut seed. This arrangement — lending coupled with crop
insurance — allowed farmers in the pilot areas to access finance that would not have been available to
them otherwise. Credit, in turn, allowed them to invest in higher yield, higher return activities. In 2007,
the pilot was expanded to cash crops. By 2008, the number of participants had increased significantly;
with 2,600 farmers buying policies worth US$2.5 million (see GFDRR (2012). Lessons learned from the
implementation of the index in Malawi, however, show that:




Problems related to production, marketing, and sale of crops can undermine credit repayment in
weather index insurance scheme. Also insurance programs should be integrated into supply
chains so that other risks related to agricultural production can be managed.
To be effective, weather index-based insurance contracts require reliable, timely, and high quality
data from weather station networks.
An enabling legal and regulatory framework is necessary for the take off and expansion of the
program.
Client/stakeholder education and outreach would also be as lack of understanding of insurance
can lead to dissatisfaction with the program and resistance to insurance purchase.
Adamtey et al (2006) argued that many studies analyze macroeconomic policies without making any
explicit linkage to poverty. Even when considered, they noted that it is often an afterthought and in most
cases, addressed in an isolated way. Furthermore, that many poverty studies do not make any explicit link
to macroeconomic policies. Furthermore, that while most ex-ante studies use macroeconomic indicators,
non-quantifiable indicators have been ignored. These studies have also focused on the macroeconomic
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impact and ignored the micro effects. The use of CGE model by the study, however, questions the
disaggregated impact of the study at the micro level.
One of the objective in Garba and Garba (2011) was to examine how informal economic agents perceive
and respond to government policies. They found that the perception and response of households in the
informal sector to government policies are non-uniform and depend on geo-ethnic and religious
considerations as well as certain information sets which are non-uniform and asymmetric. Thus, they
argued that for government policies to stand a chance of effective poverty reduction, they must be
informed by empirical knowledge of the specific group of informal sector operators that they target.
While this objective could be examined using experimental approach, they noted that it requires
considerable resources and length of time. Responses from surveys could therefore be used as an
alternative to measure the collect information on household perception to proposed policies. They,
however, noted that, such responses would only yield reliable data if they are designed to empower
informal economic agents hence, would be more useful to generate reliable data on their operations and
extend the frontiers of theoretical knowledge.
Using Development Evaluation Model (DEVPEM), Brooks, Filipski, Jonasson and Taylor (2011) found
that untargeted agricultural policy intervention are not pro-poor within the rural economy and that
agricultural policy instruments are less efficient at raising rural incomes than direct payments. One of the
policy deductions from the study was that efforts to reduce poverty and hunger need to safeguard and
strengthen incomes of the poorest in the short to medium term, and simultaneously lay the foundations for
enduring improvements in the long term. Thus we deduce that, access to financial services would help
poor small scale farmers cope with shocks and also implement adaptation strategies that would improve
their situations in the long term. Understanding what financial innovation (in the context of climate
change) would help poor farm households come and stay out of poverty would thus, contribute to the
debate on climate policy and development. While Brooks et al (2011) used DEVPEM model to examine
the distributional effect of agricultural policies for six countries and across farm type, the present study is
community specific and would examine the distributional effect of financial services policies across farm
households by income quintile.
2.3
Theoretical Review
2.3.1 The Poverty-Growth-Inequality Triangle
The poverty-growth-inequality triangle theory provides the theoretical basis on the link between finance,
inequality and poverty reduction (Bourguignon, 2004). Grammy and Assane (2006) summarize the
Poverty-Growth-Inequality hypothesis as follows:
The theory states that, the extent and magnitude of absolute poverty depends on the growth of the
mean level of real per capita income and the degree of inequality in the distribution of income.
Thus the strategy of poverty reduction requires both growth and improved income distribution.
Hence, growth is a process of sustained long-term increase in mean level of per capita income
and improved distribution which would bring about greater equality in the distribution of
income. At any given level of per capita income therefore, the more unequal the distribution of
income, the greater is the incidence of poverty. It follows therefore that for any given pattern of
income distribution, the lower the level of per capita income; the greater is the incidence of
poverty.
The Poverty Growth Inequality theory, however, does not recognize the economic and non-economic
factors that could trigger shock to the growth of sustained long term mean income especially for rural
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households, where poverty is high and households who are dependent on rain-fed agriculture are
vulnerable to climate risks of flood or drought. The argument here is that development in the context of
climate change requires rethinking the framework upon which existing policy measures are based to take
cognizance of climate risks. This argument finds support in the literature. While noting that the
relationship between financial development and economic growth has been well documented in King and
Levine (1993), Beck et al., (2000), Demirgüç-Kunt and Maksimovic (1998), Beck et al., (2004), Levine
(2005) and Klapperet al., (2006); Ardic et al (2011) point out that recent debates have extended to include
the notion of financial exclusion as a barrier to economic development and the need to build inclusive
financial systems. They cited Caskeyet al., (2006) and Dupas and Robinson (2009) who using evidence
from household data argued that access to basic financial services such as savings, payments and credit
can make a substantial positive difference in improving the lives of poor people.
2.3.2 The Kuznet Hypothesis
Another variant of theory is the Kuznet hypothesis. It argues that the distribution effect of financial
deepening is adverse for the poor at early stages, but positive after a turning point (Beck et al, 2004).
Greenwood and Jovanovic (1990) argued that the interaction of financial and economic development
gives rise to an inverted U-shaped curve of income inequality and financial intermediary development
since at an early stage of financial development, it is only the rich who have access to financial markets
and thus the opportunity to invest in high-risk and high-return projects. Over time, however, access will
expand to poorer segments of the population. The theory, however, is time insensitive to the period it
would take for rural poor and vulnerable households would take to have access to finance. Thus this paper
applies the poverty-growth-inequality hypothesis, with slight modification. In the representative model,
the impact of climate change would affect the mean income of rural households dependent on rain-fed
agriculture. Hence, they would seek to insure against risk to maximize crop yield and raised long term
mean income. Since insurance against risk would involvement payment for some weather index based
insurance (against flood risk or drought risk), households would prefer to adapt with the impact of climate
change by adopting coping strategies which would require financing. These households are, however,
financially excluded and thus have no access to formal finance. Enhancing their access to sustainable
finance would therefore help them cope with the immediate impact of climate change and slowly enable
them to insure against future flood or drought risks until a time when such household gradually go out of
poverty and diversify to other sectors with very low probability to climate risks.
IMF (2014) argued that incorporating low-income segments of the population into formal financial
systems would go a long way in narrowing the financial exclusion. Failing to recognize how assist
excluded households using existing structures to get them included is in the first place, the reason issues
of ethics, morals and values are used to ward off any potential benefit that could arise from existing
formal financial institutions. Cross country regression analysis from the IMF 2014 report on Sub Saharan
Africa (SSA) showed that poverty in SSA has been higher in countries with less financial access and a
large share of population living in rural areas (IMF, 2014:31). Given the role of credit to development,
households that are financially excluded (with no access to finance), would have no access to formal
credit thus, reducing their ability to cope and adapt to the negative impacts of climate and environmental
change.
2.4
Historic Overview of Micro Finance and Development
The past 40 years has seen tremendous effort recorded in the fight against poverty through the access-tocredit channel in developing countries. The literature identifies four (4) phases in the development of
microfinance (AfDB, 2006): (1) The 1950s, when subsidized credit targeted the poor assuming that
money was the only obstacle to eradicate poverty; (2) the 1970s, with NGO providing microcredit and
playing the role of intermediary between financial clubs and the poor; (3) the 1990s, when formal
microfinance institutions offered more services with social wellbeing of client in mind; (4) the late 1990s,
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with microfinance institutions targeting the poor. The history of small-scale credit is linked to the Comilla
model, Akhtar-Hameed-Khan (1983) implemented in countries like India, Pakistan and then Bangladesh.
The model; Khan’s (1983) reply to the failure of Village Agricultural and Industrial Development (VAID) programme launched in 1953 in East and West Pakistan with technical assistance from the US
government. The model which also identified infrastructural deficit as a constrain to the success of
microcredit programmes sought to simultaneously address problems caused by the inadequacy of both
local infrastructure and local institutions by establishing training and development centres; road-drainage
works; decentralized, small scale irrigation program; and a two-tiered cooperative system (with both
primary and federal cooperatives operating at different levels).
By late 1970s Yunus (1999) saw prospects in microcredit following empirical case studies and develops
his own model that that formally led to establishing the Grameen Bank in 1983 to lend to the poor for
income-generating activities. The Grameen Bank pioneered the innovation of microcredit for the poor in
Bangladesh. The aim was to make microcredit services available to poor households that commercial
lenders were unable to offer on a profitable basis and to whom traditional moneylenders were willing to
provide only at high rates of interest. At this stage, the model microcredit was dependent on donor
funding indicating that microcredit was not a commercially sustainable venture (see Culpeper, 2012).
However, donors were appreciative because high loan repayment rates meant that grants could be
recycled to several rounds of beneficiary borrowers hence, the model was replicated across developing
countries. By the 1990s, microcredit became a favoured policy instrument in the fight against poverty (see
Culpeper, 2012).
There are, however, critical arguments against the impact of microfinance on development outcomes.
Four of such arguments can be deduced from Bateman (2010) on how microfinance has failed in small
scale agricultural related household based on the Comilla and Grameen Bank model. First, that
subsistence farms enticed into microfinance got into huge difficulties due to high interest rates of up 3540% in countries like India. Secondly, following Dichter’s microcredit paradox, Bateman (2010) argued
that the poorest people in countries that experimented microfinance models could do little with credit and
the ones who could do the most, had no need for credit but rather, required larger amount and longer
credit terms. Thirdly, that microfinance was not suitable for minimum efficient scale farms requiring
investments in quality seeds, fertilizer, irrigation, storage and the likes. This argument was supported in
Bateman (2010) using the case of Andhra Pradesh, that ultimately landed in micro debt crisis. The fourth
argument against microfinance deduced from Bateman (2010) is that family farms and agricultural
corporations that urgently needed support could not get. Bateman (2010) further argued that Jobra village
in Bangladesh where Grameen bank was born, was still trapped in deep poverty and deprivation, and has
enmeshed in serious debt problem since the 1990s thereby, further justifying is argument on why
microfinance does not work. In one sentence, Bateman (2010) argument on why microfinance did not
work, was linked to the neoliberal approach upon which microfinance was implemented as small loans
where accompanied by high interest rates termed, the destructive rise of local neoliberalism. Asides the
issue of interest rate identified in the argument against the effectiveness of microfinance, two issues has
been ignored in this argument: access to finance and information technology (see AfDB, 2006). Firstly,
the need for extending access to financial services to rural areas in a cost-effective manner. The picture is
clearer when viewed from the perspective of financial exclusion as vulnerable farm households in rural
areas who could adapt to the impact of climate change are constrained due to inadequate access to
financial services in cost-effective manner (AfDB, 2006). Secondly, the institutional infrastructure needed
for microfinance, which include information technologies, were ignored from the debates.
The lessons learned from microcredit implementation in the mid-1990s, saw the emergence of consultative groups
such as the Consultative Group for International Agricultural Research (CGIAR) established in 1971 with the vision
of reducing poverty and hunger, improving human health and nutrition, and greater ecosystem resilience, through
high-quality international agricultural research. In 1995, a core group of donors came together to create the
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Consultative Group to Assist the Poor (CGAP) with the specific focus to assist the poor through the provision of
microfinance. As Culpepper (2012) puts it, much of the G20’s thinking about financial inclusion sprouted from the
work of CGAP thus, making CGAP one of the three key implementing agencies for the G20’s initiative on financial
inclusion.
The Maya Declaration is the first global and measurable set of commitments by developing and emerging
country policy makers to unlock the economic and social potential of the 2.5 billion poorest people
through greater financial inclusion (Alliance for Financial Inclusion (AFI), 2011). More than 80
institutions from developing and emerging countries – representing over 75% of the world’s unbanked
population – have endorsed the Declaration. Institutions that sign the Declaration agree to make
measurable commitments in four broad areas that have been proven to increase financial inclusion. These
four areas, which are aligned with the G20 Principles for Innovative Financial Inclusion, include:




Create an enabling environment to harness new technology that increases access and lowers costs
of financial services;
Implement a proportional framework that advances synergies in financial inclusion, integrity, and
stability;
Integrate consumer protection and empowerment as a key pillar of financial inclusion; and
Utilize data for informed policymaking and tracking results.
Across developing and emerging countries, government effort has continued to scale up credit available
for agriculture (World Bank, 2006). Having access to these credits remains a major problem. This creates
a credit gap as micro enterprises requiring capital cannot access formal credit available from formal
financial institutions. In a report on Microfinance Policy and strategy, the African Development Bank
(AfDB 2006) argued that the absence of strong retail capacity in microfinance institutions constitute the
biggest challenge in expanding the outreach of financial services to the poor in Africa. Thus, they argued
that extending access to financial services to the remotest of rural areas in a cost-effective manner and
providing institutional infrastructure needed for microfinance, including services to support information
technologies, would enhance access to credit and help address poverty.
In Nigeria for instance, the Nigeria Incentive-Based Risk Sharing System for Agricultural Lending
(NIRSAL) is an initiative of the Central Bank of Nigeria (CBN), the Bankers Committee (BC) and the
Federal Ministry of Agriculture & Rural Development (FMA&RD). NIRSAL, through a dynamic and
holistic approach, seeks to tackle both agricultural value chain and the agricultural financing value chain
in Nigeria. Basically, the scheme seeks to fix the agricultural value chain and to encourage banks to lend
to the agricultural value chain by offering string incentives and technical assistance. From the CBN
(2011) report, at least five issues to be addressed by an estimated USD 500 million of CBN money that
are:




Risk-sharing Facility (USD 300 million). This component would address banks’ perception of
high-risks in the sector by sharing losses on agricultural loans.
Insurance Facility (USD 30 million). The facility’s primary goal is to expand insurance products
for agricultural lending from the current coverage to new products, such as weather index
insurance, new variants of pest and disease insurance etc.
Technical Assistance Facility (USD 60 million). This would equip banks to lend sustainably to
agriculture, producers to borrow and use loans more effectively and increase output of better
quality agricultural products.
Holistic Bank Rating Mechanism (USD 10 million). This mechanism rates banks based on two
factors, the effectiveness of their agricultural lending and the social impact and makes them
available for the public. Bank Incentives Mechanism (USD 100 million). This mechanism offers
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winning banks in Pillar four, additional incentives to build their long-term capabilities to lend to
agriculture. It will be in terms of cash awards.
The NIRSAL framework, like the National Adaptation Strategy and Plan of Action on Climate Change
(NASPA-CCN) for Nigeria, identified the role of funding in building resilience against climate change
but do not clearly spell out how it would benefit small farm households. The conceptualization of the
operation of these frameworks are also lacking in bottom-up approach. The National Adaptation Strategy
and Plan of Action on Climate Change (NASPA-CCN) (see BNRCC, 2011), seeks to address the funding
gap problem in climate change adaptation by among other things, situating climate change adaptation
financing within the broader context of national development financing and the development goals of
Vision 20:2020.
2.5
Evaluation Framework
According to the Japan International Cooperation Agency – JICA - (2003), project evaluation or
examinations are basically conducted from the following perspectives: ex-ante evaluation, mid-term
evaluation, terminal evaluation and ex-post evaluation. Each has different purpose, viewpoints and
different purpose depending on the timing of the evaluation study. In the ex-ante evaluation, before
starting a project, the relevance can be examined based on the actual situation. The other approaches,
however, require survey based on forecasts and prospects (JICA, 2003). Since most developing countries
have evidence of mixed experienced with policy and product implementation received from more
developed economies, the philosophical consideration of this study is to examine the relevance of the
weather index insurance for farmers in Nigeria who are poor and financially excluded. This relevance,
however, would be based on ascertaining the take up of the product taking into consideration the
exclusiveness of rural households and the effect of inclusive strategies alongside other government
programmes. Five processes of carrying out an ex-ante evaluation in JICA (2003) are: to ascertain
relevance, effectiveness, efficiency, impact and sustainability.
In ascertaining relevance, the examination is based on the actual situation and performance. This is linked
to the respondent’s perception of the policy based on experiences with similar projects in the past
rationalized against the reality on ground affecting their particular line of economic activity. The other
stages, however, require carrying out such examination based on forecasts and prospects. Since weather
insurance has not yet been implemented in Nigeria, beginning with the examining its relevance using the
responses of farm households who are the ultimate focus of the product is critically. Moreover, these
household already have experience with traditional insurance and would easily grasp the implication of
weather index take up. JICA (2003) also noted that ex-ante evaluation verifies the appropriateness of a
project by looking at its plan with the aim of formulating an appropriate project.
Ex-ante analyses of the economic impact of proposed policies are important in helping economic units
anticipate the consequence of a set of policy choices. The importance of such analysis for poor
households that have over the years been the victims of poorly conceptualized and adopted policies in
developing countries cannot be overemphasized. According to Garba and Garba (2011), such study is
much more important given the size of the informal economy in countries like Nigeria and of economic
agents that derive livelihood within the informal economy, improved understanding of the development
strategies and poverty-reducing policies is much more critical.
Awolala (2015) argued that alternate way of conducting ex-ante weather index insurance is to simply ask
respondents if they are willing to insure their crop (take up) weather insurance derivative. The respondents should,
however, be properly informed of the conditions around a typical weather index insurance. Generally, the condition
is that households would only receive insurance compensation for loss of production because of a high relationship
between an index and crop outputs. This protects farm households from income losses and reduces their worries in
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case of disaster risks on their farm (Collier et al, 2009). The specific preconditions to educate respondents in such
ex-ante studies on weather index take up are further expressed by Awolala (2015):







you can buy rainfall insurance cover by paying a small amount called premium to protect your crop for x
years;
whenever drought actually occurs, you will receive a compensation called indemnity;
occurrence and intensity drought is measured by an index built with rainfall data from nearest NIMET
weather station to you;
if the rainfall index exceeds a certain pre-agreed value, insurance is automatically triggered;
compensation is triggered by the index without checking the damage on your farm;
indemnity is computed and paid to you based on rain at the weather station, not your farm; and
you will not receive any money back if early cessation of rain or droughts does not occur in the next x years
but your insurance contract will be protected by Nigerian laws.
Another option would be to proxy weather index insurance with traditional crop insurance. Though this
approach has inherent draw backs as crop insurance cannot be likened for weather index insurance, it,
however, provides a historical index that households can relate with and premise their response to. A
word of caution can be drawn on this approach can be drawn from a study by the Global facility for
Disaster Reduction and Recovery (GFDRR, 2011) when traditional crop insurance is compared with
weather index based insurance:
“Traditional crop insurance is difficult to deliver in smallholder economies as it involves costly
individual loss assessments and is prone to moral hazard and adverse selection. Index-based crop
insurance, on the other hand, uses weather observations as proxies for losses in production or quality
and does not require loss assessments. Index-based crop insurance systems have lower administrative
costs and are less technically complex than traditional crop insurance, but are exposed to basis risk (that
is, mismatch between actual loss and insurance indemnity) and only cover selected perils”.
Global facility for Disaster Reduction and Recovery (GFDRR, 2011).
3.
Methodology
To achieve the objectives of this study, global Findex data from the World Bank was relied upon. The
Global Findex indicators are drawn from survey data collected by Gallup, Incorporation over the 2011
calendar year. The data set, funded by the Bill & Melinda Gates Foundation, measure how 1000
households in each economy in 148 countries (including Nigeria), borrow, make payments, and manage
y
risk. Following Grammy and Assane (2006) the outcome, i , would be regressed on the a set of Xs by
ordinary least square (OLS) method. Executing a binary linear probability model (LPM), which is a
viable alternative, was constrained due to missing responses observed from the database. The World Bank
database asked if households have in the past paid for crop/ livestock/ rainfall insurance. The total
household for Nigeria with valid response was 168. The advantage of this response size is that it suggests
that we are dealing with farm households with some experience with payment for crop/livestock/ rainfall
insurance. The OLS model is specified below:
AgInst   1SEsex ,edu   2 Povquintile   3 FFI   t
………………………………………….(3.1)
SE
Pov
sex , edu
quintile
Where
captures the respondent’s gender and level of educational qualification while
captures the poverty classification of the respondents by income quintile ranging from the poorest 20% to
the richest 20%. In (3.1) formal financial inclusion is captured using FFI consisting of access to formal
finance from banks, having bank account with financial institution, to debit card (ATM card) and having
savings with formal financial institution.
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AgInst   1SEsex ,edu   2 Povquintile   3 IFI   t
…………………………………………(3.2)
On the other hand, IFI in (3.2) captures informal financial inclusive mechanism which in the World Bank
Findex data can be proxied using informal arrangement such community savings club, borrowing from
family and friends, and use of mobile phone for receiving information. In the context of climate change,
however, where all farm households are exposed to shocks, borrowing from family and friends might be
constrained as the best bet would be to draw from common resource pool to cope with shocks.
To estimate the influence of financial inclusion on the take up agricultural (crop) insurance therefore, the
equation (3.1) is estimated with and without the proxy for financial inclusion and the size of the adjusted
R-squared compared. Likewise, equation (3.2) is estimated first, without interacting the informal financial
mechanism variables and, then with interaction. The hypothesis to test in this objective is that the
tendency for vulnerable farm household to take up agricultural insurance is lower in rural areas where
poverty is high and households are financially excluded. Hence, addressing financial exclusion and
poverty is critical for achieving sustainable development.
4.
Results and Discussion
The discussion of empirical results is in two sections. The first is on the effect of formal financial
inclusion and poverty on the take up of weather index based insurance and secondly, on the effect of
informal financial inclusion mechanism and poverty on the take up on weather index insurance.
4.1
Formal Financial Inclusion, Poverty and Insurance take up in Agriculture
The multiple regression result for the effect of formal financial inclusion and poverty on insurance take
up is discussed in this section. The result, estimated with and without financial inclusion, is presented in
Table 4.1.
Table 4.1: Interaction between Weather Index based insurance and Financial Inclusion (Estimated
Equation 3.1)1
Variables
Coefficients
p-value (t-stat)
Model Summary
Constant
(1) Model with Financial Access
Proxy
Coefficie p-value
Model
nts
(t-stat)
Summary
2.372
0.000
R = 0.401
2.290
0.000
Gender
-0.058
0.88
R 2 = 0.161
-0.045
0.18
Education
-0.087
0.017
-0.095
0.009
Poorest 20%
Second 20%
0.011
-0.390
0.941
0.062
0.021
-0.392
0.888
0.062
DW = 2.213
F-Stat = 2.159
Fourth 20%
-0.006
0.913
Adj-R2=
0.09
DW = 2.19
F-Stat
=
2.268
F-stat pvalue
= 0.009
R = 0.378
R 2 = 0.143
2
Adj- R = 0.077
-0.007
0.901
F-stat
0.016
Richest 20%
Financial Access
(FI’s, PO, MFI)
Debit Card
Credit Card
Savings
Mobile
Phone
(Paying)
0.397
0.108
0.012
0.075
0.397
xxxxxxxxxx
0.012
xxxxxxxxxx
-0.031
-0.038
0.057
-0.113
0.713
0.797
0.095
0.452
0.057
-0.028
0.063
-0.095
0.412
0.849
0.066
0.529
1
(2) Model without Financial Access Proxy
pvalue
=
See Appendix 1a and1b for the Estimated SPSS output
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Mobile
Phone
(Sending)
Mobile
Phone
(Receiving)
-0.04
0.766
-0.003
0.980
-0.038
0.761
-0.061
0.626
2
Adjusted R
(With Financial Access)
Adjusted R
(Without
Financial
Access)
0.09
(9%)
2
0.077 (7.7%)
Difference
in
2
Adjusted- R
0.013 (1.3%)
Dependent variable: Payment for crop/rainfall/livestock insurance
Source: Author’s estimation using SPSS (Using World Bank 2011 Findex Data)
In both models, the level of educational attainment had a negative coefficient with the payment for
weather index based insurance (WIBI). This implies that farm households with lower level of academic
attainment (who attended primary school or less) have higher demand for WIBI than with farm
households with higher level of educational attainment (completed tertiary or more). The coefficient for
respondents that constitute 20% of the second poorest quintile had a significant and negative coefficient
related with the dependent variable. The deduction is that as the proportion of farm households within this
group decreases, the more would there be households willing to participate or pay for weather index
insurance. Poverty reduction for the second poorest 20% quintile among farm households is therefore
important for weather index insurance take up. On the other hand, the coefficient for the richest 20% was
significant and positively related with the demand for WIBI implying that as the respondents move away
from ‘poverty’ into ‘riches’, the demand for WIBI will likewise increase. The non-parametric regression
curve showing the relationship between payment for weather index insurance and income quintile from
the poorest 20% to the richest 20% is presented in Fig 4.1 further buttresses this point.
1 .9 7
1 .9 7
1 .9 6 5
1 .9 6
1 .9 5 5
E ( Y |X )
'P a y in g fo r W e a th e r In d e x I n s u
Fig 4.1: Non Parametric relationship between Poverty Level and Climate Risk Mitigation
1
1.2
1.4
1.6
1.8
2
X values (Economy Income Qunitile)
Source: Author (Using World Bank Findex Data)
The curve shows that payment for insurance take up is lowest at the lowest quintiles and highest for
richest income quintiles. This also implies that as vulnerable households move out of poverty, their
payment for weather index based insurance would increase. When they become rich (i.e. join the richest
20% income quintile), however, their demand for weather index based insurance would decline. This is so
because they would have less need to take up agricultural weather index based insurance due to
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diversification of investments from farm to off-farm activities. Thus, poverty reduction strategies are in
themselves effective for helping vulnerable households adapt with the impact of climate change.
The financial inclusion variable was also significant and positively related to the demand for WIBI in the
first model meaning that, as more household’s gain higher access to finance, WIBI take would increase.
Dropping the financial access variable in the second model reduced the adjusted R-square from 9 percent
to 7.7 percent. This suggests that financial access increases the demand for weather index insurance in
vulnerable and poor communities. Since savings was significant and positively related to WIBI in model
one and two, we deduce that household savings is also critical to weather index insurance take up as a
climate risk mitigation strategy. This has two implies that farm households with formal savings are likely
to have higher take up of insurance than those without.
4.2
Informal Financial Inclusion, Poverty and Insurance take up in Agriculture
The result for the effect of informal financial inclusion mechanism on insurance take up in the
agricultural sector is presented in Table 4.2. The result in Model 1 shows that education had a negative
effect on insurance take up in the agricultural sector. This means that those with the least level of
educational qualification (primary/Quranic) would have low take up while those with higher education
would have higher take up. This point is also buttressed by the low take up of insurance that is associated
with households in the lowest income quintile, as they are likely to be in the category with the least level
of educational qualification.
Table 4.2: Interaction between Weather Index based insurance and Financial Inclusion (Estimated
Equation 3.2)2
Variables
Model 1
Model 2
Gender
-0.0724
Gender
-0.0778
[0.0534]
[0.053]
Education
-0.1353**
Education
-0.1349***
[0.0511]
[0.0506]
2nd
poorest -0.324
2nd poorest quintile
-0.305
quintile
[0.1954]
[0.1939]
Richest quintile
0.345*
Richest quintile
0.3289*
[0.1893]
[0.1885]
Community
-0.0816
Informal financial mechanism Interacted
-0.0526*
savings clubs
[0.0622]
( Community savings clubs and Mobile
[0.0303]
phone – information smoothening)
Mobile
phone -0.0932
(receiving)
[0.0861]
Intercept
2.464***
Intercept
2.311***
[0.2468]
[0.1662]
Adj R-square
9.47%
Adj R-square
10.75%
F Stat (prob)
0.015
F Stat (prob)
0.0061
Omitted variable F stat = 2.34
Omitted variable test
F stat = 2.19
test
F prob (0.078)
F prob (0.094)
Linktest (_hatsq) t-stat = -1.53
Linktest (_hatsq)
t-stat = -1.51
t-prob (0.130)
t-prob (0.134)
Dependent variable: Payment for crop/rainfall/livestock insurance
Figures in square brackets [ ] are standard errors, ( ) are probability values;*** 1% significance,
**5% significance and *10% significance
2
See Appendix 2a and 2b for the estimated STATA output
Bingham University Journal of Accounting and Business (BUJAB)
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Effect of Financial Access and Poverty Reduction as Determinants of Weather Index Insurance
Take-up in Nigeria: An Ex-ante Analysis
The variables capturing the effect of informal financial system (community savings and information
smoothening using mobile phones), were negative at in the first model, but became significant at 10%
when interacted in the second model. The policy implication is that rural households organized in
community savings club have low take for agricultural insurance. Note that in the model without rural
financial inclusion; savings (i.e. with formal financial institutions), had a positive effect on take up of
agricultural crop insurance. The contrasts is that while empirical evidence of formal conceptualization of
financial inclusion supports a positive relationship between having a bank account and take up of
agricultural insurance, empirical evidence that conceptualizes informal financial inclusion to include
savings with community savings clubs, shows a negative relationship with agricultural insurance take up.
Thus, providing credit to rural households organized around a savings club in the rural areas could serve
as better coping and adaptation strategy than selling insurance products to them. Since these households
are organized in groups, lending to them would be consistent with group lending models and they would
be able to take part in the repayment. Insurance on the other hand would require them to purchase it.
Since most of them are poor, this might in turn require such schemes to be subsidized hence, further
complicating issues in the agricultural sector.
5.
Conclusion and Recommendations
Using descriptive analysis and regression model, this paper examines the effect of financial inclusion (formal and
informally defined) and poverty across income quintiles on the take up of weather index insurance in Nigeria. The
idea behind the paper is to stimulate ex-ante debates and analysis before implementation of the product takes root in
Nigeria. Developing country experience with the Structural Adjustment Programme (SAP) and a set of other poorly
conceptualized and adopted policies highlights the benefit of such analysis. This argument is consistent with Garba
and Garba (2011), Brooks et al (2011) and Hildén et al (2014) who argued that poor households have over the
years been the victims of poorly conceptualized and adopted policies in developing countries hence the need to
model the distributional effect of agricultural and climate change policy innovations in developing countries.
Despite the challenge of having a robust proxy for weather index insurance in the paper, evidence obtained using
proxy from secondary data showed that:



Financial access enhances the take up of agricultural insurance in Nigeria. Conceptualized differently,
however, the evidence showed that poor farmers organized into savings clubs and having access to
information, have less need for insurance take up in agricultural sector in Nigeria.
Farmers in the richest income quintile and categorized to be financially included in the formal sense, have
higher take up for insurance with access to finance than without it.
Farmers in the poor income quintile group have informal financial inclusive mechanisms (informal
organized savings clubs) that helps them cope with a range of shocks hence, have low tendency for taking
up insurance.
Making effort to understand how rural household farmers are organized and how they use such structures to build
resilience is critical to helping them sustain production and lift up their livelihoods. With increasing impact of
covariate and idiosyncratic shocks, however, this option faces increasing stress hence, farm households organized
into such groups could access credit from formal financial institutions using traditional group lending models in the
Grameen sense or Village banking model sense. Thus, rather than placing on poor farm households a sense of
urgency for taking up agricultural weather index insurance as a viable climate risk coping strategy despite its basis
risk drawback, establishing food processing and preservation centers across the nation and establishing food security
advancement funds for instance; which would have the same effect of re-establishing agricultural commodity boards
in Nigeria, are other viable options to explore.
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Bingham University Journal of Accounting and Business (BUJAB)
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Entrepreneurship Education in an Emerging Economy: Evidence from Bingham University Karu
Entrepreneurship Education in an Emerging Economy: Evidence
from Bingham University - Karu
Gwems A. M. Joy
Department of Business Administration,
Bingham University Karu,
Nasarawa State, Nigeria
E-Mail: Mikejoy.g@gmail.com
Mwanse Hannatu P.
Department of Business Administration,
Bingham University Karu,
Nasarawa State, Nigeria
and
Julius Tumba Ndaghu
Department of Management Technology,
Modibbo Adama University of Technology Yola,
Adamawa State Nigeria.
Abstract
The study takes on the issue of entrepreneurship education in an emerging economy like Nigeria. Descriptive design
was adopted for the study and the population included all the 400 level students of the department of Accounting
and Business Administration of Bingham University Karu, Nasarawa State. The students were 105 in all. Mean
scores was used to analyze the data. It was found out that entrepreneurship education gives students the opportunity
to acquire skills, creates entrepreneurial intention in them and positive entrepreneurial attitude. It was
recommended that entrepreneurship education should be taught at an early stage, and specific skills needed for
economic growth should be taught
Keywords: Entrepreneurship Education, Emerging Economy, Skills acquisition
1.
Introduction
The imperativeness of Entrepreneurship as a component of economic development of a nation in
contemporary times is glaring. Its critical role to the economy of nations is now widely acknowledged as
a major source of innovation, job creation and growth. In the past, tertiary institutions produced graduates
who depended completely on the Government for employment. Tertiary institutions did not properly
include the philosophy of self-reliance such as creating a new cultural and productive environment that
will promote pride in primitive work and self-discipline, encouraging people to take part actively and
freely in discussions and decisions affecting their general welfare, promoting new sets of attitudes and
culture for the attainment of future challenges (Arogundade, 2011).
In spite of the belief that Entrepreneurship is a solution to graduate unemployment problem and will help
boost the economy of the nation, there are still many graduates who are jobless and flooding employment
interview venues. This belief made the Nigerian Government to recently introduce entrepreneurship as a
course of study into the curriculum of tertiary institutions. Most tertiary institutions in Nigeria have
established entrepreneurship centers where students are trained practically with various entrepreneurial
skills to develop them to become self-reliant. Bingham University is one of the Universities that
introduced the teaching of Entrepreneurship as a course and cuts across all disciplines. This paper seeks to
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Entrepreneurship Education in an Emerging Economy: Evidence from Bingham University Karu
find out the role of entrepreneurship education on the 400 level undergraduate students of Bingham
University Karu, Nasarawa State and how it will help the Nigerian economy as an emerging economy.
2.
Literature Review
2.1
Conceptual Framework
Nyello eta’al (2015) defined entrepreneurship as the innovative way of creating and exploiting the
business opportunities regardless of whether someone is employed or has established a business, however
determined by their entrepreneurial behaviour. Entrepreneurship is the willingness and ability of an
individual to seek for investment opportunities, to establish and to run an enterprise successfully
(Suleiman, 2006). The entrepreneurship spirit is imperative to an emerging economy. This spirit is
required for the overall economic growth of any nation especially developing ones like Nigeria. This is in
line with the view of Nwangwu (2006) that entrepreneurship is the willingness and the ability of an
individual or a firm or an organization to identify an environmental change and exploit such an
opportunity to produce goods and services for public consumption.
2.1.1 Entrepreneurship Education
In the past, Nigerian institutions taught entrepreneurship as a course in the field of management and
business economics only. Increasingly other study domains like engineering, information technology (IT),
and the health sector have acknowledged the added value of fostering entrepreneurial skills, knowledge
and attitude among their students (Shane &Venkaraman,2000).
In Nigeria, the need to ensure that the present effort at turning out graduates, who will not only be selfreliant but employers of labour cannot be over emphasized. In order to achieve this, the Federal
Government of Nigeria, through the National Board for Technical Education (NBTE), introduced
Entrepreneurship Education in all Nigerian Tertiary institutions, with the aim of giving students the
opportunity to acquire entrepreneurial skills, competencies and attitudes so as to make them become job
providers rather than job seekers. This is to improve the economic, technological and industrial
development of the nation and reduce poverty (Okala 2008).
The rationale for the inclusion of entrepreneurship curricula in universities according to Cotton,
O’Gorman and Stampfi (2000) is that it will help graduates to acquire increased understanding of
entrepreneurship, equip them with an entrepreneurial approach to the world of work and prepare them to
become entrepreneurs. Entrepreneurial education is the process of providing individuals with the ability
to recognise commercial opportunities and the insight, self-esteem, knowledge and skills to act on them.
It includes instruction in opportunity recognition, commercialising a concept, marshalling resources in the
face of risk, and initiating a business venture (Jones & English, 2004). Entrepreneurship education refers
to a formal structured instruction that conveys entrepreneurial knowledge and develops in students,
focused awareness relating to opportunity recognition and the creation of new ventures (Sexton and
Smilor, 1997). Martinez, et al. (2010) defined entrepreneurship education as the building of knowledge
and skills about or for the purpose of entrepreneurship generally, as part of recognized education
programmes at a primary, secondary or tertiary-level educational institution.
Jones and English (2004) defined entrepreneurship education as the process of providing individuals with
the concepts and skills to recognize opportunities that others have overlooked and to have the insight,
self-esteem and knowledge to act where others have hesitated. Entrepreneurship education is about
transforming ideas into reality and consists of three ingredients, creativity; which is creating all kinds of
ideas; innovation; which is finding value in the selected ideas; and entrepreneurship; which is developing
a business from the innovative idea. Globally, public authorities have increased awareness of the
importance of entrepreneurship and this has contributed to continuous increase in the number of tertiary
institutions offering entrepreneurship courses. Given that these educational programs are developed to
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Entrepreneurship Education in an Emerging Economy: Evidence from Bingham University Karu
teach and encourage entrepreneurial behaviour understanding their impact on the factors that influence
and shape individuals’ intentions to choose self-employment as a career are critical.
Entrepreneurship education is defined as all activities [stipulated in the curriculum] aimed at fostering
entrepreneurship mindset, attitudes and skills as well as covering a range of aspects such as idea
generation, start-up, growth and innovation (Ediagbonya, 2013). Bassey & Archibong (2005) submitted
that the goal of entrepreneurship education is to empower graduates irrespective of their areas of
specialization with skills that will enable them engage in income yielding ventures if they are unable to
secure jobs Ekpoh & Edet (2011) posited that entrepreneurship education leads to increase in the level of
students knowledge in entrepreneurial process.
2.1.2 Entrepreneurial Skill Acquisition
Cotton et. al (2000), states that entrepreneurship education helps graduates to acquire increased
understanding of entrepreneurship and equip them with skills relevant for job creation. Through
entrepreneurship education, graduates can acquire the selected entrepreneurial traits and influence their
entrepreneurship behavior (Ediagbonya, 2013). Therefore the entrepreneurial tendency [or behavior]
including the university graduates can be improved through exposing them to entrepreneurship education
(Katundu & Gabagambi, 2014). They grouped the level of skills into three, low, moderate and high.
Thandi & Sharma (2004) posited that, entrepreneurship courses can indeed raise the level of students’
skills on entrepreneurial activity. Equally, these findings support the arguments of Garavan & O'Cinnede
(1994) that, education or training can influence the development of entrepreneurial role. Evidently, the
result of this study is an indication that entrepreneurship education has, to a certain extent, created a
positive impact on the respondents and has raised their level of skills. This finding is instructive against
the background that entrepreneurship education in Akwa Ibom and Cross River institutions is relatively
recent and merely taught for a semester on an ad hoc basis. Moderate skill is also an indication that much
of what is done is theoretical with little or no exposure to practical aspect. This could however be due to
lack of facilities.
2.1.3 Entrepreneurial Attitude
Entrepreneurship attitude has been defined as the extent to which one perceives entrepreneurial behaviour
and its consequences as valuable, beneficial and favourable (Azen, 2002). Guerero, Riaph & Urbano
(2008) affirm that attitude towards entrepreneurship is one of the determinant factors on decision of
becoming an entrepreneur. Therefore, attitude plays very important role in determining the learning
behaviours of students in schools. Robinson et al. (1991) identified four dimensions for entrepreneurial
attitude including need for achievement, personal control over behaviour, innovation, and self-esteem.
Attitudes are habitual ways of reacting to situations.
2.1.4 Entrepreneurial Intention
Entrepreneurial intention is the state of mind that enables individuals to choose in favour of a privatebusiness instead of choosing a salary based work (Gerba, 2012). According to Engle et al. (2010)
“entrepreneurial intent refers to the intention of an individual to start a new business” i.e. to behave in an
entrepreneurial manner. Highlighting the importance of promoting entrepreneurship education in tertiary
institution, Ademiluyi (2007) affirm that it addresses some socio-psychological problems and
delinquency that arise from joblessness. Offusio, Nwolodo & Dele (2010) model advocated for job
creation or venture through orientation, skill development, career development, and opportunities. Their
adopted model maintains that students while in school will acquire necessary training and skills, identify
an opportunity to exploit and eventual creation of their venture. It is against this background that the
study advocates full incorporation and implementation of entrepreneurial education in tertiary institutions
in order to ameliorate the persistent unemployment saga among youth and graduates in Nigeria. Sujani
(2011) posited that entrepreneurship is seen as a wealth creation activity among economies in many
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Entrepreneurship Education in an Emerging Economy: Evidence from Bingham University Karu
countries and it is also a best solution for the problem of unemployment in developing countries.
Exposure to entrepreneurship education is one of the factors that influence the development of favourable
attitude towards entrepreneurship.
2.2
Empirical Review
The findings by Peterman and Kennedy (2003) indicated that offering entrepreneurship education course
is helping students in development of favourable entrepreneurial attitude. Similarly, empirical findings of
Autio et al (1997), Tounes (2006), Trenan, Renfrow and Watson (2003), and Audet (2000) indicated that
taking entrepreneurship education course has positive effects on students’ entrepreneurial attitude.
Research shows that entrepreneurial attitudes and skills can be developed and refined in entrepreneurship
education programs (Harris & Gibson, 2008). Nyello et. al (2015) analysed the attitudes of graduates
based on five (5) entrepreneurship attitudes, namely need for achievement, need for autonomy, creative
tendencies, calculated risks and drive and determination.
There have been a number of studies relating to entrepreneurship education and self-employment
intention have reported that there is a significant relationship between entrepreneurship education and
self-employment intention (Unachukwu et al., 2009; Emmanuel, 2012, Ekpo and Edet, 2013). In his
study, Noel (2001) found out that students who graduated in entrepreneurship reached higher scores in
entrepreneurship intention and entrepreneurial self-efficiency than students who graduate in other
discipline. Similarly in a study conducted by Wilson et al., (2007), it was revealed that entrepreneurship
education serves a medium of increasing students’ interest in entrepreneurship career. In addition, some
previous studies have reported findings on the impact of entrepreneurship education on career intentions
and aspiration; it was found that most people were motivated to a large or very large extent to start-up a
business by virtue of their exposure to entrepreneurship trainings (Owusu-Ansah, 2004). From the above,
it could be observed that most existing research conceptualize entrepreneurship education as instrumental
or what facilitates self-employment intention and the reduction of unemployment.
Ndaghu, Gwems, Wajiga & Vasumu (2016) established in their study that it was promising to offer
entrepreneurship and business development program in institutions since it could create intentions which
can produce the aptitude and enthusiasm to become an entrepreneur. It also corroborates Fayolle (2005)
view that entrepreneurship courses create more entrepreneurship students which in turn lead ultimately to
a greater number of students willing to start their own businesses. Quality entrepreneurship education will
enhance job creation which will subsequently reduce unemployment, poverty and social vices in Nigeria.
This will also help to improve the standard of living; hence promote social economic and political
development in Nigeria which is the cardinal objective of Millennium Development Goals (MDGs)
(Maina, 2014 cited in Evans 2016). According to him, for recipient of entrepreneurship education to be a
job creator rather than job-seeker, he might acquire essential basic skills and attitudes which will enable
him to function as an entrepreneur. Thus, entrepreneurship education would lead to self-reliance improves
the quality of life and the general standard of living of the masses. It reflects in the following economic
indicators such as Higher Profit Employers, more employment, Higher Productivity, Promotion of
Innovative Technologies, products and services and increase in local sourcing of raw materials (Okoba,
2000). Onuma (2016) in his study explored the causes of graduate unemployment and exposure of
students to entrepreneurial education in which he discovered that entrepreneurial education had a
significant relationship with post-graduate job creation ability.
A study by Souitaris, Zerbinati & Andreas (2007) found that entrepreneurship education stimulates
students’ subjective norms and intentions towards entrepreneurship by providing them with knowledge,
skills and a sense of belief that inspire them to choose entrepreneurship as a career. In another study by
Basu & Virik (2008), it was found that entrepreneurship education improves attitudes of students towards
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Entrepreneurship Education in an Emerging Economy: Evidence from Bingham University Karu
entrepreneurship. These results were also confirmed in another study by Ediagbonya (2013) whose results
showed that by developing skills, knowledge and motivation in university students for them to
successfully engage in entrepreneurship activities, entrepreneurship education positively impacts on the
attitudes of students towards entrepreneurship. In a study by the Kauffman Foundation (2000), it was
found that entrepreneurship education increased the probability of start-ups, self-employment and also
that it enhances the likelihood of economic reward and self-satisfaction of the entrepreneur. Adetayo, Oke
& Aderonmu (2015) asserts that Entrepreneurial training and education encourages Nigerians to become
job creators rather than job seekers. It also equips them with skills for constant improvement and
innovations in their undertakings.
2.3
Theoritical Framework
This study was based on the human capital theory which advocates education as a tool for improving
human capital, stimulating labour productivity and boosting the levels of technology across the globe
(Robert, 1991). Human capital theorist encourage spending on nation’s workforce because expenditure on
training and development is a productive investment like investment on physical assets (Olaniyan and
Okemakinde, 2008). This agrees with the view of (Byrant, 2003; Ochu 2005) that stressed the importance
of training sound human capital required for national growth and development. Entrepreneurship
Education must be seen and utilized as a major contributor in the development process as well as a shaper
of our youths since our future heavily depends on these young people.
2.4
Entreprenuership Education and Emerging Economy
Entrepreneurship is beneficial for economic growth and development. Heakal (2017) defined an emerging
economy as a nation's economy that is progressing toward becoming advanced, as shown by
some liquidity in local debt and equity markets and the existence of some form of market exchange and
regulatory body. Emerging markets are not as advanced as developed countries but maintain economies
and infrastructures that are more advanced than frontier market countries. Entrepreneurs create new
enterprises, new commercial activities, and new economic sectors. They generate jobs for others; they
produce goods and services for society; they introduce new technologies and improve or lower cost
outputs; and they earn foreign exchange through export expansion or the substitution of imports.
Oteh (2009) submitted that in emerging economies, growth is driven by the accumulation of human and
physical capital and increasing specialization. Entrepreneurship education when effectively and
efficiently taught has the likelihood to precipitates self-employment among learners and accelerating
sustainable growth and development. This is evident in a number of developed nations like Japan and
America that utilized entrepreneurial (facilitative) education for improving their human capital as
opposed to the traditional approach of teach-and-listen approach, which is prevalent in the developing
third world nation (Witte & Wolf, 2003; Raimi et al., 2011). Indeed, youths are one of the greatest assets
that any nation can have and therefore, need to be developed and empowered.
For skills to be acquired, the training of youths who can function effectively in the society for the
betterment of self in particular and society at large becomes a paramount issue. Also the opportunity and
responsibility to transform our society into a healthy and productive economy relies on youths especially
through the auspices of entrepreneurship. Nigeria as a nation must ensure that schools where youths are
taught are deliberately planned to provide sector-specific skills needed for the development of human
capital (Uzoamaka, 2015). The various studies on entrepreneurship education emphasize on skills
acquisition and attitude, innovative ideas and job creation.
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Entrepreneurship Education in an Emerging Economy: Evidence from Bingham University Karu
3.
Methodology
The population of study comprised 105 students of the department of Accounting and Business
Administration of Bingham University Karu, Nasarawa State. Primary data was collected through the
administration of 105 questionnaires on the 400 level students. All the questionnaires were returned.
Mean scores were used in analysing the data collected in which mean score above 2.5 was accepted
considering it as the mid piont since the 4piont Likert scale was used. As such; strongly agreed (SA),
agreed (S), strongly disagreed (SDA) and disagree (D).
4.
Data Presentation and Analysis
Table 1: Skill acquisition through entrepreneurship education
ITEM
I acquired some skills
The skill acquired is high
I can start up a business with the skill acquired
Source: field survey
SA
81
58
24
A
24
20
49
SDA
0
9
15
D
0
8
17
Table 2: Mean score
VARIABLE
4
Acquisition of skills
81
High skill acquisition
68
Starting a business because 35
of skill acquired
Source: researcher’s computation
3
2
1
FX
N
MEAN
24
20
49
0
9
10
0
8
11
324
356
318
105
105
105
3.10
4.06
3.02
SECTORIAL
MEAN
3.39
The above table indicate that the mean value of skill acquisition was acceptable because the sectorial
mean of 3.39 was above the average and this implies that the items mentioned in table 1 were acceptable.
Table 3: Entrepreneurship education and entrepreneurship intention
ITEM
SA
It pays to be an entrepreneur
93
Paid employment is not the best
84
Take up full time entrepreneurship
65
Take up part time entrepreneurship and paid employment
70
Source: field survey
Table 4: Mean score
VARIABLE
Become
entrepreneur
Paid employment
Full-time
entrepreneurship
Part-time
entrepreneurship
an
4
3
2
1
FX
N
MEAN
93
6
5
1
401
105
3.82
84
65
10
16
4
10
7
14
381
342
105
105
3.63
3.27
70
3
27
5
348
105
3.31
Bingham University Journal of Accounting and Business (BUJAB)
A
6
10
16
3
RATING
SDA
5
4
10
27
DA
1
7
14
5
SECTORIAL
MEAN
3.51
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Entrepreneurship Education in an Emerging Economy: Evidence from Bingham University Karu
Source: researcher’s computation
The above table indicate that the mean value of entrepreneurship intention was acceptable because the
sectorial mean of 3.51 was above the average and this implies that the items mentioned in table 3 were
acceptable. This Indicates that entrepreneurship education creates entrepreneurship intention among
undergraduates.
Table 5: Entrepreneurship education and entrepreneurship attitude
ITEM
SA
A
Creates initiative spirit
Increases risk tolerance
Perceived business opportunities
Source: field survey
100
75
102
5
26
3
SD
A
0
1
0
DA
0
3
0
Table 6
Mean score
VARIABLE
4
3
2
1
FX
N
MEAN
Initiative spirit
100 5
0
Risk tolerance
75
26 1
Perceived
business 102 3
0
opportunuties
SOURCE: Researcher’s computation
0
3
0
415
383
417
105
105
105
3.95
3.65
3.97
RATING
SECTORIAL
MEAN
3.86
Table 6 indicate that the mean value of entrepreneurial attitude was acceptable because the sectorial mean
of 3.86 was above the average of 2.5 and this implies that the items mentioned in the above table were
acceptable indicating that entrepreneurial education leads to the development of positive entrepreneurial
attitude which is necessary for economic growth.
Table 7: The benefits of entrepreneurship education in an emerging economy
ITEM
SA
A
Creates awareness of business opportunities
Develops creativity
Builds self confidence
Develops resourcefulness
Develops planning skill
Makes one entrepreneur oriented
Exposes one to entrepreneurship process
Develops skills for self-employment and financial management
Leads to Job creation
Brings about wealth creation
Source; field survey 2017
Table 8: Mean score
VARIABLE
4
3
2
1
FX
N
Bingham University Journal of Accounting and Business (BUJAB)
MEAN
85
90
40
36
99
100
101
103
105
76
20
12
61
65
6
5
4
2
0
25
SD
A
0
0
1
0
0
0
0
0
0
1
DA
0
0
3
4
0
0
0
0
0
3
SECTORIAL
MEAN
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Entrepreneurship Education in an Emerging Economy: Evidence from Bingham University Karu
Awareness of business 85
opportunity
Creativity
90
Self confidence
40
Resourcefulness
36
Planning skill
99
Entrepreneur oriented
100
Exposure
to 101
entrepreneurship
process
Skills
for
self- 103
employment
Job creation
105
Wealth creation
76
Source: Researcher’s computation
20
0
0
340
105
3.24
12
61
65
6
5
4
0
1
0
0
0
0
0
3
4
0
0
0
456
348
343
414
415
416
105
105
105
105
105
105
4.34
3.31
3.27
3.94
3.95
3.96
2
0
0
418
105
3.98
0
25
0
1
0
3
420
384
105
105
4.00
3.66
3.77
The above table indicate that the mean value of the benefits of entrepreneurship education in an emerging
economy was high and acceptable because the sectorial mean of 3.77 was above the average and this
implies that the items mentioned in table 7 were acceptable and seen to of great benefit to the
development of an economy.
4.1
Discussion of Findings
Result on Table 1 revealed that entrepreneurship education enhances skill acquisition and ideas for
creating employment for oneself and others. The institutions can as well arrange entrepreneurship
workshops, seminars and vocational training courses for the students. This study is in line with Gana
(2001) as cited in (Arogundade, 2011) who stated that entrepreneurship is the ability to seek investment
opportunities and establish an enterprise based on identified opportunities. Therefore, the youthful period
is a very critical one that has been noted as an essential time for training in entrepreneurship, and provides
a positive distractive alternative from the self- destructive and aggressive behaviours that are frequently
associated with adolescents and growing up youths. Woolfilk (1998) also noted that this critical age
however is the right time to teach the youths the concept of entrepreneurship and to help the youths learn
wealth creation.
Table 3 responses revealed the importance of entrepreneurship education as it has to do with
entrepreneurship intention for sustainable development. As seen from the responses, entrepreneurship
education spurs up intention to become an entrepreneur in students as revealed by the mean score that is
very high.
Table 5 reveals that attitude towards becoming an entrepreneur can be positive for students exposed to
entrepreneurship education.
Table 7 responses reveals that entrepreneurial education is very beneficial in an emerging economy in the
sense that students who have acquired skills, developed entrepreneurial intention and show a positive
attitude towards entrepreneurship are likely to end up in business which will create jobs and wealth for
the economy.
5.
Conclusion and Recommendation
Nigerian universities should therefore strive to inculcate sound and qualitative entrepreneurship education
to their students. This would lead to acquisition of skills and development of positive attitude, and when
students are having positive attitude towards entrepreneurship education, they tend to develop and sustain
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Entrepreneurship Education in an Emerging Economy: Evidence from Bingham University Karu
intention to start businesses. Finally, the intention may lead to actual venturing into business activities
thereby improving the economy of the nation. Against this backdrop, this study agrees with the view of
Nkechi et.al, (2012) which states that entrepreneurship when and if gallantly developed in Nigeria will
take its pride of place in quelling unemployment and thus generating employment among Nigerian youths
especially the graduates and once again, place the economy on a proper footing. It is recommended that
entrepreneurship education should be taught at early stage, schools should provide specific skills needed
for the development of human capital, and use professionals and entrepreneurs as instructors and/or
facilitators.
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Bingham University Journal of Accounting and Business (BUJAB)
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Foreign Direct Investment Inflow and Capital Market Development: The Case of Nigeria
Foreign Direct Investment Inflow and Capital Market Development:
The Case of Nigeria
Lambe Isaac
Department of Accounting
Bingham University,
Karu, Nasarawa State.
E – Mail: talk2ice@yahoo.com, Phone No: 08027629054
and
Uwaleke Uchenna Joseph, P.hD
Department of Banking and Finance,
Nasarawa State University, Keffi
Phone No: 08035865566
Abstract
Foreign direct investment is expected to serve as a means of complementing the nation’s domestic resources in
order to ensure development and improve the overall standard of living. Several economic, political and social
policies have been deliberately initiated in Nigeria, which are aimed at attracting foreign direct investment.
However, the much anticipated surge of FDI into the Nigeria economy has not yet occurred. This is particularly
worrisome, as Nigeria possesses quite a number of attributes of a good FDI destination, some of which includes;
size of market, availability of natural resources, low labour cost amongst others, thus necessitating the need for a
study to investigate the linkage and causality between foreign direct investment inflows and capital market
development in Nigeria. The Autoregressive Distributed Lag (ARDL) bounds testing approach to co-integration and
the Vector error correction (VEC) Granger Causality tests is employed using time series data for 35 years from
1981 to 2015. The empirical results indicate a positive relationship between FDI and market capitalization both in
the short-run and long-run. This infers the complementary role of FDI to the capital market development in Nigeria.
Real gross domestic product, inflation and exchange rate showed a strong positive relationship with the capital
market development in the short-run. Further empirical evidence showed that causality between foreign direct
investment inflows and capital market development in Nigeria does not exist during the study period. By
implication, there is no causal link between foreign direct investment inflows and capital market development. It is
therefore recommended that there should be a deliberate effort by the government to continuously liberalize the
trans-national investment sector, so that all barriers to cross border trading are eliminated. This will eventually
encourage more investor participation in all sectors of the economy.
Keywords: Capital Market, Development, Economic Growth, FDI, Market Capitalization.
1.
INTRODUCTION
The rate of growth in developing countries which has often times been described as slow is traceable to
inadequate resources required to speed up requisite economic growth and development. Savings in
developing economies is usually less than the investment needs. Most economies have resorted to foreign
borrowings while others tend towards attracting foreign investments to stimulate the needed development.
Within the purview of the Nigerian economy, foreign direct investment is expected to serve as a means of
complementing the nation’s domestic resources in order to ensure development and improve the overall
standard of living. Thus, the core purpose of foreign investments is to complement indigenous efforts
geared at even development in any given society. Foreign direct investment can equally have a direct
relationship and exerts some level of influence on capital market development, as most of the investible
funds coming into any country are usually channelled through the financial market. Over the years,
several economic, political and social policies have been deliberately initiated in Nigeria, which are
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Foreign Direct Investment Inflow and Capital Market Development: The Case of Nigeria
aimed at attracting foreign direct investment. This is because Nigeria, like other African countries,
recognizes the contribution of FDI to economic development and integration into the world economy.
Nigeria as a nation has been making considerable efforts to improve its investment climate since the preindependence era till date, most especially through liberalization, deregulation, privatization and enabling
laws and incentives. Some of these laudable policies put in place over the years among several others
include: The Aid to Pioneer Industries Ordinance and the Income Tax (Amendment) Ordinance Act of
1952, Nigerian Enterprises Promotion (Issues of Non-voting Shares) Act 1987, The Nigerian Enterprises
Promotion Act No. 54 1989 and Nigerian Investment Promotion Commission amongst other policies.
However, the much anticipated surge of FDI into the Nigeria economy has not yet occurred (Isiaq &
Sunday, 2011). This is particularly worrisome, as Nigeria possesses quite a number of attributes of a good
FDI destination, some of which includes; size of market, availability of natural resources, low labour cost
and high productivity, incentive, high level of human capital development, major markets proximity, etc.
In recent times, policymakers in Nigeria have come to the conclusion that attracting foreign direct
investment(FDI) inflows, is critical to the Nigerian capital development, and FDI itself is needed to boost
the growth and development of the economy, especially given the prevailing economic recession. Experts
posit that FDI can create employment, increase technological development in the host country and
improve the socio-economic condition of the country in general (Sarumi, 2006). The reality however is
that inspite of the recent improvements in the political orientation on economic management, investment
policies and reforms; the business environment in Nigeria (as it relates to FDI inflows, as well as capital
market development), is still a far cry in terms of competitiveness when compared to the economies that
are contemporaries to the nation.
According to the World Bank ease of doing business index released in 2016, Nigeria is perceived as a
difficult place to do business. The country was graded 169 out of 189 countries in 2016 overall ease of
doing business; 139 out of 169 in ease of starting new business, 182 out of 189 in accessing electricity, 59
out of 189 in getting credit, 143 out of 189 in implementing contract agreements. Based on these realities,
which are affecting growth of investment within the country, the need to review all policies of
government restraining the flow of foreign capital into the country becomes crucial. More so, the needed
attention must be given to capital market development, if the ease of doing business index in Nigeria must
be improved upon. In spite of the foregoing however, it is important to note that there are recent positive
government policies in Nigeria aimed at encouraging foreign capital inflows into the economy. Some of
these include policies such as the abolition of import licensing system, review of import duties and tariffs,
privatization of most state owned enterprises and the deregulation of the exchange rate regime.
According to the Central Bank of Nigeria (2014), Nigeria ranks high in Africa along with South Africa
and Egypt as major recipients of foreign direct investment. However, the influence of this receipt on the
development of the Nigerian capital market, the Nigeria economy, and other economic indicators has
remained a subject of intense discourse.
Theoretical assumptions regarding the characteristics of FDI emphasize the stability, long-term
motivation and resilience of this type of capital investment, even during financial crises (Lipsey, 2001).
Empirically, relationship between FDI and growth have been explored from four major directions such as
the determinants of growth, the determinants of FDI, the role of multinational firms in host countries and
the direction of causality between the two variables (Karimi et.al, 2009). The reasons behind this position
can be explained by a number of issues that are related to the investigation process (Reyadh & Khalifa,
2009). Some of the issues relating to the investigative processes include sample selection (for example
developed versus less developed countries), the choice of the time period, the estimation methodology
(such as time series versus cross- section), and the choice of the estimation techniques (ranging from
OLS, Co-integration, to Error correction models) among several others.
Given the complex of relationships between FDI and National development across countries, this paper
mainly aims to test the direction of causality between foreign direct investment inflows (FDI) and capital
market development in Nigeria. Accordingly, one of the three possible types of causal relationship that
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could exist include; the development-driven FDI (that is the case when the development of the host
country attracts FDI); the FDI-led development (that is the case when the FDI improves the rate of
development of the host country; and the two way causal link between the two variables (or possibly no
causality at all). The paper will contribute significantly to the literature by providing new and sturdy
evidence on FDI-development relationship in Nigeria. In the present study, the Autoregressive
Distributed Lag (ARDL) bounds test developed by Pesaran, Shin and Smith (2001) which is robust in
dealing with small sample observations, to establish the existence of a long-run relationship between
variables is adopted and an innovative and more robust ‘Vector error correction (VEC) Granger
Causality’ to test the direction of causality between the two variables. These methodologies go clearly
beyond the existing literature on the subject in Nigeria. Thus, this study adds to existing literature by
varying on the period covered, methodology adopted, variables used, and frequency of data among other
factors to examine the empirical linkage between foreign direct investment inflows and capital
development in Nigeria and through such an analysis, assess whether FDI spurs capital market
development given a period of 35 years from 1981-2015. This helps to validate past findings or bring
forth new issues on the subject for further research.
2.
2.1
LITERATURE REVIEW
Concept of Foreign Direct Investment and Capital Market Development
Foreign direct investment basically relates to investment which allows investors to enjoy a perpetual interest in an
enterprise in a country other than their own country and it takes the form of building a factory, purchase of
equipment or establishment of plants, etc. In a more restricted and technical sense, foreign direct investment may be
defined as a situation in which the concern of the investing countries is to exercise control over the assets created in
the capital importing countries by means of that investment (Adaramola & Obisesan, 2015). Divine (2016) put it
more succinctly by defining foreign direct investment as those investment from one country into another, usually
undertaken by firms rather than central governments, which involves establishing operations, acquiring tangible
assets, acquiring stakes in other businesses, and purchase or establishment of income-generating assets in a foreign
country, usually encompassing some level of control of operations or the entire organization.
However, the World Bank (1996) on its part conceptualized foreign direct investment as investment that is made to
acquire a lasting management interest (usually 10% of voting stock) in an enterprise and operating in a country other
than that of the investor. The Capital market or equity market on the other hand, is a private or public market for the
trading of company stock and derivatives of company stock at an agreed price; these are securities listed on a stock
exchange as well as those only traded privately. In other words, a stock market or exchange is the centre of a
network of transactions where securities buyers meet sellers at a certain price.
2.2
Empirical Review
Adaramola and Obisesan (2015) examined the impact of foreign direct investment on the Nigerian
capital market development. The study employed ADF unit root test and Johansen co-integration test and
Oordinary Least Squares regression analysis to analyse the data. The absence of co-integration between
foreign direct investment and market capitalization informed the resort to OLS regression result which
showed that foreign direct investment impact positively and significantly on market capitalization.
However given the lack of co-integration and low beta weight in their analysis, they suggested that
emphasis on foreign direct investment as a way of stimulating long run growth in the developing country
like Nigeria is not worth the while.
Odo, Anoke, Nwachukwu, and Agbi (2016) examined the impact of foreign direct investment on the
growth of the Nigeria stock market using Co-integration, Vector Error Correction Model (VECM) and
Pair Wise Granger Causality econometric process in the estimation of the variables specified in the
regression model. The results of the test revealed a long run equilibrium relationship between the
dependent and explanatory variables as supported by the existence of four (4) co integration vectors. The
findings from the VECM indicated that FDI and export have negative relationship with stock market
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Foreign Direct Investment Inflow and Capital Market Development: The Case of Nigeria
growth both in the long and short run while import (IMP) and gross capital formation (GCF) was found to
have a positive relationship with stock market growth both in the short and long run periods. The result of
the Pair Wise Granger Causality indicated no causality between FDI and stock market growth. A
unidirectional causality however was found running from market capitalization (MCAP) to GCF, IMP to
MCAP and FDI to GCF. Based on the above results, the study concluded that foreign direct investment
has no significant impact on stock market growth in Nigeria and recommend that government should by
conscious policy ensure that foreign investors sourcing for investment funds in Nigeria are encouraged to
go through the Nigeria stock market in raising their funds, in addition to the active participation of all
multinational companies operating in Nigeria in the activities of the Nigeria stock market.
Isiaq and Sunday (2011) investigated the impact of foreign direct investment on stock market development
in Nigeria between 1980 and 2009. Their study employed the econometric techniques of unit root test, Cointegration and Error Correction Mechanism. The results showed that both foreign direct investment, its
lagged and lagged stock market development have small, and a statistically significant effect on economic
growth. The results seem to support the argument that extractive FDI and stock market development were
growth enhancing. The Co-integration analysis also revealed existence of long-run relationship among
FDI, stock market development and economic growth. The study recommended the need for policy
makers to devise strategies to increase the FDI stock (retain FDI) and offer incentive for long term
investing and listing on the stock market so that the main objective of the government to stimulate growth
will be fulfilled.
James and Jiangyan (2010) examined the determinants of foreign direct investment, through a sectorial
and institutional approach. Using a dataset which breaks down FDI flows into primary, secondary and
tertiary sector investments and a Generalized Method of Moment (GMM) dynamic approach to address
concerns about endogeneity, they analysed various macroeconomic, developmental, and institutional and
qualitative determinants of FDI in a sample of emerging market and developed economies. The results
showed that primary sector FDI has no strong linkages to either macroeconomic stability, level of
development, or institutional quality, though like other forms of FDI, clustering effects appear important,
with larger stocks attracting greater additional inflows. They concluded that FDI naturally flows into
countries with relatively stable economic conditions and strong institutions, and that investors would
normally be concerned about political instability, inflexible regulations, and poor development indicators
among prospective workers.
Anfofum, Joshua and Tauhid (2013) assessed the impact of foreign direct investment on economic growth
in Nigeria. Variables used included infrastructural development, exchange rate, total export and gross
domestic product and through the instrumentality of Ordinary Least Squares regression analysis. The
study found positive impact of FDI on investment, exchange rate, exports and gross domestic product
while a negative outcome was found between foreign direct investment and infrastructure. Their study
recommended improvements in infrastructural developments as a pre-requisite for increased inflow of
foreign direct investment.
Musa and Mohammed (2014) examined stock market development, foreign direct investment and macroeconomic
stability with evidence from Nigeria. The Johansen Co-integration and Error Correction Mechanism techniques were
used as analytical tools for the research. The study showed evidence of an existing long-run relationship between the
variables. It also revealed that foreign direct investment has an insignificant impact on stock market development;
exchange rate was also found to have significant negative impact the while effect of inflation on stock market is
insignificant and negative. Study recommended policies that would encourage foreign firms operating in the oil and
gas including the telecommunication sectors to be listed since it would go a long way in attracting more FDI,
leading to stock market development. They suggested that this should be complemented with policies that ensure
stable macroeconomic environment.
2.3
Theoretical Framework
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Foreign Direct Investment Inflow and Capital Market Development: The Case of Nigeria
Although, there have been substantial research efforts devoted by different scholars in determining what
seems to be an optimal impact of foreign direct investment, yet there is no universally accepted theory
throughout the literatures explaining the FDI and capital market relationship. But in the last decades,
several theories have emerged explaining FDI structure and the resultant effects on market values.
Similarly a number of contemporary theories have equally been put forward by the researchers to explain
foreign direct investment, however, no single theory fits the different types of direct investment or the
investment made by a particular multinational corporation or country in any region. The applicability of
the theory differs with the type and origin of investment. Nevertheless, all these theories are unanimous in
their view that a firm moves abroad to reap the benefits of the advantages in the form of location, firmspecific or internationalization of markets.
Fundamentally, the theories of stock market and portfolio investment formed the basis in explaining the
emergence of foreign direct investment, considering that earlier direct investment was seen as
international capital transfer alone (Odo, Anoke, Nwachukwu, & Agbi; 2016) 2016). Foreign direct
investment was initially considered as part of portfolio investment and differences in rates of interest
assumed as the main cause of capital inflows. It was believed that by influence of interest rate, capital
moves to any economy with expected higher return. However, Hymer (1976) argued that this view failed
to explain the place of control in organizational management. Different theorists have given diverse
explanations on reasons of foreign direct investment ranging from market imperfections, oligopolistic and
monopolistic considerations, absolute and comparative trade advantage, as well as even religious and
political reasons (Shivangi, 2016). However, this study considers FDI theories based on the modern
portfolio theory, which assumes that all investors are rational and always seek to maximize returns and
minimize cost; the perfect market theory of FDI, which suggests that FDI stems from perfect market
theory of free trade that uses market equilibrium tools; the imperfect market theory of FDI, which
conversely suggests that foreign direct investment is an alternative option to exporting if the hurdles to a
firm exporting its products and services abroad are too costly to make profit.
Other theoretical perspectives in this study are predicated on foreign exchange rate theory (which is an FDI
theory based on strength of currency), the Uppsala model of FDI (which describes how multinational
companies and firms gradually accelerate their business activities by first gaining experience from the
domestic market before they move to foreign markets); the industrial organisational theory (which
assumes that fund flow across boundaries and the major tasks faced by the investors for venturing in other
countries is the competition from the local entities). Closely related is the eclectic theory otherwise called
the OLI paradigm (which emphasizes that ownership, localization and internalization as the core values of
FDI); the dependency theory (an orientation which insists that FDI impacts rather negatively on local
economy and may enhance the sustenance of dependency relationship between the advanced economy
and the developing country); the endogenous growth or new growth theory (which posits that
improvements in productivity as driven by FDI has significant impact on the long-run growth rate of an
economy and can be linked to a faster pace of innovation and investment in human capital).
Consequently, the monopolistic power theory of FDI; the internationalisation theory; the marginal
efficiency hypothesis; and the capital asset pricing model (CAPM), equally have theoretical leanings to
the issue in question.
3.
METHODOLOGY
The main objective of this study is to examine the linkage between foreign direct investment inflows and capital
market development in Nigeria and as such provide an insight as to whether FDI spurs capital market development.
For this purpose the model adapted for this study is predicated on the theoretical framework above and a modified
model of Shahbaz, Lean and Kalim (2013). The preferred model is represented in the equation below:
InMCAP  0  1 InFDI   2 InRGDP  3 InINFR   4 InEXR  
(1)
Where: MCAP = market capitalization as share of GDP as proxy for capital market development, FDI = foreign
direct investment as share of GDP, RGDP = real gross domestic product as proxy for economic growth, INFR =
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Foreign Direct Investment Inflow and Capital Market Development: The Case of Nigeria
inflation rate proxy for macroeconomic stability, EXR = official exchange rate and  = Error term (or stochastic
 to

4 = Parameter estimate
term). In = Natural logarithm, 0 = the intercept or autonomous parameter estimate, 1
representing the coefficient of FDI, RGDP, INFR and EXR respectively. The a’priori’ expectations are determined
by the principles of economic theory and refer to the expected relationship between the explained variable and the
 to  0.
4
To guarantee the necessity of uniformed scale of
explanatory variable(s). It is expected that 1
measurement and consistent interpretation of results, all variables were transformed to natural logarithms, which
allow for the interpretation of the coefficients as elasticties.
The study used secondary data that were obtained from the Central Bank of Nigeria (CBN) Statistical Bulletin
various issues, National Bureau of Statistics and World Development Indicators for Nigeria (WDI). It covers the
period from 1981 to 2015 representing 35 years.
3.1
Technique of Data Analysis
In order to investigate the relationship that exists between the dependent variable and explanatory variables, this
study adopted the Autoregressive Distributed Lag (ARDL) bounds testing approach to co-integration proposed by
Pesaran, Shin and Smith (2001). This technique has a number of advantages over Johansen co-integration
techniques.
First, whereas the Johansen techniques require large data sample, a luxury that most developing economies do not
have, the ARDL model is the most useful method of determining the existence of co-integration in small samples
(Ghatak & Siddiki, 2001). The second advantage of ARDL approach is that while other co-integration techniques
require all of the regressors to be of the same order, the ARDL approach can be applied whether the variables in the
regression are purely of I(I) and/or purely I(0) or a mixture of both. This implies that the ARDL approach avoids the
pre-testing problem associated with standard co-integration, which requires that the variables be already classified
into I(I) (Pesaran, Shin., & Smith, 2001). Thirdly, the ARDL approach to co-integration is superior to Johansen
approach because it avoids the problem of too many choices that are to be made in Johansen method. These include
the treatment of deterministic elements, the order of VAR and the optimal lag length to be used. Finally, in the
ARDL approach variables could have different lag length, whereas in the Johansen method this is not permissible.
The augmented ARDL model provided by Pesaran, Shin and Smith (2001) is given as:
i
j
i 1
i 0
Yt  0  1Yt  1   2 X t  1   1i Yt  i    2i X t  i   t                    (2)
Incorporating policy variables model into the ARDL model framework, it results into:
m
n
o
p
q
i 1
j 0
k 0
l 0
m 0
InMCAPt  0   1i InMCAPt  i    2i InFDI t  j    3i InRGDPt  k    4i InINFRt  l    5i InEXRt  m
 6 InMCAPt  1   7 InFDI t  1   8 InRGDPt  1   9 InINFRt  1  10 InEXRt  1  t                (3)
1 ,  2 ,  3 ,  4 and 5
The first section of Equations 3 (that is:
) examines the short-run dynamic
 ,  ,  ,  , and10 ) investigates the long-run
relationship while the second section (that is: 6 7 8 9
relationship between industrial productivity growth rate and exchange rate.
To test for the co-integration relationship using the ARDL approach based on the F-statistic or Wald statistic, the
study state null hypotheses of no co-integration against the alternative hypothesis of co-integration among the
variables in the model as follows:
H0:
 6  7  8  9 10 0 . H  6  7  8  9 10 0
1:
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Foreign Direct Investment Inflow and Capital Market Development: The Case of Nigeria
The acceptance or rejection of the hypothesis is based on comparison between the calculated F-statistic and the Fstatistic tabulated by Pesaran, Shin and Smith (2001) and for small samples by Narayan (2005). The tabulated Fstatistic has both upper and lower bounds critical values and if the calculated F-statistic is higher than the upper
bounds, the null hypothesis is rejected and the alternative hypothesis is accepted that there is co-integration
relationship between the variables. But if the calculated F-statistic is lower than the lower bound critical value, the
null hypothesis is accepted and the alternative hypothesis is rejected, meaning that there is no co-integration
relationship between the variables. However, the test is inconclusive if the calculated F-statistic lies between the
lower and upper bound critical values. Once a co-integration relationship is established between the variables, the
study proceeds to examine the long-run effect and the short-run dynamics using ECT equation given as follows:
m
n
o
p
i 1
j 0
k 0
l 0
 ln MCAPt  0   1i  ln MCAPt  i    2i  ln FDI t  j    3i InRGDPt  k    4i  ln INFRt  l
q
  5i  ln EXRt  m  ECTt  1   t                                  (4)
m 0
Where; ECTt-1 = lagged Error correction term. The ECT captures the output evolution process by which agents
adjust for prediction errors made in the last period.
Finally, the VEC Granger Causality test will be used to determine the causal relationship between the two
focus variables; foreign direct investment (FDI) and market capitalization (MCAP). Such an exercise will
provide an understanding of the interactions among the variables in the system and shed light on the
directions of the causality. It is instructive to note here that, in the absence of co-integration among
variables, Granger causality test is specified in the Vector auto regression (VAR) framework in first
difference form, in the presence of co-integration, the specification for the causality test is in the form of a
Vector error correction (VECM) framework. Therefore, either the Vector auto regression (VAR) or VEC
Granger Causality test will be used to determine the causal relationship between the two focus variables.
Sargent (1977) has proposed a simple procedure called the direct Granger procedure for testing causality.
Consider two stationary variables Y and X for which the regression equations are given below:
p
p
i 1
i 1
p
p
i 1
i 1
Yt  iYt  1   1 X t  1  t                                      (5)
Yt   iYt  1   i X t  1  t                                       (6)
The Wald test is used to test whether all the lagged values of X in the Y equation are simultaneously equal
  0
to zero. X Granger causes Y if
bidirectional causality between Y and X.
and, if both
  0
and
  0
then there exists
3.2
Justification of the Variables in the Model
Market capitalization: Capital market development is usually measured by stock market's size, liquidity, volatility,
concentration, and integration with world capital markets. Market capitalization is defined as the total market value
of all listed shares. Following Adam and Tweneboah (2009), market capitalization as a proportion of GDP is used as
a proxy for capital market development. Garcia and Liu (1999) argued that this measure is less arbitrary than other
measures of capital market development.
FDI: The relationship between FDI and capital market development has been widely discussed in the
literature (Errunza, 1983; Gracia & Liu, 1999; Yartey & Adajasi, 2007, Adam & Tweneboah, 2009). FDI
may either complement or substitute the development of capital market.
RGDP: Numerous studies have suggested that economic growth and capital market development are positively
related to each other (Spears, 1991; Atje & Jovanovic, 1993; Garcia & Liu, 1999; Luintel & Khan, 1999). In this
paper, it is hypothesized that economic growth promotes capital market development.
Bingham University Journal of Accounting and Business (BUJAB)
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Foreign Direct Investment Inflow and Capital Market Development: The Case of Nigeria
Inflation: Inflation refers to the annual percentage changes in consumer prices has been employed in past studies on
capital market (Naceur, Ghazouani, & Omran; 2007). Thus, empirical studies show that inflation plays a significant
role in capital market development and the higher the volatility within the economy (that is changes in inflation), the
lesser the incentives companies and investors would have to invest in the stock market and vice versa. Garcia and
Liu (1990), as well as Naceur, Samir and Omran (2007) used inflation rate as a proxy for macroeconomic stability in
their empirical studies and found a positive relationship between the economic stability and capital market
development.
Exchange Rate: The relationship between exchange rate and stock prices is important, because changes in exchange
rate may lead to changes in stock prices. Also, weak currency discourages FDI. An overvalued exchange rate or
highly distorted foreign exchange rate will discourage exports and negatively affect foreign direct investment
(Omankhanlen, 2011).
4.
DATA PRESENTATION AND ANALYSIS
In order to have glimpse of the data used in the study, a first pass at the data in form of pictorial
representation and descriptive statistics was carried out. This gives a good idea of the patterns in the data
and the nature of the estimations and diagnostics to be carried out. The graphical illustration of trends of
the variables used in the model is presented below:
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Foreign Direct Investment Inflow and Capital Market Development: The Case of Nigeria
MCAP
FDI
20,000
12,000
10,000
15,000
8,000
10,000
6,000
4,000
5,000
2,000
0
0
1985
1990
1995
2000
2005
2010
2015
1985
1990
1995
RGDP
2000
2005
2010
2015
2005
2010
2015
INFR
100,000,000
40
35
80,000,000
30
60,000,000
25
20
40,000,000
15
20,000,000
10
0
5
1985
1990
1995
2000
2005
2010
2015
2005
2010
2015
1985
1990
1995
2000
EXR
200
150
100
50
0
1985
1990
1995
2000
Source: Researcher’s Plot, underlying data from CBN Statistical Bulletin, 2014 and World Bank
World Development Indicators (WDI), 2017- online version.
Figure 1.1 provides a glimpse to the data set used for the research analysis. The above graphical
representation depicts wide variations in the data particularly inflation rate that is very volatile. Generally,
the above fluctuations in the data set may be attributed to policy summersaults that characterized different
administration in Nigeria over time. Next is a descriptive statistics of the data set. The purpose is to
determine inter-relationships of all the variables in model. The summary of the descriptive statistics is
presented below.
Table 1: Summary of Descriptive Statistics
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Foreign Direct Investment Inflow and Capital Market Development: The Case of Nigeria
MCAP
FDI
Mean
2823.378
291.2448
Std. Dev.
5044.387
1697.874
Skewness
1.816717
5.659434
Kurtosis
5.199592
33.02927
Jarque-Bera
26.30841
1501.900
Probability
0.533732
0.604119
Observations
35
35
Source: Researcher’s computations (2017).
RGDP
11518534
18919802
2.434572
9.688466
99.81438
0.691818
35
INFR
18.93486
6.763458
0.404029
2.669185
1.111828
0.573548
35
EXR
78.89029
64.12750
-0.016775
1.461429
3.453811
0.177834
35
Table 1 shows the summary of descriptive statistics of the variables included in the model. It shows the
existence of wide variations in the variables as depicted by the mean values during the 1981 to 2015 study
period. The analysis was also fortified by the value of the skewness and kurtosis of all the variables
involved in the model. All the distributions are positively skewed with the exception of exchange rate that
is negatively skewed. Variables with value of kurtosis less than three are called platykurtic (fat or shorttailed) and INFR and EXR variables qualified for this during the study period. On the other hand,
variables whose kurtosis value is greater than three are called leptokurtic (slim or long tailed) and MCAP,
FDI & RGDP variables qualified for this during the study period. Jarque-Bera test shows that the
residuals are not normally distributed but with the exception of INFR and EXR with probability values
exceeding 5%. In summary, the descriptive statistics revealed that most of the data sets are not normally
distributed. This is so because the probability values of the variables do not exceed 5%.
4.1
Time Series Properties of the Variables
Econometric studies have shown that most financial and macro-economic time series variables are non-stationary
and using non-stationary variables leads to spurious regression (Engel & Granger, 1987). Thus, the variables were
investigated for their stochastic properties, using two traditional unit roots tests. The traditional tests deployed are
the Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP). The two tests were used to test for consistency and
where conflicts exist, to decide on the most appropriate option (see Hamilton, 1994). The results of unit root tests
are presented in Table 2 below:
Table 2: Traditional Unit Root Test Results (Trend and Intercept)
Variables
ADF
Critical Values
Order of
Integration
PP
Critical Values
Order of
Integration
-4.701
-4.324*
I(0)
-6.598
-4.263*
I(1)
-5.743
-4.253*
I(0)
-33.340
-4.263*
I(1)
-2.924
-2.647*
I(0)
-14.726
-4.263*
I(1)
-7.025
-4.273*
I(1)
-9.101
-4.263*
I(1)
-5.519
-4.263*
I(1)
-5.499
-4.263*
I(1)
MCAP
FDI
RGDP
INFR
EXR
Note: * Indicates stationary at the 1% level.
Source: Researcher’s Computations Using E-views 9.5.
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Foreign Direct Investment Inflow and Capital Market Development: The Case of Nigeria
From Table 2, the traditional tests of the ADF and PP indicates that all the variables tend to be stationary
in first difference except MCAP, FDI & RGDP which tends to be stationary at level in ADF test. These
stationary variables were then used for the linear regression analysis. The purpose of testing for the
stationarity properties of the variables in bounds approach to cointegration is because the (ARDL) bounds
testing approach becomes applicable only in the presence of I(1) and I(0) variables or a mixture of both.
This means that the assumption of bounds testing will collapse in the presence of I(2) variable. Both the
ADF and PP unit root results presented in table 2, implies that the bounds testing approach is applicable
in this study, as all the variables are a mixture of I(1) and I(0).
4.2
Co-integration Test
The next task of the study, having established the order of integration, is to establish long run relationship
among the variables. Thereafter, the ADRL-bounds testing approach is used to determine whether a longrun cointegration relationship exists between monetary policy and economic growth. The result of the
cointegration test is presented in Table 3.
Table 3: Result of ARDL Bounds Test for Cointegration
Null Hypothesis: No Long-run Relationships Exist
Test Statistic
Value
K
F-Statistic
5.153823
4
Critical Value Bounds
Significance
Lower Bound
Upper Bound
5%
2.86
4.01
Source: Researcher’s Computations.
The cointegration test result shows that the F-statistic is greater than the lower and upper bound critical value at the
5% significance level. Thus the inferred null hypothesis of no long-run relationship is rejected at the 5% significance
level. It can therefore be inferred that the variables are cointegrated.
4.3
Estimated Error Correction and Long-run Models
In view of the cointregration relationship between the dependent variable and the regressors, the study proceeds to
estimate the error correction and long-run models. The results of the estimations are presented in Table 4 below.
Table 4: Results of Estimation of Error Correction and Long-run Models
Dependent Variable: LOG(MCAP)
Selected Model: ARDL(2, 0, 0, 2, 1)
Cointegrating Form (ECM)
Variable
Coefficient
T-Statistic
Prob
DLOG(MCAP(-1))
0.851***
8.889
0.00
DLOG(FDI)
0.038
1.056
0.30
DLOG(RGDP)
1.187***
22.649
0.00
DLOG(INFR)
0.064
0.224
0.82
DLOG(INFR(-1))
0.696**
2.097
0.04
DLOG(EXR)
0.357*
1.688
0.10
ECM(-1)
-0.730***
-9.379
0.00
Long Run Coefficients
LOG(FDI)
0.052
1.077
0.29
LOG(RGDP)
1.625***
10.344
0.00
LOG(INFR)
-0.185
-0.409
0.69
LOG(EXR)
-0.343*
-1.817
0.08
C
-16.825***
-6.108
0.00
Note: *, **, *** indicate significance at 10, 5 and 1 percent respectively. p-values are reported in square
brackets.
Source: Researcher’s Computations.
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Foreign Direct Investment Inflow and Capital Market Development: The Case of Nigeria
As expected, the lagged error correction term is negative and statistically significant at 1 percent level. Since, the
coefficient of the lagged error correction term is negative and significant; the coefficient reveals the speed at which
the entire system adjusts towards long-run equilibrium. The coefficient of ECM is (-0.73) which shows speed of
adjustment from short run fluctuations to long run equilibrium (73% discrepancy is corrected each year)
approximately to 73 percent of disequilibrium from the previous year's shock convergence back to the long run
equilibrium in the current year.
All the variables are correctly signed in the short-run. It was found that foreign direct investment (FDI) had a
positive effect on capital market development in the short-run meaning that foreign direct investment is contributing
towards capital market development in Nigeria. Specifically, a percentage change in foreign direct investment will
led to 0.038 increases in capital market development in the short run. This finding is in line with theoretical
prediction and empirical findings of Errunza, 1983; Gracia and Liu, 1999; Yartey and Adajasi, 2007 and Adam and
Tweneboah, 2009, that FDI may either complement or substitute the development of capital market. This confirms
that the relationship between FDI and capital market development is complementary. Economic growth proxied as
real gross domestic product (RGDP) is linked positively with the development of capital markets in Nigeria. This
implies that a percentage increase in RGDP will lead to an increase in development of capital markets by 1.187% in
the short run. This finding is in line with theoretical prediction that economic growth promotes capital market
development and empirical findings of Spears, 1991; Atje and Jovanovic, 1993; Garcia and Liu, 1999; Luintel and
Khan, 1999.
The impact of inflation on capital market growth is positive but minimal. Specifically, a percentage
change in inflation will led to 0.064 increases in capital market growth. The positive association between
inflation and capital market development supports that Nigeria's capital markets are hedge against
inflation. In other words, capital market is an alternative place for investors to hedge their risk against
inflation in Nigeria. Similarly, an increase in one period lagged measure of inflation by one percent led to
an increase in capital market growth by 0.696% in the short run in Nigeria. Also, the coefficient of
exchange rate (EXR) shows a positive relationship with capital market growth. This implies that a
percentage increase in EXR will lead to an increase in capital market development by 0.357% in the short
run. This implies that depreciation of the currency in Nigeria does stimulate capital market development.
From Table 4, the long-run effect of foreign direct investment (FDI) on capital market development is
positive; meaning that foreign direct investment is contributing towards capital market development in
Nigeria. Also, the long run effect of the coefficient of RGDP on capital market development is positive
and statistically. This long-run result is in agreement with the short-run result and in line with theoretical
prediction that economic growth promotes capital market development. Inflation and exchange rate are
observed to be negatively related to capital market development in the long-run. This long-run result is
not in agreement with the short-run result and theoretical prediction.
4.4
Granger Causality Test
To confirm and establish the existence of causal relationship between foreign direct investment inflows
and capital market development in Nigeria and to further confirm the existence of long-run cointegrating
relations between the variables, the Vector error correction (VEC) Granger Causality test was conducted.
Cointegration relationship also implies existence of causal relationships (unidirectional or bidirectional)
between the variables (Gujarati and Porter, 2009). Table 5 reports the causality results for the model
during the study period
Excluded
D(FDI)
Table 5: VEC Granger Causality/Block Exogeneity Wald Tests
Dependent variable: D(MCAP)
Decision
Causality
Chi-sq
Df
Prob.
Independent
0.318605
2
0.8527
Accept
Dependent variable: D(FDI)
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Foreign Direct Investment Inflow and Capital Market Development: The Case of Nigeria
Excluded
D(MCAP)
0.223950
2
0.8941
Accept
Source: Researcher’s Computations (2017).
The essence of this test is to investigate the causal links amongst the variables. This test is important in
the sense that it informs us about the direction of causality amongst the variables. There are basically
three possible outcomes: unidirectional, bidirectional or neutral/independent relationships.
Applying the WALD test, the results from Table 5 showed that causality between foreign direct
investment inflows and capital market development in Nigeria does not exist during the study period. The
probability values of 0.8527 and 0.8941 are not statistically significant showing that foreign direct
investment inflows does not granger cause capital market growth. This result implies that an independent
causality exists between the two focus variables. By implication, there is no causal link between foreign
direct investment inflows and capital market development and to keep within acceptable limits, other
explanatory variables were not reported.
5
CONCLUSION AND RECOMMENDATIONS
The study examined the linkage between foreign direct investment inflows and capital market
development in Nigeria and through that assess whether FDI spurs capital market development for the
period 1981 to 2015. The Autoregressive Distributed Lag (ARDL) bounds testing approach to cointegration was deployed and Vector error correction (VEC) Granger Causality to test the direction of
causality between the two variables.
A long-run equilibrium relationship was found among the variables used, namely market capitalization,
foreign direct investment, real gross domestic product, inflation rate and exchange rate. The empirical
results indicate a positive relationship between FDI and market capitalization both in the short-run and
long-run. This infers the complementary role of FDI to the capital market development in Nigeria. Real
gross domestic product also shows a strong significant positive relationship with the capital market
development both in the short-run and in the long-run. Impact of RGDP implies that economic growth is
imperative for the development of capital market in Nigeria. The impact of inflation on capital market
development is positive but minimal; while exchange rate had a positive relationship with capital market
development in the short run. However, inflation and exchange rate were observed to be negatively
related to capital market development in the long-run. This long-run result is not in agreement with the
short-run result and theoretical prediction. Consequently, the Vector error correction (VEC) Granger
Causality conducted revealed that causality between foreign direct investment inflows and capital market
development in Nigeria does not exist during the study period. By implication, there is no causal link
between foreign direct investment inflows and capital market growth.
The capital market is a key element of the modern and market-based economic system because it serves
as the main channel to collect funds from depositors to borrowers. Since the empirical evidence revealed
complementary role of FDI to the capital market development in Nigeria, it is therefore recommended
that government should attract FDI by taking a number of steps, some of which includes the following:
-
-
A conscious policy that ensures that foreign investors sourcing for investment funds in Nigeria
are encouraged to go through the Nigeria capital market in raising their funds, in addition to the
active participation of all multinational companies operating in Nigeria in the activities of the
Nigeria capital market.
Domestic investors involved in the production of exportable goods and services should by
positive policy initiatives be encouraged to access funds through the Nigerian capital market
guided by the central bank of Nigeria in collaboration with the investor’s commercial bank.
Bingham University Journal of Accounting and Business (BUJAB)
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Foreign Direct Investment Inflow and Capital Market Development: The Case of Nigeria
-
-
-
Contemporary strategies aimed at increasing the National FDI stock (that is FDI overall retention)
should be devised. Such strategies includes favourable tax regimes, bridging infrastructural and
energy deficits, strengthening of requisite institutions, deliberate reduction in the cost of doing
business and affordable interest rates to reduce cost of capital for both domestic and foreign
investors.
The continuous liberalization of the trans-national investment sector, so that all barriers to cross
border trading (such as arbitrary tariffs, import and export duties, as well as multiple levies) are
eliminated so as to encourage investor participation in all sectors of the economy.
A deliberate and conscious effort at maintain both political and macroeconomic stability in the
country, in other to guarantee investor confidence in the economy.
The strengthening of existing institutions and the effective provision and maintainace of requisite
infrastructures that can drive investments.
The initiation of actions that will minimize the volatility of foreign exchange and the rate of
interest most especially through appropriate and effective monetary policy.
In addition to the foregoing, the government should take some appropriate steps to improve the efficiency
and transparency of the primary market. It will not only strengthen the government securities in the
capital market but also improve efficiency and development of secondary market. Government should
encourage FDI in the capital market as well to enhance competition, creation of new job opportunities by
transferring new technology and skill.
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Year
Appendix I: Data set used for Research Analysis
MCAP (=N=) RINTR (% )
EXR
BMS (% GDP)
(=N=/$)
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INFR (%)
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Foreign Direct Investment Inflow and Capital Market Development: The Case of Nigeria
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
5.0
5.0
5.7
5.5
5.5
7.1
8.3
10.1
14.1
22.2
33.9
47.9
66.8
95.4
220.4
302.6
278.7
256.9
294.1
466.1
648.4
748.7
1,324.9
1,925.9
2,523.5
4,227.1
10,180.3
6,957.5
4,989.4
7,913.8
20.9
7.7
23.2
39.6
5.5
5.4
10.2
38.3
40.9
7.5
13
44.5
54.2
57
72.8
29.3
8.5
10
6.6
6.9
18.9
12.9
14
15
17.9
8.2
5.4
15.1
12.1
17.59
16.02
6,532.6
2012
2013
2014
2015
0.63
0.67
0.72
0.76
0.89
3.76
4.08
4.59
7.39
8.04
9.91
17.45
22.41
22
81.2
81.2
82
83.8
94
101.7
111.98
120.97
129.36
133.5
132.15
128.27
117.97
132.56
149.58
150.66
15.62463
17.91817
17.0042
16.1559
15.42587
20.03492
14.4364
12.94116
9.243889
8.70966
9.397857
13.43194
12.31741
15.03483
10.04625
9.013525
10.68804
12.99978
13.52085
12.35032
16.57256
13.04419
13.81568
13.13731
13.2359
13.18334
25.24882
33.7511
38.38656
15.42156
153.86
12.47631
157.49
157.31
165.86
192.44
11.80391
12.59411
14.54293
14.21804
12
8,974.4
13,226.0
11,477.7
9,850.6
10.25
11.35
13.59
10
11.75
11.5
13
11.75
12
19.2
17.6
24.6
27.7
20.8
31
36.09
21
20.79
20.86
23.32
21.34
27.19
21.55
21.34
30.19
22.88
20.82
19.49
18.41
18.36
18.8
23.5
13.72
10.8
12.2
10.67
9.5
9.0
Source: CBN Statistical Bulletin 2015
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Effect of Career Growth on Job Mobility of Academic Staff in Public Universities in North
Central Nigeria.
Effect of Career Growth on Job Mobility of Academic Staff in
Public Universities in North Central Nigeria
Musa, Zhebu Oliver
Department of Business Administration
Nasarawa State University,
Keffi, Nasarawa State.
E – Mail: zhebumusa@yahoo.com
Abstract
The paper examines the effect of career growth on job mobility of academic staff in public universities in North
Central Zone of Nigeria. Using data generated through the instrumentality of survey research method and subjected
to descriptive analysis, a sample size of 380 respondents was arrived at using Smith (1984) sample formula from the
entire population of seven thousand, six hundred and twenty-two (7622) staff drawn from the thirteen (13) public
universities across the North Central Zone of Nigeria. Ordinary Least Square (OLS) regression method of analysis
was employed in carrying out the empirical analysis. Findings from the study revealed that there is a symbolic
relationship between career growth and job mobility of Academic Staff in Public Universities in North Central Zone
of Nigeria which is an indication that the outcome of one variable affects the other and vice versa. However, it was
also discovered that job positions have no significant effect on job mobility of academic staff in Public Universities
in North Central Zone of Nigeria. This was attributed to factors such as favoritism, god-fatherism and mediocrity
that were given prominent place higher and above meritocracy which ordinarily should be the watch word of any
academic culture and discipline. In the light of these findings, the study recommends that management of
Universities in the North Central zone of Nigeria, particularly the university stakeholders need to be proactive in
policies formulation and implementation with respect to human resource management that invariably would create
an enabling environment for career job growth of academic staff members. Furthermore, there is the need for
adoption of strategies such as ethics, work standards, meritocracy for promotion as against mediocrity
Keywords: Career growth, Job mobility, Higher Institutions, Academic Staff.
1.
Introduction
Professional career growth of academic staff seeks to address a variety of needs from institutionally identified
priorities to the particular needs of departments or individual lecturers. This may take the form of short courses,
seminars, and training of lecturers in the use of new technology such as ICT in teaching. The extent to which
academics staff have access to such opportunities in the universities needs to be examined (Amusa, 2013).
Akinwale (2010) sees staff career growth as continuing liberal education of the whole person to develop his or her
potential fully. Managers of institutions are there to identify staff career development needs in relation to
organizational needs. Though, staff career development programmes, including continuous training and retraining of
both skilled and semi-skilled personnel in an organization, whether clerical, technical, orprofessional has remain a
thing of concern to institutions of higher learning in Nigeria. The introduction of specialize programmes specifically
designed for teaching and impacting knowledge is fairly recent and quite limited (Ekanem, 2007). This is due to the
prevalent belief that the very nature of higher education requires that academics continuously keep their knowledge
and skills up to date. In countries where teaching staff shows a high level of qualification, as indicated in studies
conducted by Ekanem (2007), the implementation of programmes of quality assurance has revealed that the
observed deficiencies in teaching had sometimes to do with the teacher’s knowledge of its subject, but were
generally related to ignorance of andragogy and neglect of the available knowledge on teaching methods and
techniques. When the overall level of qualification is deemed too low, as it is in a number of poor countries per
UNESCO report, the task is even more difficult, especially because of the lack of research. This situation calls for
effective programmes to be organized frequently in order to update the skills of teachers.
For over ten years now, there has been reported and documented increase in the number of unqualified professionals
in the university environment. Some preliminary investigation into the causes of decline reveals that public
universities in Nigerian have been faced with serious challenges such as poor condition of service, poor working
environment, and poor workers’ morale among other work environmental factors. The myriads and cumulative
effects of these problems if left unchecked could have negative consequence on the job career development of any
worker-academically and technically.
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The worst of the matter, is that even when an individual employees are aware of their organization’s lack of finance
and unwillingness to invest in their career growth, many could remain adamant on whether to embark on selfdevelopment or not and most of the time were undisturbed. Those organizations that lack well equipped, skilled and
committed employees are bound not to stand the test of time in the challenging global environment. Similarly, Staff
in higher institutions in Nigerian universities (North- Central Nigeria inclusive) most times find it difficult to move
from a lower qualification to the higher ones; including recommendations and approval for elevation and subsequent
promotion to higher ranks, because, it is highly politicized with all manners of favoritism, god-fatherism, and
mediocrity as against meritocracy (Adenike, 2011). This unwholesome situation has led to increase in enrolment
and subsequent need for more academic staff which are not readily available within the system. Thus, the
universities have to compete for the available number of staff within the system.
It is obvious that career growth plays an important role in improving employees’ performance which promotes
academic achievement, especially the aspect key to human growth and organizational sustainability. But evidence
has shown that staff that lack career growth are bound to experience depression, inadequate work satisfaction and
vulnerable to deviant behavior. On the basis of this backdrop, therefore, this study aimed at assessing the effect of
career growth on academic staff job mobility in selected public Universities in North- Central Nigeria. The
objectives of this study are to:
i.
examine the extent to which promotions has affected job mobility of academic staff in public universities in
North Central Zone of Nigeria
ii.
Establish the extent Job positions affect job mobility of academic staff in public Universities in North
Central Zone of Nigeria.
Based on the problem under study, the study provided answer to the following questions:
i.
To what extent has promotions affect job mobility of academic staff in public universities in North Central
zone of Nigeria?
ii.
To what extent do Job positions affect job mobility of academic staff in public universities in North Central
Region of Nigeria?
The following Hypotheses guide the study:
H01: Promotions has no significant effect on job mobility of workers in the public universities in North Central
Zone of Nigeria.
H02: Job position has no significant effect on job mobility academic staff in Public Universities in North Central
Zone of Nigeria.
2.
Literature Review
2.1
Concept of Career growth
Career growth can be viewed from different approaches; congruence between career growth, individuals’
personality, and their occupation (Parson, 1989); it is a process for achieving specific employee’s and organization
goals, (Kirk, Downey, Duckett &Woody, 2000). Walton (1999), stresses that it is increasingly difficult to
disentangle career growth from general training and development process. Career success is achieved through an
individual, and can be defined as individual satisfaction with job career through the process of meeting personal
career goals.
Also, in the recent debate on the balance between investments and returns on education, the critical role that teachers
play in educational quality and improvement has been repeatedly acknowledged (Owoyemi and Ekwoba, 2014) with
regard to professional career growth of teachers. Reports suggest that, there are two most important aspects to
opportunities teachers have for professional career growth. Although, conditions of service with its direct bearing on
the attractiveness of the teaching career, such opportunities also may have an undeniable impact on the quality of
tuition that teachers provide to their students. Again, such training will seek to address a variety of needs from
institutionally identified priorities to the particular needs of departments or individual teachers. This may take the
form of short courses, seminars and training of teachers in the use of new technology (e.g. ICT) in teaching.
2.2
Empirical Literature
A number of studies reports that the availability of promotion opportunities appears to be perceived as an influential
factor among faculty members to voluntarily relinquish their jobs or quit their institutions (Akpotu & Nwadiani,
2013). Promotional activities refer to the degree an employee perceives his or her chances to grow and be promoted
within the organization. Armstrong (2009) strongly argues that people should not only be rewarded financially but
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they should also be offered opportunities to grow within the organization. Promotion offers opportunities for growth
and is also one of Herzberg motivators which can be used to enhance immobility. Promotion for academic staff is
dependent on teaching, research and publications however, due to financial constraints; non-prioritization of
research by government and inadequate publishing facilities, publishing of refereed articles has become a
monumental challenge for Nigerian and other African academics
Olugende (2014) states that training is the process of providing junior employees with specific knowledge and skills
in order to enable them perform specific work tasks while development is about providing senior employees with
conceptual skills for performing general duties. Olugende further maintained that every employee must be given
further training irrespective of previous training. Training is a form of human capital investment. No matter how
automated an organization or university may be, high productivity depends on the level of motivation and the
effectiveness of the workforce. The universities must have good training programmes for the purpose of individual’s
self-improvement that in the long run translate to career growth to meet the challenges and requirements of
emerging technological changes.
Universities in Nigeria and other parts of the world are places where higher education is acquired. They are expected
to create, discover and impart new knowledge, prepare people for leadership positions in all works of life and strive
to promote equality as well as social justice which will in turn metamorphosed to individual career growth in an
organization. This punctuates the fact that they are entrusted with the responsibility of providing semi-skilled and
skilled workforce for the economy. The relevance of university and its conceived role as a major panacea for all
societal problems has led to an unprecedented increase in social demand for education in Nigeria (Ekanem, 2007).
Job mobility otherwise known as labour turnover or staff wastage is largely unavoidable in an organization; it refers
to voluntary resignation or involuntary loss of job. The persistence of labour mobility in Nigerian higher institutions
of learning is alarming and disturbing, especially in small and medium organizations (SMOs). A typical Nigerian
youth presently wants to get rich quick unlike the situation in the colonial era (1900- 1960); this attitude appears to
reinforce the incidence of labour mobility in SMOs. Decisions on labour mobility are usually based on subjective
interpretation of a range of factors some of which are external to the workplace. The external factors usually
comprise the social environment, educational experiences, family responsibilities, religious beliefs and changing
work values. Also, internal factors which have traditionally provided a basis for the incidence of labour mobility
include job satisfaction, organizational commitment, age and tenure (Oweyemi and Ekwoaba, 2014). A combination
of internal and external factors can provide impetus for adequate understanding of labour mobility in organizations
and high institutions of learning.
The influence of a plethora of factors on labour mobility has been demonstrated in literature but its persistence has
not been adequately investigated (Akinwale, 2010). Unfortunately, the menace of labour mobility remains
astronomically high in various organizations in Nigeria, especially in SMOs, which are characterized by neglect and
poor socio-economic conditions. Most SMOs are handicapped owing to low capacity for competition, inadequate
resources and the top ten problems noted by Owoyemi and Ekwoaba (2014). The problems are paraphrased as
follows: poor /weak management, inadequate access to funds, inadequate infrastructure facility, failure of policies,
bureaucracy, high taxes and levies, inadequate access to modern technology, unethical competition and poor
marketing. Attempts to address these problems have been thwarted by the growing spate of labour mobility.
Akindele (2010) observes that many employees of an organization are dissatisfied if working conditions are poor
which then leads to job mobility. However, some Academic Staff move with ease from one university to another
when there is a feeling of dissatisfaction in career growth. According to the author, career satisfactions are the
degree to which people are happy with their careers. Essien (2002) in his own view sees career satisfaction as an
emotional response to a job situation and often determined by how outcome meets or exceeds expectation. Akindele
(2010) opines that career growth is a strong factor that can make academic staff in public higher institutions in
Nigeria including the North Central Nigeria to consider moving to other institutions when there is dissatisfaction.
That is to say, academic staff in a particular public university find it difficult to move from a lower qualification to a
higher one (Master’s holders to Doctorate Degree holders; Doctorate Degree Holders including recommendations
and approval for elevation up the cadre tothe rank of Professorship). It is highly political with all manners of
favoritism, god-fatherism, and mediocrity as against meritocracy. Academic staffs in public higher institutions are
currently facing many challenges in education and in the society, which may well affect their levels of job
satisfaction (Adenike 2011). This has led to increase in enrolment and subsequent need for more academic staff
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Effect of Career Growth on Job Mobility of Academic Staff in Public Universities in North
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which are not readily available within the system. Thus, the universities have to compete for the available number of
staff within the system.
Owolabi (2013) carried out an investigation on work environments and career groth of librarians working in public
universities in South-West, Nigeria with the aid of survey research approach. Questionnaire was used to elicit
information from 189 Academic Librarians, out of which 153 (81%) copies of the questionnaire were duly
completed and returned. The data collected were analyzed using frequency count, percentage and ANOVA Analysis
tested at 0.05 level of significance. The findings revealed that the work environment of librarians in terms of
physical facilities, open communication, motivation among others is fairly favourable while personnel emolument
was considered not to be favourable at all. This inadequacy affects their career growth. To alleviate the incidence of
poor work environment and under performance in libraries, the study recommends that there should be improvement
in the levels of physical facilities, personnel emolument, open communication as wells as adequate funding from
government, donor agencies and philanthropists.
2.3
Theoretical framework
2.3.1
Theory of Work Adjustment (TWA)
The theory adopted for this study is the theory of Work Adjustment (TWA) propounded by Dawi (2005). The theory
is also referred to as person environment correspondence theory. The main preoposition of this theory is that career
growth can be achieved when an individual searches for organizations environment and align his success with the
perceived requirements; while the organizations (environment) seek for individuals that possess expected
requirements of the organization and when the two are aligned to each other, mutual is achieved (Dawis, 2005).
The theory also recognizes the growth stages people should undergo from childhood into maturity taking into
consideration factors such as mental ability, physical ability, individual characteristics, and any other opportunities
and privileges in which individuals are predispose and contribute to career patterns of such individuals. The recent
past career research focus has been shifted from organizations to individuals. This could be as a result of work
adjustment theory, which suggests that, the primary purpose of work is to meet the current and future expectation
needs of the organization and the individual at workplace. This increasingly means developing employability in the
long-run.
3.
Methodology
The study adopted descriptive research design. This design described as the overall plan for obtaining answers to the
questions being studied and from which data are obtained from various respondents’ (Onwumere, 2005). It also aims
at describing or defining a subject by creating a profile of a group of problems, people or events through the
collection of data and tabulation of the frequencies on research variables or their interaction.
3.1
Population and Sample Techniques
The population of the study constitutes the entire academic Staff of Public Universities in the study area which was
put together at seven thousand, six hundred and twenty-two (7622) staff that were drawn from the thirteen (13)
public universities across the North Central Zone of Nigeria as at August, 2017.
Smith (1984) sample technique was used to estimate the sample size. The Smith, (1984) formula is given by the
formula:
n
N
3  Ne 2
Margin error = 5%
Where;
N
3
e
=
=
=
population size
is constant
is the Margin of error at 5%
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Effect of Career Growth on Job Mobility of Academic Staff in Public Universities in North
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n
N
3  Ne 2
Substituting we have:
7622
3  7622(0.05)2
7622
n
3  7622(0.0025)
7622
n
22.055
n = 380
n
The sample size is therefore: 380
Questionnaire was used as the instrument for data collection and most of the questions were well defined to arouse
respondents’ interest to read carefully and to answer each question put across to them for easy completion. They
indicate, 5= Strongly agreed = 4 = agreed = 3 = undecided = 2 = disagreed = 1 = strongly disagreed in a 5-point
Likert type scale.
The Ordinary Last Square (OLS) regression method was adopted to find out the linear relationship among the
independent variables and the dependent variable. The OLS is the most precise efficient and unbiased estimation
technique that is frequently used to estimate parameters of the regression model used. The justification for the use of
OLS regression method is because it measures the relationship that exists between two or more variables. It is
simple to compute without errors and it helps to illustrate the directional outcome and strength of the variable. It
further shows a precise quantitative measurement of the degree of relationship between dependent and independent
variables.
3.2
Model Specification
Following the theory of work adjustment propounded by Dawi (2005), the model specifications were
formulated to tests the two hypotheses as shown below:
JM  0  1 PR   2 JP  t         1
Where;
0
=
1 ,  2 =
Intercept
PR
JM
JP
=
=
=
coefficients of Promotions and Job Positions
Promotions
Job mobility
Job Positions
t
=
Error term
4.
Results and Discussion
4.1
Summary of Descriptive Results
Results from the descriptive statistics showed that job mobility has an average of 3%, Promotions has average of
3.18%; while Job positions was found to be 3.41% as shown in Table 1. Skewness which measures the shape of the
distribution showed that all the variables have values less than zero which suggests that the distribution tails to the
left-hand side of the mean. Jarque-Bera statistic (which is a statistical test) that determines whether the series are
normally distributed or not showed that job mobility, job positions and promotions were normally distributed at 5%.
This was captured by the probability values that were all higher than 0.05.
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Table 1: Descriptive statistics for selected variables
JM
Mean
3.008164
Median
3.2139
Maximum
3.365854
Minimum
2.165094
Std. Dev.
0.416559
Skewness
-1.01647
Kurtosis
2.685628
Jarque-Bera
1.586865
Probability
0.45229
Sum
27.07348
Sum Sq. Dev.
1.388174
Observations
380
Source: Author’s computations (2017), using Eviews-10.
PR
3.181091
3.288043
3.6778
2.666667
0.322963
-0.22339
2.061657
0.405037
0.816671
28.62982
0.834442
380
JP
3.405145
3.4007
4.344619
2.280779
0.522254
-0.54725
4.494805
1.287138
0.525414
30.64631
2.181994
380
Statistical Test of Hypothesis
The results obtained under this section were generated using OLS regression analysis. The two
hypotheses formulated in the study were tested using student t-statistics. The level of significance for the
study was 5%, for a two-tailed test. The decision rule is that we accept the null hypothesis if the critical tvalue of ±1.96 is greater than the estimated t-value, otherwise reject the null hypothesis.
Table 4: Regression Model Result
Dependent Variable: JM
Method: Least Squares
Date: 11/13/17 Time: 20:49
Sample: 380
Included observations: 380
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
PR
JP
-81.62133
2.969415
1.556490
42.57841 -1.916965
0.944807 3.142880
0.814681 1.910525
0.0842
0.0105
0.0846
R-squared
0.535808
Adjusted R-squared 0.506550
S.E. of regression
10.65606
Sum squared resid
1135.517
Log likelihood
-50.63564
F-statistic
3.847599
Prob(F-statistic)
0.045623
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat
30.82162
13.71754
7.805091
7.987679
7.788189
1.976983
Source: Authors Computation Using E-Views 10
The ANOVA F-statistic: The F-statistics which is used to examine the overall significance of regression model
showed that the result is significant, as indicated by the value of the F-statistic, 3.84 and it is significant at the 5.0
per cent level. That is, the F-statistic P-value of 0.045 is less than 0.05.
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Effect of Career Growth on Job Mobility of Academic Staff in Public Universities in North
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2
The R (R-square): The coefficient of determination (R-square), used to measure the goodness of fit of
2
the estimated model, indicates that the model is reasonably fit in prediction. The R (R-square) value of
0.5358 shows that Promotions and Job Positions have a very good impact on job mobility. It indicates that
about 53.58 per cent of the variation in job mobility is explained jointly by Promotions and Job Positions,
while the remaining unaccounted variation of 46.42 percent is captured by the white noise error term.
Serial correlation: Durbin Watson (DW) statistic was used to test for the presence of serial correlation or
autocorrelation among the error terms. The acceptable Durbin – Watson range is between 1.5 and 2.5.
The model also indicates that there is no autocorrelation among the variables as indicated by Durbin
Watson (DW) statistic of 1.97. This shows that the estimates are unbiased and can be relied upon for
managerial decisions.
Test of Hypotheses One:
H01: Promotions has no significant effect on job mobility of workers in the public universities in North Central
Zone of Nigeria.
From the regression result in table 4 the calculated t-value for Promotions is 3.14 and the critical value is 1.96 under
95% confidence level. Since the t-calculated is greater than the critical value (3.14 > 1.96) it also falls in the
rejection region and hence, we reject the first null hypothesis (H01). The conclusion here is that Promotions has a
significant effect on job mobility of workers in the public universities in North Central Zone of Nigeria.
Test of Hypotheses Two:
H02: Job positions has no significant effect on job mobility academic staff in Public Universities in North
Central Zone of Nigeria.
However, the calculated t-value for Job positions was found to be 1.91 and also by rule of thumb, the
tabulated value is 1.96 under 95% confidence interval levels. Since the calculated t-value for Job
positions was found to be less than the tabulated value (that is; 1.91 > 1.96), we thus accept the second
null hypotheses (H02) and conclude that Job positions has no significant effect on job mobility academic
staff in Public Universities in North Central Zone of Nigeria.
4.2
Discussion of Findings
In this study, after data were generated, presented and analyzed with respect to the effect of career growth
on job mobility of academic staff in public university in North Central Zone of Nigeria. Findings from the
study revealed that there is a significant relationship between promotions and job mobility of academic
staff in the public universities of North Central Zone of Nigeria. It was found that there are many
instances and opportunities that has led to staff career growth such as in- house training, seminars,
workshops and conferences attended both locally, nationally and internationally by academic staff
including Heads of Departments and Deans of Faculties. This align with the study conducted by Okumbe
(2001) who strongly posits that every employee should be given opportunities for further training and
retraining irrespective of the previous training acquired. This would not only promote their career, but
also improve their productivity because training is an investment for human capital development.
However, it was observed from the empirical analysis that job positions had no significant effect on job
mobility of academic staff in Public Universities of North Central Zone of Nigeria. Some staff members
find it difficult to move from a lower qualification to a higher one (that is, Master’s holders to acquire
their doctorate degrees); and recommendations for promotion to the top level) is sometimes not only
abused but highly political.
5.
Conclusions and Recommendations
Based on the findings of this study, and bearing in mind the dynamism of Nigerian university system to
compete favourable in line with best universal practices, the study conclude that the management of
public universities should not only concentrate on financial component of the staff welfare but should also
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Effect of Career Growth on Job Mobility of Academic Staff in Public Universities in North
Central Nigeria.
provide the enabling environment and opportunities for staff to grow within the organization through
training and retraining for Promotion avenue that will lead to their career growth.
Based on the findings of the study, the following recommendations were made:
i.
Management of Universities in the North Central Nigeria should encourage their academic staff
members to participate in seminars; workshops and conferences both locally, national and
international with a view of developing their potential to achieve and sustain consistent
promotion and job career growth.
ii.
In addition, the university stakeholders should be proactive in policy formulation and
implementation that would provide enabling environment for career job growth of academic staff
member. Furthermore, there is the need for adoption of strategies such as ethics, work standards,
meritocracy for promotion as against mediocrity.
References
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Armstrong, M. (2009). Armstrong’s handbook of human resource management practice (11th
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Dawis, L. (2005). Social research: Methods, qualitative and quantitative approaches. Boston: Allyn &
Bacon.
Ekanem, I. &Smallbone, D. (2007).“Learning in Small Manufacturing Firms: The Case of Investment
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Kirk, M. Downey, K. Duckett,O., &Woody,U. (2000). e measurement of organizational commitment.
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Okumbe, M. (2001)Human Resource Management: A Managerial Tool for Competitive Advantage. 2nd
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Ologunde, A. O., Asaolu, T.O., &Elumilade, D. O. (2011). Labour Turnover among University in South
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Walton, M. (1999). Career development, personal growth, and experimental learning. In J.W. Springer
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Internal Control System as a Management Tool to Enhance Organizational Performance
Internal Control System as a Management Tool to Enhance
Organizational Performance
Musa Ahmed Muhammed
Department of Accounting,
Nasarawa State University,
Kefi, Nasarawa State
E-Mail: ubaahmed70@gmail.com
and
Baba Ahmed
Department of Accounting,
Nasarawa State University,
Kefi, Nasarawa State
E-Mail: abibrahim62@gmail.com
Abstract
This study examines Internal control as a management tool used to provide a reasonable assurance through which
organizational objectives are achieved by effective control and stewardship responsibility over the use of
organizational resources.. A survey design method was employed to sample opinions of respondents through the use
of questionnaire. Descriptive Statistic using mean, ordinary least square (OLS) multiple regression analysis, t-test
and F-test were employed to answer the research questions, and to ascertain the impact of the variables and carryout
individual and joint test respectively. The result shows that out of the three variables in the model, effective
management control in public sector was most impactful on internal control system in Nigeria. The R-Square
adjusted shows that the model was robust and fit for policy prescription. The F- test shows that the model was
jointly statistically significant although individually it Was statistically insignificant at 0.5 level of significant. The
researcher recommends among others that ppunishment and reward should be advocated for auditors. Those who
uncompromisingly reveal embezzlement should be rewarded openly and those who compromise should be punished
in the same manner.
Keywords: Internal Control System, Management Tool, Organizational Performance
Introduction
Accountability is a fundamental value for any political system. Citizens should have the right to know
what actions have been taken in their name, and they should have the means to force corrective actions
when government acts in an illegal, immoral, or unjust manner (Peter, 2011). Accountability is also
important for government. It provides government with the means of understanding how programs may
fail and finding ways that can make programmes perform understanding how programs may fail and
finding ways that can make programmes perform better. Okoh (2010) argues that an emphasis on
accountability by citizens one aspect of the growing emphasis on eliminating corruption and promoting
transparency in government. However, the issue of accountability in Nigeria is a fundamental problem
because of the high level corruption at all levels of government.
The need for assessing internal control and accountability in the public sector arises because achieving
proper accountability demands internal mechanism. This mechanism ensures that the provisions made in
the financial memoranda concerning accountability are adhered to. Absence of control mechanism creates
room for fraudulent accounting system. Moreover, control aids in making sure that the targets of the
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Internal Control System as a Management Tool to Enhance Organizational Performance
organization are achieved. Installation of internal control mechanism in the system enhances dictation of
poor accountability (Peters, 2011).
Public Organizations in Nigeria represent the most dominant economic forces, so efficiency and effective
systems of government financial management in form of internal control are essential for budgeting the
nation’s assets. It is also for facilitating the emergence of economic maturation processes through
accountability. There is a general opinion that most of the public enterprises have failed to deliver on the
purposes for which they were established. Management ineffectiveness and inefficiency have been
advanced by practitioners and researchers of public enterprises as the bane of the Nigerian public sector
(Esu & Inyang, 2008).
According to Lee, Johnson and Joyce (2004), internal control is desired to provide some assurance to
stakeholders that scarce resources are not diverted away from basic considerations inherent in financial
management system design. The diversion of scarce resources has profoundly affected the traditional
accountability of government to the public in Nigeria where internal control system is sometimes
sidelined to the extent of poor accountability. International Federation of Accountants (IFAC) (2006),
opined that the severity of high-profile corporate accounting failure which has increased steadily over that
decade has led to development of new legislations, standards, code and guidelines.
Morris (2011) separates internal controls into those that are general (entity-wide) controls from those that
are specific (account-level) controls. He believes that if management was overriding control features in
order to manage earnings, then one would expect to find more internal control Weakness related to
general controls, even if the specific (account- level) controls are effective. This type of behavior should
be uncovered during the audit process since this is an area of concern specifically identified in Auditing
Standard No. 5 Paragraph 24, which states that “entity- level controls include controls over management
override.” On the other hand, a stronger argument could be made that if general controls are in place and
working, then one would expect to find less Internal Control Weakness related to general controls.
Wittington (2011), attempts to explain the meaning, significance of internal controls, and the Components
of a Company’s internal controls. They also attempt to explain the relevancy of internal controls in large
scale business organizations. In their book while borrowing the definition of the Committee of
Sponsoring Organization (COSO); Internal Control- Integrated Framework, Whittington (2011) defines
internal control as a process effected by the entity’s board of directors, management and other personnel,
designed to provide reasonable assurance regarding the achievement of objectives in the following
categories; reliability of financial reporting, effectiveness and efficiency of operations, and compliance
with applicable laws and regulations. They emphasize that internal controls is a process and not end in or
of itself.
The specific problems highlighted in this study are factors militating against effective internal control
system. The problems include poor accountability, backward economic development, in-effective legal
punitive measures. Although Information Technology is used to drive internal control in the Nigerian
Public Sector but this has not been incorporated in the guiding laws especially the financial regulation
which summarize the Finance (Audit) and Management Act (1958).
These problems are exposed in the literature for example, according to Dandago (2080), a major problem
in Nigeria as a developing nation is the fact that the government is not capable of dealing with the
rigidities of the Nigerian society that hold back economic development, a firm government action is
needed to overcome those rigidities. Dandago (2008) stated the even through there are numerous legal
framework for accountability, they are backed up by soft punishment and sometimes double standard.
Amudo and Inanga (2009) made a significant contribution in this area: their study noted that monitoring
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Internal Control System as a Management Tool to Enhance Organizational Performance
of operations in an organization ensures effective functioning of internal control in achieving the set
objectives.
Salawu and Agbeja (2007) examined auditing and accountability mechanism in the public sector, provide
a significant contribution towards the need for a strong internal control. Esu and Inyang (2009) also
provided evidence on the need for performance management in the public sector. Although their studies
focused o internal control system, they are not linked with accountability in the public sector in Nigeria.
Therefore, this study evaluating the effectiveness of internal control system on accountability as perceived
by the public in the Nigeria public sector is expected to fill some of these gaps.
With the aforementioned problems, the following research questions become fundamental:
i.
Does adequate internal control ensure effective management system in Nigeria?
ii.
How effective is internal control system in public sector organization system on Audit Function
accountability in Nigeria?
iii.
does internal control system pose any effect on improvement of Organization Performance in
public sectors in Nigeria?
The main aim of this study will be to examine the role of internal control system on accountability in the
public sector. The specific objectives of the study will be to:
i.
Determine how the adequacy of internal control system on effective management system in
Public sectors in Nigeria
ii.
Find how effective is internal control system in public sector organization system on Audit
Function accountability in Nigeria
iii.
Examine the effect of internal control system on improvement of Organization Performance in
public sectors in Nigeria.
In order to achieve the objective, the following hypotheses will be formulated thus:
Ho1: There is no significant relationship between Internal control system and
system in Public sectors in Nigeria
effective management
H02: There is no significant relationship between internal control system and
Accountability in Public sectors in Nigeria
Audit Function
Ho3: There is no significant relationship between internal control system and Organization Performance
in Public sectors in Nigeria.
2.
Literature Review
2.1
Conceptual Framework
Internal Control serves as an important link in the business and financial reporting processes of
corporations and not –for-profit providers (Reynolds, 2010), Internal Control System play a key role in
monitoring a company‟ theorys risk profile and identifying areas to improve risk management (GodwinStewart& Kent 2010). The aim of
Internal Control is to improve organizational efficiency and
effectiveness through constructive criticism. Unegbu and Obi (2012) defined Internal Control as part of
the Internal Control System put in place by management of an organization to ensure adherence to
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Internal Control System as a Management Tool to Enhance Organizational Performance
stipulated work procedure and as aid to management. According to Unegbu and Obi (2011), Internal
Control measures, analyses and evaluates the efficiency and effectiveness of other control established by
management in other to ensure smooth administration, control cost minimization, ensure capacity
utilization and maximum benefit derivation. In the view of Adeniji (2013) Internal Control is part of the
internal control system put in place by management of an organization.
The institute of Internal Control System (IIA, 2009) defined Internal Control as a independent, objective
assurance and consulting activity designed to add value improve an organization ‟ theorys operations, it helps an
organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and
improve the effectiveness of risk management, control, and governance processes. this definition signifies
that Internal Control has undergone a paradigm shift from an emphasis on accountability about the past to
improving future outcomes to help auditors operate more effectively and efficiently (Nagy & Cenker,
2012; Stern, 2013).
2.1.1 Concept of Accountability
Accountability is all about being answerable to those who invested their trust, faith, and resources to you.
Arena (2010) defined accountability as the obligation to demonstrate that work has been conducted in
accordance with agreed rules and standard and the officer reports fairly and accurately on performance
results vis-à-vis mandate roles and or/plans. It means doing things transparently in line with due process
and the provision of feedback. Badara (2012) posits that public accountability is an essentials component
for the functioning of our political system, as accountability means that those who are charged with
drafting and / or carrying out policy should be obliged to give an explanation of their actions to their
electorate. Theofanis (2011) observed that the capacity to achieve full accountability has been and
continues to be inadequate, partly because of the design of accountability itself and partly because of the
widening range of objectives and associated expectations attached to accountability. He further argues
that if accountability is to be achieved in full, including its constructive aspects, then it must be designed
with care.
The objective of accountability should go beyond the naming and shaming of officials, or the pursuit of
sleaze, to a search for durable improvements in economics management to reduce the incidence of
institutional recidivism. It should envisage a three- tier structure of accountability: that of official (both
political and regular employees), that of intra-governmental relationships and that between and their
respective legislatures.
2.1.2 Concept of Internal Control Mechanism
Internal control entails special purpose accounting tools which are systematically structured to prevent
and fraudulent activities in the process of accounting for financial transactions (Odhiambo, 2012). Ruud
(2013) sees internal control as yardstick to ensure financial statements are complied with statutory
recommendations, regulations and standards set up for effective operations. According to Adams (2010),
internal control consists of both revenue control and expenditure control. The paper sees revenue control
as the series of coordinated activities that should be embarked upon so that the streams of income
accruing to the company remained unaltered if such income cannot be increased. While expenditure
control is the stream of coordinated actions that should be carried out to ensure that all expenditures are
wholly, reasonably exclusively and necessarily incurred for the purpose for which they were meant for.
Abushiba (2012), views internal control as the entire policies and procedures an organization uses to
prevent, detect and correct errors, irregularities and fraudulent activities that might get into financial
reports.
2.1.3 Effective Internal Control Functioning
Auditing is independent examination of, and the expression of an opinion on the financial statement of an
enterprise by an appointed auditor, in accordance with his terms of engagement and the observance of
statutory regulations and professional requirements (Mainoma, 2017). It is a systematic investigation and
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Internal Control System as a Management Tool to Enhance Organizational Performance
appraise of tranascations, procedures, operations and result in financial statement s (Anichebe, 2010) the
auditor should be approved and must have personal and operational indpendance in order to perform his
duty effcectively. Akpan (2010) classify audit into four: private, statutory, management and Internal
Control, even though all the types of audit focus on regulations which lead to control of expenditure or
revenue. Millichamp (2010) defines Internal Control as ‟ theoryan independent appraisal function within an
organisation for the review of system of control and the quality of performance as a service to the
organization for the review of system of control the quality of performance as a service to the
organization. Unegbu and Obi (2012) see Internal Control as part of the Internal control system put in
place by management of an Organization to ensure adherence to stipulated work procedure and as aid to
management for smooth administration, control cost minimization, ensure capacity utilization and
maximum benefit derivation.
Adeniji (2013) encapsulate Internal Control as a review of various operations of the company and if its
records by the staff especially for this purpose. By measuring and evaluating the effectiveness of
organizational control, Internal Control system are concerned with the entire range of an organization ‟ theorys
internal controls that includes operational, Financial, and compliance control systems are meant to deliver
key assurances to all stakeholders against corruption, waste, and inefficiencies in public services. In the
absence of a control system with Internal Control as a safeguard for checking efficiency and effectiveness
of that system, government offices are vulnerable to waste, corruption and inefficiencies.
2.2
Empirical Review
Literature review revealed that only fewer studies give consideration to the recent internal control
functions (Sarens & Abdolmohammadi, 2011) despite the fact that it is important to have effective
internal control function in place (Kinsella, 2010). In this vein, one of the functions of the internal control
which recent literature affirmed was the constant review of management operation with the intention to
ensure effectiveness of management activities (Badara & Sadin, 2012; Badara & Sadin, 2014; Yule,
2010). That is why organization are now require to broaden the scope of their respective internal control
system (Ahmad, Othman, & Jusoff, 2009; Aguolu, 2009; Zahran, Chulkov & Inomata, 2010) so that to
have extensive coverage in order to assist in achieving the organizational objectives. Even Cohen and
Sayag (2010) Mihret, James, and Joseph, (2010) acknowledge that effectiveness and efficiency of an
organizational operation is part of the objective of internal control. Therefore, such functions of internal
control need to be given due consideration so that to achieve management effectiveness in any
Organizations (Badara & Saidin, 2014)
The study conduct by Ziegenfus (2011) examines preventing fraud in their book titled forensic
accounting. The book submitted that preventing fraud involves creating of honesty, openness, and
assistance which has three factors. These factors include, employing honest personnel or people and
providing fraud awareness training, developing a positive work environment, and providing employee
assistance scheme (that aids worker deal with personal pressures). They explained that hiring honest
people and organizing fraud awareness workshop involve effect screening of applicants ‟ theory resume
verification and certification, government should train those involved in the recruiting process to conduct
skillful and thorough interviews. Such interview provides the government an opportunity to obtain in
depth personal data about a job applicant‟ theorys skills, job, history, and employment and personal background.
In an empirical study carried Ut by Chelimo (2013) within the Israeli organizations on the internal control
effectiveness, the study employed the followings independent variables in determining internal control
effectiveness that comprised: quality of audit work, career and advancement, organizational
independence, top management support, professional proficiency of internal control system and finally
private versus public sector. The study reveals the strong support of top management in determining the
effectiveness of internal control system. And other determinants of internal control effectiveness derive
from support of top management. In a conceptual research carried out by Mihret et. al., (2010) using the
mediating effects of internal control effectiveness on the relationship between organizational attribute and
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Internal Control System as a Management Tool to Enhance Organizational Performance
organizational performance through the moderating effect of management action on internal control
recommendation. The study concluded that such relationship should be empirically validating and thereby
calling for more research to be concluded on internal control effectiveness.
In a related empirical study conducted by Theofanis et al., (2011) in Greek Hotel business on the internal
control effectiveness evaluation, the study used the following element of internal control system in
examining the internal control effectiveness that comprised of: information and communication,
monitoring, control environment, control activities and risk assessment. The result of the study reveals the
significant of the hotel and thereby concluded by suggested that more research on internal control
effectiveness are need using a large sample size. Liewise Unegbu and Kida (2011) conducted an
Empirical Study at Kano State in Nigeria on the internal control effectiveness as an instrument that
improves public sector management. The study revealed that Kano State Public sector of Nigeria have
significant number of revealed internal control department and such internal control system have the
ability to figure out fraudulent activities within such organizations.
Similarly, Feizizadeh (2012) carried out conceptual research on strengthening internal control
effectiveness in iran. Finally the study discloses that most of the companies in Iran measure and quantify
the performance and effectiveness of their business activities, thereafter the study concluded by
recommending that measuring the performance of internal control system is one of the factors that
contribute toward their effectiveness. This shows that performance measurement is an antecedent of
internal control effectiveness. Badara and Saidin (2012) carried out another conceptual study on the effect
of risk management on internal control effectiveness at local level; the study concluded that such risk
management can definite influence the effectiveness of internal control system at local level. Equally,
Badara, and Saidin (2013) carried out another conceptual study on antecedents of internal control
effectiveness through the interaction of audit committee effectiveness, the study concluded that such
relationship should be validated and finally emphasize on more research to be conducted on internal
control effectiveness.
Therefore, having identified some of the previous studies on internal control effectiveness, it ‟ theorys quite
agreeing that such effectiveness has been examined by different variables and his is in line with
interpretations made by (arena & Azzone, 2010; Theofanis et al,. 2011) that different variable can be
employ in examining such effectiveness. But then, despite the above studies on internal control
effectiveness, none of the studies empirically examine the effect of performance measurement on internal
control effectiveness. Therefore, this study extended the previous via presenting the empirical evidence
on the effect of performance measurement on internal control effectiveness using the perceptions of
internal control system.
Besisdes, Ziegenfus (2011) suggest creating a positive work environment as a key to prevent fraud. There
also have three factors which are: drafting expectations about honesty via having a good corporate code of
conduct as well as converting those expectations throughout the organization; having open-door or easy
access policies‟ theory and having positive personnel and operating procedures. These expectations must be
genuine and accepted by those who in charge with responsibility and duties (directors and chairman).
They said moral development suggest that ‟ theoryif you want someone to behave honesty, you must both label
and model honest behaviour and lastly, they concluded that fraud prevention involves eliminating
opportunity for frauds occurrence. This includes five factors namely: employing good internal controls‟ theory
discouraging the act of collusion between employees and customers or vendors as well as clearly
informing vendors and other outsiders contacts or other stakeholders of the company’s policies against
fraud; monitoring workers and providing a host line (whistleblowing systems) for anonymous tips:
creating an expectation of punishment; and conducting proactive auditing exercise. Previous researches
concerning fraud detection has focused primarily on so-called ‟ theoryred flags”, which are defined as conditions
or circumstance that indicate potential fraud. In a study conducted by Albrecht and Romney, 1986 87 red
flags were evaluated as being predictions of fraud. Questionnaires were sent to CPA forms which were
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Internal Control System as a Management Tool to Enhance Organizational Performance
divided into two (2) groups. The control group consist of ten (10) patterns who had not detected fraud.
Out of a list of 87 red flags, 31 red flags were found to significant as predictions of management fraud.
Mawanda (1008) also used the red flags approach to develop a conceptual model to assess the probability
of the occurrence of material management fraud. They surveyed 277 audit partners at KPMG (Peat
Marwick). Ruud (2013) conclude that the auditor ‟ theorys evaluation of the client ‟ theorys control environment is
important in order to assess the likelihood of materials mis-statement during the planning of the audit.
Weak control creates a significant condition that would allow management fraud, a defalcation or an error
to occur. Some empirical studies have been done on this subject matter in some countries of the word.
Tracey (2004) did a study entitled Control Effectiveness: An Ethiopian Public sector Case Study. The
Study which used structured questionnaire, interview and observation as instruments of data collection
discovered that certain factors such as Internal Control quality, support from management, etc. strongly
effect effectiveness of Internal Control while organizational structure and Internal Control System ‟ theorys
attribute have less impact on the same variable.
In a study carried out by Ahmed, Othman and Jusoff (2009) on effectiveness of Internal Control in
Malaysian Public sector in which simple percentage was used as the tool for date analysis, they found that
lack of audit staff was a major impediment to effective Internal Control System. Arena and Azzone
(2009) in their study entitled “identifying organization drivers of Internal Control effectiveness in Italy”
with the use of 153 Italian companies and survey method found that characteristics of the Internal Control
team, the audit processes and activities as well as organizational links influenced effectiveness of Internal
Control. Furthermore, Cohen and Sayag (2010) studied effectiveness of Internal Control System: An
Empire Examination of its Determinants in Israel organization. With the use of questionnaire and mail
survey of 292 organizations, the study identified management support, especially in relation to provision
of proficient Internal Control staff, career development and independence of Internal Control System as
vital to the effectiveness of Internal Control. In another study conducted by Theofanis, Drogalas and
Giovanis (2011) on the ‘relationship between elements of internal control system and Internal Control
effectiveness’ with the use of 52 Hotels in Greek through mail survey, the results reveal positive
relationship between the variables. However, they suggested that with larger samples the outcome of the
study might differ significantly from their own.
2.3
Theoretical Framework
2.3.1
Agency Theory
Agency theory and the Internal Control System as propounded by Adams (2010) is one of the theoretical
frameworks that guided this study. Agency theory is extensively employed in the accounting literature to
explain and predict the appointment and performance of external auditors and financial consultants. He
argued that, agency theory also provides a useful theoretical framework for the Internal Control System
function. He also proposed that agency theory not only helps to explain and predict the existence of
Internal Control System but that is also helps to explain the role and responsibility assigned to Internal
Control System by the organization and that agency theory predicts how the Internal Control System
function is likely to be affected by organizational change. He concludes that agency theory provides a
basis for rich research, which can benefit both academic community and Internal Control System
profession. This theory no doubt relates to this study as it helps to explain the role and responsibilities of
Internal Control System function which if methodically applied would help to improve financial
performance in tertiary insinuations in Nigeria.
According to Anderson, Sarens (2013), Agency theory describes firms as necessary structures to maintain
contracts, and through firms, it is possible to exercise control which minimize opportunistic behavior of
agents. In order to harmonize the interest of the agent and the principal, a comprehensive contract is
written to address the interest of both the agent and the principal; they further explain that the relationship
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Internal Control System as a Management Tool to Enhance Organizational Performance
is further strengthened by the principal employing an expert to monitor the agent. Other related reviews
include the Sarbanes-Oxley act of 2002 (SOX) which requires companies to report on the effectiveness as
part of an overall effort to reduce fraud and restore integrity to the financial reporting process. Morris,
(2011) assert that software vendors that market enterprise resource planning (ERP) system have taken
advantage of this new focus on internal controls by emphasizing that a key feature of ERP system is the
in-built controls that mirror a firm‟ theorys infrastructure. They emphasized these feature in their marketing
literature, asserting that these systems will help firm ‟ theorys improve the effectiveness of their controls as
required by Sarbanes-Oxley Act.
3.
Methodology
This study will use the survey research design. Survey research focuses on people, the vital facts of
people including their beliefs, opinions, actions, attitudes, motivations, and behaviour. Survey research
can be classified by the following methods of obtaining information: personal interview, mail
questioning, panel, telephone, and controlled observation. The research design used in this study aims at
evaluating the impact of Internal Control in Public Sector in Nigeria. It is a Survey Research Study using
questionnaire s as the instrument of drawing information from the respondents.
3.1
Population, Sample and Sampling Techniques
The population of this study comprise of all the staff in Account and Audit departments in National
Primary Health Care Development Agency. Convenience Sampling would be used for the study. The
methodology used to sample from a large population would depend on the type of analysis been
performed. The population size of the study comprised of (200) staff in Accounts and Audit departments
in FCT Universal Basic Education Board, FCT Secondary Education Board, FCT Scholarship board, FCT
Mass Agency and FCT Education Resource Centre Abuja .
Sampling techniques is a process used in statistical analysis in which a predetermine number of
observations would be taken from a large population. The methodology used to sample from a large
population would depend on the type of analysis been performed. The simple random sample was used in
this study. A sample of 100 out of 200 staff in Account and Audit departments in FCT Universal Basic
Education Board, FCT Secondary Education Board, FCT Scholarship board, FCT Mass Agency and
FCT Education Resource Centre Abuja are selected for the investigation. The sample size (100) was taken
from the 200 staff in Accounts and Audit departments in FCT Universal Basic Education Board, FCT
Secondary Education Board, FCT Scholarship board, FCT Mass Agency and FCT Education Resource
Centre Abuja respectively. The sample size was calculated using 50% confidence interval:
n = N/1+N(e)2
Where: N =Population
n = Sample size
e = (0.05)2
Therefore,
n=200/1+ 200(0.0025)
n= 100
Sample size = 100
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Internal Control System as a Management Tool to Enhance Organizational Performance
3.2
Methods of Data Collection
The study would employ primary data to achieve its objectives. The primary data will be obtained through
questionnaires and interviews. The study incorporates both sources of data to enhance a balance between
the research observation and available literature on the matter under consideration. This is always
believed to promote objectivity. The plan, structure and strategy of investigation are conceived so as to
obtained answers to research problems. It ensures that the required data are collected and they are
accurate. However, the primary data used in this study is obtained from FCT Universal Basic Education
Board, FCT Secondary Education Board, FCT Scholarship board, FCT Mass Agency and FCT Education
Resource Centre.
The gathering of relevant data, using appropriate instrument is the bedrock of any research. In this study,
questionnaire method will be employed in gathering the requisite data. The questionnaire serves as a
major tool in the collection of data for the study. It is divided into two sections. Section A which will
provide Bio-data about the respondents and section B will provide information which will be used in the
analysis and set of hypothesis formulated for the study. The questionnaire of study will be distributed to
staff of FCT Universal Basic Education Board, FCT Secondary Education Board, FCT Scholarship board,
FCT Mass Agency and FCT Education Resource Centre Abuja.
3.3
Technique for Data Analysis and Model Specification
Some statistical and econometric test would be used to evaluate the registration. These include, mean
scores, and ordinary least square method specified by multiple regression model The F-statistic and “t”
statistics respectively. (T-test, measures the relative significance of each of the independent variable).
Dependent variable of the study is Internal control System which is represented by (ICS). The
independent variables/parameters are effective management control, Audit Function Accountability and
Organization Performance. Following Rapti and Medda (2012) model, with a slight modification, the
model is specified as follows:
In mathematical form, the model is specified as:
ICS = β0 + β1 EMC+B2AFA+B3OP + e
……………………………. (1)
Where:
ICS = Internal Control System
EMC = Effective management control
AFA = Audit Function Accountability
OP =Organizational Performance and e =stochastic term
β0, β1 to β3 are the coefficients of the independent variables
On a-priori we expect:
Β1>0, β2>0 and β3>0
The a-priori signs indicate that, all the independent coefficients are positively related to internal control
system of the Public Sector Performance.
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Internal Control System as a Management Tool to Enhance Organizational Performance
3.4
Justification of Methods
Ordinary Least Square method was applied because the variables are linearly dependent. Thus a multiple
regression analysis which shows an unbiased estimation of all the variables in the equation is used.
4.
Results and Discussion
Research Question 1. Does adequate internal control ensure effective management system in public
sectors in Nigeria?
Table 1
S/N
Adequate Internal Control system ensure
effective Management by
SA A
SD
D
50
30
10
10 3.2 Accept
2 Reduced financial recklessness
30
25
20
24 2.7 Accept
3
60
20
1 Accountability
Regular internal checks
Ẍ Decision Decision
10
10
Decision
3.3 Accept
3.1 Accept
Table 1 above shows the respondents on adequate internal control system ensures effective management
system in public sectors in Nigeria. The result shows a mean of 3.1 which is above the set mean of 2.5.
This signified agreement. We therefore accept that adequate internal control system ensure effective
management system in public sectors in Nigeria.
Hypothesis one:
H01: There is no significant relationship between Internal control system and effective management
system in Public sectors in Nigeria.
From table 4 the value of Tc =2.583<Tt=2.632. We accept the null hypothesis which says there is no
significant relationship between Internal control system and effective management system in Public
sectors in Nigeria and reject the alternate hypothesis which says there is no significant relationship
between Internal control system and effective management system in Public sectors in Nigeria
Research Question Two: How effective is internal control system in public sector organization system
on Audit Function accountability in Nigeria?
Table 2
S/N Effective Internal Control system on
Audit Function Accountability is to
1detect falsified figures
SA
A SD D
40
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40
Ẍ Decision Decision
10 10
3.1 Accept
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Internal Control System as a Management Tool to Enhance Organizational Performance
2 hinder contract inflation
3 prevent illegal receipts
0
0
0
0
20 80
10 90
1.2 Reject
1.2 Reject
Decision
1.8 Reject
Table 2 above shows the respondents on effective internal control system in public sector organization
system on Audit Function accountability in Nigeria?. The result shows a mean of 1.8 which is below the
set mean of 2.5. This signified disagreement. We therefore reject that there is no effective internal control
system in public sector organization system on Audit Function accountability in Nigeria.
Hypothesis Two:
H02There is no significant relationship between internal control system and
Audit Function
Accountability in Public sectors in Nigeria
From table 4 the value of Tc = -1.399<Tt=2.632. We accept the null hypothesis which says there is no
significant relationship between internal control system and Audit Function Accountability in Public
sectors in Nigeria and reject the alternate hypothesis which says there is a significant relationship between
internal control system and Audit Function accountability in Public sectors in Nigeria.
Research question Three: does internal control system posed any effect on improvement of
Organization Performance in public sectors in Nigeria?
S/N Internal Control system improves
Organization Performance by
1
conducting regular checks
SA
A SD D
Ẍ Decision Decision
69
21
8 2
3.5 Accept
2. Ensuring expenses are duly retired 30
40
30 0
3.0 Accept
3. Giving Priority to key projects
79
11
10 0
Decision
3.4 Accept
3.3 Accept
The table 3 above shows the respondents on internal control system posed any effect on improvement of
Organization Performance in public sectors in Nigeria. The result shows a mean of 3.3 which is above the
set mean of 2.5. This signified agreement. We therefore accept that internal control system posed any
effect on improvement of Organization Performance in public sectors in Nigeria
Hypothesis Three:
H03: There is no significant relationship between internal control system and Organization Performance
in Public sectors in Nigeria.
From table 4 the value of Tc =2.974>Tt=2.632. We reject the null hypothesis which says there is no
significant relationship between internal control system and Organization Performance in Public sectors
in Nigeria and accept the alternate hypothesis which says there is a significant relationship between
internal control system and Organization Performance in Public sectors in Nigeria.
Model Interpretation
Result for Model Estimation
Sample: 100, 24/11/2017
Table 4. Regression Analysis
Variables
Coefficient
C
EMC
Standard Error
1.226
0.453
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(t-test)
0.213
0.175
5.746
2.583
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Internal Control System as a Management Tool to Enhance Organizational Performance
IAF
OP
R-Squared
R2 Adjusted
F-Statistic
-0..241
0.388
0.588
0 .575
0.172
0.131
Std. Error of the Estimate
-1.399
2.974
.47603
Durbin Watson
0.196
45.595
Source: SPSS 20
The estimated model is represented as
ICS = 1.226 + 0.453EMC - 0.241 IAF+ 0.388OP ---------------------- (2)
From the estimated model 2, the coefficients of the estimated equation are correctly signed except the
coefficient of Internal Audit Function which is negatively signed due to corruption component embedded
in organizational system in Nigeria.
The result from the estimated model shows that Effective
Management Control of public organizations in Nigeria is impactful on Internal Control System by 0.453
holding other variables constant. In order wards there is a positive relationship between Internal Control
System and Effective Management Control of public organizations in Nigeria.
The result also shows that Internal Audit Function of Public Organizations in Nigeria have a negative
impact of 0.241 on Internal Control system holding other variables constant. This indicates that the
corruption from overvalued contracts, falsified receipts for local and oversea trips has strangulated
internal Audit functions in public Organizations in Nigeria. The negative impact further shows that
Nigeria Auditing functions are handicapped in eliminating corruption rather, where traces of corruptions
are found compromise take place thereby sabotaging the entire process. Also the result shows that
Organization Performance in Public Organization in Nigeria is impactful on Internal Control System by
0.388 holding other variables constant, this further shows that there is a positive relationship between
Internal Control System and Organization Performance in Public Organization in Nigeria
The result of R- Square adjusted shows that the model is explained by 55% by the explanatory variable
and is fit for policy prescription and recommendation. The F statistic calculated which is 45.595 is greater
than F-tabulated which is 3.95. This implies that the model is jointly or simultaneously statistically
significance at 0.5 level of significance though individually the model is statistically insignificant.
5.
Conclision and Recommendation
From the analysis the researcher used data collected from primary source in order to sample opinions of
civil servants who are in government Agencies. The finding revealed that internal control system is a
good tool to improve effective management through accountability, regular checks and reduction in
financial recklessness. In line with this the present administration should tightened belts on reducing
unnecessary expenditure in the civil service. The findings further show that internal control system is not
effective in the public sector in terms of Audit function accountability. This is because the system is so
corrupt such that those saddled with the responsibility of auditing sooner or later fall victim of corruption
by collecting kick-back to compromise auditing standards. The government should empower the EFCC
and ICPC to arrest and punish erring professional Auditors who are reported to have compromised their
professional standard in the cause of discharging their duties.
The result also shows that internal control system helps in improving Organization
performance .Therefore, the institution with the core mandate of audition should organize workshops,
symposium and retreat to sensitize professional auditors to employ modern techniques of auditing to fish
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Internal Control System as a Management Tool to Enhance Organizational Performance
out bad practices in order to entrench a new auditing regime predicated on transparency and
accountability. It is therefore recommended that:
i. The government of Nigeria should step up internal control system campaign in all the Agencies
of government.
ii. Punishment and reward should be advocated for auditor .Those who uncompromisingly reveal
embezzlement without compromising during audit procedure should be rewarded openly and
those who compromise should be punished in the same manner.
iii. All the public sector should uphold the tenets of corporate responsibility by ensuring zero
tolerance to contract inflation and fictitious receipt in their offices.
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Effect of Credit Risk on Financial Performance of Deposit Money Banks in Nigeria
Effect of Credit Risk on Financial Performance of Deposit Money
Banks in Nigeria
Yusuf, Mohammed Aliyu
Department of Accounting,
Federal University Dutsin-ma,
Katsina State, Nigeria
E-mail: ymohammed@fudutsinma.edu.ng Phone No: 07039476647
Yusuf, Ruth Nguavese
Department of Accounting
Nasarawa State University,
Keffi, Nasarawa State.
E – Mail: Nguavese4real88@gmail.com, Phone No: 07033875762
and
Ajayi, Foluke Oloruntoba
Department of Accountancy
Federal Polytechnic,
Nasarawa, Nasarawa State.
E – Mail: Foluomolayo2007@yahoo.com, Phone No: 08039384554
Abstract
The study examined the effect of credit risk on financial performance of deposit money banks in Nigeria. A
balanced panel data from five selected banks covering a ten-year period (2006-2015) was analysed using random
effect regression techniques. Return on asset (ROA) was used as a measure of financial performance. The credit
risk measures used in the study included nonperforming loans to total loans, loan loss provisions ratio and loans
and advances ratio. In addition, size of the banks measured as log of total assets of the sampled banks was used as a
control variable in the study. The results showed that, nonperforming loans, loan loss provision has a positive
relationship with ROA, while loans and advances has a negative relationship to financial performance (ROA). The
study recommend the need for management of banks especially credit officers to show due diligence by adhering
strictly to credit policy when given out credit facilities. This is because sound credit-granting policy will go a long
way to reduce non-performing loans, thus also reducing the loan loss provision which will further translate to
higher profit.
Keywords: Credit Risk, Deposit Money Bank, Financial Performance, Risk Measures
1.
Introduction
In every economy, there exist institution for the creation, custodian and distribution of financial assets and
liabilities. These institutions make up the financial system in any economy of which banking is a subsector. Banks are global phenomena, a universal institution; In fact, banks intermediate between surplus
and deficit economic units, thereby, acting as machinery for the allocation of scarce financial resources
(Mohammed, 2014). Consequently, banks occupy a primary position in the economy as it is the fulcrum
of the money market and the central nervous system of the economy. The banking industry worldwide,
and Nigeria in particularly, had been witnessing a lot of structural changes. These changes are meant for
the improvement of services for the betterment of it operators and for the benefit of the customers,
shareholders as well as the economy at large. Risk is an inevitable phenomenon which has lived with
mankind since time immemorial. In our domestic and especially in our business life, we find ourselves in
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Effect of Credit Risk on Financial Performance of Deposit Money Banks in Nigeria
situations where risk taking becomes the solution to our break through. Nevertheless, one should find a
way to minimize or manage this risk in order not to affect the expected result from a given investment. In
the financial sector, risk management is seen as one of the most essential internal programmes upon
which decisions are made by financial institutions. (Aureliju, & Panzuolis 2014).
Carey (2001) disclosed that the most essential issue in the managing of an economy is the mitigation of
risk. This is not different from what happens in the banking industry. In the aspect of banking, credit risk is
given much attention due to the characteristics of their borrowers and the kind of businesses they invest
into. The bank theory identifies six popular categories of risk which are related with credit guidelines of
banks. They include credit risk (risk of repayment), interest risk, portfolio risk, operating risk, credit
deficiency risk, and trade union risk (Mohammad, 2014). Analyses have shown that, credit risk is the main
risk that causes the collapse of a bank. (Sinkey, 1992). The inability of a bank or a financial institution to
effectively control its credit risk has a substantial adverse result on the performance of its profitability both
in the short and long term. In the last five years, some financial institutions in Nigeria such as, Afri bank,
Habib bank etc have had their hard earned reputation marred and others such as Oceanic bank,
intercontinental bank, who could not curtail or curb the situation have collapsed because of weak measures
in the controlling of credit risk categorized by massive insider loans and the avoidance of diversified loan
portfolio. Inefficient credit risk supervision methods and poor credit quality remain overriding reason
of bank collapse and globe financial crises (Tetteh, 2012).
One of the major problems confronting the banking industry today is the increasing incidence of loan
defaults and consequent loan losses which manifested on the profitability of the banks. Sequel to
increasing incidence of huge bad debts in the Nigerian banking industry, insider’s abuses, management’s
competence have been called to question. Bad debts, it must be noted occur due to the inability of the
bank’s management to recover loans granted to customers. The debate in the literature concerning the
effect of credit risk on financial performance of deposit money banks in Nigeria is unclear. While some
studies such as (Abiola & Samuel, 2014 and Ogboil & Unuafe, 2013) argue that credit risk have positive
affect on performance of deposit money banks, others such as (Alalade 2014, Sharma 2012 and Epure &
Laufuente 2012) argue that credit risk has negative effect on the performance of deposit money banks.
Another point of divide is to say that credit risk only affects banks in countries with weak regulatory
agency, while it does not affect banks in countries with strong regulatory agencies ( Ahmad & Ariff,
2007). The main objective of this study is to examine the effect of credit risk on financial performance of
deposit money banks in Nigerian. The specific objectives are as follows:
i.
To determine the effect of non- performing loans on financial performance of deposit money
banks in Nigeria.
ii.
Examine the effect of loan loss provision on financial performance of deposit money banks in
Nigeria.
iii.
Examine the effect of loans and advance on financial performance of deposit money banks in
Nigeria.
The following research questions were formulated to guide the study:
i.
What is the effect of non- performing loans on financial performance of deposit money banks
in Nigeria?
ii.
What is the effect of loan loss provision on financial performance of deposit money banks in
Nigeria?
iii.
What is the effect of loans and advances on financial performance of deposit money banks in
Nigeria?
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Effect of Credit Risk on Financial Performance of Deposit Money Banks in Nigeria
In line with the objective and research questions of the study the following hypotheses were formulated
in null form:
H01: Non-performing loans has no significant effect on financial performance of deposit money
banks in Nigeria
H02: loan loss provisions has no significant effect on financial performance of deposit money banks
in Nigeria
H03: loan and advances has any no significant effect on financial performance of deposit money
banks in Nigeria.
2.
Literature Review
Abiola and Samuel (2014) investigate the impact of credit risk management on financial performance of
deposit money banks in Nigeria. Financial reports of seven commercial banks were used to analyze for
seven years (2005–2011). The panel regression model was employed for the estimation of the model. In
the model, Return on Equity (ROE) and Return on Asset (ROA) were used as the performance indicators
while Non-Performing Loans (NPL) and Capital Adequacy Ratio (CAR) as credit risk management
indicators. The findings revealed that credit risk management has a significant impact on the profitability
of deposit money banks’ in Nigeria. Alalade, Binuyo, and Oguntodu (2014) examine the impact of
managing credit risk and profitability of banks in Lagos state. The research hypothesis was tested and
analyzed in relation to credit risk and its significant effect on banks ‟ theory profitability. It was also the aim of
this research to evaluate how effective it is for a bank to manage its credit risk effectively to enhance
profitability.
Data for the study was an obtained through the administering structured questionnaires which were
answered by respondents. Correlation coefficient was used to decide whether or not credit risk
management has an impact on profitability. The results revealed that credit risk reduces the profit and
therefore management of credit risk should be of great importance to management of bank in Lagos state.
The findings of the above study cannot be relied upon due to the fact that the study used correlation as the
method of data analysis instead of regression, more also a study of the above nature does not need
primary data and the use of questionnaire to collect data will not give the desire results. Ogboi and
Unuafe (2013), in their study stress that Nigerian banks in their quest to maximize profit are channeling
chuck of their scare financial resources in provision for loan loss. Time series and cross sectional data
were obtained from the annual report and accounts of selected banks from 2004-2009. The researchers
used Panel data analysis to estimate the linkage between credit risk and financial performance. The
findings of the study revealed that loan loss provisions (LLP), nonperforming loans (NPL), and capital
adequacy (CA) had a positive effect on profitability whilst loans and advances rather had an inverse
relationship with financial performance in the period under study. Sharma (2012) explores various
parameters pertinent to credit risk management as it affect banks’ financial performance. Such parameters
covered in the study were; default rate, cost per loan assets and capital adequacy ratio. Financial report of
31 banks were used to analyze for eleven years (2001-2011) comparing the profitability ratio to default
rate, cost of per loan assets and capital adequacy ratio which was presented in the descriptive statistics,
correlation and regression was used to analyze the data. The study reveals that all these parameters have
an inverse impact on banks’ financial performance; however, the default rate is the most predictor of bank
financial performance.
Epure and Lafuente (2012) examine bank performance in the presence of risk for Costa-Rican banking
industry during 1998-2007. The results showed that performance improvements follow regulatory
changes and that risk explains differences in banks and non-performing loans negatively affect efficiency
and return on assets while the capital adequacy ratio has a positive impact on the net interest margin.
Kolapo, Ayeni and Oke (2012) carry out an empirical investigation into the quantitative effect of credit
risk on the performance of deposit money banks in Nigeria over the period of 11 years (2000-2010). Five
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Effect of Credit Risk on Financial Performance of Deposit Money Banks in Nigeria
deposit money banking firms were selected on a cross sectional basis for eleven years. The traditional
profit theory was employed to formulate profit, measured by Return on Asset (ROA), while credit risk
was measured as the ratio of Non-performing loan to loan & Advances (NPL/LA), ratio of Total loan &
Advances to Total deposit (LA/TD) and the ratio of loan loss provision to classified loans (LLP/CL).
Panel regression model was used to test the data. The results show that the effect of credit risk on bank
performance measured by the Return on Assets of banks is cross-sectional invariant. That is the effect is
similar across banks in Nigeria, though the degree to which individual banks are affected is not captured
by the method of analysis employed in the study.
A 100 percent increase in non-performing loan reduces profitability (ROA) by about 6.2 percent, a 100
percent increase in loan loss provision also reduces profitability by about 0.65percent while a 100 percent
increase in total loan and advances increase profitability by about 9.6 percent. Kargi (2011) evaluates the
impact of credit risk on the profitability of Nigerian banks. Financial ratios was used as measures of bank
performance and credit risk were collected from the annual reports and accounts of sampled banks from
2004-2008 and analyzed using descriptive, correlation and regression techniques. The findings revealed
that credit risk has a significant impact on the profitability of Nigerian banks. It concluded that banks’
profitability is inversely influenced by the levels of loans and advances, non-performing loans and
deposits thereby exposing them to great risk of illiquidity and distress. Al-Khouri (2011) assesses the
impact of bank’s specific risk characteristics, and the overall banking environment on the performance of
43 commercial banks operating in 6 of the Gulf Cooperation Council (GCC) countries over the period
1998-2008. Fixed effect regression analysis was used and found that credit risk, liquidity risk and capital
risk are the major factors that affect bank performance when profitability is measured by return on assets
while the only risk that affects profitability when measured by return on equity is liquidity risk.
Ahmad and Ariff (2007) examine the key determinants of credit risk of commercial banks on emerging
economy banking systems compared with the developed economies. The study finds that regulation is
important for banking systems that offer multi-products and services; management quality is critical in
the cases of loan-dominant banks in emerging economies. An increase in loan loss provision is also
considered to be a significant determinant of potential credit risk. The study further highlighted that credit
risk in emerging economy banks is higher than that in developed economies.
3.
Methodology
The research design adopted for the study is ex-post facto research design, the population of the study is
made up of all the 15 quoted deposit money banks operating in Nigeria as at 2015. The sample of the
study is made up of 5 banks. Purposive sampling technique was adopted to select the banks. The selected
banks include First Bank Plc, United Bank for Africa Plc, Zenith Bank Plc, Guaranty Trust Bank Plc, and
Access Bank Plc. These banks were selected because they have been classified by CBN as tier one banks
on the basis that they have sufficient buffers to overcome challenges and they have higher shares holders
fund compared to other banks Secondary data were collected from the financial statement of the sampled
banks for the period of 10 years (from 2006-2015), Descriptive statistics was used to describe the data
understudy. This was immediately followed by the test of normality, correlations and panel regression
test. Post regression diagnosis test such as variance inflation factor and heteroskadasticity test were
carried out to test for multiconearity. The random effect test was used as against the fixed effect. All the
above analysis were carried out with the aid of STATA (version 13) software. The variables to be tested
include: return on Asset, non-performing loans, loan loss provision and loans and advances, as they relate
to credit risk in the banking industry. The following multiple linear regression model was formulated for
the study:
The Panel Regression Models (Random Effect Model) are:
ROAit= α + β1NPLRit + β2LLPit + β3LOANSit+ β4SIZEit (µit + εit)
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Effect of Credit Risk on Financial Performance of Deposit Money Banks in Nigeria
Where:
ROA it = Return on Asset
NPLR it = Nonperforming Loans Ratio (i.e. Nonperforming Loans to Total Loans and Advances)
LLP it = Loan Loss Provision
LOANS it = Loans and Advances to Total Deposits
SIZE it = measured as Log of Total asset control variable
α=Intercept or Constant
β1 – β4= Slope of the Regression Line
i denotes cross-sectional dimension
t denotes time series dimension
µit = error term of the explanatory variable
εit = new cross-sectional error term with Zero mean which is independent of the individual observation
error term (µit) STATA software version 13 was used to calculate a descriptive statistics (mean, standard
deviation, minimum and maximum) of the study variables, correlation matrix for the purpose of
multicollinearity and a panel data regression analysis was also used in determining the effect of credit risk
on financial performance.
4.
Results and Discussion
Table 1 Descriptive Statistics
Variable Obs
Mean
Std. Dev. Min
Max
Skweness Kurtosis Pro > chi
RETOA
50
2.1647
1.2150
-0.4897
4.9967
0.6892
0.6507
0.8309
LLPOV
50
-2.4528
2.8062
-11.1846 -0.9483
0.0000
0.1057
0.0000
NPLR
50
2.2474
1.2230
-0.0726
4.4592
0.3498
0.1101
0.1626
LOANS
50
4.1562
0.3026
3.5610
4.6997
0.3913
0.6010
0.1137
FSIZE
50
9.1821
0.3013
8.2420
9.6378
0.062
0.1177
0.0139
Source: Researcher’s Computation, 2017 Using Stata 13
Table 1 presents Descriptive Statistics of the variable of the study. It describes the Mean, Standard
Deviation Skewness and Kurtosis. The average value of Return on Asset (RETOA) recorded in the period
of the study is 2.1647 and the Maximum reached is 4.996714. In the case of Loan loss provision
(LLPOV), the average value stood at -2.4528 and the Maximum reached is -11.1846 NPLR average
stood at 2.2474 and the Maximum reached is 4.4592. The LOANS average stood at 4.1562 and the
maximum reached is 4.6997.
Table 2: Skewness/ Kurtosis Test for Normality
Variable
Obs
Pr(skewness)
Pr(Kurtosis)
Adj chi2(2)
Prob>
chi2
RETOA
50
0.6892
0.6507
0.37
0.8309
LLPOV
50
0.0000
0.1057
20.70
0.1200
NPLR
50
0.3498
0.1101
3.63
0.1626
LOANS
50
0.0610
4.35
0.1137
0.3913
FSIZE
50
0.0062
0.1177
8.55
0.0139
Source: Researcher’s Computation, 2017 Using Stata 13
Table 2 shows the result of the test for normality. The null - hypothesis of this test is that the population is
normally distributed. Thus, if the p- value is less than the chosen alpha level, then the null hypothesis is
rejected and there is evidence that the data tested are not from a normally distributed population; in other
words, the data are not normal. On the contrary, if the p-value is greater than the chosen alpha level, then
the null hypothesis that the data came from a normally distributed population cannot be rejected. From
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Effect of Credit Risk on Financial Performance of Deposit Money Banks in Nigeria
table 4.3 above the pro> chi2 are not significant ie greater than 5% we therefore accept the null
hypothesis that the data are normally distributed.
Table 3 Test of Multicollinearity
Variable
VIF
1/VIF
Llpov
1.09
0.916703
Nplr
1.08
0.926235
Loans
1.27
0.790260
Fsize
1.25
0.802945
Mean VIF
1.17
Source: Researcher’s Computation, 2017 Using Stata 13
Based on the above results in table 3, the mean VIF values for the independent variables is less than ten.
Therefore, it was concluded that there was no evidence of multi-collinearity between explanatory
variables that had a significant effect on the relationship of the independent variables and the dependent
variable at a 95% confidence level. The VIF for LLPOV, NPLR, and LOANS are 1.09, 1.08 and 1.27
respectively. This indicates that, the VIF Values are less than 10. Thus, the study concludes that there is
absent of multicollinearity. That multicollinearity exists only when the VIF is greater than 10.
Heteroscedasticity Test
The homoscedasticity assumption means that variance of the error terms is constant for each observation
(Berenson, Levine & Krehbiel, (2009). The Breusch-Pagan/Cook-Wesberg was used to test for presence
of heteroscedasticity in the study and the results were as shown below:
Breusch-Pagan / Cook-Wesberg test
Breusch-Pagan/Cook-Weisberg test of heteroskedasticity
H0: Constant variance
Chi2 (1)
= 0.02
Prob>chi2
= 0.8998
The results showed prob>chi2 = 0.8998 > 0.05. Hence the null hypothesis
that the variables had constant variance.
Table: 4 Hausman test
Fixed
random
Difference
Nplr
-.2107146
.4385457
-.6492603
Llpov
.1817868
.0952298
.086557
Loans
1.062605
-.1623247
1.22493
F- Size
.1823652
.3739628
-.1915977
Source: Researcher’s Computation, 2017 Using Stata 13
chi2 (4) = (b-B)'[(V_b-V_B)^(-1)](b-B)
= 18.24 chi2<0 =0.6284
was not rejected. This meant
S.E.
.1584466
.1215679
.1742501
.4265310
Hausman Test indicates that Random Effect Model is most appropriate to Fixed Effect Model given the
Chi-Square value of 18.24 and its corresponding P-value of 0.6284 which is greater than the critical value
of 0.05.
Table 5 Test of Hypothesis 1 Non-performing loans has no significant effect on the performance of
deposit money banks in Nigeria
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Effect of Credit Risk on Financial Performance of Deposit Money Banks in Nigeria
Random-effects GLS regression
Number of obs =
Group variable: cross
Number of groups =
RETOA
COEF.
STD. ERR.
Z
P>|Z|
NPLR
0.4385457
1.281863
3.42
0.001
LLPOV
0.952298
0.0561565
1.70
0.090
LOANS
-0.1623247
0.5608355
-0.29
0.772
BSIZE
0.3739628
0.5588447
0.67
0.503
CONS
1.34645
4.70244
0.29
0.775
R-squared
Prob > F
F ( 4, 11)
Source: Researcher’s Computation, 2017 Using Stata 13
50
5
[95%
CONF.
INTERVAL]
0.1873052 0.687862
-0.148348 0.2052944
-1.261542 0.9368927
-0.7213526 1.469278
10.56306 7.870162
0.83061
0.0005
19.85
The Coefficient of Determination (R2) of 0.83061 which indicates that about 83% of variation in RETOA
can be explained by NPLR, LLPOVR and LOANSR or the ability of the regression line to predict RETOA
is about 83%. The remaining 17% can be explained by other variables that are not captured in the
regression line (error term). The F-Statistic of 19.85 and its corresponding P-value of 0.0005 indicates that
the model is fit. The regression line RETOA = 1.34645 +0.43855NPLR+ 0.3739 FSIZE indicates that
Return on Asset (RETOA) will increase by 0.43855% and 0.3739% for every 1% increase in nonperforming loan ration (NPLR) and bank size (FSIZE) respectively. In the absent of NPLR, LLPOVR, and
LOANSR, RETOA will remain 1.34645 as indicated by constant (α). The significant values or P-values of
0.001 for NPLR is less than the t-value of 0.05. The study therefore, rejects null hypothesis and accept
alternative hypothesis that Non-performing loans has significant effect on financial performance of deposit
money banks in Nigeria.
Test of Hypothesis 2 Loan Loss Provision has no significant effect on the performance of deposit
money banks in Nigeria
The regression line RETOA = 1.34645 + 0.0953LLPOV + 0.3739 FSIZE indicates that Return on Asset
(RETOA) will increase by 0.0953% and 0.3739 for every 1% increase in loan loss provision (LLPOV)
and (FSIZE) respectively. The significant values or P-values of 0.090 for LLPOV is more than the level
of significance of 0.05. The study therefore, rejects Alternative Hypothesis and accept null hypothesis that
Loan Loss Provision has no significant effect on the performance of deposit money banks in Nigeria.
Test of Hypothesis 3 Loans and Advances has no significant effect on the performance of deposit
money banks in Nigeria
The regression line RETOA = 1.34645 + -0.1623LOANS + 0.3739 FSIZE indicates that Return on Asset
(RETOA) will decrease by 0.1623% for every 1% increase in loans and advances (LOANS), but increase
by 0.3739% for every 1% increase in size. The P-values of 0.772 for loans and advances is greater than
the level of significance of 0.05. The study therefore, rejects alternative hypothesis and accept null
hypothesis that Loans and Advances has no significant effect on the performance of deposit money banks
in Nigeria.
5.
Conclusion and Recommendations
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Effect of Credit Risk on Financial Performance of Deposit Money Banks in Nigeria
In the light of the above findings, the study concludes that non-performing loans and loan loss provision
have positive relationship on financial performance of deposit money banks Nigeria while loans and
advances has a negative relationship with financial performance of deposit money banks in Nigeria.
Effective credit risk system that can improve financial performance of quoted DMBs in Nigeria is
guaranteed by an increase loan loss provision and at the same time a decrease in loans and advances
ratios. This is to say that banks should make adequate provision for loan to effectively discharge the
primary function of preventing them from failures by absorbing losses resulting from nonperforming
loans. The primary aim of this research was to bring to light the effect of credit risk on financial
performance of deposit money banks in Nigeria. From the finding, loan loss provision have no significant
effect on return on asset, this is because the provision made for loan loss provision do not served as
adequate financial backup for the banks to absorb losses. This means the presence of LLPR do not act as
a shield that protects the banks profit from any unexpected credit default. Loan and advances had a
negative effect on financial performance measured by ROA because of the high interest rate charged on
the loan facilities which makes repayment difficult.
This meant that banks give out more loans but do not have the ability to recover the loans despite the fact
that the interest income earned on loans were not paid to cancel that which went bad. However,
nonperforming loans which is also a determinant of credit risk has a positive effect on return on asset.
Banks generate loans from the deposits received from customers therefore the banks ability to recover
these loans will mean that the more profit will be made available to serve the needs of shareholders. The
size of a bank measured by total assets had a positive impact on both performance measures. This may be
as a result of investing in assets which do yield immediate income. This suggests that big banks have the
ability to increase their profit because these banks have a lot of experience in cutting costs and also built
capacity in the area of credit recovery.
Based on the findings and conclusions drawn from the study, the following recommendations are made:
i.
The management of banks especially credit officers must show due diligence by adhering
strictly to credit policy when given out credit facilities. This because sound credit-granting
policy will go a long way to reduce non-performing loans, thus also reducing the loan loss
provision which will further translate to higher profit. In addition to these measures, sound
management practices and corporate governance should be adopted to reduce credit risk.
ii.
The researcher also recommends that bank management should be proactive in recovering
loans in order to reduce the funds set aside to provide for such loan losses. This may require
tighter loan recovery strategies to ensure that the main measure of credit risk (i.e. NPLR) is
reduced over time thereby increasing overall return on asset
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Service Quality and Customer Patronage of Global System for Mobile Communications in an
Emerging Economy
Service Quality and Customer Patronage of Global System for
Mobile Communications in an Emerging Economy
Siman Peter Mani
Department of Business Administration,
Faculty of Administration,
University of Nigeria, Nsukka, Nigeria
E-Mail: petersiman99@gmail.com
and
Miapkwap Kangrot Dorcas
Planning Department,
National Veterinary Research Institute,
Vom, Plateau State
E-Mail: kangydewa@yahoo.com
Abstract
Over the past decade, the global system for mobile communications (GSM) industry in Nigeria has witnessed a
tremendous increase in subscriber growth rate. However, there have been many complaints from customers about
the service delivery of the mobile telecom networks in Nigeria. The study thus examines the effect of service quality
on customer patronage of global system for mobile communications (GSM) in an emerging economy. The study
employed descriptive research design, and utilized Pearson Chi-Square to test the stated hypothesis. The results
from the analysis revealed that service reliability has had no significant impact on customer patronage. Unreliable
network among the telecom providers have made customer patronage low and have not created satisfaction among
these customers. Findings from the study further revealed that customer care service has no significant effect on
customer loyalty. Finally, the results showed that access to quality network has no significant effect on customer
satisfaction. The study thus recommends that there is the need for telecom providers to upgrade their service
equipment so as to provide prompt and efficient services to customers. This would help enhance their relationship
with them. Technologically upgraded organisation and reliable service will win the trust of the customers this
simplification and updates will attract many new customers to join the organisation as well help the old ones to
retain their patronage. These are some tangible aspect which may help the customers become satisfied and loyal
towards a service provider.
Keywords: Global system for mobile communication, service quality, customer satisfaction, service reliability,
network quality and customer service
1.
Introduction
The development of the global system for mobile communication (GSM) in Nigeria was well embraced and found to
be relatively efficient at the onset. As time went on, operators in the industry experienced an unprecedented
expansion in customer base which later handicapped the networks to function efficiently. This unprecedented
growth has brought about huge amount of income to both the operators and government through tax and license
fees. As revolutionary as GSM may seems to be, many problems mystified their quality of service in recent past.
According to Adegoke and Babalola (2011), quality of service is an important key performance indicator that is used
in determining the efficiency of an industry in terms of service rendered. That is, in telecommunication system,
accessibility, retainability and connection (voice) qualities are three major factors used in evaluating quality service
of an operator.
Talking about competition, service delivery and customer satisfaction, Nigeria as a country has four GSM
telecommunication companies that compete amongst themselves to woo and retain customers. In trying to achieve
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Service Quality and Customer Patronage of Global System for Mobile Communications in an
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this, these companies have designed and implemented several customer services. The companies include MTN
Nigeria, Airtel, Globacom and Etisalat. As the market continues to grow in competition for these GSM companies in
Nigeria, there is always this constant need to develop new strategies in reaching the people; because the issue of
competition between the companies would remain for a long time to come. Hence, there would be different
strategies at the disposal of these GSM companies aimed at wooing and retaining customers. Most of these strategies
might be customer relations-oriented which Kuo-Chung and Chin-Shan (2012) averred “have been found to enhance
competitive performance” among competing companies.
However, Wang (2010) noted that despite the increase in the innovative strategies used by organisations to entice
customers, they still suffer loss of customers. Xevelonakis (2005) also pointed out that in most cases, “the customer
relations packages of telecommunication companies do not pay off”. These statements call for much concern,
especially as it relates to the GSM companies in Nigeria. For customers in the industry, it is expected that maximum
satisfaction be derived from any service paid. This maximum satisfaction has now become a difficult task to achieve
in GSM industry. This is so because of the avalanche of complains of poor network in terms of error in connectivity
and inter-connectivity with other networks, call termination, drop calls and/or call retention, call set-up failure,
service charge, customer care support, instability in power supply and security of infrastructure among others. More
so, one of the key challenges confronting these Telecommunication companies is how they manage their service
quality, which holds a great deal to customer patronage.
However, there have been many complaints from customers about the service delivery of the mobile telecom
networks in Nigeria. As a result, a statement released by Nigerian Communications Commission (NCC) profusely
lamented that in spite of the appreciable growth and expansion recorded in the industry, “the quality of service is
still poor”. Therefore, the gap created by this information necessitates a further research study that will determine
the empirical effects of customer satisfaction on Nigerian mobile telecoms industry. It is against this drawback that
this study will be carried out to determine customer patronage of mobile telecommunication service provider, using
MTN, Globacom, Airtel and Etisalat Nigeria customers as the basis for the study. Based on the above stated
problems, the following research questions were addressed:
i.
What influence does service reliability has on customer patronage?
ii.
To what extent has reliable customer care service affected customer loyalty?
iii.
What effect does access to quality network has on customer satisfaction?
Hypotheses for this research are stated in a null form as shown below:
Hypothesis one:
H01: Service reliability has no significant impact on customer patronage
Hypothesis Two:
H02: Customer care service has no significant effect on customer loyalty
Hypothesis Three:
H03: Access to quality network has no significant effect on customer satisfaction.
2.
2.1
2.1.1
Literature Review
Conceptual Review
Concept of Customer Patronage
Customer patronage is key to any organization’s success means that this success is directly associated with the
demands of the customer. Tremendous methods have been applied to enhance the customer experiences and most of
the monitoring and controlling activities have a link with marketing measures. Satisfaction can be termed as a short
lived emotional condition that occurs from an intrapersonal assessment of the customer’s perception with any
service incident (Oliver, 1981, Brady and Robertson, 2001; Lovelock (2001). Furthermore, the customer satisfaction
can be rationalized as the person’s emotion of contentment or disappointment as a result of comparison of his
expectation to the experience. Service satisfaction further has two general conceptualizations 1) transaction specific
satisfaction and 2) cumulative satisfaction (Jones and Suh, 2000; Yi and Lia, 2004). Transaction-specific satisfaction
can be referred to the customer’s assessment of the service encounter he has and the resultant reaction because of
this encounter (Boshoff and Gray, 2004). Whereas cumulative satisfaction according to Cook (2008) can be defined
as customer’s assessment of the overall service experience to the date. Customer satisfaction is an intensively
researched area which has been subject to discussions for more than two decades. Currently, this phenomenon has
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shifted from transactional marketing to relationship marketing (Martin, Adrian and David, 2002) which means that
all marketing measures are now aiming towards creating, developing and adhering to successful relational
exchanges with the customers (Yi and La, 2004). According to Thomas and Getty, 1994), quality is also based on
intrinsic expectation standard of an individual and as it is a self-motivated construct; more and more customer
perceptions bring modifications in it.
2.1.2
Concept of Service Quality
The term service quality emphatically applied for service industry (also implacable for goods) but, the concept and
related studies in this field was germinated in the goods sector. The prevalent contribution was given by Persuraman,
Ziethaml and Berry, (1985). They suggested that the implications of service quality will be different for goods and
service sector and defined service quality as „a global judgment, or attitude, relating to the superiority of the
service‟ theory. Persuraman, Ziethaml and Berry (1988) proposed a model known as SERVQUAL for measuring
customers‟ theory perception towards service quality. Gronroos (1984) developed a Nordiac model of service quality. This
model proposed that two forms of qualities are provided by the service organizations i.e. technical quality and
functional quality. The technical quality is what the customer actually receives (Fischer, 2012) and the functional
quality refers to the manner in which services are delivered to customers or how the customer receives the services.
Edwardsson et al (1989) proposed service quality as a multidimensional construct and identified technical quality,
integrative quality, functional quality and outcome quality as the four attributes of service quality. Reichheld and
Sasser (1990) emphasized that firms can profitably serve the customers by zero defection which may results into
lesser customer defection and hence firms profitability. Boulding et. al. (1993) described that greater perception of
service quality of customers leads to more behavioural benefits for the organization like recommendation and
positive word of mouth. Patterson et al (1993) proposed an integral model, which suggests that service quality is an
attitude. Hence customer satisfaction and dissatisfaction along with prior attitude helps to form the attitude regarding
service quality. Johnston (1995) identified some satisfiers and dissatisfiers as determinants service quality. He
discussed that interaction between staff and customers has a significant influence on customer loyalty. Zeithaml et.
al. (1996) said that customer behavior is a mediating variable between service quality and financial performance of
the firm and improved service quality may increase favorable behavioral intention. Brady and Cronin (2001)
evaluated that customer form their perception towards service quality on the basis of evaluating outcome, interaction
with the service employer and environmental quality. Suuroja (2003) found and prove that service quality should not
be considered as a gap between perceived service quality and expected one, rather expectation may influence the
perception of customers. Overall service quality can be seen as evaluation of services. Johnston C.T (2004)
suggested that for satisfying and retaining the customers, effective service recovery is required on the part of
organizations. Abdulla (2006) called service quality as a pervasive strategic force.
2.2
Empirical Review
In case of telecommunication industry, the use of SERVQUAL has been found very reliable in various cultures and
business environments. The quality of mobile services on the global level is measured by GSM, Global System for
Mobile Communication which has presented a number of indicators for the mobile phone service quality. According
to Sutherland (2007) these indicators are 1) access to network, 2) service ease of access, 3) service reliability and 4)
service retainability. Service quality dimensions for telecommunication industry are different than that of restaurant
or other services. Thus, various studies have been conducted the effect of service quality and customer satisfaction
with mixed results. For instance, Yelkur (2010) carried out a study titled “Customer Satisfaction and the Services
Marketing Mix” which revealed that a service that puts consumer first, does not necessarily lead to chaos and
failure, but that with clear goals and an information network that gives the necessary data to improve performance, it
is entirely possible to provide a nearly perfect service to customers. The study focused primarily on one aspect of the
adaptive process of marketing mix called customer satisfaction. The major aim was to develop a model that suggests
the possible effect of each individual elements in the services marketing mix that influence customer expectations
being; place, physical evidence, participants, and process.
Findings of Xevelonakis (2005) titled “Developing Retention Strategies based on Customer Profitability in
Telecommunications: An Empirical Study”, which observed that telecommunications companies do not make their
customer relations packages beneficial to the customers. This, the researcher, attributed to the inability of
telecommunication companies to design good customer relations based on customer profitability. An Empirical
Study of Zakaria et al, (2011) in Majlis Perbandaran Sungai Petani (MPSPK)”, result indicates that there is a
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significant relationship between customer satisfaction towards e-services and ease of use, trust, privacy and security.
The main focus of e- Government was to provide efficient and effective government delivery services to the
Malaysians through internet, kiosk, Interactive Voice Response (IVR) or telephone or mobile phone. They can
easily access the services and fulfil their requirement smoothly without any disruptions.
Similarly, in 2010, a study entitled “An Empirical Study of Automated Teller Machine Service Quality and
Customer Satisfaction in Pakistani Banks” was conducted by Muhammad Asif Khan. The aim of the study was to
investigate significant dimensions of ATM (automated teller machine) service quality and its effect on customer
satisfaction. The regression results of the study indicated that convenience, efficient operation, security and privacy,
reliability and responsiveness are significant aspects of ATM service quality and that ATM service quality positively
and significantly contributes toward customer satisfaction (Khan, 2010). The study concludes that the rapid
diffusion of ICT in Pakistani banking sector provides a platform to use innovative technologies to enhance
operational efficiency and then employ quality of service to attain and retain customers. The rapid growth in use of
ATMs in Pakistan offers opportunities to banks to use customers ‟ theory passion for this innovative service for strategic
advantage. It was also recommended that banks should proactively monitor customers ‟ theory preferences with the aim to
use the result for effective response to the customers needs (Khan, 2010).
Organization of Economic Cooperation and Development (OECD) elicited that the unavailability of correct
information about quality and lack of clear knowledge about the international roaming charges affected the
customer’s behavior adversely. Furthermore, it was determined that key factors which played a role in customers’
dissatisfaction were lack of proper information sharing, inappropriate pricing, unsolicited calls and not exceeding
the customer’s requirements which means no value addition. Consumer Reports (2005) established that quality of
network based on data and voice services greatly affect the consumer contentment and loyalty with respect to the
service users. Sube (2012) through a research in Bangladesh instigated that service quality in the company if more
than adequate implies those customers who are exceedingly satisfied and subscribers that are loyal and contented
with the services are ready to recommend others. Also indulging in new techniques to increase satisfaction and
develop strong reputation entails studying of the correlation among all the variables of service quality which would
assist mobile service providers to uncover the appropriate measures which must be implemented to attain fidelity of
customers (Sube, 2012). This will ultimately lead to increased market share.
Kuo (2003) conducted a research on service quality of virtual community websites with the purpose of constructing
an instrument to evaluate service quality of virtual community websites and to have a further discussion of the
relationship between service quality dimensions and overall service quality, customer satisfaction and loyalty. The
researcher used Factor analysis, t-test, and Pearson correlation analysis to analyse the data collected from college
students of three major universities in Taiwan. One of the results was that” on-line quality and information safety is
positively related to the overall service quality, customer satisfaction, and loyalty, but the service quality level of
this dimension was the poorest. ”
In contrast to the above studies; Bennett & Barkensjo (2005) studied relationship quality, relationship marketing,
and client perceptions of the levels of service quality of charitable organisations. Questions were asked to 100
people on their perceptions of service quality of the organisations that had given them assistance, their satisfaction
with a charity service etc. they constructed a model and estimated using the method of partial least square. Also,
perceived service quality was measured via adaptations of the SERVQUAL instrument but without any assessments
of the respondents' prior expectations concerning the services they would receive from an organisation. In their
results, relationship marketing was found to represent an effective weapon for improving both relationship quality
and beneficiaries' satisfaction with service provision. They stated that “relationship quality and actual service quality
induced beneficiaries to want to recommend a charity to other people and to engage in positive word-of-mouth.”
(Bennett & Barkensjo, 2005).
McDougall and Levesque (2010) in their direct approach investigation on four service firms (dentist clinic,
automobile shop, restaurant, and haircut salon) demonstrated that both core and relational service quality classes
have significant impact on customer satisfaction. Heskett et al. (1997) conducted studies on several service firms,
such as airline, restaurants, etc and reported that service quality, solely defined as relational quality, has consistent
effect on satisfaction and is regarded as key factor in delivering customer satisfaction. Consumer Reports (2005)
established that quality of network based on data and voice services greatly affect the consumer contentment and
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Service Quality and Customer Patronage of Global System for Mobile Communications in an
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loyalty with respect to the service users. Sube (2012) through a research in Bangladesh instigated that service quality
in the company if more than adequate implies those customers who are exceedingly satisfied and subscribers that are
loyal and contented with the services are ready to recommend others. Also indulging in new techniques to increase
satisfaction and develop strong reputation entails studying of the correlation among all the variables of service
quality which would assist mobile service providers to uncover the appropriate measures which must be
implemented to attain fidelity of customers (Sube, 2012).
2.3
Theoretical Framework
2.3.1
Theory of Customer Service and Patronage
This theory was propounded by Walter Johnson in 2006. Johnson (2006) notes that the theory of customer service
and satisfaction is about retaining customers, adding that loyalty remains the key element in business survival and
that without a firm grasp on the basic principles of customer service, a firm cannot survive. This is because only few
people want to do business with a firm that cares little about customers, their comfort and concerns. The basic tenet
of this theory is that firms that truly want to succeed in the competitive market should take good care of their
customer in order to retain their loyalty. The theory is linked to Adam Smith's famous Wealth of Nations (1776),
which made customer service the centre of the basic theory of competition. Smith’s view was that if the owner of a
firm wants to be successful, that person needs to be very involved with meeting customer needs, or the customer will
go elsewhere. Therefore, profit seeking firms, regardless of their true motivation, are forced by the nature of the
marketplace to treat customers with respect and seek their loyalty and return business. Customer service, therefore,
can be said to be almost synonymous to customer loyalty and customer satisfaction. These variables are linked in a
continuum. Customer service is that which creates customer satisfaction, and in turn, creates customer loyalty
(Johnson, 2006). There are five main features of customer service that leads to satisfaction. These features include;
the firm must be reliable in its services, such as deliveries. It must be highly responsive to customer needs and,
therefore, must strive to become flexible. The customer must be assured that the firm is consistent in meeting needs
and keeping its side of the bargain. Firm staff must be empathetic with clients and customers, creating real
relationships and friendships to keep clients. Lastly, the "tangible" aspects of the firm must be in order. This
includes the basic appearance and atmosphere of the physical plant. It needs to stress brightness, welcoming and
warmth. It should be a comfortable place to do business (Johnson, 2006).
Explaining further about this theory, Johnson (2006) opined that customer service leads to customer loyalty and that
this relationship can be exemplified in what customer relations expert Maxine Kamin calls the "equation of fantastic
service." The first step in the equation is to greet the customer, making him feel welcome and at home, while the
second step is to determine the specific needs of the client. The third step is to make sure those needs are met
efficiently. The purpose here is to create a friendly and personal relationship that provides positive associations
between the customer and the establishment. Those met needs need to be checked and rechecked to make sure
nothing was left out. Finally, the last step in the equation says "leaves the door open," making sure the client has an
incentive to return. When this process is complete, the benefit to the customer is a pleasant and efficient experience,
while the firm has just recruited a loyal customer. Kamin (2002) relates customer service theory to the motivational
theory of 1960 by Douglas McGregor (theory X and theory Y). The “Fantastic Service Equation (FSE) puts
theoretical knowledge into practice” (Kamin, 2002). This equation help provide room for exceptional service both
for internal and external customers every time and it provides a simple way to remember the essentials of good
service.
Kamin (2002) as cited by Johnson (2006) holds that “the basic structure of customer satisfaction is that the basics
are seen first: the environment or the availability of help. These are the first impressions that can colour the
remainder of the experience. But once those variables are taken care of, the customer then worries about more
specific things such as the reliability of the staff, price, friendliness and the possibility of maintenance after the
purchase. This will definitely make the customer’s experience, to move from most general to most specific issues”.
Applying this theory, in 2002, Hom Willard conducted a study titled “Applying customer satisfaction theory to
community college planning of counselling services” which reviewed some historical work on satisfaction research
with the unique environment of student services in two-year colleges.
The study discussed three major points concerning the application of customer satisfaction theory to community
college planning of counselling services, including: (1) defining student satisfaction; (2) adapting the customer
satisfaction model for student services; and (3) policy implications for using the customer satisfaction model in
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student services at community colleges. The article also emphasizes that college administrators should use the
student satisfaction research as an improvement tool. Therefore, this theory is relevant to the study under
investigation because it helps explain how telecommunication operators in the country can see customer relations as
an integral part of service delivery and profit maximisation. It holds that GSM operators should develop a customeroriented form of service delivery. By this, the customer will be the central focus of the company’s activities rather
than profit maximisation. When operators practice this form of service delivery technique, every other thing will
begin to fall in place for the firm, according to the theory. First, the customer will like to come back for a return
purchase or stick to a particular network, in the case of a telecomm company. Secondly, the customer will believe so
much in the company that he/she will not want to be persuaded by another company that operate in the same
competitive market. Thirdly, the customer will even help the network company to advertise its services through
referral procedures without knowing, all because the customer is satisfied by the way he/she is been treated.
3.
Methodology
This study adopted a descriptive research design. According to Mugenda and Mugenda (2003),
descriptive research is a process of collecting data in order to test hypotheses or to answer questions
concerning the current status of the subjects in the study. The Smith (1984) formula was used in the
determination of the sample size for the study. The purposively selecetd population for the study is 558
customers of telecom operators located different location chosen within Abuja metropolis. Smith (1984)
sample technique was used to estimate a sample of 126 customers located in Abuja metropolis.
A self-administered questionnaire was used in gathering the data. A five point Likert scale of agree to
disagree (that is, agreed, Disagree, undecided, strongly agreed and Strongly Disagreed) was used to
measure the extent to which the various respondents agreed or disagreed with the issues raised. The
descriptive results from the analysis was presented using tables to provide an accurate picture of the
research findings, while postulated hypotheses were tested using the Pearson chi-square-test-statistics.
The justification for the use of Pearson chi-square-test-statistical method is because it measures the
relationships existing between two or more variables. It is simple to compute without errors and it helps
to illustrate the directional outcome and strength of the variable. It further shows a precise quantitative
measurement of the degree of relationships between dependent and independent variables.
4.
Results and Discussion
4.1
Descriptive Statistics
Analysis of the Socio-demographic Characteristics of Respondents’
Table 1: Socio-demographic Characteristics of Respondents
Variables
Gender of Respondents:
Male
Female
Age Distribution:
Below 30 years
31-40 years
41 years and above
Educational Level:
Bachelor’s Degree
Master’s Degree
Ph.D
Others
Marital Status:
Frequency (N=126)
Percentage (%)
96
30
76.2
23.8
11
48
67
8.7
38.1
53.2
89
24
5
8
69.4
19.8
4.1
6.6
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Single
Married
Divorced
Widow/Widower
Respondents Years of
Experience o network:
Below 5 years
5-10 years
11 years and above
Respondents Most Preferred
Lines:
Airtel Users
MTN Users
Glo Users
27
85
6
8
21.4
67.5
4.8
6.3
32
79
15
26.4
61.2
12.4
30
86
20
24.8
58.7
16.5
Source: Field Survey, 2017
Table 1 above showed that both genders (male and female) were sampled and accounts for 75.2 and 24.8 percent
respectively, implying that the investigation was not gender biased. It however showed that more responses came
from the male counterpart.
On age grounds, 8.7 percent of the respondents have their ages below 30 years, 38.1 percent between 31 and 40
years, while 53.2 percent of the respondents have their ages 41 years and above. It thus showed that more of the
responses came from highly experienced and seasoned customers.
The educational background of the respondents revealed that larger percent of 69.4 percent of the respondents have
bachelors while, 19.8 percent and 4.1 percent are post graduate degree holders with holds Masters and PhD. Others
are just about 6.6%. This implies that their responses can be relied upon based on their educational attainment. The
marital status revealed that 21.4 percent of the respondents were single, 4.8 percent divorced, 6.3 percent widow or
widower, while a larger part of the respondents i.e., 67.5 percent are married. Respondents’ years of experience on
network usage revealed that 26.4 percent have less than 5 years working experience, while 61.2 percent and 12.4
percent have 5 to 10 years and above 11 years working experience respectively.
The analysis of respondents‟ theory disposition towards GSM usage revealed that most respondents used MTN as their
regular line because 58.7% of the respondents voted in favour of that. The study further revealed that MTN was the
network service used most by respondents for their calls of the respondents which was basically the highest
percentage in the distribution indicated that they used the network for most of their calls; and that 24.8% 16.5% of
the respondents used Airtel and Glo as their alternative lines.
4.2
Statistical Test of Hypotheses
The three null hypotheses formulated in this study were tested using Pearson-chi square statistics. It is
commonly used for testing statistically significant relationship between variables hence, the justification
for its application in testing the stated null hypotheses. Pearson Chi-Square is given by the formula:
X
2
 0  E

Where;
E
=
O
=
2
E
Expected value
Observed value
Decision Rule: The Probability Value (PV) will be used to determine the level of significance the relationship. If the
PV is < 0.05, it implies that the regressor in question is statistically significant at 5% level; otherwise, it is not
significant at that level.
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Hypothesis One: H01: Service reliability has no significant impact on customer patronage.
Table 2: Chi-Square Results for H01
Pearson Chi-Square Tests
Value
df
Asymptotic Significance (2-sided)
a
5.098
2
0.4182
8.036
2
0.0181
4.909
1
0.0272
Pearson Chi-Square
Likelihood Ratio
Linear-by-Linear
Association
N of Valid Cases
126
a. 2 cells (33.3%) have expected count less than 5. The minimum expected count is 0.29.
Source: Field Survey & Chi-Square Computation using SPSS, 24
In the chi-square result presented above, the Pearson Chi-Square value is 5.098, with an associated significance level
of 0.418 (this is presented in the column labelled Asymp. Sig. (2-sided). To be significant the Sig. value needs to be
0.05 or smaller. In this case the value of 0.418 is greater than the alpha value of 0.05, so we can conclude that our
result is insignificant. This means that Service reliability has no significant impact on customer patronage
Hypothesis Two: H02: Customer care service has no significant effect on customer loyalty
Table 3: Chi-square Results for H02
Value
3.494a
4.465
3.166
Pearson Chi-Square Tests
df
Asymptotic Significance (2-sided)
2
0.2124
2
0.0232
1
0.0542
Pearson Chi-Square
Likelihood Ratio
Linear-by-Linear
Association
N of Valid Cases
126
a. 1 cells (16.7%) have expected count less than 5. The minimum expected count is 1.42.
Source: Field Survey & Chi-square Computation using SPSS, 24
In the chi-square result presented above table 3, the Pearson Chi-Square value is 3.494, with an associated
significance level of 0.2145 (this is presented in the column labelled Asymp. Sig. (2-sided). Since the significant
value of 0.2145 is greater than the alpha value of 0.05, so we can conclude that our result is not significant. The
results thus showed that Customer care service has no significant effect on customer satisfaction.
Hypothesis Three: H03: Access to quality network has no significant effect on customer satisfaction.
Table 4: Chi-Square Results for H03
Pearson Chi-Square Tests
Value
df
Asymptotic Significance (2-sided)
a
1.221
2
0.4221
1.216
2
0.2241
3.889
1
0.1311
Pearson Chi-Square
Likelihood Ratio
Linear-by-Linear
Association
N of Valid Cases
126
a. 2 cells (41.4%) have expected count less than 5. The minimum expected count is 0.31.
Source: Field Survey & Chi-Square Computation using SPSS, 24
In the chi-square result presented above, the Pearson Chi-Square value is 15.221, with an associated significance
level of 0.002 (this is presented in the column labelled Asymp. Sig. (2-sided). To be significant the Sig. value needs
to be 0.05 or smaller. In this case the value of 0.002 is less than the alpha value of 0.05, so we can conclude that our
result is insignificant. This means that access to quality network has no significant effect on customer satisfaction.
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4.3
Discussion of Findings
The results from the analysis revealed that service reliability has had no significant impact on customer patronage.
Unreliable network among our telecom providers has made patronage of most of them to be low and has not created
satisfaction among these customers. Service reliability in the company if more than adequate implies those
customers who are exceedingly satisfied and subscribers that are loyal and contented with the services are ready to
recommend others (Sube, 2012). Findings from the study further revealed that customer care service has no
significant effect on customer loyalty. The customer relations packages of these companies are designed in a way
that it would benefit the company, not necessarily the customers. Most of the value-added services (the free airtime
and SMS) are designed to have conditions that must be met in order to qualify for a particular package and in most
cases; such conditions are not to the benefit of the customers. This creates dissatisfaction. Unfortunately, the
unsatisfactory nature of the customer relations packages of GSM companies in Nigeria as revealed in this study is
related to the findings of Xevelonakis (2005) who found that telecommunications companies do not make their
customer relations packages beneficial to the customers. This, the researcher, attributed to the inability of
telecommunication companies to design good customer relations based on customer profitability. The implication of
this finding is that consumers are not satisfied with the customer relations programmes of GSM network providers in
FCT, Abuja; and can be satisfied if these packages are designed to meet their needs profitably and not that of the
companies alone. The more the customers perceive these programmes to be in their favour, the more satisfied they
would be.
Finally, the results showed that access to quality network has no significant effect on customer satisfaction. This
contradicts the findings of Consumer Reports (2005) who established that quality of network based on data and
voice services greatly affect the consumer contentment and loyalty with respect to the service users. Organization of
Economic Cooperation and Development (OECD) also elicited that the unavailability of correct information about
quality and lack of clear knowledge about the international roaming charges affected the customer’s behavior
adversely. Furthermore, it was determined that key factors which played a role in customers’ dissatisfaction were
lack of proper information sharing, inappropriate pricing, unsolicited calls and not exceeding the customer’s
requirements which means no value addition.
5.
Conclusion and Recommendations
Based on the findings of the study, it has been deduced that network quality, service reliability and customer service
interaction are three dominating factors which contribute to the customer satisfaction in the telecommunication
industry. However, there is a very limited amount of work done on service quality in telecommunication in Nigeria
context. It has been established the there is no significant relationship between customer satisfaction and service
quality in the dimensions of customer service, reliability and quality network.
i.
ii.
iii.
The study thus recommends that indulging in new techniques to increase satisfaction and develop strong
reputation entails studying of the correlation among all the variables of service quality would assist mobile
service providers to uncover the appropriate measures which must be implemented to attain fidelity of
customers. This will ultimately lead to increased market share.
Telecom providers service equipment should be updated and with modern technology to help provide
efficient service to their customers so as to enhance their relationship with them. Technologically upgraded
organisation and reliable service will win the trust of the customers this simplification and updates will
attract many new customers to join the organisation as well helps the old ones to retain. These are some
tangible aspect which may help the customers to become satisfied and loyal towards service providers.
Location of service centers for service facility and efficient customer service should also be convenient
enough so that the customers would get easy servicing and hence assured that this service provider is a
better option. These strategies will help the service provider to maintain a durable relationship with
customers which will further leads to customer loyalty.
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Effects of Electronic Banking Service Quality on Customer Satisfaction
Effects of Electronic Banking Service Quality on Customer
Satisfaction
Musa Abdulqadir Sadiq
Department of Business Administration,
Federal Polytechnic,
Nasarawa State. Nigeria.
E-Mail: sadiqabdulkhadir@yahoo.com
and
Hassan Umar Umar
Department of Business Administration,
Nasarawa State University,
Keffi, Nasarawa State. Nigeria.
E-Mail: yerimaazores@yahoo.com
Abstract
This study investigated effects of electronic banking service quality on customer satisfaction. E-banking was
introduced and adopted in Nigeria with the objectives of ensuring efficient operations and customer satisfaction.
This raises concerns as to whether these platforms are achieving the objectives they are meant to achieve of
efficient service delivery. The main objective of this study is to examine the effects of electronic banking service
quality on customer satisfaction. The study is confined to a period of ten (10) years (2005-2014) because this period
witnessed an increase in the use of e-banking platforms especially in Nigeria. The study used descriptive and
specifically survey research method. The ordinary least square (OLS) was used to analyze data by a software
statistical package was utilized in measuring effect of e-banking service quality on customer satisfaction. The study
therefore concludes that there is a significant relationship between electronic banking service quality (internet
banking: efficient operations, reliability needs and user friendliness) and customer satisfaction. It is therefore
recommended that the bank should improve on their internet banking service quality (efficient operations, reliability
needs solution and user friendliness) by ensuring a more dependable, reliable and efficient service since the proxies
are all significant to customer satisfaction. It study further recommended that the bank should try to encourage
more customers to use the automated teller machine by establishing more secured and reliable automated teller
machine centres and sensitizing customers on how to make use of them, since its efficient operations, reliability
needs solution and user friendliness contribute to customer satisfaction in UBA, Nasarawa State. Lastly, the UBA
mobile banking: efficient operations, reliability needs and user friendliness standard should be maintained by
improving on mobile application packages since the proxies lead to customer satisfaction (CS) in UBA, Nasarawa
State.
Keywords: Electronic banking, Service Quality, Customers Satisfaction.
Introduction
Universal banking practice in Nigeria and the adoption of electronic banking by Deposit Money banks
have offered increased services to customers with attendant increase in customer risk exposure which
improved bank performance in terms of service delivery and customer satisfaction. Timothy (2012)
posited that three or four decades ago, banking was a simple business; consumers saved their money with
and received their financial services from banks. When customers open savings account, they received
passbook from the bank with which the account would be operated; and when it is a current accounts,
they received cheque books for the same purpose.
Today, the banking industry has moved into an era of menu-driven ultra-robust specialized software
programmes called banking applications. These applications can carry out virtually all banking functions
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relying heavily on information collection, storage, transfer and processing The application of electronic
banking products to banking operations has become a subject of fundamental importance and concerns to
all banks operating within Nigeria and indeed a condition for local and global competiveness (Ezeoha,
2006).
Technology is making a tremendous impact upon service companies in general and the financial services
sector is no exception. The application of information and communication technology concepts,
techniques, policies and implementation strategies to banking services has become a subject of
fundamental importance and concerns to all banks and indeed a prerequisite for local and global
competitiveness in banking industry. As a result of this technological improvement, business environment
in financial sector is extremely dynamic and experience rapid changes and demands banks to serve their
customer electronically.The evolution of e-banking started from the use of Automatic Teller Machine
(ATM) and Finland is the first country in the world to have taken a lead in e-banking (Mishra &
Kiranmai, 2009). E-banking has been widely used in developed countries and in developing economies.
However, some challenges are pertinent to e- banking, as was reported in its recent annual reports
(2014) , The Nigeria Deposit Insurance Corporation (NDIC) stated in the report that “the Deposit Money
Banks reported 10,612 fraud cases in 2014 compared with 3,786 cases in 2013. The increase of 7.57%
percent in expected/actual loss in fraud and forgeries was mainly due to the astronomical increase in the
incidence of web-based (internet banking), Automated Teller Machine and fraudulent transfer/withdrawal
of deposit funds”. (NDIC 2014). As you can see, platforms that are supposed to satisfy customers and
increase bank profitability, the reverse seems to be the case, and it’s the customer funds that are pilfered
electronically. The report served as the motivation for carrying out this research in order to find out the
effect of e-banking service quality on customer satisfaction.
Empirical studies carried out over the years in various countries, using various methodologies and
variables showed mixed, and/or inconclusive results. Thus giving room for further research using
different variables and methodologies. For example, Jannatul (2010) in Bangladesh used variables
(responsiveness, reliability, assurance, tangibles and empathy) and primary data as his measures of
satisfaction to examine impact of e-banking on customer satisfaction. He found that reliability,
responsiveness and assurance contribute more to satisfaction of customers of e-banking in Bangladesh. In
Nigeria, Ogunlowore and Oladele (2014) used chi-square to measure impact of e-banking on customer
satisfaction. The study found that there is a significant relationship between electronic banking and
customer satisfaction.
There are little researches that have been conducted especially in Nigeria, in the aspect of electronic
banking with specific reference to the electronic platform variables: internet, automated teller machine
(ATM) and mobile banking. Most researchers have aggregated the electronic banking platforms, they
have mistakenly assumed online/internet banking services as the sole/only electronic banking platform
thereby isolating other essential sub divisional platforms such as Automated Teller Machine and Mobile
Banking quality as mentioned above. Some studied the platforms as independent of one another. Other
researchers actually studied effects of service quality on customer satisfaction, using measures of service
quality (responsiveness, reliability, empathy etc.) as their independent variables. In addition, most
previous researchers used lower statistical tools such as percentages to analyse their variables. It is against
the aforementioned background that this research uses different dimension to study the effects of three
major e -banking platforms (internet, automated teller machine and mobile banking service quality) on
customer satisfaction.
The main objective of this is to examine the effects of electronic banking service quality on customer
satisfaction in UBA. Nig. Plc. The specific objectives of this study are to: examine the effect of internet
banking quality on customer satisfaction in UBA Nig. Plc., assess the availability of automated teller
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Effects of Electronic Banking Service Quality on Customer Satisfaction
machine quality on customer satisfaction in UBA
Nig. Plc and determine the effect of mobile
banking quality on customer satisfaction in UBA Nig. Plc.
On the bases of the above objectives, the study formulates the following null research hypotheses:
H01 Internet banking quality has no significant effect on customer satisfaction in UBA. Plc.
H02 Automated teller machine availability has no significant effect on customer satisfaction in
Plc.
H03 Mobile banking quality has no significant effect on customer satisfaction in UBA. Plc.
UBA.
Review of Empirical Studies on Electronic Banking and Customer Satisfaction
Jannatul (2010) conducted a research to understand the effect of e-banking on customer satisfaction in
Bangladesh. Five service quality dimensions namely reliability, responsiveness, assurance, empathy, and
tangibles have been established based on the servqual model. These variables were tested in e-banking to
explore service quality and customer satisfaction. The data were gathered through survey interview by a
structured questionnaire with 250 customers. The study shows that these factors are the core service
quality dimensions for customer satisfaction in e-banking. The study also shows that reliability,
responsiveness and assurance have make more contribution to satisfaction of customers of e-banking in
Bangladesh.The findings was limited to Bangladesh, primary data were used to measure five service
quality dimensions namely reliability, responsiveness, assurance, empathy, and tangibles. It found that
reliability, responsiveness and assurance make more contribution to satisfaction of customers of e
banking. Therefore, lower statistical tools such as percentage were used.
Ahmed and Ajmad (2012) Studied current status of electronic banking in Pakistan and its impact on usage
and also its impression on satisfaction of customers of the banks. Further, based on the outcomes from the
data gathered on the primary scale, the study portrays the results of survey conducted on the level of
engagement of electronic banking in the minds of the customers. From the study, it has been observed
that customers who have availed themselves of the services are enjoying the benefits yet they feel
uncomfortable in terms of Online Service Quality. Many of the customers have raised the objection that
not all utility services have been enlisted in the options of Internet Banking. They found that customers do
have awareness but not on a large scale. Awareness among the customers using electronic banking
services is quite high but use of Mobile Banking is a new trend and experience, and customers are
reluctant to work freely with the new environment.
In Australia, a study was conducted using primary data in order to look at e - retailing by banks: Eservices and its importance to customer satisfaction, different servqual variables were used. Had they use
different variables, such as establishing a relationship between the e-banking platforms, the result would
have been different.
Manda, Bahran, and Maasomeh (2013). Studied the effects of electronic banking services on customer
satisfaction and loyalty among customers of six independent branches of Melli bank in Tehran. The
research was conducted using 358 e-service customers using a comprehensive questionnaire. To examine
their conceptual model, they used the structural equations modeling (SEM) approach using LISREL
software. According to the SEM approach, the unknown model parameters are chosen to make, in
general, the model-reproduced covariance matrix as close as possible to the sample covariance matrix.
They found that ease of service use, website design, speed of connectivity and transactions, information
security; information content and support service have a significant effect on user’s satisfaction.
Moreover, this satisfaction has a significant effect on loyalty to bank and willingness to continue relations
with e-banking service. They used primary data on a different variables such as website design, speed of
connectivity, security etc. The finding was that it has significant impact on customer satisfaction. The
research is limited to Iran customers. LISREL software was used.
Bingham University Journal of Accounting and Business (BUJAB)
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Effects of Electronic Banking Service Quality on Customer Satisfaction
Babatunde and Olukemi (2012) Evaluated customers’ satisfaction and its implications for bank
performance in Nigeria using primary data analysis. The study adopted descriptive and explanatory
survey design methods. Findings from the study showed that customers enjoying electronic banking
services are still not satisfied with the quality and efficiency of the services. This is expressed in the
number of times customers physically visit banks and length of time spent before such services are
received. The research findings was only based on number of visits by customers to the bank and time
spent. Lower statistical tool such as percentage was used.
Ogunlowore and Oladele (2014)have examined the impact of electronic banking on satisfaction of
corporate bank customers in Nigeria, Data was collected with a structured questionnaire. Chi-square was
used to test hypothesis. The study found that there is a significant relationship between electronic banking
and customers’ satisfaction. They concluded that E-banking has become popular because of its
convenience and flexibility, and transaction related benefits like speed, efficiency and accessibility. They
used inappropriate tool such as chi- square which is not the best method of testing impact between
variables.
Amanfo and Gloria (2012) examined the role of e-banking and its relation to customer satisfaction in the
banking industry in Ghana. The study addressed some issues that affect the role of e-banking and its link
to customer satisfaction in Ghana’s banking industry. Data were obtained from bank staff and customers
through a questionnaire using simple random sampling as well as an interview with bank staff. 60
questionnaires sent out were responded. Findings from the study indicated that e-banking has had a
positive impact on the productivity and profitability of the banking industry amid expansion. Also,
customers are to a large extent satisfied with services provided through electronic delivery channels by
banks in Ghana. There was also evidence that customers ‟ theory age group contributed to the propensity to use
any of the electronic delivery channels used by banks. This study concludes by highlighting the need for
banks to understand customer needs, develop appropriate e-banking marketing strategies that maximize
value for customers and satisfaction in the long run. The research was limited to Ghana, the e-banking
platforms were not specified and primary data was used.
Automated Teller Machine and Customer Satisfaction
Odusina and Ayokunle (2014) investigated automated teller machine (ATM) usage on customers’
satisfaction in Nigeria. The study discovered that despite the increasing number of ATM installations in
Nigeria. Customers’ needs are not satisfactorily met as customers are always seen on queue in large
numbers at various ATM designated centers as well as poor service delivery of some of these machine.
The research carried out a comparative analysis of three banks in Ogun State, Metropolis of Nigeria vizaviz First Bank, Guaranty Trust Bank and Skye Bank. Questionnaires were distributed to the respondents.
A total of 200 respondents answered the questionnaire cutting across the three banks, the chi-square
statistical tool was used to analyze the data and the results showed a positive and significant relationship
between ATM Usage and Customers’ Satisfaction. Had they used regression analysis, another statistical
tool to measure the impact, better result would have been ascertained for Chi-square measures only
association, it does not measure the fitness of variables used.
Luiz (2000) studied the effect of automated teller machine service on customer satisfaction, he used
discovered that the general proposition that the measurement of consumer prolonged satisfaction can be a
central element of evaluation and control of strategic marketing input. Empirical findings related to
automated teller machines (ATMs) have shown that different types of consumer processes lead to the
formation of expectations, introduces the hypothesized model of a newly described consumer behavior
measure (prolonged satisfaction) which is determined and refined by incorporating consumer expectations
and product/service usage rate as predictor variables to the measurement of consumer satisfaction over
time.
Bingham University Journal of Accounting and Business (BUJAB)
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Effects of Electronic Banking Service Quality on Customer Satisfaction
Charles (2014) studied 325 ATM smart card users of selected banks in Malawi, he uses percentages as
his methodology where he found over half are satisfied with the service from their banks, he found that
service quality correlates significantly with customer satisfaction with ATM services and that reliability is
the most important dimension followed by responsiveness empathy, assurance and tangibles. He used
simple percentage as tool of analysis. The findings cannot be generalized beyond Malawi.
Shamsher (2011) investigated the impact of ATM services on the customer satisfaction in Indian urban
banking sector. The study used primary data of customer satisfaction survey (N = 400). The data was
collected using a structured questionnaire designed to ascertain the satisfaction levels. ANOVA and factor
analysis was used to identify significant factors and frequency analysis was used to analyse customer
satisfaction. It was found that the ATM services have a positive impact on the customer satisfaction. He
suggested that if improvement of service is made by the banks, there will be significantly higher customer
satisfaction. The research was carried out primarily in urban area and hence cannot be generalized on
entire India.
Theoretical framework
The study adopts the theory of hypothesis testing of customer satisfaction to underpin the study. Deighton
(1983) suggested a two-step model for satisfaction generation. First, Deighton hypothesizes that prepurchase information (advertising) plays a substantial role in building up expectations. Customers use
their experience with product/service to test their expectations. Secondly, Deighton believes, customers
will tend to attempt to confirm rather than disconfirm their expectations. The theory suggests that
customers are biased to positively confirm their product/service experiences. It is an optimistic view, but
it turns the management of evidence into a very powerful marketing tool (Vavra, 1997, p.47)
Methodology
The study adopted descriptive and specifically survey research method in as it will rely heavily on
responses from primary data. The population of the study covers the entire customers of United Bank for
Africa PLC. In Nasarawa state who are up to one hundred and ten thousand, five hundred (110,500)
customers. Although the population size was gotten from an insider (staff) in the bank, the source cannot
be authoritatively quoted since the bank refused officially disclose its exact customer base to the public as
at time of this research. Therefore, the population is assumed as infinity. Simple random sampling was
used because it allows for equal opportunity of selection. Of the thirteen (13) local government areas of
Nasarawa State, UBA has branches only in five 5 local governments’ areas (LGA’s).
Model specification
The ordinary least square (OLS) was used to analyze data by a software statistical package called spss
was utilized in measuring effect of e-banking service quality on customer satisfaction. A simple model of
regression shall be used to estimate the effect of electronic banking service quality on customer
satisfaction as follows:
CS = α + βIBE + βIBRN+ βIBU+ μ … …………….… (1)
CS = α + βATME +βATMRN + βATMU+ μ.…….….. (2)
CS = α + βMBE + βMBRN+ βMBU+ μ…………….... (3)
Results and Discussion
Hypothesis 1
OLS result Using SPSS version 20.0 statistical software Package
CS = α + βIBE + βIBRN+ βIBU+ μ
Bingham University Journal of Accounting and Business (BUJAB)
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Effects of Electronic Banking Service Quality on Customer Satisfaction
Model Summary
Model
R
R Square
Adjusted R
Std. Error of
Square
the Estimate
1
.976a
.952
.952
.324
a. Predictors: (Constant), IBU, IBE, IBRN
ANOVAa
Model
Sum of
df
Mean
F
Squares
Square
Regression
4417.505
3
1472.502 13997.833
1
Residual
222.172
2112
.105
Total
4639.676
2115
a. Dependent Variable: CS
b. Predictors: (Constant), IBU, IBE, IBRN
Coefficientsa
Model
Unstandardized
Standardized
t
Coefficients
Coefficients
B
Std. Error
Beta
(Constant)
-.203
.021
-9.600
IBE
.383
.017
.336
22.179
1
IBRN
.535
.015
.537
34.778
IBU
.126
.010
.127
12.113
a. Dependent Variable: CS
Sig.
.000b
Sig.
.000
.000
.000
.000
The regression line CS=-0.203+0.383+0.535+0.126 depicts that Customer Satisfaction will increase by
0.383units for every 1unit increase in Internet Banking Efficient Operation (IBE), increase by 0.535units
for every 1unit increase in Internet Banking Reliability Needs (IBRN), and increase by 0.126units for
every 1unit increase in Internet Banking Users Friendliness (IBU). This implies that customer satisfaction
increases with increase in IBE, IBRN and IBU. This is corroborated by the correlation coefficient (r) of
0.976 that indicates a strong relation and, the coefficient of determination (r 2) of 0.952 which indicates
that the variation of the customer satisfaction that can be explained by IBE, IBRN, and IBU is about
95.2%. In the absence of IBE, IBRN, and IBU, CS will reduce by 0.203 units as indicated by (α).
Hypothesis 2
OLS result Using SPSS Version 20.0 statistical software Package
CS = α + ATME + βATMRN + ATMU+ μ
Model Summary
Model
R
R Square Adjusted R
Std. Error of
Square
the Estimate
1
.985a
.970
.970
.255
a. Predictors: (Constant), ATMU, ATME, ATMRN
ANOVAa
Model
Sum of
Df
Mean
F
Squares
Square
Regression
4502.022
3
1500.674 23024.478
1
Residual
137.655
2112
.065
Total
4639.676
2115
Bingham University Journal of Accounting and Business (BUJAB)
Sig.
.000b
Page 167
Effects of Electronic Banking Service Quality on Customer Satisfaction
a. Dependent Variable: CS
b. Predictors: (Constant), ATMU, ATME, ATMRN
Coefficientsa
Model
Unstandardized
Standardized
Coefficients
Coefficients
B
Std. Error
Beta
(Constant)
.052
.014
ATME
.161
.018
.160
1
ATMRN
.747
.019
.738
ATMU
.105
.008
.103
a. Dependent Variable: CS
t
Sig.
3.675
8.916
39.803
13.940
.000
.000
.000
.000
The regression line CS=0.052+0.161+0.747+0.105 depicts that Customer Satisfaction will increase by
0.161units for every 1unit increase Automated Teller Machine Efficient Operations (ATME), increase by
0.747units for every 1unit increase in Automated Teller Machine Reliability Needs (ATMRN), and
increase by 0.105units for every 1unit increase in Automated Teller Machine User Friendliness
(ATMU). This implies that customers satisfaction increases with increase in IBE, IBRN and IBU. This is
corroborated by the correlation coefficient (r) of 0.985 that indicates a strong relation and, the coefficient
of determination (r2) of 0.970 which indicates that the variation of the customer satisfaction that can be
explained by ATME, ATMRN, and ATMU is about 97.0%. In the absence of ATME, ATMPN, and
ATMU, CS will stop at 0.052 as indicated by (α).
Hypothesis 3
OLS result using SPSSversion 20.0 statistical software Package
CS = α +βMBE+ βMBRN+ βMBU+ μ
Model Summary
Model
R
R Square
Adjusted R
Std. Error of the
Square
Estimate
a
1
.986
.972
.972
.247
a. Predictors: (Constant), MBU, MBRN, MBE
ANOVAa
Df
Mean Square
3
1503.631
2112
.061
2115
Model
Sum of Squares
Regression
4510.894
1
Residual
128.783
Total
4639.676
a. Dependent Variable: CS
b. Predictors: (Constant), MBU, MBRN, MBE
Model
1
(Constant)
Coefficientsa
Unstandardized Coefficients
Standardized
Coefficients
B
Std. Error
Beta
-.166
.016
Bingham University Journal of Accounting and Business (BUJAB)
F
24659.160
t
-10.486
Sig.
.000b
Sig.
.000
Page 168
Effects of Electronic Banking Service Quality on Customer Satisfaction
MBE
MBPN
MBU
a. Dependent Variable: CS
.767
.226
.033
.015
.014
.008
.757
.207
.033
52.692
16.275
4.142
.000
.000
.000
The regression line CS=-0.166+0.767+0.226+0.33 depicts that Customer Satisfaction will increase by
0.767units for every 1unit increase in Mobile Banking Efficient Operation (MBE), increase by 0.226 units
for every 1unit increase in Mobile Banking Reliability Needs (MBRN), and increase by 0.008 units for
every 1unit increase in Mobile Banking User Friendliness (MBU). This implies that customer satisfaction
increases with increase in MBE, MBRN and MBU. This is corroborated by the correlation coefficient (r)
of 0.986 that indicates a strong relation and, the coefficient of determination (r 2) of 0.972 which indicates
that the variation of the customer satisfaction that can be explained by MBE, MBRN, and MBU is about
97.2%. In the absence of MBE, MBRN, and MBU, CS will reduce by-0.166 as indicated by (α).
The analysis in hypothesis 1 reveals that there is a significant relationship between electronic banking
service quality (internet banking: efficient operation, reliability needs and user friendliness). This findings
is in line with findings of Rangsan and Titida (2013) who found that there is a significant relationship
between internet banking and customer satisfaction. The finding also conforms to the assimilation theory
which states that consumers are motivated enough to adjust both their expectations and their product
performance perceptions. If the consumers adjust their expectations or product performance perceptions,
dissatisfaction would not be a result of the post-usage process. Consumers can reduce the tension
resulting from a discrepancy between expectations and product/service performance either by distorting
expectations so that they coincide with perceived product performance or by raising the level of
satisfaction by minimizing the relative importance of the disconfirmation experienced (Olson & Dover,
1979)
The analysis in hypothesis 2 revealed that there is a significant relationship between electronic banking
service quality (Automated Teller Machine: efficient operations, reliability needs and user friendliness)
and customer satisfaction (CS). This findings is in line with findings of Odusina and Ayokunle (2014)
who found that there is a significant relationship between automated teller machine and customer
satisfaction. The finding also conformsto the assimilation theory which states that consumers are
motivated enough to adjust both their expectations and their product performance perceptions. If the
consumers adjust their expectations or product performance perceptions, dissatisfaction would not be a
result of the post-usage process. Consumers can reduce the tension resulting from a discrepancy between
expectations and product/service performance either by distorting expectations so that they coincide with
perceived product performance or by raising the level of satisfaction by minimizing the relative
importance of the disconfirmation experienced (Olson & Dover, 1979)
The analysis in hypothesis 3 revealed that there is a significant relationship between electronic banking
service quality (Mobile Banking: efficient operations, reliability needs and user friendliness) and
customer satisfaction (CS). This findings is in line with findings of Odusina and Ayokunle (2014) who
found that there is a significant relationship between mobile banking and customer satisfaction. The
findings also conformed to the assimilation theory which states that consumers are motivated enough to
adjust both their expectations and their product performance perceptions. If the consumers adjust their
expectations or product performance perceptions, dissatisfaction would not be a result of the post-usage
process. Consumers can reduce the tension resulting from a discrepancy between expectations and
product/service performance either by distorting expectations so that they coincide with perceived
product performance or by raising the level of satisfaction by minimizing the relative importance of the
disconfirmation experienced (Olson & Dover, 1979)
Bingham University Journal of Accounting and Business (BUJAB)
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Effects of Electronic Banking Service Quality on Customer Satisfaction
Conclusion and Recommendation
In this study, an attempt was made to examine the effect of electronic banking service quality on
customer satisfaction in UBA. Nig. Plc. The empirical research of this study is based on the sample of ten
thousand customers and within five local governments that has UBA branches. The conclusions were
drawn from the results analysed. There is a significant relationship between electronic banking service
quality (internet banking: efficient operations, reliability needs and user friendliness) and customer
satisfaction in UBA, Nasarawa State. This implies that electronic banking service quality contributes
significantly to customer satisfaction in UBA, Nasarawa State. Furthermore, There is a significant
relationship between electronic banking service quality (Automated teller machinebanking: efficient
operations, reliability needs and user friendliness) this implies that electronic banking service quality
contributes significantly to customer satisfaction in UBA, Nasarawa State.in UBA. Also, for mobile
banking, there is a significant relationship between electronic banking service quality (mobile banking:
efficient operation, reliability needs and user friendliness) and customer satisfaction (CS) in UBA,
Nasarawa State. This indicates that mobile banking in UBA Nasarawa State contributes significantly to
customer satisfaction.
Recommendations given are based on the results of the tested hypotheses. The United Bank for Africa
should continue to improve on their internet banking service quality(efficient operations, reliability needs
solution and user friendliness) by ensuring a more dependable, reliable and efficient service since the
proxies are all significant to customer satisfaction in UBA, Nasarawa State. The United Bank for Africa,
Nasarawa State should try to encourage more customers to use the automated teller machine by
establishing more secured and reliable automated teller machine centres and sensitizing customers on how
to make use of them, since its efficient operations, reliability needs solution and user friendliness
contribute to customer satisfaction in UBA, Nasarawa State. Lastly, the UBA mobile banking: efficient
operations, reliability needs and user friendliness standard should be maintained by improving on mobile
application packages since the proxies lead to customer satisfaction (CS) in UBA, Nasarawa State.
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Gender Dimension of the meaning of Work in Contemporary Nigeria
Impact of Capital Market on the Performance of SMEs in Nigeria
Dalut Nanwul Alfred
Department of Economics,
University of Jos – Plateau State.
Phone Number: 08035840778
Abstract
Nigeria capital market as a source for long term funds for small and medium enterprises (SMEs) cannot be
undermined, most especially in this contemporary regime of fairer trade in goods and services. However, SMEs in
Nigeria are plagued with myriads of problems, among which is finance which tends to have inhibited the growth of
SMEs. The study thus examines the Impact of Capital Market on the Performance of SMEs in Nigeria from 19992015. Unit root pre-estimation test was performed on each of the variables to avoid spurious regression results;
while the bound test approach to co-integration showed that long-run equilibrium relationship exist between capital
market and the performance of SMEs in Nigeria. The error correction model results revealed that stock market
capitalization had no significant impact on SMEs growth in Nigeria. In addition, the study revealed that stock
market value has no significant influence on SMEs growth in Nigeria between 1986 and 2015. This showed that a
significant number of the SMEs have not benefitted from capital market financial facility that could improve their
productivity. Lastly, it was discovered that stock market deals have no significant influence on SMEs growth in
Nigeria. This showed that SMEs contribution in capital market formation either through shares or bonds is very
limited, mainly because of the financial constraints they face. Therefore, it is recommended that support programs
should be created that will guarantee access to finance, market access and business support. Nigeria can also adopt
same in the form of incentive schemes which pay out matching grants to business owners, with either half or a large
percentage of the project costs being funded by the applicants themselves.
Keywords: Capital Market, Performance, Market Capitalization, SMEs
1.
Introduction
Over the years, the capital market has been identified as a vehicle for mobilization and redistribution of surplus fund
(savings in small units) to the capital deficient units through specifically designed instruments (securities). It is a
mechanism for monetisation of securities that would have otherwise remained illiquid. Therefore, the capital market
is a source of domestic finance which provides equality and loan capital for more than one fiscal year. It is a meeting
point for buying and selling of securities (shares, loan stock, and other securities) issued by listed companies,
governments and other statutory bodies on the basis of wide distribution of ownership, adequate and full disclosure
of information which must be provided regularly (Meier and Ranch, 2005).
However, Kneown (1996) stressed that, one reason why underdeveloped countries are underdeveloped is because,
they lack a financial system that has the confidence of those who must use it. Particularly, the stock market crash of
2008 affected the Nigerian financial sector adversely. It generated a pessimistic outlook on the economy that led to a
decline in the demand for loans and higher percentage of loan defaults, causing a consequent decline in the stock
prices. Despite all these illicit practices in the financial sector, the Nigerian capital market is potentially the most
viable source of capital for industries in Nigeria. Thus, the role of the Nigeria capital market as a source for long
term funds for small and medium enterprises (SMEs) cannot be undermined, most especially in this contemporary
regime of fairer trade in goods and services. There is no gainsaying that every business starts off as an SME and as
such, the significance of SMEs to growth, productivity and competitiveness of the economies of developing
countries is universally recognized. SMEs are generally acknowledged as the bedrock of the industrial development
of world economies. They are more innovative than larger firms are.
SMEs usually provide training grounds for entrepreneurs even as they generally rely more on the use of local
materials (Kasekende and Opondo, 2003). SMEs development can play a key role in entrepreneurs’ development
through their contributions to economic advancement and social empowerment. They perform such functions as
employment generation, acceleration of rural development, utilization of domestic resources, formation of
competitive environment and maintenance of innovative activity. From this type of business, maximum results of
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Gender Dimension of the meaning of Work in Contemporary Nigeria
economic development can be achieved, and it also has a sensation of a market (Toktarova, 2004). In Nigeria, SMEs
account for some 95 per cent of formal manufacturing activity and 70 per cent of industrial jobs. The real sector of
the economy, comprising manufacturing, solid minerals and agriculture sectors- is where most SMEs fall into. They
employ an average of 50 percent of the working population as well as contributing up to 50 percent to Nigeria’s
industrial output (Oteh, 2010). The recognition of the role of SMEs, has made successive governments to be
interested in SMEs, and caused them to implement various measures and programs in Nigeria in order to encourage
their development. Despite these measures, SMEs are still plagued with myriads of problems, among which is
finance. Finance is a major problem that has inhibited the growth of SMEs. Some of the constraints of inadequate
SME financing include inadequate collateral to secure loans from private credit institutions, poor feasibility studies
and lack of equity contribution, among others. Although, the second-tier security market was introduced in 1985 to
cater for small indigenous companies to be quoted in the stock exchange, yet only few were listed because of
requirements and as well as the fact that some of these entrepreneurs do not want to share their companies with the
public.
Industrial economists further indicated that the small industries have higher bankruptcy rates and also a faster
growing rate than larger industries. SMEs still experience various difficulties in improving their financial
performance since short term loan, trade credit and long-term loans are not well managed. This may be as a result of
SMEs not using ideal debts in their day-to-day transactions and if this problem is not tackled it may continue to
cause financial distress and business failure. While large loans are available to a certain degree for large-scale
industries, there is an evident lack of access to medium and small-scale finance for MSMEs. In trying to bring a
solution to this problem, the Central Bank stipulated that 20% of banks’ credit should be granted as loan to the
Small-Scale Enterprises. This was not adhered to because, most loans granted to small scale holders were not repaid
and so the banks did not consider them as creditworthy. In the light of these, the research has explored the financial
incentives available to the small-scale enterprises especially in the Nigerian capital market in order to provide the
financial information needed by entrepreneurs.
In addition, previous studies pertaining to the relationship between capital market and business performance had so
far been focused on larger firms. Yet, very little attention is given to the actual forms of capital market finance used
by small and medium-sized enterprises, the available finance made by lending institutions or investors and the
relation between the use of the said debt finance and SMEs performance. Thus, the study was conducted to examine
impact of capital market on the performance of SMEs in Nigeria between 1999 and 2015. The following research
questions were addressed in the course of the study:
i.
What impact does stock market capitalization have on SMEs growth in Nigeria?
ii.
How has stock market value significantly influenced SMEs growth in Nigeria?
iii.
What influence does stock market deals have on SMEs growth in Nigeria?
In-line with the research questions, the following hypotheses were formulated:
H01: Stock market capitalization has no significant impact on SMEs growth in Nigeria
H02: Stock market value has no significant effect on SMEs growth in Nigeria
H03: Stock market deals has no significant influence on SMEs growth in Nigeria
2.
Literature Review
2.1
Concept of SMEs
Conceptual definitions of SMEs vary depending on the region/country and the threshold that is used. Definitions in
use today define thresholds in terms of employment, turnover and assets (Oteh, 2009). In the United States, small
businesses that are defined by the number of employees, refers to those with fewer than 100 employees, while
medium-sized business often refers to those with fewer than 500 employees. In the European Union (EU),
companies with fewer than 10 employees are defined as "micro", those with fewer than 50 employees as "small",
and those with fewer than 250 as "medium". For developing countries, small-scale enterprises would generally mean
enterprises with less than 50 workers and medium-size enterprises would usually mean those that have 50-99
workers. In Nigeria, for example, the criteria of employment and paid up capital is used. Small enterprises are
defined as those employing less than 50 people with assets (excluding land and buildings) below N50m ($328, 947)
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Gender Dimension of the meaning of Work in Contemporary Nigeria
and a small and medium enterprise in Nigeria is seen as one which employs less than 200 people with assets less
than N500m ($3,289,473) (CBN, 2015).
SMEs are a very heterogeneous group and as Hallberg (2009) describes it, they include a wide variety of firms—
village handicraft makers, small machine shops, restaurants, and computer software firms—that possess a wide
range of sophistication and skills, and operate in very different markets and social environments. Their owners may
or may not be poor. Some are dynamic, innovative, and growth-oriented; others are traditional ―lifestyle enterprises
that are satisfied to remain small. SMEs are the main source of employment in developed and developing countries
alike. In the US for example, Oteh (2010) observed that the SME sector is said to provide 67% employment and
61% manufacturing sector output. In Korea, there are over 30 million SMEs constituting about 99.9% of the
enterprises and employing over 88.1% of the labour force. Similarly, in Africa, SMEs comprise over 90% of African
business operations and contribute to over 50% of African employment and GDP. In Nigeria, SMEs account for
some 95 per cent of formal manufacturing activity and 70 percent of industrial jobs. The real sector of the economy,
comprising manufacturing, solid minerals and agriculture sectors- is where most SMEs fall into. They employ an
average of 50 percent of the working population as well as contributing up to 50 percent to Nigeria’s industrial
output. In Morocco, 93 per cent of all industrial firms are SMEs and account for 38 per cent of production, 33 per
cent of investment, 30 per cent of exports and 46 per cent of all jobs (ADB, 2005). These examples confirm that
SMEs are an integral part of society and that they are critical to economic development.
2.1.1
Financing Constraints for SMEs
SMEs face numerous difficulties during their life cycle. One of the main challenges they have to deal with is the
issue of financing constraints. This is because the conditions for financing for SMEs are inferior to that of large
enterprises. The lack of access to credit is a major factor in the underdevelopment of SMEs in Africa. Despite their
dominant numbers and importance in job creation, SMEs traditionally have faced difficulty in obtaining formal
credit or equity. Banks have also been quite reluctant to service SMEs for a number of well-known reasons, which
include the following:
i.
SMEs are regarded by creditors and investors as high-risk borrowers’ due to insufficient assets and low
capitalization, vulnerability to market fluctuations and high mortality rates;
ii.
Information asymmetry arising from SMEs’ lack of accounting records, inadequate financial statements or
business plans makes it difficult for creditors and investors to assess the creditworthiness of potential SME
proposals. SMEs are less structured than large scale organizations and are usually dominated in terms of
management style and other characteristics by the promoter. They are therefore perceived as higher risk.
iii.
High administrative/transaction costs of lending or investing small amounts do not make SME financing a
profitable business. Since banking credit is a scale economy, it is typically more expensive on a unit cost
basis to lend to SMEs compared to larger organizations.
As a result, commercial banks are generally biased toward large corporate borrowers, who usually provide better
prepared business plans, have credit ratings, more reliable financial information, better chances of success and
higher profitability for the banks. When banks lend to SMEs, they tend to charge them a commission for assuming
risk and apply tougher screening measures, which drives up costs on all sides. Borrowers are typically required to
demonstrate that they have sufficient equity to contribute to their businesses, which many small business owners
usually lack. Entrepreneurs also tend to lack traditional collateral (such as land) and the credit history needed to
qualify for loans. Banks also tend to regard SMEs as unprofitable because of the high transaction costs involved in
providing many small-sized loans as opposed to fewer large loans. Even when SME owners are able to access bank
financing, the maturities of commercial bank loans are often too short to pay off any substantial investment. Another
problem is that entrepreneurs also tend to have less information about financial products and services because of
their higher financial illiteracy rate. The actual cost of finance is also an issue. The lengthy and costly procedures
involved in starting and exiting a business often serve as huge deterrents for them. High interest rate payments are
also a significant barrier. This means that not only do SMEs have difficulty accessing finance; they also have to deal
with the higher cost of finance relative to the charges larger firms face. This provides a strong rationale for the
exploration of alternative sources of funding for entrepreneurs.
2.1.2
Role of Capital Markets in SME Development
For entrepreneurship and innovation to thrive, not only does credit need to be accessible, but there needs to be
different types of financing. Capital markets are an important source of long term finance, especially since SMEs
have been primarily dependent on banks for financing. A financial system that is built on the two pillars of banking
and securities markets is stronger than a system that is built solely on banking credit since a well -functioning
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system would be comprised of various sources of finance. The choice of banks or the market would then depend on
the needs of the SME. They are both crucial components of an economy, and it is impossible to say unequivocally
which of the two systems is better for economic growth (Levine and Zervos, 1998). The capital market can and
should compete head on with banks in the supply of debt finance to businesses including those to SMEs. From a
regulatory viewpoint, it is necessary for the competition between the banks and capital markets to take place on a
level playing field (Economist, 2011). Therefore, capital markets should be actively promoted as an important
alternative source of finance for SMEs, particularly long-term finance through equity financing. Equity and debt
financing can be made available as well as venture capital funds.
2.1.3
Equity Financing
Equity investors primarily seek growth opportunities, so they are often willing to take a chance on a good idea and
provide the needed capital. Equity financing is a strategy for obtaining capital that involves selling a partial interest
in the company to investors. The equity, or ownership position, that investors receive in exchange for their funds
usually takes the form of stock in the company. This provides small business owners with a broader scope in terms
of financing as they gain access to multiple funding sources. In contrast to debt financing, which includes loans and
other forms of credit, equity financing does not involve a direct obligation to repay the funds. Instead, equity
investors become part-owners and partners in the business, and thus are able to exercise some degree of control over
how it is run. As the only way for equity investors to recover their investment is to sell the stock at a higher value
later, they are generally committed to furthering the long-term success and profitability of the company. Many
equity investors in startup ventures and very young companies also provide managerial assistance to the
entrepreneurs and are often good sources of advice and contacts.
While there are many benefits that can be derived from equity financing, there are also a few reasons why there has
traditionally been a lack of equity investment in SMEs. The primary reason is that equity investors seek highest
return consistent with the risk of investment; SME investments are difficult to evaluate; SME investments take time
to mature; and they are often difficult to liquidate. One of the major disadvantages of equity financing is that the
founders must cede some control of the business. If investors have different ideas about the company's strategic
direction or day-to-day operations, they can pose problems for the entrepreneur. In addition, initial public offerings
can be very complex and expensive to administer because of onerous listing rules and other disclosure requirements.
Such equity financing may require complicated legal filings and a great deal of paperwork to comply with various
regulations put in place to provide credible information to investors. For many small businesses, therefore, equity
financing may necessitate enlisting the help of attorneys and accountants. Nevertheless, the benefits tend to
outweigh the disadvantages. This is primarily because equity finance raised by an SME provides additional equity
cushion for more credit that can further fund growth and expansion.
2.1.4
Venture Capital
Venture capital, on the other hand, refers to the next round of finance in companies that have achieved stability and
have strong growth potential. A venture capital fund would typically invest in an SME in a high-growth sector
looking to expand its operations. Venture capital can also play a role in buy–outs of more established companies.
The involvement of a venture capitalist is usually from two to four years, after which the venture capitalist will
typically either sell the shares of the company on a stock exchange, e.g. an initial public offering (IPO), or sell the
whole stake in the company, for example, to a more established competitor. Venture capital firms can be key
financing vehicles for SMEs and venture capital funds value the possibility of monitoring the performance of the
invested business, giving advice when needed and following-up on such advice. Capital markets provide important
exit opportunities for venture capital firms enabling them to put their capital at risk to finance other SME
opportunities. Specifically, the capital markets provide initial public offerings and other opportunities for venture
capital firms to exit an investment in an SME.
2.2
Empirical Review
Githaiga and Kabiru (2015) examined debt financing and financial performance of small and medium size
enterprises in Kenya. The objectives of their study were to determine the effects of long-term loans and short-term
loans on SMEs financial performance. Their study was guided by optimal capital structure theories and they
collected quantitative secondary data from SMEs’ financial statements for three consecutive years (2011-2013).
Through the use of multiple Regression analysis their results revealed that short term loans and long-term loans had
negative impact on financial performance of SMEs. Their study concluded that long term and short-term loans
reduce financial performance of SMEs.
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Gender Dimension of the meaning of Work in Contemporary Nigeria
Akinola and Iordoo (2013) investigated the effects of the Nigerian Capital Market on the Micro, Small and Medium
Scale Enterprises (MSMEs) in Nigeria using a disproportionate stratified random sampling technique to select a
representative sample of one hundred MSMEs in Lagos state being the centre of commerce in Nigeria.
Questionnaire was used as their instrument for data collection; while the hypothesis developed was tested using Chisquare (X2). Based on their findings, they recommended that the government through the Nigerian Capital Market
should create an Alternative Stock Exchange-that is dedicated for MSMEs as done in the developed countries like
USA, Japan, China, Malaysia, Morocco and many other countries. They were of the view that this has changed their
economic fortunes, also, the management of small and medium scale businesses should prepare timely, transparent
and acceptable financial reports of their companies which would be acceptable to regulators, investors and
stakeholders especially financial institutions and in addition to innovative financing mechanisms, innovative
measures can also be put in place to share risk.
Oladepo and Ajoseh (2015) evaluated capital market operations vis-a-vis SMEs’ financing in Nigeria. Their
fundamental objective was to assess how the capital market enables organisations, particularly the small and
medium scale enterprises (SMEs), raise medium to long-term finance. Their findings revealed that financial
accessibility has been a key challenge to SMEs’ growth in Nigeria. They advised that the issue of SMEs’ funding
need to be addressed with swiftness, given the importance of SMEs to Nigeria and the global economy in general.
They concluded that there is need to develop a culture of venture capital and private equity in Nigeria. They
recommended that using the capital market to finance the SMEs in the developing economy should not be a matter
of choice but a part of the operating environment in the country’s financial system, especially in this contemporary
regime of fairer trade in goods and services.
Omran (2008) examined Access to Finance for SMEs through the Stock Exchange in Egypt: Conceptual Framework
and Policy Implications. Using descriptive method of analysis, he found that SMEs contribution in capital
formation is very limited, mainly because of the financial constraints they face. He concluded that in order to
improve SMEs access to finance, the creation of a junior exchange is a must. Based on his findings, he
recommended that there is the need to examine the institutional setting of the small firm initial public offerings
(IPOs) market in order to identify the specific modifications to the regulatory requirements that should be
performed.
Olusoji and Enofe (2012) carried out a research on Capital Market and the Development of the Small and Medium –
Scale Enterprises in Nigeria. Their paper looked at the need to incorporate the Small and Medium Scale enterprises
(SMEs) into the capital market in Nigeria as a means of raising capital for their operations using descriptive method
of analysis. Based on their empirical analysis, they found that the growth in the transactions of the quoted companies
has been fluctuating over the years. They concluded that relaxation of conditions for listing of the SMEs in the stock
exchange market and provision of enabling environment for SMEs to thrive in Nigeria will enhance the growth in
the transactions of the capital market.
Harash, Al-Timimi, and Alsaadi (2014) examined the influence of finance on performance of Small and Medium
Enterprises (SMES). Their study was undertaken to highlight the issues facing small and medium enterprises
(SMEs) in Iraq in her quest to accessing finance to undertake various activities; be it general business operations or
carrying out expansion project all in the name of fulfilling the objectives as being job creators and helping to reduce
poverty. Findings from their study revealed that there are financial institutions that are willing to provide funds to
small and medium enterprises (SMEs) but Iraq small and medium enterprises (SMEs) are not able to meet the
requirements of these financial institutions. Chief among these requirements is the issue of collateral, which most
small and medium enterprises (SMEs) cannot provide.
Quainoo (2011) carried out an empirical research titled “examining the impact of loans on SMEs in Ghana”. He
adopted Simple random sampling technique in selecting the 100 SMEs that constituted the sample size of his
research; while structured questionnaire was utilized to facilitate the acquisition of relevant data used for the
analysis. He also employed descriptive statistics in data presentations and analysis. Findings from his study revealed
that significant number of the SMEs benefitted from the loans given to them even though only few of them were
capable enough to secure the required amount needed. His discovered that majority of the SMEs acknowledged
positive contributions of loans towards increasing their returns and sales thus placing them in the competitive arena.
Based on his findings, he recommended that Banks should review their interest rate downwards and also share best
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Gender Dimension of the meaning of Work in Contemporary Nigeria
practices with their SME customers especially on the efficient use of loans; as this will boost their productivity and
support SMEs in Ghana.
2.3
Theoretical Framework
2.3.1
The Efficient Market Hypothesis (EMH)
The efficient market hypothesis suggests that a market is efficient when it is able to adjust quickly to take account of
all available information, such that no single participant in the market gets more information than the information
that is already reflected in the market prices. Consequently, the efficient market hypothesis discusses three main
dimensions involved in capital market efficiency depending on the set of information available: weak- form market
efficiency, Semi-strong market efficiency and Strong market efficiency (Omuchesie et al., 2014). Weak-form market
efficiency exists when current prices fully reflect all historical price information, such that prices automatically
adjust to information changes without lags. With semi-strong form efficiency, market prices reflect available public
information including company reports, annual earnings, stock splits and company public profits forecasts. The
strong form of efficiency, however, exists when prices reflect both public and private information about earnings,
book values, investment opportunities.
2.3.2
Supply Leading Hypothesis
This hypothesis was first put forth by Schumpeter (1911) and later supported by the works of McKinnon (1973),
Shaw (1973). The theory posits that a well-developed financial sector provides critical services to reduce
transaction, information and monitoring costs and increase the efficiency of intermediation. It mobilizes savings,
identifies and funds good business projects, monitors the performance of managers, facilitates trading and the
diversification of risks, and fosters exchange of goods and services. These services lead to efficient allocation of
resources; lead to a more rapid accumulation of physical and human capital; and lead to faster technological
innovation. This eventually results into faster and long-term economic growth (Schumpeter, 1911).
2.3.3
Harrod-Domar Model
The Harrod-Domar model was developed independently by Sir Roy Harrod in 1939 and Evsey Domar in 1946. It is
a growth model which states that the rate of economic growth in an economy is dependent on the level of saving and
the capital output ratio. If there is a high level of saving in a country, it provides funds for firms to borrow and
invest. Investment can increase the capital stock of an economy and generate economic growth through the increase
in production of goods and services. The capital output ratio measures the productivity of the investment that takes
place. If capital output ratio decreases the economy will be more productive, so higher amounts of output is
generated from fewer inputs. This again, leads to higher economic growth. The model suggests that if developing
countries want to achieve economic growth, governments need to encourage saving, and support technological
advancements to decrease the economy’s capital output ratio.
3.
Methodology
3.1
Data Sources
The data used for this study were secondary data derived from the audited financial statements of the Nigerian Stock
Exchange (NSE) and CBN statistical bulletin between the 13 years period of 1999 and 2015.
3.2
Techniques of analysis
For the purpose of this research, Error correction model (ECM) is used to estimate the variables. The econometric
regression model used enabled the study to examine capital market impact on SMEs growth in Nigeria. This
estimation technique aims at achieving unique parameter estimates that enabled the study examine short run
dynamics of the structural model with a better fit. It is worthwhile to note at this juncture that it has become
fashionable in contemporary econometric analysis to, among other things, rigorously consider issues of stationarity,
co-integration and error correction mechanism when dealing with models involving time series variables.
Stationarity assures non-spurious results; cointegration captures long-run or equilibrium relationship between
(cointegrating) variables; and error correction mechanism is a means of reconciling the short-run behaviour of
economic variables with their long-run behaviour (Gujarati & Porter, 2009). Popular test of stationarity of
Augmented Dickey-Fuller (ADF) unit root test derived from Dickey & Fuller (1979 and 1981) has been developed
over the years.
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Gender Dimension of the meaning of Work in Contemporary Nigeria
3.3
The Structural Model
This section is preoccupied with the formulation of an appropriate model, which theoretically establishes the
relationships between capital market and SMEs growth in Nigeria. For this purpose, the equation below has been
formulated and simultaneously analyzed:
SO  f ( SMC , ASI , SMV )         (1)
Specifying the model in a log-linear stochastic form, we have:
log SMO  0  1 log SMC   2 log SMV   3 log SMD  t        (2)
Where;
SMO
SMV
SMC
SMD
=
=
=
=
SMEs level of outputs
stock market value
stock market capitalisation
stock market deals
1  3 =
0
=
t
Coefficients of capital market indicators
Intercept
=
Error Term
Suffice to reiterate that cointegration provides the theoretical underpinning for error-correction model.
Therefore, specifying equation (2) in an Error-Correction Model (ECM) form, we have:
m
n
p
i 1
i 1
i 1
 log SMOt c    i log SMCt  i   i log SMVt  i   i  log SMDt  i    1  t     (3)
Where:

is difference operator;
  1 (one period laggedECM) is one period lag of the residual from Equation (3);
it is the equilibrium term; c is the constant terms;
noise error term.
4.
 i, i ,  i
and

are respective parameters; and
t
is the white
Results and Discussion
4.1
Descriptive Statistics
From the descriptive results in Table 1, the analysis of the means(M)and standard deviations(SD) shows the
following descriptive statistics SMO(Mean (M)= 10.03, Standard Deviation (SD)= 0.756); SMC(M = 8.30, SD =
1.40); SMV(M = 12.71, SD = 1.51). The analysis indicates that stock market deals (SMD) has the highest means (M
= 13.80), with the deviation from the mean at 0.88%. Skewness which measures the shape of the distribution shows
that all the variables have values to be negative (that is negatively skewed), which suggests the distribution tails to
the left of the mean. The kurtosis statistics reveals that SMD is leptokurtic implying that the distribution is peaked
relative to the normal distribution. However, the other variables are platykurtic, suggesting that their distributions
are flat relative to normal distribution. Jarque-Bera is a statistical test that determines whether the series is normally
distributed. The null hypothesis here is that the series is normally distributed (i.e skewness =0) so as to be consistent
with skewness test. The Jarque-Bera statistics here accepts the null hypothesis forall the variables since their
probability values are greater than 0.05. We conclude that capital market and small and medium scale enterprises
(SMEs) growth variables are normally distributed during the period under study.
Table 1: Summary of Descriptive Statistics Results
Mean
Std. Dev.
Skewness
Kurtosis
Jarque-Bera
Probability
LOG(SMO)
10.03944
0.756835
-0.59399
1.694771
2.20639
0.331809
LOG(SMC)
8.309676
1.403339
-0.56626
1.85846
1.831549
0.400206
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LOG(SMV)
12.71139
1.518339
-0.71116
2.325609
1.755115
0.415797
LOG(SMD)
13.80564
0.888643
-0.68982
3.067067
1.351412
0.508797
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Gender Dimension of the meaning of Work in Contemporary Nigeria
Observations
17
17
Source: Authors Computation, 2017 (Eviews-10)
4.2
17
17
Augmented Dickey-Fuller (ADF) Unit Root Test
Time series data are assumed to be non-stationary and this implies that the results obtained from the OLS method
may be misleading. In this vein, it is cognizant that stationarity test should be conducted. The stationarity test is
carried out using the Augmented Dickey-Fuller (ADF) Unit Root Test. The stationarity of data is essential for cointegration test. The decision rule for the ADF Unit root test states that the ADF Test statistic value must be greater
than the Mackinnon Critical Value at 5% at absolute term for stationarity to be established at level and if otherwise,
differencing occurs using the same decision rule.
Table 2: Summary of Unit Root Test Results
Variables
ADF Test Statistic(Critical values)
SMO
-6.012176 (-4.992279)*
SMC
-3.974878 (-3.828975)**
SMV
-3.516067 (-3.362984)***
SMD
-3.639634 (-3.388330)***
Notes: ***, ** and * significant at 10%, 5% and 1%, respectively
Source: Authors Computation, E-views-10
Order of Integration
I(1)
I(0)
I(0)
I(1)
From Table 2, it could be deduced that SMC and SMV were found stationary at levels i.eI(0). This was captured by
the ADF test statistics value of -3.974878 and -3.516067. however, the other two variables (SMO and SMD) were
found stationary at first difference i.e. I(1) series. This is because their respective ADF statistic valuesare greater
than the Critical Value at1 and 10% significant levels.
4.3
Bound Co-Integration Test
The co-integration test establishes whether a long-run equilibrium relationship exist among the variables.Table 3
thus presents the result of the co-integration test using the bound test approach to Co-integration. The result revealed
that there is an existence of co-integration among the variables. The F-statistics values at 3.97 is greater than the
lower and upper bound values put at 5percent level of significance. Hence, there is a sufficient proof of the existence
of a long-run equilibrium relationship between capital market and SMEs growth in Nigeria between 1999 and 2015.
Table 3: Bound Test Results
Wald Test (ARDL Long-Run Equilibrium Condition)
Test Statistic
F-statistic
Significance
10%
5%
2.5%
1%
Value
k
3.97**
Critical Value Bounds Values by Pesaran(2001)
3
I0 Bound
I1 Bound
2.37
2.79
3.15
3.65
3.2
3.67
4.08
4.66
Notes: ***, ** and * significant at 10%, 5% and 1%, respectively.
Source: Authors Computation, E-views-10
Table 4: ARDL-ECM(1, 3, 2, 2) and Statistical Test of the Hypothesis
Variable
DLOG(SMC)
DLOG(SMC(-1))
Coefficient
-0.75429
-0.27963
t-Statistic
-3.42467
-1.33396
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Prob.
0.0757
0.3138
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Gender Dimension of the meaning of Work in Contemporary Nigeria
DLOG(SMC(-2))
DLOG(SMV)
DLOG(SMV(-1))
DLOG(SMD)
DLOG(SMD(-1))
ECM (-1)*
R-squared
Adjusted R-squared
Durbin-Watson stat
-0.62794
1.697622
1.941471
-1.19913
-2.1698
-0.122228
0.868927
0.716008
2.887624
-4.55591
4.305582
5.276498
-4.20798
-5.69626
5.44732
0.0450
0.0499
0.0341
0.0521
0.0295
0.0321
Notes: ***, ** and * significant at 10%, 5% and 1%, respectively.
Source: Authors Computation, E-views-10
As expected, the lagged error correction terms (ECM) is negative, less than unity and statistically significant at 5
percent. The coefficient revealed that once there is disequilibrium in the system, it takes an average (annual) speed
of 12.22percent to restore the long-run relationship between the capital market and SME growth. The adjusted
coefficient of determination (Adj.R-Bar-square), which was used to measure the goodness of fit of the estimated
model, indicates that the model is reasonably fit in prediction. It showed that 71.60 percent changes in SMEs growth
were collectively due to SMC, SMV and SMD while 28.4 percent unaccounted variations were captured by the
white noise error term. It showed that SMC, SMV and SMD had strong significant impact on SMEs growth within
the period under study.
The three hypotheses formulated in this paper were tested using Wald test and p-value. The level of significance for
the study is 5percent, for a two-tailed test. The Wald test computes a test statistic based on the unrestricted
regression and tests for the joint significance of the coefficients. It is used to denote whether the joint impact of the
explanatory (exogenous/ independent variables) actually have a significant influence on the dependent variable.
The decision rule for accepting or rejecting the null hypothesis for any of the hypothesis was be based on the
Probability Value (PV). If the PV is less than 5% or 0.05 (that is, PV < 0.05), it implies that the regressor in question
is statistically significant at 5% level; otherwise, it is not significant at that level.
H01: Stock market capitalization has no significant impact on SMEs growth in Nigeria
Table 5: Results of Wald Test on SMCand SMEs growth in Nigeria
Test Statistic
Value
Df
F-statistic
1.99581
(3, 2)
Chi-square
5.98743
3
Source: Authors Computation, E-views-10
Probability
0.351
0.1122
The Wald-test in Table 5 indicated that the calculated F-value for SMC is 1.99 and its probability value is 0.351.
Since the probability value is greater than 0.05 at 5percent level of significance, it thus falls in the acceptance region
and hence, the first null hypothesis (H01) was accepted. The result thus shows that SMC has no significant impact on
SMEs growth in Nigeria between 1999 and 2015.
H02: Stock market value has no significant influence on SMEs growth in Nigeria
Table 6: Results of Wald Test on SMVand SMEs growth in Nigeria
Test Statistic
Value
Df
F-statistic
2.546925
(2, 2)
Chi-square
5.093851
2
Source: Authors Computation, E-views-10
Probability
0.2819
0.0783
The Wald-test in Table 6, indicated that the calculated F-value for SMVwas found to be 3.61 and its probability
value is 0.28. Since the probability value is greater than 0.05 or 5percent level of significance, it thus fell in the
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Gender Dimension of the meaning of Work in Contemporary Nigeria
acceptance region and hence, we accepted the second null hypothesis (H02). The conclusion here is that SMV has no
significant influence on SMEs growth in Nigeriabetween 1986 and 2015.
H03:Stock market deals has no significant influence on SMEs growth in Nigeria
Table 7: Results of Wald Test for SMDand SMEs growth in Nigeria
Test Statistic
Value
df
Probability
F-statistic
3.018183
(2, 2)
0.2489
Chi-square
6.036367
2
0.0489
Source: Authors Computation, E-views-10
Lastly, from the Wald-test in Table 7, it could be observed that the F-value for SMDwas found to be
3.018with an associated probability value 0.248. Since the probability value is greater than 0.05 or
5percent level of significance, it thus fell in the acceptance region. We thus reject the third null hypothesis
(H03) and conclude that SMD has no significant influence on SMEs growth in Nigeria between 1986 and
2015.
4.4
Discussion
The empirical results revealed that SMC has had no significant impact on SMEs growth in Nigeria between 1999
and 2015. This is in line with the findings of Githaiga and Kabiru (2015) whose analysis their results revealed that
short term loans, and long-term loans had negative impact on financial performance of SMEs. In addition, the study
revealed that SMV has no significant influence on SMEs growth in Nigeria between 1986 and 2015. This showed
that a significant number of the SMEs have not benefitted from capital market financial facility that could improve
their productivity. Lastly, it was discovered that SMD has no significant influence on SMEs growth in Nigeria
between 1986 and 2015. The findings also agree with Omran (2008) who found that SMEs contribution in capital
market formation either through shares or bonds is very limited, mainly because of the financial constraints they
face.
5.
Conclusion and Recommendations
Small and medium enterprises (SMEs) are a policy priority for many countries, given their significance in terms of it
play a key role in economic development and make an important contribution to employment. Financial access is
critical for Small and medium enterprises (SMEs) growth and development, and the availability of external finance
is positively associated with productivity and growth. However, access to financial services remains a key constraint
to SME growth and development, especially in emerging economies. SMEs in Nigeria suffer from lack of access to
appropriate (term and cost) funds from both the money and capital markets. This is due in part to the perception of
higher risk resulting in high mortality rate of the business, information asymmetry, poorly prepared project
proposals, inadequate collateral, absence of, or unverified history of past credit(s) obtained and lack of adequate
accounting records of the company’s transaction. In some cases, there are virtual absence of capital market facilities
and instruments that SMEs can access (Bates, 2010).
The capital market in Nigeria is still evolving while other conventional sources have no confidence in the credit
worthiness of the SMEs. Non-bank financial intermediaries such as micro credit institutions could play a greater role
in lending to the SMEs. Nevertheless, some of these institutions may not consider MSMEs credit worthy. MSMEs
therefore rely on their retained earnings, informal savings and loan associations, which are unpredictable and
insecure with little scope for risk sharing as their major source of capital. Yet, the panacea for solving problems of
economic growth in Nigeria often resides in adequate financing of small-scale industries. Therefore, there is the
need to create support programmes through access to finance, market access and business support. For instance,
South Africa has a wide range of support schemes that target small business owners in the areas of research and
development, business and marketing support, exports and support for setting up manufacturing, tourism and cooperatives. Nigeria could adopt same in the form of incentive schemes which pay out matching grants to business
owners, with either half or a large percentage of the project costs being funded by the applicants themselves.
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Bingham University Journal of Accounting and Business (BUJAB)
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Gender Dimension of the meaning of Work in Contemporary Nigeria
ARDL Error Correction Regression
Dependent Variable: DLOG(SMO)
Selected Model: ARDL(1, 3, 2, 2)
Case 2: Restricted Constant and No Trend
Date: 11/16/17 Time: 19:31
Sample: 1999 2015
Included observations: 14
ECM Regression
Case 2: Restricted Constant and No Trend
Variable
Coefficient
Std. Error
t-Statistic
Prob.
DLOG(SMC)
DLOG(SMC(-1))
DLOG(SMC(-2))
DLOG(SMV)
DLOG(SMV(-1))
DLOG(SMD)
DLOG(SMD(-1))
CointEq(-1)*
-0.754290
-0.279630
-0.627943
1.697622
1.941471
-1.199132
-2.169797
-0.122228
0.220252
0.209625
0.137831
0.394284
0.367947
0.284966
0.380916
0.022438
-3.424670
-1.333955
-4.555909
4.305582
5.276498
-4.207978
-5.696257
5.447320
0.0757
0.3138
0.0450
0.0499
0.0341
0.0521
0.0295
0.0321
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat
0.868927
0.716008
0.108312
0.070389
17.18426
2.887624
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
0.134278
0.203247
-1.312037
-0.946862
-1.345841
* p-value incompatible with t-Bounds distribution.
F-Bounds Test
Test Statistic
F-statistic
K
Year
1999
2000
2001
2002
2003
2004
SMV(N'
Million)
14072
28153.1
57683.8
59406.7
120402.6
225820
Null Hypothesis: No levels relationship
Value
Signif.
I(0)
I(1)
3.978220
3
10%
5%
2.5%
1%
2.37
2.79
3.15
3.65
3.2
3.67
4.08
4.66
SMC(N'
Billion)
300
472.3
662.5
764.9
1359.3
2112.5
SMD(N'
Million)
123509
256523
426163
451850
621717
973526
SMO(N'
Million)
7180
7480
7820
7967
8842
19767
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Gender Dimension of the meaning of Work in Contemporary Nigeria
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
262935.8
470253.4
1076020.4
1679143.7
685717.288
799910.95
638925.7
808991.42
2350875.7
1334783.13
961221.509
2900.06
5120.9
13181.69
9562.97
7030.84
9918.21
10275.3448
14800.9444
19077.4182
16875.1027
17003.3924
1021966.6
1367954
2615020
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1147174
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51243
Effects of Competitive Strategies on the Performance of Quoted
Cement Companies in Nigeria
J. E. I. Abbah. Esq
LL.B., B.L., LL.M., MBA, PhD, FCIS, FSCA. AIPMN,
Faculty of Administration,
Nasarawa State University, Keffi.
E-Mail: edacheabbah@yahoo.com, Phone No: 08062279557; 07051087105
and
Adaje, Unamani Jerome
Nigeria Security & Civil Defence Corps
Independence Way, Kaduna
E-Mail: jeromeaus@yahoo.com, Phone No: 08033974911
Abstract
Among the quoted cement companies in Nigerian, it has been observed that while some cement manufacturers, such
as Dangote Cement Plc are growing and expanding rapidly in terms of production capacity others are finding it
difficult to fully utilize their installed capacity. This study investigated the Competitive Strategies (cost leadership
and differentiation) of these companies as possible factors responsible for these performance differentials (sales
growth and profitability) of quoted cement companies in Nigeria. Descriptive research design was adopted using
secondary data in terms of published annual reports of these companies. Ordinary Least Square method of
regression was applied on the financial ratios of the companies. The findings were that cost leadership has greater
influence on both sales volume and profitability than product differentiation. The conclusion was that, cost
leadership strategy in terms of reduction of cost of energy (which constitutes about 40% of production cost) and
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haulage coupled with differentiation (branding and processing quality) were the drivers of profitability and sales
growth of the companies. It is recommended therefore, that cement companies in Nigeria should employ cheaper
energy such as coal or gas instead of LPFO in powering their plants; alternatively they should differentiate their
products out of competition by producing and packaging special purpose cement grades.
Keywords: Competitive Strategy, Performance, Production Capacity, Quoted Companies
1.
INTRODUCTION
Business environment is highly dynamic and uncertain therefore, competitiveness becomes inevitable for
firms survival and growth. As a result, organizations wishing to remain ahead of present or potential
competition will have to pursue suitable competitive strategies. A sustained competitive strategy will
allow a firm to generate greater sales and retain more customers than its competition. These can be gained
through the firm's cost structure, product offerings, distribution network and customer support.
Competitive strategy is concerned with the patterns of choices managers make over which markets to
serve and how the business creates more value for buyers than its competitors. A good competitive
strategy can give a company an edge over its rivals as it leads to an ability to generate greater value for
the firm and its shareholders. The more sustainable the competitive strategy, the more difficult it is for
competitors to neutralize the strategy.
Thus, understanding sources of sustained competitive strategy has become a major area of study in
strategic management. Porter (1980, 1985, & 2008) identified three strategies: product differentiation,
cost leadership and focus. We shall be dealing with the first two in this study. A differentiation strategy
involves the firm creating a product or service that are different from that of competitors. Cost leadership
strategy is an integrated set of action taken to produce goods or services with features that are acceptable
to customers at the lowest cost, relative to that of competitors (Ireland, Hokisson & Hitt, 2011).
Comparative advantage, or cost advantage, can be created if a firm has ability to produce a good or
service at a lower cost than its competitors, which gives the firm the ability to sell its goods or services at
a lower price than its competition or to generate a larger margin on sales. A firm can differentiate itself in
various ways, such as offering innovative features, launching effective promotion, providing superior
service, developing a strong brand name, and so on (Li & Zhou, 2010). A differential advantage is created
when a firm's products or services differ from its competitors and are seen as better than a competitor's
products by customers.
In the course of a pilot study on the Nigerian cement industry, it was observed that some cement
producers are facing very stiff competition especially from the major players. Therefore, while some
cement manufacturers are growing in terms of increase or addition of production capacities, volume of
output and sales coverage, others are operating below their installed capacities. It seems therefore that
demand for cement and availability of raw materials cannot be reasons for this phenomenon. When in the
same industry some players are performing or growing while others are not, it is profitable to isolate the
problem, hence this paper.
2.
LITERATURE REVIEW
Given the importance of competition, scholars have focused on the identification of the most successful
competitive strategies that firms pursue, in order to remain profitable (Bowman & Toms, 2010:
Ormanidhi & Stringa, 2008). But one of the major challenges organizations face today is how to have a
sustained competitive strategy (Dirisu, Iyiola & Ibidunni, 2013). Competitive strategy entails the moves
undertaken by a firm so as to withstand competitive pressure, enhance buyers’ attraction, and improve its
current market position (Thompson & Strickland, 2002). A firm can also gain competitive advantage by
differentiating itself from competition through various ways, such as offering innovative features,
launching effective promotion, providing superior service, developing a strong brand name, and so on (Li
& Zhou, 2010). Boschman, (2006), observed that firms in the same industry respond to competition by
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Gender Dimension of the meaning of Work in Contemporary Nigeria
employing one or a combination of six strategies which include cost leadership, relocation, product
differentiation, market differentiation, avoidance and deterrent strategies.
Cost leadership strategy
Cost leadership strategy is an integrated set of action taken to produce goods or services with features that
are acceptable to customers at the lowest cost, relative to that of competitors (Ireland, et. al, 2011). The
most profitable competitor in any industry sector tends to be the lowest-cost producer or the supplier
providing a product with the greatest perceived differentiated values (Christopher, 2011).
Differentiation Strategy
This strategy is aimed at the broad market that involves the creation of a product or services that is
perceived throughout its industry as unique (Porter, 2008, 1985). He observed that the company or
business unit may then charge a premium for its product.
A differentiation strategy therefore can be based on many dimensions such as brand image,
innovativeness and design features, product quality, reliability, durability, customer service and firm
reputation, all of which should be difficult for competitors to copy (Porter, 2008, 1996, 1985 & 1980).
Organizational Performance
Organizational performance is described as the extent to which the organization is able to meet the needs
of its stakeholders and its own needs for survival (Griffin, 2003). Various measures of performance have
been identified, such as service productivity (Tsiotsou & Vlachopoulou, 2011), return on assets (Narver &
Slater, 1994), employee satisfaction (Ramayah, Samat & Lo, (2011), service quality, market share (Zhou,
Brown & Dev, 2009), sales, net income (Kumar, Jones, Venkatesan & Leone, 2011).
Empirical Literature
Atikiya, Mukulu, Kihoro and Waiganjo, (2015) investigated 12 key industrial subsectors located within
Nairobi and its environs in Kenya, and employed regression analysis, to estimate the effect of cost
leadership strategy on performance of these firms. They found that performance of the firms was
significantly influenced by cost leadership strategy. Birijandi, Jahroni, Darabi and Birjandi, (2014)
investigated the effect of Cost Leadership Strategy on return on asset (ROA) and future performance of
listed companies in Tehran stock exchange. They used a sample of 45 firms covering 2009-2013. After
subjecting the data to multiple regressions, they found that, in the firms with cost leadership strategy,
there were positive relationships between the ratios of sales to capital expenditure with some percentage
growth in sales.
Many studies investigated the relationship between the differentiation strategy and organizational
performance. Acquaah and Yasai- Ardekani (2008) studied the viability and profitability of implementing
cost leadership, differentiation, and the combination of the singular strategies using multiple regression
models on 45 sampled firms in Kenya and found that the incremental performance benefits to firms
implementing a combination strategy do not significantly differ from the performance of firms
implementing only the differentiation strategy. Similarly, Dirisu, Ibiduni and Iyiola (2013), interviewed
300 customers of Unilever Plc that reside in Ota, Ogun state Nigeria, in a study product differentiation
using multiple regression model. They found that significant product differentiation have positive
relationship with organizational performance.
Da silva, Gervasoni and Rossi (2013), analyzed data from a sample of seven companies in the Auto Parts
Industry in Brazil, in an investigation of the effect of differentiation strategy on the profitability of those
companies. They investigated how costs and expenses explained the profitability of the companies. They
used multiple regression and Pearson correlation coefficient and found that the company’s profitability
depends on the generic strategy adopted to deal with the competitive forces in the industry. Aliqah
(2012), investigated the relationship between differentiation strategy and organizational performance in
33 industrial companies listed at Amman Stock Exchange at the beginning of 2010 using multiple
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regression and Pearson correlation coefficient. He found out that the differentiation strategy has no
significant effect on organizational performance of such companies in Jordan. Oghojafor, Ogunkoya,
Owolabi, and Shobayo, (2014), examined the effects of competitive strategies and technological
capabilities on organizational performance of manufacturing industry in Lagos Nigeria, using random
sampling of 220 management staff. The data were analyzed using simple regression analysis. The result
showed that there existed no significant effect of the differentiation type of competitive strategy on
organizational performance but cost leadership strategy had a significant effect on performance.
Birjandi, Honarbakhsh and Valipour (2012), investigated the effects of business strategies (cost
leadership and differentiation strategies) on the relationship between financial leverage and the
performance of 45 firms in the Tehran Security Exchange (TSE) during 2003 to 2010, using multiple
regression. The firms were divided into two groups: those using cost leadership strategy and those using
product differentiation strategies and found that firms employing cost leadership strategy exhibited
positive relationships between leverage, cost leadership strategy and dividend payout with performance,
while there was positive relationship between leverage and firm's size with performance in the firms
employing product differentiation strategy. But the relationship between product differentiation strategy
and dividend payout with performance was negative.
3.
METHODOLOGY
The population of the study and the selected sample for this study are the four quoted cement companies
in Nigeria as at 2014. These are, Ashaka Cement Plc. Cement Company of Northern Nig. Plc., Dangote
Cement Company Plc, and Lafarge Africa Plc. These companies are quoted on the Nigerian Stock
Exchange and therefore their Annual Reports are published, making necessary data available for the
study. In this study the independent variables (cost leadership and differentiation), cost leadership were
represented as ratio of sales to total assets and differentiation was represented as the ratio of research and
development reserve to total assets. The dependent variables measurements: Profitability was represented
by ratio of net income to revenue and Sales Growth which is growing percentage of sales, is ratio of
change in revenue to current year revenue.
The following ratios were evaluated in this research
Table 1
Type of ratio
Profitability ratio
Sales growth
Cost leadership strategy
Differentiation strategy
Measure of
The effective use of firm’s resources
to generate profit
Firm’s increase in volume sold or
market share gained
Effective use of firm’s asset to
generate sales
Effective use of earns to develop a
better
products
that
meets
customers’ needs.
Formulae
EAT/Turnover
Turnover B-Turnover A
Turnover B
Total sales /total assets
Research and development
reserved/Total assets
Key: EAT= Earns after tax
Reliability and Validity
To test if the extracted data are normal, Pearson correlation coefficient and regression model was used to
analyze data.
N
96
Normal parameters a-b
Mean
0.817
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Gender Dimension of the meaning of Work in Contemporary Nigeria
0.3868
0.074
0.074
-0.070
Z
1.212
Asmp. Sig( 2-tailed)
0.106
From the above table, sig = 0.106>0.05. Thus data is normal as shown.
Ordinary Least Squares Method of Regression was used to determine and analyze the effect of
competitive strategy (differentiation and cost leadership) on the performance (sales growth and
profitability) of the cement companies.
Most extreme differences
Std. Devation
Absolute
Positive
Negative
The models for the regression are:
PRFT= α + βCost Leadership + µ -------------------------------------------------SG= α + βCost Leadership + µ ----------------------------------------------------SG= α + βDifferentiation + µ ------------------------------------------------------PRFT= α + βDifferentiation + µ ---------------------------------------------------Where:
SG= Sales Growth
PRFT=Profitability
α =Intercept or Constant
β = Slope of the regression line with respect to the independent variables
µ=error term.
1
2
3
4
Overview of Nigeria Cement Industry Operational Environment
The major challenge in the cement industry in Nigeria is the cost of power which accounts for up to 40%
of the total production cost and haulage which account for another 10% of costs in the industry.
Production plants are powered using gas, low-pour fuel oil (LPFO) and coal, of these three, coal is two
times cheaper than gas, and gas is also two times cheaper than LPFO.
Cement manufacturers usually establish their plants in areas close to limestone deposits to reduce the cost
of moving the major raw material limestone to plants and this is common practice for all the
manufacturers in the industry. But the cost of hauling another major input Gypsum which is imported
from the ports to the plants affect the plants cost structure in terms of distance from the ports to the plants
and the mode of haulage; using company’s fleet of trucks which is cheaper or using hired trucks.
Therefore factors that present cost differences at the cement plants in Nigeria are: energy mix at the plant,
distance and mode of hauling energy, distance and mode of hauling of gypsum from the ports and number
of depots.
Price is key in cement consumption therefore competitors can gain competitive advantage majorly
through reduction of the above costs. Also, unique and quality crafting of the product to meet the desired
need of customers is another way of differentiating oneself from competition in the market.
4.
DATA PRESETATION AND ANALYSIS
Table 2 - Profitability Percentages 2010 to 2014.
Ashaka
CCNN
%
%
2010
15.5
11.3
2011
13.9
9.4
2012
14.3
7.2
2013
13.0
10.2
Bingham University Journal of Accounting and Business (BUJAB)
Dangote
%
52.6
50.3
51.1
56.6
Lafarge
%
11.1
13.3
29.9
28.2
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Gender Dimension of the meaning of Work in Contemporary Nigeria
2014
21.6
12.7
50.1
18.0
Firm Average
15.60
10.16
52.14
20.10
Industry average
24.50%
24.50%
24.50%
24.50%
(Source: Author’s computation from the companies’ published annual reports 2010 to 2014).
Table 2 shows that for the period of this study, Dangote had the highest average profitability of 52.14%
followed by Lafarge 20.10%, Ashaka 15.60% and CCNN 10.16% in descending order. Industry average
of profitability within Quoted companies’ stood at 24.50%.
Table 4.2 Percentages of Sales Growth in the Nigerian cement industry 2010 to 2014.
Ashaka %
CCNN %
Dangote %
Lafarge %
2010
10.2
-6.1
35.9
-4.0
2011
7.8
19.6
16.1
29.9
2012
4.8
8.0
15.5
28.2
2013
-0.6
1.2
23.1
10.4
2014
-2.7
-1.3
-0.0046
8.2
Firm Average
3.9
4.28
18.12
14.54
Industry average
10.21%
10.21%
10.21%
10.21%
(Source: Authors’ computation from the companies published annual reports 2010 to 2014).
Table 4.2 shows that for the period of this study, Dangote had the highest average sales growth of 18.12%
followed by Lafarge 14.54% then CCNN 4.28% and Ashaka 3.9% in descending order. All the companies
have experienced negative growth at a particular year but CCNN has the highest negative growth of 7.4% followed by Lafarge -4.0%, Ashaka -3.3% and Dangote -0.0046%. Industry average within the
quoted companies stood at 10.21%.
Cost Leadership and Sales Growth
H02: Cost Leadership has no significant effects on sales growth of quoted cement companies
in
Nigeria. Cost leadership was represented by ratio of total sales to total assets while sales growth was
represented by ratio of increase in turnover.
Model Summary
b
Adjusted
R Std.
Error of the
ANOVA
Model
R
R Square
Square
Estimate
Model
Sum of Squares
Df
Mean Square
1
.776a
.603
.581
.45276
1
Regression
84.473
1
84.473
a. Predictors: (Constant), Cost Leadership
Residual
47.328
18
.631
Total
223.801
F
327.300
Sig.
.000a
19
a. Predictors: (Constant), Cost Leadership
b. Dependent Variable: Sales Growth
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Gender Dimension of the meaning of Work in Contemporary Nigeria
Coefficientsa
Unstandardized Coefficients
Model
1
B
(Constant)
Cost Leadership
Std. Error
-2.154
5.320
1.629
.312
Standardized
Coefficients
Beta
t
.776
Sig.
2219
.000
5.225
.000
a. Dependent Variable: Sales Growth
The regression line is SG =-2.154+1.629CL indicates that the sales growth (SG) will increase by 1.629
unites (Naira) for every 1 unit (Naira) increase in cost leadership (CL). The p-value of 0.000 is less than
the t-value 0f 0.05. CL has a significant effect on sales growth of quoted cement companies in Nigeria.
The correlation coefficient (r) of 0.776 showed a strong relationship and the coefficient of determination (
r 2) of 0.603 revealed that about 60% of variation in the SG can be explained by CL or the ability of the
regression line to predict the SG is about 60%. More so in absent of CL, the SG will reduce by 2.154
Naira as indicated by α constant.
Cost Leadership and Profitability
Model Summary
Model
R
1
.865
Adjusted R
Square
R Square
a
.748
Std. Error of the
Estimate
.734
.38604
a. Predictors: (Constant), Cost Leadership
ANOVAb
Model
1
Sum of Squares
Regression
Residual
Total
Df
Mean Square
15.5976
1
15.5976
88.086
18
.728
306.837
19
F
Sig.
.000a
53.302
a. Predictors: (Constant), Cost Leadership
b. Dependent Variable: Profitability Coefficients a
Unstandardized Coefficients
Model
1
B
(Constant)
Cost Leadership
Std. Error
-5.645
.954.
2.064
.009
Standardized
Coefficients
Beta
t
.865
Sig.
2.133
.000
7.301
.000
a. Dependent Variable: Profitability
The regression line is PRFT = -5.645+2.064CL indicates that the profitability (PRFT) will increase by
2.064 units (Naira) for every 1 unit (Naira) increase in cost leadership (CL). The P-value of 0.000 is less
than the t-value 0.05. WE then reject the Null Hypothesis and accept Alternative hypothesis that CL has a
significant effect on PRFT of quoted cement companies in Nigeria. The correlation coefficient (r) of
0.865 showed a strong relationship and the coefficient of determination r 2 of 0.748 indicated that 75% of
variations in PRFT can be explained by CL or the ability of regression line to predict the PRFT is about
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Gender Dimension of the meaning of Work in Contemporary Nigeria
75%. The result showed that in absent of CL, the PRFT will reduce by 5.645 Naira as indicated by (α)
constant
Differentiation and Sales Growth
Model Summary
Model
R
R square
Adjusted R
Square
1
.510
.560
.560
Std Error of
the Estimate
.22162
Pridictors: (constant), Diffrentiation
Coefficientsa
Standardized
Unstandardized Coefficients
Coefficients
Model
Sum of Squares
Df
Mean Square
F
Sig.
Model
B
Std. Error
Beta
T
Sig. a
1
Regression
174.7000
1
174.7000
336.339
.000
1
(Constant)
-0.561
377
4.157
.001
Residual
46.100
18
0850
Differentiation
1.883
089
510
32.518
.000
Total
802.5900
19
a. Dependent Variable: Sales Growth
a. Predictors: (Constant), Differentiation
b. Dependent Variable: Sales Growth.
ANOVAb
The regression line Sales growth (SG) = -0.561 + 1.883(Diff) indicated that the SG will increase
by 1.883 units (Naira) for every 1unit (Naira) increase in Diff. the p-value of 0.000 is less than the
t-value of 0.05. Therefore we reject the Null Hypothesis and accept the Alternative hypothesis
that Diff has a significant effect on sales growth of quoted cement companies in Nigeria. The
correlation coefficient (r) of 0.510 showed a strong relationship and the coefficient of
determination (r 2 ) of 0.560 indicated that about 56% of the variation in the SG can be explained
by Diff or the ability of the regression line to predict the SG is about 56%. In the absent of Diff,
the SG will reduce by 0.561 Naira as indicated by constant α
Differentiation and Profitability
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Gender Dimension of the meaning of Work in Contemporary Nigeria
Model Summary
Model
R
.653a
1
Adjusted R
Square
R Square
.664
Std. Error of the
Estimate
.662
.56088
a. Predictors: (Constant), Differentiation
ANOVA b
Model
1
Sum of Squares
Df
Regression
Mean Square
1
F
139.009
Sig.
362.244
.000a
109.009
Residual
41.146
18
Total
.441
19
138.950
a. Predictors: (Constant), Differentiation
b. Dependent Variable: Profitability
Coefficients a
Unstandardized Coefficients
Model
1
(Constant)
Differentiation
B
Std. Error
-0.795
.202
1.234
Standardized
Coefficients
.021
Beta
T
.653
Sig.
-2.186
.002
17.111
.000
a. Dependent Variable: Profitability
The regression line Profitability = -0.795 + 1.234Differentiation indicated that the profitability
(PRFT) will increase by 1.234 units (Naira) increase in differentiation (Diff). The p-value of
0.000 is less than the t-value of 0.05, the study reject the Null Hypothesis and accept the
alternative hypothesis that Diff has a significant effect on PFRT of quoted cement companies in
Nigeria. The correlation coefficient (r ) of 0.653 showed a strong relationship and the coefficient
of determination (r 2) of 0.664 indicates that about 66% of the variation in the PRFT can be
explained by Diff or the ability of the regression line to predict the PRFT is about 66%. In the
absent of Diff, the PRFT will reduce by 0.795 Naira as indicated by α constant
Discussion of Findings
It is evident from the above results and analysis that, competitive strategy in terms of product
differentiation, and cost leadership have a positive effect on both sales growth and profitability with
statistical significance. This has given a base to establish why some cement manufacturing companies are
growing and increasing their production capacity while others are not. Because it has been statistically
established that cost leadership strategy (which is management’s posture to continue to reduce cost in all
business activities relative to competitors) has a positive effect on profitability and sales growth.
In view of the foregoing analyses, the following inferences are drawn; Ashakacem was running its plant
on LPFO and coal but doubled its gross earnings immediately coal use increased to 70%, have high cost
of haulage of input due to distance from Ports, use key distributors to manage trucks and depots, produce
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Gender Dimension of the meaning of Work in Contemporary Nigeria
a brand with differentiation only in label, these give low average profitability percentage of 15.60%
which is below industry average of 24.50% and low total sales growth percentage of 3.90% industry
lowest within this period. CCNN plc that runs its plant entirely on expensive LPFO, has a high cost of
haulage of input due to its distance from the Ports and use of hired trucks. The plant could not increase
capacity due to uneconomical mode of operation and Produce a brand which is differentiated only in
label. These lead to a low total average profitability percentage of 10.16% which is below industry
average of 24.50% and low total average sales growth percentage of 4.28% which is also below industry
average of 10.21% and has the highest negative sales growth of -7.4% within the period of the study.
DCP have a continuous cost reduction strategy relative to competitors by running its plants on coal and
gas except Gboko that run on LPFO, Gboko do shut down when demand become low. DCP use its own
fleet of truck for all haulages, plants located in the centre of the country and South-West which reduce
cost of haulage of inputs from the Ports. It has 45 sales depots located in all regions of the country and
differentiate its brands using SON grading. All these efforts made the company to achieve the industry
highest average profitability percentage of 52.14% which is far above industry average of 24.50% and
industry highest average sales growth percentage of 18.12%. Lafarge Africa plc runs its old plants
entirely on expensive LPFO but new ones on Gas. All plants are located close to the Ports except Ashaka.
Transfer depots and finished goods haulage cost to 133 key distributors that own and manage the branded
trucks and depots. Produce many differentiated brands to meet the needs of users, even produce cement
mixed with sand as ready-mix. All these strategic efforts gave the company average profitability of
20.10% which is a little below industry average of 24.50% and average sales growth of 14.54% which is a
little above industry average of 10.21%.
These findings are consistent with the findings in previous studies such as Birjandi, Hanarbarhsh, and
Valipour, (2012), Ma, (2004); Fahy, (2004); Wang and Lo, (2004); Ray et al., (2004). The study also
supports the theory of hybrid business strategy based on study done by scholars like: Abdullah, Baroto
and Wan, (2012), and Prajogo (2007) which hold that firms employing the hybrid business strategy (Low
cost and differentiation strategy) outperform the ones adopting only one generic strategy. That explained
why DCP having combination strategy, is the industry leader with highest average profitability
percentage of 52.14% which is far above industry average of 24.50% and industry highest average sales
growth percentage of 18.12%. This may also be why Lafarge is the second industry leader by employing
to a lesser degree, both cost leadership and differentiation.
The results and analyses revealed that, competitive strategy in terms, product differentiation, and cost
leadership strategies have positive effects on both sales growth and profitability with statistical
significance. Cost leadership has more influence on both sales volume and profitability, followed by
product differentiation. Sales growth will increase by N1.69 for every one Naira increase in cost
leadership and absent of cost leadership will reduce sales growth by N2.15. Profitability will increase by
N2.06 for every one Naira increase in cost leadership and absent of cost leadership profitability will
reduce by N5.65. Sales growth will increase by N1.88 for every one Naira increase in Differentiation and
will reduce by N0.56 if Differentiation is absent. Profitability will increase by N1.23 for every one Naira
increase in differentiation and will reduce by N0.80 in absent of differentiation. Finally, although both
cost leadership and differentiation strategies have positive effects on the performance of the companies
studied; cost leadership has the highest effect on both sales growth and profitability compared to product
differentiation.
5.
CONCLUSIONS AND RECOMMENDATIONS
Cost leadership has more influence on both sales growth and profitability because energy and haulage
cost constitute about 50% of the production cost of cement. This explains why reduction in all cost
elements by Dangote Cement plc made it the market leader as shown by its average sales growth
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Gender Dimension of the meaning of Work in Contemporary Nigeria
(18.12%) and profitability (52.14%) which was above industry averages of 10.21% and 24.50%
respectively. On the other hand, the inability of CCNN plc’s to pursue cost reduction made it to have the
lowest average profitability (10.16%) in the industry and second to the lowest sales growth (4.28%).
Ashakacem’s lowest sales growth could be attributed to other causes as it has a better energy cost than
CCNN plc. It is also concluded that, product differentiation must have been partly responsible for
increased sales growth and profitability of cement companies. That may be why Lafarge Africa is clearly
the second industry leader in Nigerian Cement industry, in terms sales growth (14.54%) and profitability
(20.10%). Ashakcem is third in the industry with (average sales growth 3.9%; average profitability
15.6%).
In the light of the findings and conclusions of the study, the following recommendations are made.
Reduction of powering cost relative to competitors by using cheaper energy mix like coal and gas is the
right place to start the implementation of cost leadership strategy in this industry.
The reduction of haulage cost by using own trucks or railway for haulage of inputs. Addition of
production capacity in a location where there is no access to cheaper energy like coal and gas should be
discouraged. Cement companies like CCNN and Ashakcem that have not done serious differentiation
need to adopt it now because this study has shown that differentiation is one of the strategic tools the
industry leaders are using to push up their sales growth and profitability. This is more important for those
companies that may not be able to pursue cost leadership strategy. All cement companies in Nigeria may
also consider strategizing a combination of cost leadership and differentiation strategies.
References
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for Competitive advantage. International Journal of Business and Management, vol.7, No.20,
pp.120-133.
Acquaah, M. and Yasai-Ardekani, M, (2008), Does the implementation of a combination
strategy yield incremental performance benefits? A new perspective from a transition economy in
Sub-Saharan Africa. Journal of Business Research, vol.6, no. 2, pp.346-354.
Aliqah, A. k, (2012), Differentiation and organization performance. Empirical evidence from
Jordanian companies. Journal of Economics, vol.3, no.1, Pp.7-11.
Allen, R. and Helms, M, (2006), Liking strategic practices and organizational performance to
Porter’s Generic strategies. Journal of Business Process Management, vol.12, no.4, pp.433-454.
Amoako-Gyampah, K.and Acquaah, M, (2008), Manufacturing strategy, competitive strategy
and Firm performance: An empirical study in a developing economy environment. International
Journal of Production Economics, vol.111, no.1, pp.575-592.
Arthur, A, Gamble, J, John, E, Thompson, A. J. and Strickland, W, (2010), Crafting and
executing strategy : The Quest for Competitive Advantage Concepts and Cases, 17/
E: Boston : MCGraw –Hill/Irwin.
Atikiya, R, Mukulu, E, Kihoro J. and Waiganjo, E, (2015), Effects of cost leadership strategy
on the performance of manufacturing firms in Kenya. Journal of Management, vol.2,
no.8, pp.134-143
Barney, J .B, (2007), Gaining and sustaining competitive advantage (3rd ed.), Upper Saddle
River,
NJ: Pearson Education.
Birjandi, H, Hanarbarhsh, S. and Valipour, H, (2012), The effects of cost leadership and
Product differentiation strategies on the performance of Firms. Journal of Asian Business
Strategy , vol.2, no.1, pp.14-23.
Birjand,, h, Jahron, N.M. and Darabi, S.A, (2014), the effects of cost leadership strategy on
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Gender Dimension of the meaning of Work in Contemporary Nigeria
ROA and future performance of accepted companies in the Tehran stock exchange. Research
Journal of Finance and Accounting, vol. 5,no. 7, pp.152-158.
Caroline, B. L. and Julie, J.L, (2008), Achieving financial performance in China:
Differentiation, cost leadership or both? Journal of International Marketing, vol.16, no. 3, pp.122.
Campbell-Hunt, C, (2000), What have we learned about generic competitive strategy? A
Meta- analysis of Strategic Management Journal, vol. 21, pp.127–154.
Da Silva, D, Gervasoni, C.V. and Rossi, B.G,(2013), Analysis of differentiation and
Profitability of business (auto parts industry in Brazil). Brazilian Journal of Marketing, Opinion
and Median Research, vol. 13, pp.33-45.
Dirisu, I.J, Ibidunni, O.S. and Iyiola, O, (2013), Product differentiation: A tool of competitive
advantage and optimal organizational performance ( A study of Unilever Nig. Plc),
European Scientific Journal, vol.9, no.34 ,pp.258-28.
Evans, C, (2003), Managing for Knowledge: HR’s Strategic Role, Butterworth-Heinemann,
Amsterdam.
Kim, E, Nam, D. and Stimpert, J.L, (2004), Testing the applicability of Porter's generic
strategies in the digital age: A study of Korean cyber malls. Journal of Business Strategies,
vol.21, no.1, pp.19-45.
Learning, O,(2010), Integrated cost leadership-differentiation strategy. Retrieved from:
http//www.open learning world.com.
Minarik,M, (2007), Cost leadership and differentiation: An investigation of the fundamental
trade-off between Porter’s cost leadership and differentiation strategies. Msc Thesis in
International business, Institute of international business, Stokholm school of
economics
Neely, A, (2005), The evolution of performance measurement research: Developments in the last decade
and a research agenda for the Next. International Journal of Operations and Production
Management,vol.25, no.12, pp. 1264-1277.
Oghojafor, B. E. A, Ogunkoya. O.A, Owolabi. L.K. and Shobayo.P.B,(2014), The effects of
competitive strategies and technological capabilities on organizational performance.
Arabian Journal of Business and Management Review (Nigerian Chapter) vol.2, no. 1
Pp.11 -24.
Powell, W. W, (2001), Competitive advantage: Logical and philosophical considerations.
Strategic Management Journal, vol. 22, no.9, pp.875-888.
Prajogo, D. I, (2007), The relationship between competitive strategies and product. Journal
of Quality Industrial Management and Data Systems, vol.107, pp. 69-831.
Ramayah, T, Samat, N. and Lo, M. C, (2011), Market orientation, service quality and
organizational performance in service organizations in Malaysia. Asia-Pacific
Journal of Business Administration, vol.3, no.1, pp. 8-27.
Tanwar ,R, (2013), Porter’s generic competitive strategies an overview. Journal of Business
and Management. vol.15, no.1,pp. 11-17
Appendix I
Profitability of the four quoted cement companies as represented by ratio of EAT over turnover as calculated from the
companies’ published annual reports for the period 2010 to 2014
Ashaka plc
CCNN plc
DCP
Lafarge plc
2010
0.1568
0.1135
0.5263
0.1113
2011
0.1388
0.0935
0.5029
0.1391
2012
0.1431
0.0718
0.5111
0.1677
2013
0.1301
0.1018
0.5659
0.2884
2014
0.2160
0.1268
0.5013
0.2679
Appendix II
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Gender Dimension of the meaning of Work in Contemporary Nigeria
Sale growth of the four quoted companies as represented by ratio of change in turnover as calculated from the companies’
published annual reports for the period 2010 to 2014
Ashaka plc
CCNN plc
DCP
Lafarge plc
2010
0.1023
-0.0613
0.35943
-0.0399
2011
0.0784
0.1964
0.1609
0.2984
2012
0.0479
0.0802
0.1554
0.2823
2013
-0.0063
0.0123
0.2314
0.1037
2014
-0.0265
-0.0126
-0.000046
0.0819
Appendix III
Cost leadership strategy of the four quoted companies represented by their ratios of net sales revenue over total assets as
calculated from the companies’ published annual reports 2010 to 2014
Ashakacem plc
CCNN plc
Dangote cem.
Lafarge plc
2010
0.0800
0.2698
0.4896
0.1010
2011
0.0618
0.2168
0.3866
0.1542
2012
0.0631
0.1640
0.3543
0.2140
2013
0.0603
0.1882
0.3679
0.3025
2014
0.0891
0.20309
0.2910
0.1025
Appendix IV
Differentiation strategy of the four quoted cement companies represented by ratios of research and development reserve to total
assets for the period 2010 to 2014
Ashakacem plc
CCNN plc
DCP
Lafarge plc
2010
0.00800
0.02698
0.04896
0.01010
2011
0.00618
0.02168
0.03866
0.01542
212
0.00631
0.01640
0.03543
0.02140
2013
0.00603
0.01882
0.03679
0.03025
2014
0.00891
0.020309
0.02910
0.01025
Gender Dimension of the Meaning of Work in Contemporary
Nigeria
Olowu Josephine
Department of Sociology,
Bingham University
Karu, Nasarawa State
Tel: 08036145794
E-mail: olowujosephine@gmail.com
and
Isa Hezakiah Grace
Department of Economics,
Bingham University
Karu, Nasarawa State
Tel: 08036145794
E-mail: olowujosephine@gmail.com
Abstract
Work is an old as man but they very experience of work has changes from the earliest times to the present. While
work can be perceived as an activity people engage in within an organization to earn some form of benefit, which
can be monetary or otherwise, in other to meet basic needsof life, the richness of the experience people can easily
relate about their work is enormous. Using the social survey method with questionnaire as instrument for data
gathering, this paper examined the gender dimension of the meaning of work in contemporary Nigeria. It was
Bingham University Journal of Accounting and Business (BUJAB)
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Gender Dimension of the meaning of Work in Contemporary Nigeria
discovered that to both gender work means a mean to earn money, that the reason why people work is to have a
source of living, that both gender get committed to their work to earn promotion and can frequently change their
jobs for the propose of better pay. That harsh economic situation in Nigeria makes retired worker to work on
contract. The paper recommends that worker pay should be improved to be able to prepare adequately for life after
retirement.
Keywords: Gender Dimension, Work Place, Contemporary Nigeria
Introduction
Work is as old as the human species itself. Even the earliest bits of recorded history about our ancestors
are basically accounts of the work they did. Most work in the earliest times was devoted to the purpose of
keeping the individual alive. Often, such work was in the line of gathering food, capturing prey, attacking
or defending against enemies and obtaining safely from the elements in the form of an appropriate shelter
(Dex, 1985). However, the very experience of work has changed from earliest times to the present Prior
to the industrial revolution, work was extremely physical with the advent of other sources of energy, work
became mechanized and standardized.
Most of us spend over fifty percent of our working life engaged in some form of work. And like other
human activities essential to our very existence such as eating sleeping and socializing, work is well
known experientially. Yet, if we ask for the meaning of work, we are, likely to hear that work is
something one does in an organization for money. While this basic conceptualization is true to most of
us, it seems pretty bare in contrast to the richness of the experience people can so easily relate about
their work. To Damachi (1986) work has held several dominant meanings and oppositions to the
generations of western workers, and has tended to acquire its significance as a function of cultural and
environmental situation which incidentally change, ever so often, with each passing generation wither
as a reaction to environmental realism, cultural changes (norms and values) or s a fact. Each generation
evolves it acceptable meaning of work, which therefore determines how work is to be done, including
hours of work who should work, what wages for work etc. This paper attempts to examine the gender
dimension of the work in contemporary Nigeria.
Wage labour according to Olugbile (997) was not a common thing in some parts of the country; there were
systems of collective labour which made it possible for .work especially farming with to be done on a
fairly large scale. Traditional work - culture developed outside the atmosphere in which work is today
situated and was an essential part of people's way of life. However with colonialism and the amalgamation
of Northern and Southern protectorates came a burgeoning evil serv.ee and a private sector that was
initially substantially based on the commerce created by the activities of such organizations as the Royal
Niger Company. On the other hand, Nigeria is a country with a very large public sector, with six States and
Federal Capital Territory, each state government operates its own civil service apart from that of federal
government. There are also parastatals established by the federal government which also have offices in
almost all the state capitals employing serves of people.
Various expositions on the attitude of work of the Nigerian workforce have painted a rather negative
picture of an apathetic uncommitted men and women who are equally unresponsive to traditional
techniques. Popoola, (1992) stated that Nigerian workers have therefore, been described as "indolent",
apathetic, unresponsive to motivation and generally, not willing to put forth maximum productive efforts.
The understanding of the meaning of work is therefore central to the issue of improved attitude to work,
to government as the largest employer labour and management of human resources. This is because; the
meaning men give to their work determines their attitude towards it. What meaning do people give to
their work?
It is commonly observed that most people, if asked the meaning of work would imply that work provides
them with a means of livelihood. While this may be true, it however, neglects many crucial aspects of the
meaning of work. Moreover, our views of work have changed considerably over the past decades to a
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Gender Dimension of the meaning of Work in Contemporary Nigeria
point where people expect more from work than sheer economic reward. The expectation people hold for
work than sheer economic reward is indicative of an area of further studies.
2.1
Conceptual Framework
According to the oxford dictionary of economics by Black (1997), works are activities involving
physical mental efforts. It was further noted that, a greater part constitute paid employment or
working for economic gain, while some are self-employed. This work could be voluntarily done for
charities; other people receive payment for work. Work therefore is synonymous with labour which is
one of the factors of production. The consent of labour should be obtained before rendering a service
because labour has a mind of its own (Lawal, 1982). Additionally, Labour is distinct from other
factors of production such as Land and Capital due to its human attributes.
2.1.1
Work Orientation
In the philosophy of instrumental orientation, workers conceive and define work in terms of a means
workers are not involved in their job and thus conceive of work as a means to an end. The bureaucratic
orientation on the other hand defines work as involving service to an organization return t career. These
workers have positive involvement in work and with the organization. For the solidaristic rrientation, it
defines work as an activity. Workers here identify more with workmate social relationship in some cases
form the basis of occupational communities outside work. Martin and Fryer's (1972) in their study of
redundant men hold the view that there is no reason for having a job. If you have enough money without
working but that more women than men declared that friendly and helpful relations with their fellow
worker was important and women's priorities about work differ from those of men.
Fraiser (1968) noted that among factory workers women are much happier than men because they can
chatter all day long about their homes, their holidays, who is in the family way and anything else
unconnected with work. This view was also shared by Atif (1984) who observed that for women, the
work space is an area for individually selected relationship in a place for exchange of information that
is an ideal condition where women value the environment of work which encourages relationships
and communication. However Brown (1984) and Jepeott (1962) work for women means the desire to
escape boredom and loneliness at home and to gain companionship at work. But Dex (1985) and
Parker (1977) refutes this position and stated that women work for money. Hunt (1968) also agreed
with Dex and Parker (1977) that women work for economic reasons.
2.2
Empirical Preview
Lawal (1982) identified various incentive schemes that can encourage workers increase their
happiness and make them contended in order to discharge their duties effectively. These schemes are
benefits, profit-sharing schemes and retirement benefits. They are reward for service rendered by
labour.
2.3
Theoretical Framework
2.3.1 Structural/Functionalist Perspective (Marxist Theory of Gender)
In due view of functionalist, society is like a living organism in which each part of the organism
contributes to its survival. The perspective emphasizes the way that parts of a society are structured to
maintain its stability such as Emile Durkheim’s analysis on religion. The approach is concerned with how
structure guide’s the functions of anyone assigned to an office. It also sees to the distribution of power in
both society and organization as the only legitimate and rational goal. It views the factory and
organization as an enclose entity not affected by development outside the work situation like industrial
conflict as bad it also emphasized consensus shared values and industrial peace.
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Gender Dimension of the meaning of Work in Contemporary Nigeria
Therefore work is functional and contributes to the progress of society especially when men and women
play their roles. Marxist theory of gender differs from the functionalist theory through agrees that work is
functional but the Marxist theory is rooted in the historical materialist theory which Karl Marx developed
(1930) According to Idyorough (2005) the theory is premised on the fact that human begins must produce
their food, clothing and shelter and must also and independent of their will (Marx, Engles & Benin,
1972). In this theory, Marx posits that the historical development of societies is made possible through the
relations of production. The relations of production in this case refer to reproduction of human species
and how produces socially and social classes) To Marx, it is the development in the forces of production
(i.e Kinship relationship in the forces of production (i.e developments from implements such as species,
bows, arrows to the invention of the steam engine and the mechanization of production processes that has
led to several social changes in the society, including formation of social classes, exploitation, oppression
and subjugation of women. In this case men and women sell their labour for basic need and are exploited
by owners of means of production. Work here is for the sole basis of money and exploitation men and
women go into paid work for the money that is why they sell their labours.
3.
Methodology
As posited earlier, work is an old as man but they very experience of work has changes from the
earliest times to the present. While it is assumed to be an activity something one does in an
organization to earn money and to meet basic needs, the richness of the experience people can easily
relate about their work is enormous. Therefore, this study employed the use of the social survey
method with questionnaire as instrument for data gathering.
4.
Result and Discussion
Results of the administered questionnaires are subsequently tabulated and discussed below:
Table 1: Meaning of Work
Sex
A means of
A way interacting
Satisfaction from getting
earning money
with co-workers
something done
Male
71.2%
5.1%
23.3%
(84)
(6)
(28)
Female
64.6%
8.1%
27.3%
(64)
(14)
(27)
Total
148
14
55
(68.3)
(6.4)
(25.3)
Source: Field Work 2016
Total
100%
(118)
100%
(99)
217
(100)
The table above shows the differences by sex for the main reason why people work, from the above table
(1) findings show that 64% of female say they work mainly to earn a living while 71% of male also wok
to earn a living. These findings may be explained by this fact that the responsibilities of caring for
families and dependents rest more on women in our societies. Although on gender difference, only a
slightly greater tendency is seen in women who see work as providing a milieu of interaction with coworkers. This provides support for Brown et al (1964) and Jephcott (1962) that for women, work means
the desire to escape boredom and loneliness at home and gain companionship at work. However the harsh
economic situation in the country has increase push many women into wage labour to payment family
income.
Table 2: Main Reason for working by Sex.
Bingham University Journal of Accounting and Business (BUJAB)
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Gender Dimension of the meaning of Work in Contemporary Nigeria
Sex
To earn a living
Male
74.2%
(84)
Female
67%
(66)
Total
153
(70.5)
Source: Field Work 2016
To take care of my
family
15.1%
(19)
21.2%
(21)
40
(18.4)
To interact with co-workers
Total
10.2%
(12)
12.2%
(12)
24
(11.1)
100%
(118)
100%
(99)
21.7
(100)
Majority (67%) of female respondents work mainly to earn a living while 74% of male respondents gave
the main reason why they work is also to earn a living, this may be explained by the fad that the
responsibilities of oaring for families and dependents now rest more on both due to the global economic
downturn which encourages dual career families.We also examined the relationship between the reasons
for commitment and sex and our findings in Table 3 shows female respondents feel more secure in their
jobs than their male counterparts and are not committed to work for fear of being sacked.
Table 3: Commitment to Work
Sex
To earn promotion
Male
To avoid being
sacked
31.3%
(37)
23%
(22)
59
(27.4)
It’s just part of me
Total
38.1%
30.6%
100%
(45)
(36)
(118)
38.3%
100%
Female
39.1%
(38)
(37)
(97)
Total
83
73
215
(38.7)
(33.9)
(100)
Source: Field Work 2016
The table above shows that commitment to work is essentially because of the desire to be promoted and
because it is part of them to be committed while males are committed to work so as not to be sacked. In
Nigeria the entry of women into the modern workforce is relatively recent. They are yet to enter into the
mainstream occupations and consequently are not perceived as threats in terms of competition. For this
reason an examination of major retrenchment exercise is likely to reveal a preponderance of male workers
over female workers on the list of workers laid off. On the question of how frequent respondents change
jobs, we also compared the responses of male and female workers and the findings are shown in table 4.
TABLE 4: Frequency of Job Change
Sex
Male
Once
7.%
(8)
Female
35.3%
(35)
Total
43
(43.9)
Source: Field Work 2016
Twice
3%
(3)
1%
(1)
4
(1.8)
Bingham University Journal of Accounting and Business (BUJAB)
Thrice
90.8%
(107)
12.2%
(12)
118
(54.3)
Total
100%
(118)
100%
(99)
21.7
(100)
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Gender Dimension of the meaning of Work in Contemporary Nigeria
The findings show that 90% of male workers have changed jobs three times while 63% of their female
counterparts have done so. This finding may be explained by the pressure which may come upon male
workers to move in search of more paying jobs and better condition of service to shoulder more
adequately family responsibilities. Another possible explanation is that male workers as we explained
earlier in our discussion on the relationship between commitment to work and sex may be more
vulnerable to lay off which could be one reason for job change.
When asked .to explain why they think workers work on contract after retirement, 355 of female
respondents say lack of planning is the reason why people work after retirement while only 19% of their
male counterparts advance the same reason as shown in Table 5.
TABLE 5: Why People Work on Contract after Retirement
Sex
Male
Lack of Planning
19.4%
(23)
Female
35.3%
(35)
Total
58
(26.9)
Source: Field Work 2016
Economy/ money
Impact on
Money?
64.4%
(76)
55.5%
(55)
131
(60.3)
6.7%
(18)
4%
(4)
12
(5.5)
Total
Avoid
Idleness
100%
(118)
100%
(99)
21.7
(100)
As indicated above, 64.4% of male respondents as against 55% of female respondents say that
unfavorably economic environment accounts for retirees return to contract work. The difference in gender
response here may be due to the saying that women are more careful with resources and better managers.
In other words, "being so described, they feel that lack of planning while in service accounts for why
retirees return to work on contract. This view however fails to take into account the fact those workers
wages are meager and that saving is almost impossible.
5.
Conclusion and Recommendation
In general, it was found that workers see work as a means of earning money to obtain material needs and
to care for family. This general finding provides support for earlier studies as well as Coleman,
Goldthorpe (1968) and Bennelt (1978) who stressed material gain as the very reason for working. In other
words, idleness, the need to interact with co-workers and other variables measuring the relational and
expensive orientation to work do not account for why majority of people work in Nigeria. This finding is
reflective of Nigeria’s prevailing economic hardship and high level of poverty among the citizenry
worker’s inclusive. On gender or sex difference only a slightly greater tendency is seen in women to see
work as providing a milieu of interaction with co-workers. When asked why they work, 73% of males as
against 66% of females said they worked to earn a living.
It was found that 90% of male workers changed jobs only 63% of female workers did so the main
reason given was search for better pay. Therefore it can be safely asserted that people work in Nigeria
mainly for instrumental reason and see work as a means of earning money. It follows from this
conclusion that effort geared at effective human resources mobilization and management in institutions,
organizations and industries in Nigeria must first and foremost centre on adequate monetary reward.
Also to retain the needed personnel therefore it is recommend that careful review of workers’ pay
should be a regular exercise. It is also recommend that in addition to improving the pay of workers a
deliberate policy focusing on the post service life of workers be evolved to ensure that they can meet
their basic needs. The recent, increase in retirement benefits by government is a step in the right
Bingham University Journal of Accounting and Business (BUJAB)
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Gender Dimension of the meaning of Work in Contemporary Nigeria
direction. Such policies would be more rewarding if they take into account prevailing inflationary
trends and living standard.
References
Black, J. (1997). Oxford dictionaries of Economics (2nd Ed) New York: Oxford University Press.
Brown, R. K (1964). The Employment of married women and the supervisory Role. British Journals of
industrial Relations
Coleman, J.C (1986) Contemporary Psychology and Effective Behaviors Illinois, Scott, foreman & Co.
Damachi, U. G (1986). Contemporary Problems in Nigeria Industrial Relations Lagos: Development
Press.
Dex S. (1986). The sexual Division of work Issues: Harvester Press Pub. Group.
Goldthorpe Lockwood (1968). The Affluent Worker Industrial Attitude and
London: Cambridge Uni. Press
Behavior.
Idyorough, A. E. (2005) Gender, Concepts and Issues in Nigeria, Makurdi, Aboki Publisher.
Lawal A. S (1982) economic for Nigeria. London: Cassell Ltd.
Martin, R. (1972) Redundancy and Paternalist. London: George Allen & Union
Olugbile F. (1997). Nigeria at Work. Lagos: Malthouse Press Ltd.
Parker, S. R (1977). The sociology of Industry. London: George Allen and Union
Popoola, D. (1982). Job satisfaction in institutions of higher leadership. The University of Lagos
Experience. Nigerian Journal of Economic and Social Studies No, 14 Vol 3 pp 142
Bingham University Journal of Accounting and Business (BUJAB)
Page 208
Fiscal Relationship in Nigeria's Fiscal Federalism
Fiscal Relationship in Nigeria's Fiscal Federalism
Musa Ahmed Muhammed
Department of Accounting
Nasarawa State University,
Keffi, Nasarawa State.
E – Mail: ubaahmed70@gmail.com, Phone No: +2348036235966
Abstract
Revenue allocation amongst the three federating units is a matter of concern to the government and the governed in
Nigeria today. It is always a matter that generates conflict either internally or openly. Most recently, the 13%
derivation policy has also added to the existing problems experienced in this regard, the 13% derivation is yet to
assume wide range of acceptability in Nigerian even though the implementation has taken over decades of
operation based on the amalgamation principles. Other variables considered are population, the IGR, special needs
and attention etc. Even at this, the derivation policy which seems to be at the disadvantage of the North does not
still gives the South some level of comfort as they are still agitating for absolute resource control. The government
in the past resulted to the creation of the Niger-Delta ministry to solve immediate needs of the Niger-Deltans,
which would proclaimed another page of disagreement between the south and the North because the north is also
asking for such developmental ministry to explore all avenues that will give us some level of advantage as assume
by the south. This paper is out to examine the fiscal relationship in Nigerian's fiscal federalism, the new dimension.
It will detailed the way out to the problems of derivation, resources control and the emerging Northern agitations
especially with the recent discovery of oil in some part of the North and even the South-west and the North central
where some solid minerals were discovered.
Keywords: Derivation Principle, Fiscal Relationship, Revenue Allocation
Introduction
Basically the contentious issue in Nigerians fiscal federalism lies on how the federal allocation is shared
amongst the federating unit (Uche, 2004) the amalgamation stories started in 1861 when Lagos colony
was ceded to the British government which later gave rise to the proclamation of present day southern
Nigeria (Nwoke 2006). In government exist powers and responsibilities which in turn determine the
pattern of relationships amongst them. (Inter-governmental relations). This portends different level of
responsibility amongst different level of government, be it federal, state, or local. But the key is the
provision of security and services to the citizens. This gave raise to fiscal federalism. Fiscal federalism is
merely about allocation of resources to the tiers of government. To achieve this, government has resorted
to the establishment of committees, commission, constitutional amendments and even court rulings. Yet
distribution of federally generated revenue is still of concern to the Nigerian government and the
governed since the absolute solution is yet to be found.
This is because the derivation principle has generated more problems than solution since inception
because of the agitation from other parts of the country. The constitution of the federal republic of Nigeria
provides that at least 13% of the federal revenue be calculated and returned to the area producing it. This
gave birth to the idea of resource control by the South-South states. This is still a complex problem
affecting the Nigerian federalism. In this respect the paper will examine the application of the past
principles and highlight some key solutions towards solving the problems.
Conceptual Framework
Despite progressive increase in the federally generated revenue in the country, the corresponding
economic growth and national development has not been encouraging. In Nigeria, federalism is
theoretically about equality, equity, justice and fair play amongst both the constituent units and the
communal group that comprises it. It is also mobilization and utilization of societal resources in a manner
that facilitates balanced growth and development. The greater the sense of equity, fairness and justice, the
more likely a state of stability, harmonious coexistence and growth (Jega 1996 & Musgrave 2004).
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Federalism is a system of government in which power is divided between central authority and various
units in the country. In Nigeria, we have the central government (Federal), state and local government. It
is the decentralization of responsibilities for expenditure and revenue to different levels of government
that ensures that each level makes decision and allocates resources according to its priorities. Therefore,
two aspect are crucial for the institution and practice federalism (Weil, 2008).
Salami (2011) identifies two types of federalism, namely, dual federalism and cooperative federalism. In
dual federalism the constitution creates two separates and independent tiers of government with their own
clearly defined areas of responsibilities. In such a system, it is enviable that a certain level of tension and
competition will exist. In cooperative federalism, there is partnership between different levels of
government providing effective public services for the nation. This type of federalism is practiced in the
United States of America and Germany (Sani, 2003). Fiscal federalism in addition to the fiscal
relationship between central and lower levels of government also involves financial aspects. Fiscal
federalism constitutes a set of guiding principles that helps in designing relations between the national
and sub-national levels of government. Fiscal decentralization is on the other hand a process of applying
such principles (Skrab, 2009). Specifically, decentralization achieved the following reasons:
i.
Central government increasingly are finding that it is impossible for them to meet all the
competing needs of their various constituencies and are attempting to build local capacities by delegating
responsibilities downward to their regional government.
ii.
Central governments are looking to local and regional government to assist them with national
economic development strategies.
iii.
Regional and local political leaders are demanding more autonomy and want taxation powers that
go along wit their expenditure responsibilities. (Ozo-eson 2005).
The basic foundation for the initial theory on fiscal federalism were led by Keneth Amo, Richard
Musgrave and Paul Sandway's two important papers (1954, 1955) on the theory of public goods, another
book by Richard Musgrave (1959) on public finance provided the framework for what becomes accepted
as the proper role of states in the economy. Fiscal federalism, from the very beginning, raised several
fundamental issues. The assignment of responsibilities among federating units in Nigeria has also created
problems. First, there was the question of how each level of government would be given adequate fiscal
powers to enable it maximize its revenue and discharge its constitutional duties and still preserve its fiscal
autonomy. While a reduction of fiscal independence through central administration of a particular tax may
conflict with the principle of fiscal independence of states and local government the hard choice might be
between more fiscal powers and less revenue, or less fiscal powers and more revenue. The introduction of
value added tax (VAT) which replaces states’ sales tax and administered by the federal government is an
example of one of such conflicts.
Secondly, there were problems of allocating the centrally collected revenue equitably among all the levels
of governments. In order to resolve this problem, various principles had been tried by different fiscal
commissions and, so far, there are yet to be fully acceptable principles for sharing revenue. Very often,
lack of adequate data for objective analysis had exacerbated, rather than ameliorated, the revenue sharing
problem among states and local governments. Third, fiscal federalism had been encumbered in the past
by non-jurisdictional problems such as imbalance in population, size of land area, resource endowments
and levels of development. Consequently, there has been a growing gap between the requirements of
individual states and local government and the revenues they are able to raise on their own. This sharp
difference between the very rich and the very poor levels of government tended to influence the principles
applied in favour of poorer states, and sometimes at the expense of the richer ones. Fourth, while the
creation of states and local governments by the military government was to produce a balanced
federation, the emergence and proliferation of states and local governments have continued to pose new
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problems for intergovernmental fiscal relations. Although, a major objective of the military government
in creating states was to reduce the political powers of the regions and play down regional/ethnic politics
that was already cracking the new federal structure, unfortunately, it also saw it as an opportunity to use
its military might to assert the “supremacy” of federal government fiscal powers over the states.
The present allocation of functions is based on the 1999 Constitution, which divided government
functions into three categories of legislative powers. “The exclusive list, on which only the federal
government can act; the concurrent list, which contains responsibilities shared by both federal and state
governments; and the residual list, which is reserved for state governments. The federal government has
responsibility for functions whose benefits extend nationwide, such as, defence, foreign trade,
immigration, currency among others” (Akpan, 2011, p. 169). It also has responsibility for important
business undertakings through parastatals, for example, railways, electricity among others, while
functions whose benefits have the possibility of spilling over state boundaries were placed on the
concurrent list. Local governments, on the other hand, have responsibility for functions whose benefits
accrue to a limited geographical area such as markets, primary education, and cemeteries among others.
The different formulas that have been used for revenue allocation have consistently increased the
financial powers of the federal government against the other levels of government, The allocation of the
most productive income-elastic taxes to the federal government have made the centre financially stronger
than the states and local governments. The principal effect of this is the increasing fiscal dependence of
the lower governments on federally collected revenue (both statutory and non-statutory), and their
inability to meet the cost of functions assigned to them. Over-dependence on oil revenue has impacted
negatively and posed serious challenges to the issues of fiscal federalism in the country. It has created the
leech syndrome whereby the states have become economic appendage of the federal government and
eroded the fiscal autonomy of the federating units. Thus it has created a master servant relationship in
which the subnational governments are at the mercy of the federal government. As long as states and local
governments continue to depend on the federal government for their “economic development and
survival, the wrangling and controversy surrounding the issue of revenue allocation will remain persistent
and a recurrent problem in Nigerian fiscal federalism” (Arowolo, 2011).
The overview of the nature and challenges of fiscal federalism in Nigeria have been presented to show
deviation from the true practice of fiscal federalism in Nigeria. The main issue is that if the three tiers of
government in a federal system were to simultaneously intervene in a market economy, without
coordination, and perform the role of the public sector, the situation will be chaotic. Therefore, in order to
ensure sustainable growth and national development, it is necessary to understand and institutionalize the
policy issues of fiscal federalism. More importantly, the horizontal distribution principles have remained
contentious and have been described as unfair by some political zones. The emphasis on population is the
most important issue, resulting from complaints that population figures were manipulated in favour of
some states. Furthermore, the progressive decline of weights on derivation principle for revenue sharing
has also been criticized. The basis of emphasis on derivation was to make the units maximize the yield
from available tax sources as well as promote fiscal discipline among the sub national governments. The
issue of landmass and terrain undermines the interest of the states with small landmass. The trend of
progressive opinion is that this criterion of landmass should be excluded from the revenue allocation
system. As it is now, Nigerian fiscal federalism is fraught with so many problems.
Fiscal Federalism and Revenue Mobilisation and Fiscal Commission
The establishment of RMAFC is a body that reflects federal character principles in its membership
composition and has enabling laws which empowers the commission to act as follows:
i.
Monitor the accruals and disbursement of revenue from the federation account.
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ii.
Review from time to time the revenue allocation formula and principles of operation to ensure
conformity with changing realities.
iii.
Advice the federal state and local government on fiscal efficiencyand method by which their
revenue be increased.
iv.
Determine the renumeration appropriate to political office holders.
v.
Discharge such other functions as may be confered on them through the constitution or any act of
the national assembly (Shuaibu, 2002).
By this arrangement, the sharing powers between the three tieres of government aer designed to guarantee
the equitable distribution of the nation’s wealth in the spirit of time fiscal federalism. In 2001, the fiscal
body made a draft with this sharing formular:
Federal government
41.3%
State governments
31.%
Local governments
16%
Special funds
11.7%
The constitution of the federal republic of Nigeria in Sec 313 and 315 calls for periodic review of the
revenue sharing formular. Presently, it stands at:
Federal
52.68%
States
27.72%
Local government
20.60%
According to Sewell et al (1994) cited in Guyer (1997), the objectives of fiscal relational units in a
federation are:
i.
To ensure correspondence between sub-national expenditure responsibilities and their financial
resources (including transfer from central government) so that functions assigned to sub-national
government can be effectively carried out;
ii.
To increase the autonomy of sub-national government by incorporating incentives for them to
mobilize revenues of their own.
iii.
To ensure that the macroeconomic management policies of central government are not
undermined and compromised;
iv.
To give expenditure discretion to sub-national government in appropriate area in order to increase
the efficiency of public spending and improve the accountability of sub-national officials to their
constituents in the provision of sub-national services.
v.
To incorporate intergovernmental transfers that are administratively simple, transparent and based
on objective, stable and non-negotiated criteria;
vi.
To minimize administrative costs and thereby economize on scarce criteria
vii.
To provide equalization payments to offset the differences in fiscal capacity among states and
among local governments so as to ensure that poorer sub-national governments can offer a sufficient
amount of key services;
viii.
To incorporate mechanisms to support public infrastructure development and its appropriate
financing;
ix.
To support the emergence of a governmental role that is consistent with market-oriented reforms;
and
x.
To be consistent with nationally agreed income distribution goals.
Akindele (2009) has observed that in Nigeria, local government expenditure has constantly surpassed the
potential for revenue sources owing to the great gulf between their needs and their fiscal capacity. This
has largely been caused by the incongruous nature of their revenue rights and fiscal jurisdiction with the
duties and functions constitutionally allocated to them. In other words, the nature and scope of Nigerian
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fiscal system or federalism with reference to tax jurisdiction and revenue allocation are progenies of the
constitutional and political developments of the country per se. According to Ekpo (1994), there is no
gainsaying that fiscal laws’ in Nigeria clearly give more tax powers to the federal and state than the local
government.
Ofuebe (2000) maintained that the importance placed on the principle of derivation virtually excludes the
majority of the states from benefiting from such productive sources of federal revenues as mining rents,
royalties and petroleum profit tax, which the political Bureau (MAMSER, 1987) supportively averred that
these states deserve the preferential treatment hence it should be seen like a compensation from the
government to them because; In view of the ecological disasters that have often befallen these areas
whose sources of livelihood, especially agriculture and fishing, have been wiped out by pollution
resulting from oil exploitation. Attention has been drawn to the very deplorable conditions of all the oil
producing communities throughout the country. Unfortunately, the principle of derivation began to be deemphasized in the revenue sharing formulae, at a time when the oil-producing states which suffer
deprivations in the past, were to have the opportunity to enjoy special advantages accruing from oil from
their areas which has now become the fastest growing sources of revenue.
The right of the states government, according to Edevbie (2000), to receive statutory allocation arising
from the application of the principle of derivation is derived from several legislations dating as far back as
1960. An example is section 2, sub-section 2 and 3 of the Allocation of the Revenue (Federation Account
etc) Act, 1982 as subsequently amended and the combined effects of section 162(2) and section 313 of the
1999 constitution of the Federal Republic of Nigeria. Section 2(2) of the Allocation of Revenue
(Federation Account, etc)Act 1982 is very clear and unambiguous in the provision that the 3.5%
specified in the subsection 1 above shall be sub-divided and allocated as follows: 2% shall be paid
directly to the states concerned in direct proportion to the value of mineral extracted from the territory of
the states and the balance of 1.5% shall be paid by the government of the federation into a fund to be
administered by the federal government for the development of the mineral producing areas in Nigeria,
which fund should be managed in accordance with such directions as may be issued in that behalf from
time to time by the president having due regard to the value of minerals extracted from and around the
particular areas. These rights, according to Dina Committee Report (1969), culminates to the fact that the
preference of the Philipson for the derivation principle was based on his believe that there was need to
inculcate in each region, a sense of “financial responsibility” so that they will all learn to “cut their coat
according to their cloth”. Also, Littleton and Philips (1980) asserted that the principle of derivation has
dominated revenue sharing in this country since [the 1940s]…when we began moving from a unitary to a
federal system of government. Thus, the Phillipson commission of 1946 applied effectively on the
principle of derivation. Hicks-Philipson commission of 1951 proposed derivation principle as one of the
three principles while Chick commission of 1953 adopted derivation only, but for the first time extended
it to cover 100% of mining rents and royalties to the regions of origin.
Mining rents and royalties since, have remained with us in varying degrees, as a derivation principle of
Revenue allocation…this principle, be it in the glorious days of cocoa in the West and Groundnut
pyramids in the north or the Oil boom seventies in the Rivers and Bendel states, have always aroused
envy not because it is illogical or unjust to give more to him that contribute more, but simply and solely
because it gives more money to these states. The situation has been aggravated by the sudden dominance
of the economy by the oil sector, resulting in much larger sums of money accruing from rents and
royalties, being shared essentially between two minority states. After the reducing the factor from 100%
to a mere 20% (Decree No 6 of 1975) and the residue was still sizeable, we had to look for reasons why it
should not exist at all.
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In the same manner, Balogun (2002, cited in Emeh, 2010 ) asserts that section 162(2) of the 1999
constitution states that the president, upon the receipt of advice from the Revenue mobilization
Allocation and Fiscal Commission, shall table before the National Assembly proposal for revenue
allocation from the federation Account, and in determining the formular, the National Assembly shall take
into account, the allocation principles especially, those of Population, equality of states, internal revenue
generation, landmass, terrain as well as population density: provided that the principle of derivation shall
be constantly reflected in any approved formula as being not less than thirteen per cent of the revenue
accruing to the Federation Account directly from any natural resources.
The unfaithfulness in the application of the principle of derivation and the meagerness of the 13 percent,
recommended by the 1999 constitution coupled with its concomitant onshore-offshore dichotomy,
alongside their claim on the former Republican constitutional 50% derivation recommendation and the
apparent subjugation and sidelining of the derivation principle, led the oil producing states to the clamour
and demand for “Resource Control”. But the concept of resource control is fuzzy and ambiguous such
that the understanding of the main contention of this paper may be displaced without a clear
conceptualization of the concept of “Resource Control” and subsequently, identify the relationship
between the principle of derivation and resource control.
Resource Control
According to Nwokedi, cited in Onah and Ifedayo (2010), resource control connotes the access of
communities and state governments to natural resources located within their boundaries and the freedom
to develop and utilize these resources without interference from the federal government. Ofeimum (2005)
captured the concept of resource control thus: this principle is that every federating unit must be
empowered to be self-governing in this sense. It is the business of the rest of the country to help them
exercise their right without let or hindrance. Seen in the above light, resource control amounts to an
expression of self determination by the zone and it places a collaborative duty on other parts of the
country to assist the zone realize this objective. This, according to Onah and Ifedayo (2010), is more of an
emotional view or expression of the concept.
Agu (2004) conceptualized it as a question thus “…how can these states be compensated?...how would
the revenue accruing from mineral resources be redistributed to ensure that the contributing states or
communities benefit while an agreed sum is paid to the federal government”. Onah and Ifedayo (op.cit)
observed that this conceptualization attempts to locate resource control within a “true” fiscal federal
practice. Douglas (2005) sees it as “Actual control of resources by the people who live in the
communities with these resources for the support of life…Resource Control is about survival”. This
according to Onah and Ifedayo is an average Niger-delta view of resource control. It is seen as a magic
wand or pill that solves all the problems of the zone. It totally ignores the management question on the
elite, which is tantamount to postponing the core issue at stake. Deriving from the above definitions of
resource control given above, Nigeria resource control agitation amounts to verbal war of liberation
which can be said to be multi-dimensional as “between the oil minorities and the federal and the federal
state… and between oil producing and non oil producing state” (Obi, 2005). Implied in the above is the
fact that center should relate with the oil bearing areas (where over 80% of the federal revenue are
generated) based on equity, justice and transparency among several virtues, and against the backdrop of
negative externalities that oil prospecting, exploration and production generate. Noting also that oil is a
depleting asset. In related development, Ikporukpo (2002), asserted that “…a common thread linking all
the protests is the feeling of the people that in spite of their oil resources and the governmental
deterioration consequent on the resource exploitation, the region remains underdeveloped and neglected
with the non-oil producing areas such as Abuja deriving most of its benefits.
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Ikhariale (2003) posited that the questions of resource control and genuine federalism are treated with
levity and that percentage of compensation to the zone for redressing lingering injustices is being
insulted. This is why Orji and Jaja, () undertook a thorough research in other to understand the
underpinnings of the issue of derivation principle and resource control in which they averred that the
resource control question has taken a Centre stage in the economy of our nation-state, Nigeria. Allied
issues like revenue generation and revenue allocation cum fiscal policies vis-à-vis a derivation formula
are inextricably inter-twined. Our subject matter deals with the mechanisms for the equitable distribution
of the proceeds of internally generated revenue. Nigeria is a nation endowed with viable mineral
resources in virtually all the states.
In Abuja (FCT) we have marble and tantalite; Abia State has deposits of gold, salt, limestone, lead/zinc,
oil and gas; Adamawa State – kaolin, bentonite, gypsum magnesite, barites, bauxite; Akwa Ibom State –
clay, limestone, lead/zinc, uranimum (traces) salt, lignite (traces), oil and gas, Anambra State - lead/zinc,
clay, limestone, iron-or, lignite (partially investigated), salt glasssand, phosphate, gypsum; Bauchi State –
amethyst (violet), gypsum, lead/zinc, uranium (partially investigated); Bayelsa State – clay, gypsum,
hignite and manganese (partially investigated), lead /zinc (traces), oil and gas; Benue State – lead/zinc,
limestone, iron-ore, coal, clay, marble, bauxite, salt, barites (traces), gemstone, gypsum, oil and gas;
Borno State – diatomite, clay, limestone, oil and gas (partially investigated) gypsium, Kaolin, bentonite;
Cross Rivers State - limestone, uranium, manganese, lignite, lead/zinc, salt, oil and gas; Delta Statemarble, glass-sand, clay, gypsum, lignite, iron-ore kaolin, oil and gas; Ebonyi State –lead/zinc, gold , salt;
Edo State – marble, clay, limestone, iron-ore, gypsum, glasssand, gold, dolomite, phosphate, bitumen, oil
and gas; Ekiti State – kaoline, feldspar, taticum, granite, syenites; Enugu State – coal, limestone,
lead/zinc; Gombe State – gemstone, gypsum; Imo State – lead/zinc, limestone, lignite, phosphate,
marcasite, gypsum, salt, oil and gas; Jigawa State - barities; Kaduna State- sapphire, kaolin, gold, clay,
serpentinite, asbestos, amethyst, kyanite, graphite and sillimanite (partially investigated), mica (traces),
aqua marine, ruby, rock crystal, topaz, flouspar, tourmaline, gem stone , tantalite;
On the other hand, Kano- pyrochlore, cassiterite, copper, glass-sand, gemstone, lead/zinc, tantalite; Kano
– pyrochlore, cassiterites, copper, glass-sand, gemstone, lead/zinc, tantalite; Kano StatePyrocholre,
cassiterite, copper, glass-sand, lead/zinc, tantalite; Katsina State- kaolin, marble, salt, Kebbi State –
tantalite, limestone, bitumen; Kwara State-gold marble, iron-ore, cassiterite, columbite feldspar and mica
(traces); Lagos State – glass-sand, clay, bitumen, sand tar, oil and gas; Nasarawa- beryl (omerald),
acquamarine and bellodor, dolomite/marble, sapphire, tourmaline, quartz, amethyst (garnet) topaz, zircon,
tantalite, cassiterite, columbite, limonite, galena, iron-ore, baryles, feldspar, limestone, mica cooking coal,
tale, clay, salt, chalcopyrite; Niger State – gold, talc, lead/Zinc, iron-ore; Ogun State – phosphate, clay
feldspar (traces); Ondo State- bitumen kaolin, gemstone, gypsum, feldspar, granite, clay, glass-sand,
dimension stones, coal, bauxite, oil and gas; Osun State- gold, talc, tourmaline, columbite, granite; Oyo
State – kaolin, marble, clay, silimanite, talc, gold, cassiterite, aquamarine, dolomite, gemstone, tantalite;
Plateau State-emerald, tin, marble , granite, tantalite/columbite, lead/zinc, barites, ironore, kaoline,
cassiterite, phrochlore, clay, coal, wolram, salt, bismuth, fluoride, molybdenite, gem stone, bauxite,
Rivers State-glass-sand, clay, marble, lignite (trances), oil and gas; Sokoto State- kaoline, gold, limestone,
phosphate, gypsum, silica-sand , clay, laterite, potash, flaks, granite, salt; Taraba State – kaoline,
lead/zinc; Yobe State- diatomite, soda ash (partially investigated) and Zamfara State-gold (Federal
Ministry of Solid Minerals. Abuja cited in Tell, July 11, 2005).
Apart from these mineral resources, the various Regions during the colonial era and shortly after were
known for producing cash –crops that were in high demand. For example, the North concentrated mainly
on the production and export of groundnuts while the West embarked on cocoa with the East majoring on
palm products. The essence of x-raying the preponderance of natural resources is to unveil the economic
potentialities of the Nigerian state vis-avis the argument for resource control and the conflicts associated
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with it. This is because the political economy of resource control has assumed the status of an albatross
vis-à-vis the socio-economic development and political stability of nascent democracy in Nigeria.
Relationship between the Principle of Derivation and Resource Control
One of the contemporary issues in the political economy of oil in Nigeria is the fiscal ownership question
or what has come to be termed ‘resource control’. In recent times, this issue has assumed crisis proportion
as the oil producing communities have fiercely asserted their claims to ownership following decades of
uninterrupted process of economic marginalization and political repression (Anam-Ndu, 2007). The issue
of resource control was first muted in 1953 at the London Conference constitutional. Chicks’ commission
was appointed to work out a suitable fiscal revenue sharing arrangement between the central and regional
government. It recommended that Regions should collect and retain revenues from personal income tax,
License and service fees, interest on loans and earnings on surplus funds invested, revenue from regional
department, etc.
The Raisman commission of 1958 recommended that derivation principle be ensured so that 50 per cent
allocation to the region of origin of the mineral resources be guaranteed. Even though some minor
resentment were in the offing, military interventions appeared to have exacerbated such resentments
because of the abolishment of the derivation principle. It was the Aboyade Technical Committee on
Revenue Allocation of 1977 recommended complete abrogation of derivation principle. The military
endorsed the recommendation and consequently deprived the states of the right to enjoy the benefit of
their endowed mineral resources (Okeke, 2004). The agitation culminated into the demand for resources
control.
Resource Control can only be fully appreciated and understood under Federalism. Federalism is a
constitutional system under which the people of any particular territory are politically united in subjection
to the control, not of one government supreme over them in all matters and for all purposes, but a number
of governments each supreme in a definite sphere of its own, free completely from the possibilities of
encroachment from the rest". This is cardinal and gives rise to the assertion that, in a true federal
arrangement, no level of government is subordinate to the other, but rather all tiers of government are
coordinate, one with another. Financial subordination, which can only exist in the absence of Resource
Control, makes a mockery of Federalism no matter how carefully the legal forms may be preserved. It
stands to reason therefore that each unit must have the power to harness its resources for its own
developmental purposes (Priye, 2005). Resource control is therefore rooted in the desire by some
Nigerian patriots to promote the practice of True Federalism as the most efficient means of unbinding all
sections of Nigeria from the shackles that have weighted them down since the first military misrule, thus
making it possible for us to harness our vast economic potentials towards rapid development and progress
of our nation. The history of extractive mineral production, which today is limited to oil and gas, presents
a study on the one hand, in extreme frustration on the part of those in whose land and territorial waters
such minerals are found; and on the other hand, aggravation on the part of legitimate exploiters.
Germane to the issue of Resource Control is Derivation. This is the nexus of this paper. It is regrettable
that those who wanted to cause confusion sometimes used Resource Control and Derivation
interchangeably. The distinction between Resource Control and Derivation is very important to our
understanding of the issues. Derivation simply posits that if any mineral in any state is exploited and it
yields revenue, then a certain percentage of that revenue shall be retained (given back) to that State on the
principle of derivation while the rest will accrue to the Federation Account to be enjoyed by all the
federating units. Today, the 1999 constitution of Nigeria provides that at least 13 per cent of such
revenues will go to the derived source while the balance of 87 per cent will accrue to the Federation
Account. This is regardless of how, or by whom the mineral is mined. It was therefore a wicked campaign
of misinformation to suggest that by Resource Control, the Niger Delta States wanted to keep back 100
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per cent of the revenue derivable from their mineral deposits of oil and gas (Priye, 2005). For the
politicians, resource control appears to consist of a review of the constitutional 13 percent derivation,
which accrues to oil-bearing states. Although, no fixed percentages are being canvassed, political opinion
seems to favour a return to the Republican constitution's provisions, which granted 50 percent retention of
natural resources, or earnings therefrom, by the region which owns the said resources. But even more
important than that 50 percent is the consideration of who runs the business; who is responsible for
distributing the resources accruing thereof, and who is ultimately in charge of allocating the issues of the
good life accruing from the oil and gas business.
Obnoxious as some of the laws are that govern the ownership of natural resources, the fact remains that
today, all minerals in, upon or under all of Nigeria's soil and waters, belong to the Federal Government. It
is the Federal Government therefore that issues licenses for their exploitation. Resource Control has never
challenged or conflicted with this law. All that Resource Control seeks to do is more and more, and to the
extent that is possible, to vest the exploitation of these minerals in capable indigenous companies. As has
been demonstrated, this will create local jobs bring about the much needed transfer to technology and the
development of local skills; promote local entrepreneurship; accelerate the pace of development and
engender a sense of belonging and involvement in the control of one's destiny. This is bound to bring
about peace and harmony and there can be nothing more precious than that (Priye, 2005). This is what the
principle of derivation was propounded for and the 13 per cent of all that accrues to Nigeria via oil goes
to these few states before the sharing of the remaining 87 percent jointly. It is a lot of money that can turn
the life of people around if judiciously used for the good of the states and not hijacked by few privilege
and powerful few in these states but, considering the turn of events in Nigeria where Abuja is like haven
while the entire Niger-Delta is hell, the 13 % derivation became too small couple with the onshoreoffshore dichotomy that seeks to wrestle away some money accrued to these states from the
constitutionally sanctioned 13 %, so the oil-producing states went all out demanding for a greater input
in the control and management of oil business in the country. They want the following changes so that
equity can take place in the allocation of revenue and the use of oil revenue for the development of the
country: The restoration of the principle of derivation as the impetus for the allocation of oil revenue; a
demand for increase in oil revenue allocation from the current 13% to 25 or 50%; the elimination of the
Petroleum Act, the Land Use Decrees, the National Waterways Decree, and any other law or decree which
concentrates too much power in the hands of the national government and contributes to the unequal
distribution of oil revenue; the management of the oil business by the states and not by the Federal
Government; and a true national development plan that is reflective of the national character and not
selective development (Priye, 2005).
Methodology
This study adopted exploratory assessment methods by reviewing research work done by other writers in
related field to explain the lingering controversies that underlie fiscal federalism and the challenges of
both human and infrastructural development in Nigeria. The methods attempted to unveil the various
revenue principles such as the principle of derivation, equality of states and demographic strength in
Nigerian federal system. In using these methods, the various politics and agitations for the review of
fiscal formular for even development of all states could be appreciated. However, it should be borne in
mind that within the limited scope of this paper, all the principles of fiscal federalism may not be fully
captured and explored, but these can help in the analysis and explanation of fiscal federalism especially as
it relates to national development.
Arising from the above, there is need to address the following study questions if the objectives of this
study are to be achieved:
i.
What are the imperatives of fiscal federalism in Nigeria’s development?
ii.
What are the major challenges of fiscal federalism in Nigeria?
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Fiscal Relationship in Nigeria's Fiscal Federalism
iii.
iv.
How are the intergovernmental fiscal relations in Nigeria being handled?
What hope is there for development in Nigeria via revenue distribution?
Emerging Problems
Based on the provision of the Nigerian constitution sec 313 & 315 other states like Borno, Nasarawa,
Lagos and a host of others who are now either antiscipated oil producing states or a state where mineral
resources were found but are not yet tapped, were also agitating to be part of the derivation formula
arrangements. This at the moments cannot hold water because the untapped resources beneath their land
are yet to contribute anything to the development of the nation's economy. But certainly, the moment
exploration work starts, those states stand a clear chance of enjoying from the formular. This was
categorically pronounced recently by the Nigerian government.
Challenges of fiscal federalism
In view of the foregoing points, Ajibola (2008) identified the following as the major challenges of fiscal
federalism in Nigeria:
i.
The major problem could be seen in the mismatch between revenue sources and functions of the
various tiers of government. The revenue allocated to the lower tiers of government is lower in
comparison to the enormous duties expected of them. This has actually influenced meaningful
infrastructural development in the country.
ii.
Frequent change in government and incessant military coups reduce the operations and
effectiveness of fiscal federalism. This is because during military intervention, constitution is usually
suspended in favour of decrees and edicts. In this situation, the principles of fiscal federalism were
affected and this in turn affected development in the country, especially within the state and local
government areas.
iii.
Dwindling revenue due to reduction in the country’s export and fluctuations in the prices of the
nation’s commodities in the international commodity market are among the challenges of the fiscal
federalism in Nigeria.
iv.
Economic and financial mismanagement which is reflected in corruption and financial
impropriety of government functionaries have actually affected development in Nigeria especially where
leaders in the country are corrupt and self centred.
In view of the foregoing points, Ajibola (2008) identified the following as the major challenges of fiscal
federalism in Nigeria:
i.
The major problem could be seen in the mismatch between revenue sources and functions of the
various tiers of government. The revenue allocated to the lower tiers of government is lower in
comparison to the enormous duties expected of them. This has actually influenced meaningful
infrastructural development in the country.
ii.
Frequent change in government and incessant military coups reduce the operations and
effectiveness of fiscal federalism. This is because during military intervention, constitution is usually
suspended in favour of decrees and edicts. In this situation, the principles of fiscal federalism were
affected and this in turn affected development in the country, especially within the state and local
government areas.
iii.
Dwindling revenue due to reduction in the country’s export and fluctuations in the prices of the
nation’s commodities in the international commodity market are among the challenges of the fiscal
federalism in Nigeria.
iv.
Economic and financial mismanagement which is reflected in corruption and financial
impropriety of government functionaries have actually affected development in Nigeria especially where
leaders in the country are corrupt and self centred.
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Fiscal Relationship in Nigeria's Fiscal Federalism
Conclusion
This paper has x-rayed the genesis of fiscal federalism, by highlighting the fiscal relationships in the
Nigeria's fiscal federalism. The paper concluded that the Nigerian fiscal federalism is still as it were with
the federal government receiving as always the largest portion of the revenue generated from all sources.
This is highly disadvantageous to the state and the local government considering the fact that the two tiers
of government are closer to the people than the federal. This has contributed immensely to the slow phase
of the economic development of the country. With this therefore, it is important to say that so many
factors have hindered the practice of fiscal
i.
The sharing of federally revenue reflects political applications rather than economic
consideration.
ii.
Rapid increase in fiscal unit thereby reducing the funds allocated to each state and local
government in the country federalism in Nigeria. This include over dependence on oil, derivation and
resource control(sharing formula), joint account system (state and local government) “The intractable
problems arising from the widely unacceptable and constant conflicting fiscal federalism in Nigeria need
urgent measures” (Arowolo, 2011). Accordingly, the following suggestions are proffered.
iii.
The need to reverse the age long fiscal dominance by the federal government in order to reestablish a true federal system is strongly recommended. The solution is to redress the prevailing
mismatch by raising the level of taxing assignment of subnational governments.
iv.
The need for an efficient formula between the centre and other tiers of government is
recommended. This formula should also satisfy the broad objectives of inter-regional equity and balanced
national development. To this end the present vertical revenue allocation formula should be reviewed by
the federal government to increase the percentage to lower governments in Nigeria to strengthen their
fiscal capacity and enable them play strong role in nation building
v.
Also, it is imperative to embark on radical diversification of the Nigerian economy to other viable
and productive sectors of the economy, such as agriculture, mining, industry and human development.
vi.
Urgent reform in fiscal federalism in Nigeria to address the constitutional issue of fiscal powers
among the three tiers of government to redress the prevailing fiscal mismatch at subnational levels of
government is strongly recommended.
vii.
The need to diversify and strengthen the fiscal base of subnational governments is recommended.
To this end, local tax administration should be improved, unproductive local taxes eliminated, and
untapped tax potentials identified.
viii.
The need to promote fiscal discipline at all levels of government to sustain place effective limits
on governments’ deficits at all levels, consistent with the objective of macroeconomic stability to ensure
sustainable national development.
References
Akpan, E.O. (2011). Fiscal Decentralization and Social outcome in Nigeria. European journal of
Business and management, Vol. 2 (4), pp. 167-183.
Arowolo, D. (2011). Fiscal federalism in Nigerian theory and dimensions. Asian journal of social science,
Vol 2 (2) pp.1
Mainoma, M.A & Aruwa, S.A.S (2015). Managing public finance for development, pp. 15 - 16.
Musgrave, R.A & Musgrave, P.B (2004). Public finance theory and practice. New Delhi, India. Hill
education private ltd, pp116-117, 474-477.
Oates, W.E. (2005). Toward the second generation theory of fiscal federalism, International tax and
public finance 12, 349-373.
Salman, A. (2011). Taxation revenue allocation in fiscal federalism in Nigeria, issues, challenges, and
policy options. Journals of Taxation, Vol 54 (189).
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Fiscal Relationship in Nigeria's Fiscal Federalism
Tanzi, V. (1996), “Fiscal federalism and decentralization: A review of some efficiency and
macroeconomic aspects”, in Bruno, M. and pleskovic, B. (Eds.), Annual World Bank
Conference on Development Economics, The World Bank, pp. 295-316.
Usman, O. (2011) fiscal federalism and economic growth process in Nigeria. Journal of business and
management, Vol 3 (4), pp, 2-8.
Vincent, O. O. (2001), Fiscal Federalism: The Nigerian Experience, Fourth Public Lecture. The
Nigerian Economic Society. Ibadan.
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Cybercrime and Electronic Banking in Nigeria
Cybercrime and Electronic Banking in Nigeria
Attah Philomina Achenyo
Department of Sociology
Bingham University,
Karu, Nasarawa State.
E – Mail: philoattah@yahoo.com, Phone No: 08064592427, 08059891120
Abstract
The practice of electronic commerce and electronic banking in Nigeria has been accompanied by a rapidly growing
rate of electronic crime otherwise known as cybercrime. In spite of the numerous initiates deployed to curb this
menace, there appears not to be any significant reduction in Cybercrime rates. This paper examines the emergence
of electronic banking in Nigeria and makes a review of electronic-banking fraud cases as reported by relevant
regulatory bodies in Nigeria. The paper also discusses the security risks associated with electronic banking within
the Nigerian banking industry bearing in mind the legal provisions in the Nigerian Constitution and Provisional
Acts to address Electronic banking procedures. It is recommended that Nigeria’s embrace of electronic banking
should be accompanied with the following precautionary actions: appropriate legislation, adequate regulatory
activities, continuous surveillance activities and the education of all stakeholders to curtail the menace of
cybercrime in electronic banking.
Keywords: Cybercrime, Commercial Banking, Electronic Banking
INTRODUCTION
Banking industries all over the world have benefitted from the wide application of technology to banking
operations. Electronic banking enables banks to reach out to a large number of customers providing retail
products and services beyond the restriction of time and space. For customers, electronic banking gives
them easy access to their bank accounts, saves time and enables them to carry out speedy banking
transactions from the comfort of their homes or offices with the aid of any intelligent electronic device
available. However, the application of information technology in banking has also led to emerging threats
and attacks, basically in the form of Computer crimes and fraud otherwise known as Cybercrime. (Wada,
Lounge, & Danquah, 2012).
Cybercrime can be described as any illegal activity where a computer, computer systems, information
network or data is the target of the crime and where such illegal activity or crime is actively committed
through or with the aid of a computer, computer systems, information network or data, within the
cyberspace. Cybercrimes have been observed to have more severe economic impacts than most
conventional crimes. Though the internet creates great opportunities for commercial activities, there are
several risks that internet users have had to face overtime. The convenience and anonymity associated
with information communications technology (ICT) and the internet is now being exploited to serve
criminal purposes.
Banks are not only dealing with intangible money transactions, but also with protection of highly
sensitive information such are credit cards' PINs, personal information about the customers, history of
transactions regarding their bank accounts and all other kinds of information that could enable to third
party conducting the criminal activities and making damage for both, customer and bank. Weaknesses of
banks' information systems are named vulnerabilities, and it is likely that such vulnerabilities present
opportunities for crime by third parties (Landwehr, 2001). People perceive that electronic handling of
money with no physical contact as one of the alternatives to keep money in safer forms than cash is. This
means that almost all transactions can be realized via different devices including computers, mail or
telephone, without physical contact. However, it is important to bear in mind that online banking resulted
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in new types of breaking the law and stealing the assets. Some of them are still new to the legal systems.
Beside the physical security systems of banks, possibility of crime is still very high. Sometimes, in order
to keep public image, banks do not even investigate and prosecute cybercrimes. The reason is that
customers might loose confidence in them and stop patronizing those (Pfleeger & Pfleeger, 2006).
The menace of cybercrime in Nigeria has become a great source of concern to many Nigerians and in
particular bank customers who make use electronic banking services around the country. In 2013 alone,
Nigerian banks lost a whooping sum of Forty (40) Billion Naira to online fraud cases, an indication of
high rate of cybercrime in Nigeria (Uzor, 2104). The Nigerian Deposit insurance Corporation had in its
2014 report on the banking sector stated that there were 7,181 reported cases of ATM/card related frauds,
while internet frauds and fraudulent transfers recorded 1,277 and 1,099 cases respectively. This signifies
that colossal sums have been lost to banking frauds and this has grave consequences on the rate of
banking patronage generally.
Additionally, the Nigeria Deposit Insurance Corporation (NDIC) Annual Report of 2015 states that the
actual loss sustained in respect of internet banking fraud was N857 million, representing 27% of total
actual loss of the industry. There was an increase in the frequency of ATM/Card-Related Fraud cases
from 7,181 in 2014 to 8,039 in 2015, an increase of 11.95%. It is on the basis of these observed trends
that this paper is deemed necessary. The paper examines the emergence of electronic banking in Nigeria
and makes a review of electronic-banking fraud cases as reported by relevant regulatory bodies. The
paper also discusses the security risks associated with electronic banking within the Nigerian banking
industry bearing in mind the legal provisions in the Nigerian Constitution and Provisional Acts to address
Electronic Banking procedures.
EMERGENCE OF ELECTRONIC BANKING IN NIGERIA
Conventional banking system commenced in Nigeria in 1952. Since this period, the industry has
witnessed a lot of regulatory and institutional advances. The industry was being controlled by at most five
out of the 89 banks in existence before the commencement of banking industry reforms in the country.
Multiple branch systems is also one of the notable features of Nigerian banks, with a total of 89 banks
accounting for about 3017 bank branches nationwide as at 2004. The industry is currently faced with
heavy challenges, including the overbearing impact of fraud and corruption, erosion in public confidence,
a poor capital base, persistent cases of distress and failure, poor asset quality, and so on (Onodugo, 2015).
Part of the moves to resolve these lingering problems include the banking reform initiated by the Central
Bank of Nigeria in June 2004, which was largely targeted at reducing the number of banks in the country
and making the emerging banks much stronger and reliable. In the bid to catch up with global
developments and improve the quality of their service delivery, Nigerian banks have no doubt invested
much on technology; and have widely adopted electronic and telecommunication networks for delivering
a wide range of value added products and services. They have in the last few years transformed from
manual to automated systems. Unlike before when ledger-cards were used, today banking has been
connected to computer networks, thereby facilitating the practice of inter-bank/inter-branch banking
transactions (Onodugo, 2015).
Developments such as the introduction of mobile telephone in 2001 and improved access to personal
computers and Internet service facilities have also added to the growth of electronic banking in the
country. However, whereas local banks most commonly practice real time online intranet banking, the
integration of customers into the process is far from been realized. Many of the reasons are attributed to
the high prevalence of Internet fraud and lack of an adequate regulatory framework to protect the banks
from the volatility of risks associated with Internet banking, especially at the levels of communication and
transaction. In the main, Nigeria is globally regarded as the headquarters of Advance Fee Fraud which is
perpetrated mostly via the Internet.
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According to Okechi & Oruan (2013), electronic Banking System is an innovative service delivery mode
that offers diversified financial services like cash withdrawal, funds transfer, cash deposits, payment of
utility and credit card bills, cheque book requests, and other financial enquiries. In Nigeria, ATM was
conventionally introduced as an electronic delivery channel in 1989, and was first installed by National
Cash Registers (NCR) for the defunct Societe Generale Bank of Nigeria (SGBN) in the same year. Since
its introduction, many Nigerian banks have installed ATM in response to the changing nature of modern
banking operations. Until 2003, a small number of banks operated their own propriety ATM fleets. The
main shared ATM network in Nigeria, Inter Switch, began operations in 2003 with 5 ATMs from United
Bank for Africa (UBA) and First Bank of Nigeria (FBN), (Tope, 2010).
ELECTRONIC-BANKING RELATED FRAUDS IN NIGERIA
Idolor (2010) stressed that the spate of fraud in the banking industry has lately become an embarrassment
to the nation as apparent in the seeming inability of the law enforcement agents to successfully track
down culprits. While the activities of armed robbers are given widespread reviews in the pages of
newspapers, especially during major thefts, it is an irony that what they cart away is only a slice of what
fraudsters remove from banks. In line with the view of Idolor, Oseni (2006), stated that the incessant
frauds in the banking industry are getting to a level at which many stakeholders in the industry are losing
their trust and confidence in the industry.
The Nigeria Deposit Insurance Corporation (NDIC) annual report stated a total of 3,756 fraud cases in
2013 involving N21.79billion, which represents a 21 percent increase from 2012. About half of the actual
loss occurred within the first three months of 2013. The NDIC 2013 report also offers an elaborate list of
fourteen major fraud channels - automated teller machine (ATM) fraud being the leading source.
Amongst the e-banking innovations, Automated Teller Machines (ATMS) have emerged to be the most
popular service delivery channels in Nigeria today. Other e-payment channels available for use in Nigeria
include Point of Sales (POS), internet banking and mobile banking. It is important to note state that all
these e-platforms are prone to attacks with consequences on customers and distrust in payment systems.
Fraudulent transactions via the internet or ATMs present a considerable problem for financial institutions
and customers. This is because millions of transactions are mediated by technology usually deployed
within a cashless ecosystem like Nigeria. Existing studies conducted in Nigeria reveal that many banks
are confronted with problems of insecurity and the fear of fraudulent practices having migrated from cash
to automated transactions (Wada & Odulaja, 2012; Tade & Aliyu, 2011). As noted by Tade (2013),
technology mediated transactions have provided avenues for legally approved transactions as well as
created opportunities for deviant behaviours. Despite the development of technological solutions to the
problem of internet and ATM fraud, the amount of money lost to crime remains huge with an increasing
number of users becoming victims.
According to the NDIC Annual Report (2015), a total of 12,279 fraud cases were reported, representing
an increase of 15.71% over the 10,612 fraud cases reported in 2014. However, the amount involved
decreased significantly by N7.59 billion or 29.63% from N25.608 billion in 2014 to N18.021 billion in
2015. Similarly, the actual loss suffered by the insured banks decreased by N3.02 billion or 48.79% from
N6.19 billion in 2014 to N3.17 billion in 2015. The actual loss sustained in respect of internet banking
fraud was N857 million, representing 27% of total actual loss of the industry. There was an increase in
the frequency of ATM/Card-Related Fraud cases from 7,181 in 2014 to 8,039 in 2015, an increase of
11.95%. However, the loss suffered by the industry due to such frauds declined significantly by 59.4%
from previous year figure of 1.242 billion to 0.504 billion, representing 15.9% of total industry loss to
frauds and forgeries. Out of the 12,279 fraud cases reported by the DMBs, 425 cases were attributed to
staff. The number of fraud cases perpetrated by staff had decreased from 465 in 2014 to 425 in 2015.
Similarly, losses arising therefrom substantially decreased by 70% from N3.165 billion in 2014 to 0.979
billion in 2015. The highest percentage of frauds and forgeries cases of 38.59% was perpetrated by
temporary staff.
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SECURITY RISKS ASSOCIATED WITH ELECTRONIC BANKING
The incidence of fraud in Nigeria’s banking sector has become more pervasive with the introduction of
cashless policy and the adoption of e-banking. One major problem since the introduction of Nigeria’s
cashless policy is electronic banking fraud. Though the policy was aimed at encouraging electronic
transactions, reducing physical cash in the economy and thereby reducing the risk of cash related crimes,
fostering transparency, curbing corruption/leakages and driving financial inclusion, the perpetration of
fraud threatens the cashless ecosystem. The increased perpetration of electronic banking fraud and
subscriber victimization has brought about a growing fear of migrating to and using electronic banking
(Tade & Adeniyi, 2016).
Electronic banking provides many opportunities for banks and customers, however it is also the case that
the current banking services provided through Internet are limited due to security concerns, complexity
and technological problems (Sathye, 1999 & Mols, 1999). Internet assuage in the country has been
abused by cybercriminals and has made its window unattractive for domestic banking operations and
legitimate international operations. The inherent fear associated with patronizing internet banking
services in Nigeria is again re-enforced by the growing evidences that these cybercriminals use fake
websites and phishing emails to scoop funds from unsuspecting victims. In some cases, these crimes are
committed using emails that are linked to parts of authentic bank websites. As a result of these trends,
consumer’s confidence and trust in e-banking have been greatly affected as this has made customers less
likely to adopt the new technology. New technologies will not dominate the market until customers are
confident that their privacy will be protected and adequate assurance of security is guaranteed. (Taddesse
& Kidan, 2005). New technologies also requires the test of time in order to earn the confidence of the
people, even if it is easier to use and cheaper than older methods.
Reputation of a service provider is another important factor affecting trust. Doney and Cannon (1997)
defined reputation as the extent to which customers believe a supplier or service provider is honest and
concerned about its customers. Sadly, many banks in Nigeria have not built a good reputation for
themselves as it relates to handling security breaches in electronic banking transactions. Confidentiality of
consumer data is another important concern in the adoption of online banking (Gerrard & Cunningham,
2003). Customers fear that someone will have unlimited access to their personal financial information. It
is important to note that Nigeria does not have a comprehensive Data Protection and Privacy Law. There
are some industry-specific and legislations of general application that deal with some aspects of data
protection. It appears that there is no regulation or legislation on data protection for the financial sector.
This is a major lacuna considering the enormous amount of sensitive personal information of customers at
the bank’s disposal. The closest attempt at any sort of regulation on protection of data that would be
applicable to the financial sector is the Guidelines on Data Protection published in September 2013 by the
National Information Technology Development Agency (“NITDA”). The Guidelines, which restated the
internationally accepted principles that govern the best practice for handling data, does not provide
adequate framework and protection for the data subject.
Lack of specific laws to govern Internet banking is another important concern for both bankers and
customers especially in Nigeria where the regulatory framework is weak. This relates to issues such as
unfair and deceptive trade practice by the supplier and unauthorized access by hackers. Larpsiri,
Rotchanakitumnuai, Chaisrakeo, & Speece (2002) argued that it is not clear whether electronic documents
and records are acceptable as sufficient evidence of transactions. Larpsiri et al., (2002) also pointed out
that the jurisdiction of the courts and dispute resolution procedures in the case of using the Internet for
commercial purposes are important concerns. Disputes can arise from many sources. For instance,
websites are not a branch of the bank. It is difficult for the court to define the location of the branch and
decide whether they have jurisdiction (Rotchanakitumnuai and Speece, 2003).
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Cybercrime and Electronic Banking in Nigeria
Relevant regulatory agencies in Nigeria have attempted to match the rapidly changing electronic banking
environment with necessary regulations and institutional frameworks. Earlier efforts made to this effect
included the enactment of the Failed Banks (Recovery of Debts) and Malpractices in Banks Decree No.18
of 1994, and the Money Laundering Decree of 1995. However, poor enforcement procedure rendered
these instruments very inactive in checking the menace of financial crimes (Ezeoha, 2005). Following
record growth in Internet and computer usage in the country in the late 1990s, almost all the regulations
guiding the banking industry, including the Banks and Other Institutions Act of 1991, were lacking
adequate provisions to accommodate the emerging trend. In 2003, the maiden guidelines on electronic
banking were formulated to further address these issues. The electronic banking guidelines emerged from
the findings of a Technical Committee on Electronic Banking set up by the Central Bank of Nigeria in
2003 to find appropriate modalities for the operation of electronic banking in the country. It was the
findings and recommendations of the committee that led to the adoption of a set of guidelines on
Electronic Banking in August 2003. Of the key provisions of the Guidelines, only a section deals with
issues relating to Internet Banking. Section 1.3, paragraph 4 of the guidelines, exceptionally stresses that
banks should put in place procedures for maintaining their websites, including the various security
features needed for Internet banking services. According to Ezeoha (2005) the e-banking guidelines have
been widely criticized as not being enough to check the growing popularity of Internet banking against
the backdrop of growing sophistication in technology related crimes and frauds.
The Guidelines have also been criticized for not addressing adequately the critical issues concerning
Internet security. It failed to explicitly recommend a standard that allows banks to examine potential
threats that may already be in existence in each individual financial institution's current network. In
addition to this array of criticisms, the workability of proper Internet framework is also queried amidst the
poor state of basic information technological infrastructure in the country. This is essentially necessary
since e-banking generally relies on the existence of adequate operational infrastructure like
telecommunications and electric power to function effectively. Though little success has been recorded,
the supply of these requisite facilities is very erratic in the Nigerian case.
SUMMARY AND CONCLUSION
This paper examined the emergence of electronic banking in Nigeria and the security concerns that
customers have regarding the use of electronic banking services. A review of existing literature on
electronic banking- related fraud was also carried out. Having identified the various security risks
associated with electronic banking it is recommended that Nigeria’s embrace of electronic banking should
be accompanied with the following precautionary actions: appropriate legislation, adequate regulatory
activities, continuous surveillance activities, especially on the part of e-banking service providers and
education of all stakeholders to curtail the menace of cybercrime in electronic banking.
Reference
Central Bank of Nigeria (2003a). Report of Technical Committee on Electronic Banking. Abuja: CBN
Central Bank of Nigeria (2003b). Guideline on Electronic Banking. Abuja: CBN
Doney, P.M. & Cannon, J.P. (1997). An examination of the nature of trust in buyer-seller relationship.
Journal of Marketing, 61 (1), 35-51.
Gerrard, P., Cunningham, J. B. (2003). The diffusion of Internet banking among Singapore
Consumers. International Journal of Bank Marketing, 21 (1), 16-28.
Idolor, E.J. (2010). Bank Fraud in Nigeria: Underlying Cause, Effects and Possible Remedies. African
Journal of Accounting, Economics, Finance and Banking Research, 6(6), 62.
Landwehr, C. (2001). Computer Security. International Journal of Information Security, 1 (1).
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Cybercrime and Electronic Banking in Nigeria
Larpsiri, R., Rotchanakitumnuai, S., Chaisrakeo, S., & Speece, M. (2002) "The impact of Internet
banking on Thai consumer perception", paper presented at the Conference on Marketing
Communication Strategies in a Changing Global Environment, Hong Kong.
Mols, N.P. (1999). The Internet and the banks’ strategic distribution channel decisions. International
Journal of Bank Marketing, 17 (6), 245-300.
NDIC Annual Report 2015- Retrieved from www.ndic.gov.ng
Okeci, O. & Oruan, P. (2013). Empirical Evaluation of Customers’ Use of Electronic Banking Systems
in Nigeria. African Journal of Computing & ICT, 6(1).
Onodugo, I. C. (2015). Overview of Electronic Banking in Nigeria. International Journal of
Multidisciplinary Research and Development.2(7), 336-342.
Oseni, E. (2006) “Across the Counter Frauds in the Banking industry and Evaluation of some of the
available Controls”. The Nigerian Accountant, January/March 2006.
Pfleeger, C.P & Pfleeger, S.L. (2006). Security in Computing (4 th ed). Prentice Hall.
Rotchanakitumnuai, S. & Speece, M.,(2003). Barriers to Internet banking adoption: a qualitative study
among corporate customers in Thailand. International Journal of Bank Marketing, 21 (6/7), 312323.
Sathye, M. (1999). Adoption of Internet banking by Australian consumers: an empirical investigation.
International Journal of Bank Marketing, 17 (7), 324-34.
Somoye, R.O.C. (2008). The Performances of Commercial Banks in Post Consolidation Period in
Nigeria: An Empirical Review. European Journal of Economics, Finance and Administrative
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Taddesse W.& Kidan T. (2005). E-payments: Challenges & Opportunities in Ethiopia. United Nation
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Tade, O & Aliyu, I. (2011). Social Organisation of Cybercrime among University Undergraduates in
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Wada, F. & Odulaja, G.O. (2012). Assessing cybercrime and its impact on e-banking in Nigeria using
social theories. African Journal of Computer & ICTs, 4 (3), 69-82.
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Infrastructure, Domestic Output and Revenue Generation Drive in Nigeria (1980-2014)
Infrastructure, Domestic Output and Revenue Generation Drive in
Nigeria (1980-2014)
James, A. Adam Ph.D
Department of Economics,
University of Abuja
E-Mail: Ajadam2468@yahoo.com
and
Auta, Elisha Menson
Department of Economics,
University of Abuja,
E-Mail: autaelisham@gmail.com
Abstract
This paper examines the impact of infrastructure and domestic output on revenue generation in Nigeria covering
the period 1980-2014. The unit root test of stationarity and Johansen test of cointegration was conducted. The
econometric technique use for data analysis is the Vector Error Correction Model (VECM). The data were found to
be stationary at first difference that is I(1). A long run relationship was established. The result of the estimated
model shows that infrastructure and private investment are positive and significant determinants of revenue. While
domestic output proxied by real gross domestic product and gross fixed capital formation are negative and
significant determinants of revenue in Nigeria. Based on the findings of the study, the following suggestions were
proffered. The infrastructural sub-sector in Nigeria requires reforms that should open the infrastructure sub-sector
up to competition while carving out a new strategy and regulatory framework for government. Macroeconomic
stability is essential for the proper functioning of infrastructure and exploring growth opportunities. Also, exploring
Public Private Partnership platform is desirable.
Keywords: Infrastructure, Domestic Output, Revenue Generation, Nigeria
1.
Introduction
The role of infrastructure development in economic growth process and as a source of revenue generation
cannot be overemphasized. At independence, many African economies including Nigeria were committed
to achieving economic and social progress, thereby making development planning an essential strategy
used by government to set their visions, mission and goals as effective means of realizing economic
goals. Understanding the impact of infrastructure development and types of infrastructure that facilitate
revenue generation is sine qua non to understanding the whole process of output growth and economic
development. In developing economies quality infrastructure provision generally raises the productivity
of other inputs in the production process. Adequate infrastructure facilities will enhance the productivity
of capital as well as labour, such as machinery, technological equipment is clearly raised by reliable
power supplies (Gu and MacDonald, 2009). While the productivity of labour will be far higher if good
education and health-care infrastructure produce a well-educated and healthy work force to generate a
good and a standard revenue framework.
Infrastructure has multiple linkages with economic performance, though it largely depends on the state of
the country’s infrastructure (quality and quantity). For instance, as applied to production, firms’ operating
costs and profitability are directly influenced by the availability and quality of infrastructure, which
directly or indirectly influence investment and output levels. The level of economy-wide private sector
investment is also impacted because of relative cost-return relationships. As regards the equitable
distribution of resources, the diversification of the economy, and by extension wealth creation is equally
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Infrastructure, Domestic Output and Revenue Generation Drive in Nigeria (1980-2014)
dependent upon the state and geographical availability of infrastructure. Thus, infrastructure services
contribute to improved productivity of firms, households and government services. The expansion in
quantity and improvement in quality of infrastructure services enhance the welfare of households, and
lowers costs and expands market opportunities for firms. This expands opportunities for public and
private investments and increase productivity that are essential for revenue generation and sustainable
growth. Infrastructure can be measured in terms of stock or flow. While the former relates to stock of
infrastructure at any given point in time, the latter is the net infrastructure in terms of addition or
reduction at a given point in time. Whether infrastructure is measured in terms of stock or flow, it is
important to compare with appropriate measure of economic performance. The supply of adequate
(optimal level) infrastructure will bring about an increase in the aggregate output and employment
(Akinyosoye, 2010; Rutkoski, 2009) while increase level of output will increase the government revenue
generation capacity in the economy (Anders, 2010; Gomez-Ibanez, 2008). In this approach, there is an
optimal level of infrastructure which maximizes the growth rate of the economy to reach its maximum
productivity of output to generate a standard revenue drive for the entire economy.
Infrastructure development has become a key priority to achieving development in Nigeria and other part
of the world. The poor performance of public infrastructure in Nigeria in particular and developing
countries in general has been a subject of considerable discussions (Pedro et al. 2013; Loto, 2011; Anders,
2010; Akinyosoye, 2010; Adesoye, et al. 2010; Jerome, 2010). However, none of these studies explored
the linkages between infrastructure development and revenue generation in Nigeria. Consequently, this
paper seeks to bridge the gap by examining the impact of infrastructure and economic growth on revenue
generation in Nigeria. The paper is divided into five sections and following this introduction as section
one, section two is literature review where conceptual, theoretical and empirical review is provided.
Section three is methodology which specifies the model, source of data and technique of data analysis.
Section four is data presentation, analysis and discussion of findings. Section five is conclusion and
policy recommendations.
2.
Literature Review
2.1
Conceptual and Theoretical Issues
Infrastructure has been considered as social overhead capital (Hirshman, 1958). Hirshman argued that
social overhead capital encompasses activities that share technical features such as economies of scale
and economic features like spillovers from users to non-users. Added that social overhead capital
contributes to enhancing productivity and assists in the realization of the potential ability of human
capital, and creates situations in which that potential can fully function. Hansen (1965), divided public
infrastructure into two categories. These are economic overhead capital (EOC) and social overhead
capital (SOC). EOC is oriented primarily toward the direct support of productive activities or toward the
movement of economic goods and includes most of the public works projects like electricity, ports, roads,
telecommunications, and so on. SOC is designed to enhance human capital and consists of social services
such as education, public health facilities, fire and police protection, and homes for the citizenry. Anders
(2010) categorized infrastructure into ‘hard’ infrastructure and ‘soft’ infrastructure. The former refers to
physical structures or facilities that support the society and economy, such as transport (ports, roads and
railways); energy (electricity generation, electrical grids, gas and oil pipelines); telecommunications
(telephone and internet); and, basic utilities (water supply, hospitals and health clinics, schools, irrigation,
etc.). The latter refers to non-tangibles supporting the development and operation of hard infrastructure,
such as policy, regulatory, and institutional frameworks; governance mechanisms; systems and
procedures; social networks; and transparency and accountability of financing and procurement systems.
Similarly, Jerome (2010) broadly defined infrastructure as all basic inputs into and requirements for the
proper functioning of the economy. He argued that there are two generally accepted categories of
infrastructure, namely, economic and social infrastructure. Economic infrastructure at a given point in
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Infrastructure, Domestic Output and Revenue Generation Drive in Nigeria (1980-2014)
time form part of an economy’s capital stock used to facilitate economic production, or serve as inputs to
production (e.g. electricity, communication, roads, railways, and ports). It can further be subdivided into
three categories: utilities, public works and transport sub-sectors. On the other hand, social infrastructure
encompasses services such as health, education and recreation. It enhances the level of productivity in
economic activities and streamlines activities and outcomes such as recreation, education, health and
safety. Social infrastructure facilitates investment in human capital that ensures better utilization by some
of the economy’s physical capital stock and thereby raises the productivity of the workforce.
Common to all of these classifications of public infrastructure (public goods) are two characteristics that
distinguish them from other types of investment. First, public infrastructure provides the basic foundation
for economic activity. Second, it generates positive spillovers, that is, its potential benefits far exceed
what any individual would be willing to pay for its services. These positive spillovers occur for at least
three reasons. First, some components' of public infrastructure, such as roads and waterways, are nonexcludable services (Islam, 1995). Users can share these facilities up to a point without decreasing the
benefits received by other users. Second, some infrastructure investments, exemplified by water treatment
facilities and pollution-abatement equipment, reduce negative externalities (for example, pollution)
generated by the private sector. Third, many infrastructure projects, such as power-generating facilities,
communication networks, sewer systems, and highways, exhibit economies of scale (Shah, 1992).
Because the large costs of these investments can be spread among many users, the unit cost of production
continually falls as more users gain access to the system. On the other hand, economic growth according
to Islam (1992) connotes an increase in a country’s real level of national output which can be caused by
an increase in the quality of resources (human and material), increase in the quantity of resources and
improvements in technology or an increase in the value of goods and services produced by every sector of
the economy. The goal of economic growth is to achieve sustainable economic development. In recent
past, the emergence of poverty in the midst of plenty has shifted economic focus from growth to
development.
In identifying the linkages between infrastructure, economic growth and development, World Bank
(1994) observed that the various channels through which investment in infrastructure can contribute to
sustainable growth include, reducing transaction costs and facilitating trade flows within and across
borders; enabling economic actors like individuals, firms or government to respond to new types of
demand in different places; llowering the costs of inputs for entrepreneurs, or making existing businesses
more profitable; creating employment, including public works (both as social protection and as a countercyclical policy in times of recession); eenhancing human capital, for example by improving access to
schools and health centres; and iimproving environmental conditions which are linked to improved
livelihoods, better health and hygiene, and reduced vulnerability of the poor.
Lynde and Richmond (1992) observed that the economic effects of infrastructure can be broadly divided
into two. On one hand is the demand creation effect in other economic activities induced by investment
itself. The provision of infrastructure increases local demand in other sectors, creating jobs and
stimulating the economy in the region, and thereby increasing total regional production. On the other
hand, the infrastructure investment brings about increased in capital stock. This is expected to have
supply-side effect of improved services as a result of increase infrastructure stock that drives down
production costs of the private sector, thereby raising their productivity and profit levels.
2.2
Empirical Review
Considerable efforts have been devoted to investigate the linkages between infrastructure, domestic
output or total factor productivity (TFP) and revenue generation. This section provides brief review of
various empirical models, estimation techniques, data, findings and conclusions of previous studies. For
instance, Reinikka and Svensson (2002) used microeconomic evidence to show the effects of poor
infrastructure services on private investment in Uganda. They surveyed Ugandan firms to analyze how
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entrepreneurs cope with deficient public capital. They found that faced with unavailable and
unpredictable services, many firms invest in substitutes such as electricity generators. Accordingly, poor
public capital, proxied by an unreliable and inadequate power supply, significantly reduced productive
private investment. As a result, poor public capital crowds out private investment.
Isaksson (2010) examined the linkage between public capital, infrastructure and industrial development.
He formulated a small empirical model of industrial development and applied to manufacturing level and
growth data for 57 advanced and developing countries for the time period 1970- 2008. He used five
estimators, OLS, Random-effects (RE), Fixed-effects (FE), instrumental variables of RE (RE-IV) and
instrumental variable of FE (FE-IV) on pooled data for all the countries. The results indicated that
industrialization is positively and significantly related to the growth of public capital. The results showed
that point estimates did not differ much across the estimators except for RE-IV with a coefficient of 0.64.
The other estimators ranged between 0.26 to 0.30, with OLS having the smallest. Accounting for the
interaction term, the impact ranged from 0.41 (FE) to 0.54 (OLS). In the case of Meta countries, OLS had
the largest total impact for the Tigers (0.65), followed by two-high income countries (0.46), while a third
group consists of the lowest income groups (0.31, 0.39). He concluded that growth in infrastructrure
(core) capital not only explains levels of industry, but also how rapidly it grows. Interestingly, the largest
impact occured for the fastest growing economies like the Asian tigers, and the High income ones. The
rate of return on public capital is positive at all stages of development, although higher for the countries
least endowed with such capital and those growing at the fastest rate.
Calderon (2009) provided a comprehensive assessment of the impact of infrastructure development on
economic growth in African economies. Based on econometric estimates for a sample of 136 countries
over the period 1960–2005, he evaluated the impact of a faster accumulation of infrastructure stocks and
an enhancement in the quality of infrastructure services on economic growth across African countries
over the 45 years study period. The findings of the study indicated that growth is positively affected by
the volume of infrastructure stocks and the quality of infrastructure services. The simulation analysis
showed that if all African countries were to catch up with the region’s leader, Mauritius, in the
infrastructure stock and quality, their rate of economic growth would be enhanced on average by 2.2
percent per year, and ranging from 0.6 to 3.5 percent.
Pineda and Rodriguez (2006) investigated the exogenous instruments for public infrastructure based on
the interaction between changes in national tax collection and a rule regarding how much each state and
local government received of total national value added tax revenues. Both parts of the interaction are
exogenous to state-level productivity and the variable serves as an indicator of exogenous changes in
infrastructure investment. They focused their study on manufacturing sector, at the plant level, in
Venezuela. The total number of observations used in the estimations was 8,865. The results shown that a
10 percent increase in public investment leads to an increase in productivity of the manufacturing sector
between 2 and 3.5 percent. This turns out to imply that the government would recover 72 per cent of the
initial investment every year.
Some of the studies were micro in nature. For instance, Aker (2008) examined the impact of mobile
phones on grain markets in Niger Republic. He found that the introduction of mobile phones was
associated with increased consumer welfare through a reduction in the intra-annual coefficient of
variation, thereby subjecting consumers to less intra-annual price risk. Mobile phones also increased
traders’ welfare, primarily by increasing their sales prices, as they were able to take advantage of spatial
arbitrage opportunities. The net effect of these changes was increased in average daily profits, equivalent
to 29 percent increase per year.
Aker and Mbiti (2010) further examined the impact of mobile phones and found that the introduction of
mobile phones reduces dispersion of grain prices across markets by 10 percent. The effect is stronger for
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those market pairs with higher transport costs, namely, those that are farther apart and linked by poor
quality roads. The effect is also stronger over time, suggesting that there are network effects. The primary
mechanism through which mobile phones improve market efficiency is a change in traders’ (middlemen)
marketing behaviour. The grain traders operating in mobile phone markets search over a greater number
of markets, sell in more markets and have more market contacts as compared with their non-mobile phone
counterparts.
Overall, the studies have shown that infrastructure influences both domestic output and revenue
generation capacity of economies. The impact however, varies from one economy to another depending
largely on infrastructure quality and coverage, growth potentials and enforcement of legal framework
which considerably is a function of stages of development.
3.
Methodology
Theoretical literature on infrastructure, domestic output and revenue generation has been substantially
influenced by the neoclassicals. According to endogenous growth models, the size and structure of capital
and taxation affect the potential growth of an economy. Productive public capital enhances growth
(Anders, 2010), especially in developing countries with relatively poor infrastructures. However, within
different public expenditure categories, Gu and MacDonald (2009) and World Bank (2004) observed that
capital spending is most favourable to growth and taxation (Pineda and Rodriquez, 2006). Our study
adopts the model framework developed by Pineda and Rodriquez (2006). However, we augment the
model by including gross fixed capital formation and inflation. The model of the study is of the form:
GREV = f(INFR, RGDP, GFC, PINV, INF)
3.1
In the specified model in equation (4.1), GREV is government revenue proxy by the total amount of
money received by the governments (non-oil) which are received from sources such as taxes levied on the
incomes and wealth accumulation of individuals and corporations and on the goods and services that are
produced, exported and imported from the country; INFR is public investments in infrastructure; RGDP is
the real gross domestic product proxy by macroeconomic measure of the value of economic output
adjusted for price changes.; GFC is gross fixed capital formation; PINV is private investment; INF is
inflation rate measure using Consumer Price Index. The a priori expectation (expected sign) for the
variables is that infrastructure (INFR) is expected to be positive (+) in relation to GREV; real gross
domestic product (RGDP) is expected to be positive (+) in relation to GREV; gross fixed capital
formation (GFC) is expected to be positive (+) in relation to GREV; private investment (PINV) is
expected to be positive (+) in relation to GREV; and inflation rate (INF) is expected to be either positive
or negative (+ -) depending on its level in relation with GREV.
The specified model in 3.1 can be stated in Vector Error Correction Model (VECM) form where GREV
may not immediately adjust to their long run equilibrium levels in which the speed of adjustment between
the short run and long run levels can be captured ECTt-1 in the Error Correction equation and μt is the
white noise in equation 3.2. The ∆ sign indicates change in GREV and infrastructure proxy.
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Infrastructure, Domestic Output and Revenue Generation Drive in Nigeria (1980-2014)
Th
erefore, the expected sign or a priori expectations are such that β1, β2, β3 β4, β5 > 0 while β6 < > 0. Thus, the
model to be estimated is equation 3.2 and the parameters to be estimated are β0 - β5, covering the period
1980-2014.
3.1
Technique of Analysis
This study employs Vector Error Correction Model (VECM) technique. The statistical properties of the
series are examined using Augmented Dickey Fuller (ADF) and Phillips-Perron (PP) unit root tests of the
stationarity. Engel and Granger (1987) observed that most economic time series data are not stationary
over time. This prompts the investigation of the statistical properties of the variables. Johansen cointegration tests is used to determine long run relationship
3.2
Unit Root Test for Stationarity (ADF and PP)
The study tests for non-stationarity against the alternative that the variable is trend stationary . Granger
(1969) has shown that majority of economic variables are non stationary. In ADF test, optimum lag
length, is determine using Schwarz information criterion (SIC). If unit roots exist in any variable, then the
corresponding series is considered to be non- stationary. Estimation based on non-stationary series may
lead to spurious regressions (Granger, 1988). All the variables in our specified model are tested at levels
for stationarity using the Augmented Dicky-Fuller (ADF) and Philips-Perron (PP) tests. The ADF test is
conducted using regression which includes constant and time trend of the form:
3.3
wh
ere ΔXt are the first difference of the series X, p is the lag order, t is the time. Using the results of Dickey
Fuller 1979, the null hypothesis that the variable x is nonstationary (H0 : β = 0) is rejected if β is
significantly negative. Similarly, Philip-Perron (PP) test is also employed. PP has the extra advantage
over the Dickey-Fuller test that is, it has been adjusted to take into account of serial correlation by using
the Newey-West (1994) covariance matrix. The Phillip – Perron (PP) test is computed using the following
equation 3.4:
Xt = a1 + b2Xt – 1 + a3(t +
3.4
where a1, a2, and a3 are the conventional least-squares regression coefficients and T is the total number of
observations. The hypothesis of unit root to be tested are H 0 : a1= 1, H0: a1 = 1 and H0: a2 = 0.
3.3
Cointegration Test
Johansen (1988), and Johansen and Juselius (1990) have introduced an appropriate method for
cointegration. Cointegration is perform to examine whether the variables in question have common
trends. The Johansen procedure (Johansen, 1988) established a VAR model with Gaussian errors, which
can be defined by the following Error- Correction representation:
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ΔYYt -1 = Γ0 + Γ1ΔYYt – 1 + Γ1ΔYYt – 2 + ... + Γk – 1 ΔYYt – k + ΠYY t – k + αZZt + εt (t = 1, 2, ......, T)
3.5
where ΔY is the difference operator, Yt is a p × 1 vector of non stationary variables (in levels), Г0 is the
deterministic element of the VAR model, Zt is a dummy variable that takes value 1 if there is impact and
0 if otherwise, allowing to have a structural break in the impact of the independent variables on the
dependent variable, and et is the vector of random errors that are normally distributed with mean zero and
constant variance. The coefficient matrix П encompasses the error correction terms (ECT) and provides
information about the long-run properties of the VAR model (4.6). The null hypothesis of cointegration to
be tested is:
H0 (r) : П = ab
3.6
With a, b as full rank matrices. The null hypothesis (4.6) implies that in a VAR model type (4.5) there can
be r-cointegrating relations among the variables Xt. In this way, equation (4.5) is denoted by H1, a is
named the matrix of error-correction parameters, and b is called the matrix of cointegrating vectors with
the property that bЄXXt [bЄXXt – I(0)] even though Xt is non stationary [Xt – I(1)].
3.4
Vector Error Correction Model
Analytically, Vector Error Correction Model is used as a model derived from a standard unrestricted
Vector Autoregressive Model (VAR) of lag length k. From VAR to VECM model is written as:
Δzzt =ΦDD t + Πzz t−1 + Γ 1 Δzz t−1 + .. .+ Γ k −1 Δzzt −k +1 + μt
3.7
z t is the vector of variables, Δz is the first difference operator ( z t −z t−1 ), Dt is a vector
Γ 1 is a short run
for other deterministic variables such as time trend, known as deterministic term,
coefficient matrix ( Γ=−( I− A1 −. .. .− Ai ), i=1,2,…,k-1 and Πz is a long run coefficient matrix (
Πz=−( I−A 1 −.. ..−A k ) . By estimating both short run Γ and long run Πz , they can identify the
μt is an error term that can be normally distributed.
adjustments to change. k is lag length and
where
3.5
Sources of Data
The data for this study was obtained from the following source. These are Central Bank of Nigeria (CBN)
statistical Bulletin (various versions) and Federal Ministry of Finance (FMF) reviews of federal
government public revenue and expenditure. This is complemented by data from IMF International
Financial Statistics. The series span the period 1980-2014.
4.
Data Presentation, Analysis and Discussion of Results
4.1
Unit Root Test of Stationarity
To carry out cointegration test among the variables of our model requires the existence of a unit root for
each variable. A preliminary test for unit root is first carried out. The rationale is to check the properties
of time series data. The Augmented Dickey- Fuller (ADF) and Phillips Perron (PP) tests were conducted.
The results of the ADF and PP tests are presented in Table 4.1.
Table 4.1: Unit Root Test
Variable
Lag length
ADF test Statistic
PP Test
lnGREV
D(lnGREV)
-1.0453
-3.9562**
-0.9673
-4.5651***
2
2
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Order
Integration
of
I(1)
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Infrastructure, Domestic Output and Revenue Generation Drive in Nigeria (1980-2014)
lnINFR
D(lnINFR)
RGDP
D(RGDP)
lnGFC
D(lnGFC)
lnPINV
D(lnPINV)
INF
D(INF)
2
2
2
2
2
2
2
2
2
2
-0.2428
-0.3637
-3.6632**
-5.1438***
I(1)
-0.1439
-0.4546
-5.2373***
-8.2370***
I(1)
-3.4192
-1.5319
-4.2583**
-4.8632***
I(1)
-2.0476
-1.9803
-3.6750**
-4.5812***
I(1)
-1.7642
2.9837
3.3356**
3.1024*
I(1)
Critical Values
1%
-4.2463
-4.2463
5%
-3.4891
-3.4892
10%
-3.2322
-3.2320
*** represents stationary at 1% level of significance; ** represents stationary at 5% level of
significance; * represents stationary at 10% level of significance. Where Level represents Logarithms of
variables; ‘D’ represents that the variable has been differenced.
The result of the stationarity test is presented in table 4.1. It shows that all the series seem to be exhibiting
a time varying mean and variance suggesting that they are non- stationary at levels using intercept and
trend but become stationary after first difference. Thus the variables becomes integrated of order one, that
is, I (1).
4.2
Johansen Cointegration Test
The Johansen cointegration based result on trace test is presented in Table 4.2a, while Table 4.2b presents
the results of the Johansen cointegration tests based on the maximum eigenvalue. The maximum
eigenvalue test is conducted on the null hypothesis of the number of cointegrating equations (r) against
the alternative hypothesis of number of cointegrating equations plus one (r + 1). The null hypothesis
cannot be rejected if the test statistic is smaller than the maximum eigenvalue test critical value. The trace
test (Table 4.2a) shows that atleast four cointegrating equations exist at 5 per cent significance level. The
null hypothesis of no cointegrating vectors and at most 1 is rejected. Hence the trace statistics specified 4
cointegrating relationship at 5 per cent significance level. The maximum eigenvalue test in Table 4.2b
reveals that atleast two cointegrating equation exists at 5 per cent significance level.
Table 4.2a: Rank Test (Trace) Cointegration
Date: 10/09/15 Time: 12:29
Sample (adjusted): 1982 2014
Included observations: 33 after adjustments
Trend assumption: Linear deterministic trend
Series: GFC GREV INF INFR PINV RGDP
Lags interval (in first differences): 1 to 1
Unrestricted Cointegration Rank Test (Trace)
Hypothesized
No. of CE(s)
Eigenvalue
Trace
Statistic
0.05
Critical Value
Prob.**
None *
At most 1 *
At most 2 *
0.744543
0.656556
0.564884
135.0671
91.39669
57.19734
95.75366
69.81889
47.85613
0.0000
0.0004
0.0052
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Infrastructure, Domestic Output and Revenue Generation Drive in Nigeria (1980-2014)
At most 3 *
At most 4
At most 5
0.408340
0.295393
0.077194
30.56881
13.77446
2.570774
29.79707
15.49471
3.841466
0.0407
0.0893
0.1089
Trace test indicates 4 cointegrating eqn(s) at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values
Table 4.2b: Unrestricted Cointegration Rank Test (Maximum Eigenvalue)
Hypothesized
No. of CE(s)
Eigenvalue
Max-Eigen
Statistic
0.05
Critical Value
Prob.**
None *
At most 1 *
At most 2
At most 3
At most 4
At most 5
0.744543
0.656556
0.564884
0.408340
0.295393
0.077194
43.67040
34.19936
26.62853
16.79435
11.20368
2.570774
40.07757
33.87687
27.58434
21.13162
14.26460
3.841466
0.0189
0.0458
0.0659
0.1819
0.1443
0.1089
Max-eigenvalue test indicates 2 cointegrating eqn(s) at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values
Therefore it can be concluded that there are four significant long run relationships between the variables
using trace test and two using Maximum Eigenvalue. Since variables can either have short or long run
effects, a vector error correction model (VECM) was used to disaggregate these effects.
4.3
Vector Error Correction Model Estimates
The estimated VECM result is presented in Table 4.3. The short run and long run interaction of the
underlying variables of the VECM has been estimated. The variables are converted into natural log
transformation and hence these values represent long term elasticity measures. The standard error
statistics are given in ( ) while the t-statistics are given [ ]. In Table 4.3 (Panel A), all the explanatory
variables except inflation rate are significant in determining revenue. The infrastructure (INFR) and
private investment (PINV) are positive and statistically significant determinant of revenue generation.
While real gross domestic product (RGDP) and gross fixed capital formation are negative and statistically
significant in influencing revenue. The speed of adjustment (short run dynamics) is indicated by the
coefficient of the error correction terms. The result is presented in Table 4.3 (Panel B). The coefficient of
D(lnGREV) is -0.152361. This shows that the speed of adjustment is approximately 15.24%. The
implication is that, if there is a deviation from equilibrium only 15.24% is corrected in one year as the
variable moves towards restoring equilibrium. Thus, there is relatively no strong pressure on lnGREV to
restore long run equilibrium wherever there is a disturbance. The speed of adjustment coefficient has the
correct sign (negative) and statistically significant with t-value of (-5.24).
The policy implication is that infrastructure and private sector investment play critical role in revenue
generation. This shows that if government can revamp the infrastructure subsector, more private sector
will participate in economic activities that will drive output and revenue for the government. However,
domestic output growth and gross fixed capital formation seems to have a negative relationship. The
implication is that growth in output has not contributed to drive revenue generation in Nigeria.
Table 4.3: Results of Vector Error Correction Model
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Infrastructure, Domestic Output and Revenue Generation Drive in Nigeria (1980-2014)
Panel A: Normalized Cointegrating Coefficients (Long Run Estimates)
lnGREV(-1)
lnINFR(-1)
RGDP(-1)
lnGFC(-1)
lnPINV(-1)
INF(-1)
Constant
1.000000
2.738208
(0.75171)
[3.64264]
-1.855815
(0.44456)
[-4.17450]
-2.248051
(0.32207)
[-6.98001]
5.491828
(0.83529)
[6.57473]
-2.081176
(1.04785)
[-1.68614]
9.592403
Panel B: Coefficients of Error Correction Terms
D(lnGREV)
-0.152361
(0.02907)
[-5.24120]
D(lnINFR)
0.009624
(0.00240)
[ 4.01600]
D(RGDP)
D(lnGFC)
D(lnPINV)
D(INF)
0.163024
(0.22830)
[0.46157]
1.897167
(0.91183)
[2.06225]
0.481991
(0.28824)
[1.38692]
1.006340
(0.45036)
[3.85488]
-
Source: Author’s computation from E-Views 7.0 iterations Results; Note: standard errors in ( ) and t-statistics in [ ]
5.
Conclusion and Recommendations
Revenue generation is being threatened by progressive infrastructure decline. Shortage of infrastructure
development has negative effect on the country’s growth and development. as such its impact on a
country’s economy, revenue and quality of life are dilapidated. Its inadequacy basically stunts growth in
real or vital sectors of the economy such as agriculture, manufacturing, mining or energy. Dealing with
Nigeria’s infrastructure decay and inadequacy poses a huge problem that is likely to persist without
urgent public sector reforms and private sector participation.
The infrastructural sub-sector in Nigeria requires reforms that open the infrastructure sector up to
competition while carving out a new strategy and regulatory framework for government. The
Infrastructural Concession and Regulatory Commission (ICRC) should strive to accelerate investment in
Nigeria’s infrastructure through private sector participation. The macroeconomic reform is also essential
for the proper functioning of infrastructure and growth attainments. The government should also explore
the Public Private Partnership (PPP) platform which leaves funding, development and operations of
facilities to private sector while government focus on planning, policy and regulations.
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Assessing Business Growth through Franchising in Developing Economies
Assessing Business Growth through Franchising in
Developing Economies
Peter Azamzu Aroge,
Entrepreneurship Development Centre,
Bingham University, Karu, Nasarawa State,
E-Mail: peteraroge@yahoo.com
and
Felicia Eze
Entrepreneurship Development Centre,
Bingham University, Karu, Nasarawa State,
E-Mail: felijbong@gmail.com
Abstract
Business generation has taken a new dimension in developing Nations through the process of franchising. The place
of franchising in the developing economy like Nigeria cannot be overemphasized as can be seen in the fast food
sector. Franchising has been generally accepted in Nigeria and it is yielding good profits for the local operators in
the food sector. Thus, franchising in the Nigerian fast food sector is a booming business that is meeting the need of
Nigerians in terms of job creation and revenue generation. Despite these enormous opportunities, there are acute
challenges confronting the franchised shops resulting from high costs and harsh economy environment. It is
therefore needful as this study recommended that the government should strengthen the National Association of
International Franchises (NAIF) and National Office of Technology for Technology Acquisition and Promotion
(NOTAP) towards effective and efficient regulations, so that more foreign fast food outfits will take advantage of the
Nigerian marketing environment to boost competition.
Keywords: Franchising, International Franchising, Fast Food
1.
Introduction
Global competition is highly intensifying because domestic companies that dominated the local markets
at home now find foreign competitors to contend with based on their influx through franchise as a
distribution strategy in other to gain entry into new markets. This position is in line with Omsai (2005)
who postulated that Franchising is a powerful vehicle for the marketing and distribution of goods and
services employed by franchisors to market their products. Alon (2007) posits that international
franchising has grown significantly since the 1960s because of push and pull factors. Domestic saturation,
increased competition and diminishing profits at home have pushed international franchisors to examine
their opportunities abroad as favorable macroeconomic, demographic and political conditions abroad
pulled them into specific markets. Franchising has been observed by industrial watchers as the key
strategy adopted by multinationals to promote and expand their trade in other untapped markets and this
cut across different sectors including the fast food sector which is the focus of this paper. It is therefore
our intention to focus on the introduction of fast food franchising and its acceptability in Nigeria. Over
the past 53 years when Macdonald opened her first fast food in Chicago till today, Emerson (2009)
claimed that fast food franchising in the developed economy has increased geometrically. America has
net over 521, 215 outlets in fast food stores alone (Haying, 2005). He observed further that franchising is
well established in most developed countries today with over one third of all retailing business franchised.
In recent years however, opportunities have diminished in these countries as well, and international
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Assessing Business Growth through Franchising in Developing Economies
franchisors have begun to seek development opportunities in developing economies such as China, Brazil,
South Africa and Nigeria. Chay et al (2000) in agreeing with Alon argued that over 75% of the expected
growth in the world’s trade over the next decades will come from developing countries. It was not
surprising therefore, that franchisors are assessing the economic potentials in this market. With China’s
1.3 billion people, 200 million of which are within the growing middle class and a Gross Domestic
Product (GDP) that is above 40%, Ordish (2006:30) described China as the “mother of all franchise
markets.
The continued growth (33-49 percent) of China’s consumer base provides a potentially lucrative
opportunity for foreign franchisors and Nigeria with a population of over 170 million people, growing
middle class in major Cities and Gross Domestic Product (GDP) that is put at 30% is primed as Africa’s
largest emerging market expected to be a sought – after market by multinational firms especially in the
fast food sector. Mitanni and Awodun (2005) described it as a juicy market with an estimated worth of
about N190 billion ($760 million). Yet, the multinational fast food organizations are yet to take
advantages of the immense opportunity solely enjoyed by local fast food firms like Mr. BIGGS,
Tantalizer, Chicken Republic among others with a total of about 480 outlets ( Mitanni & Awodun 2005).
The Nigerian fast food and restaurant industry has undergone phenomenal growth over the past six years,
averaging 40% per annum (Chamberlain, 2006). Despite the economic offer and ease of entry into the
Nigeria market, foreign franchisors except South Africa with few entries have shunned the Nigeria
market. Our point of concern is stemmed from the facts recorded above concerning other developing
countries where the western-styled fast food dominated their franchising marketing world and the need
for Nigeria with her unique opportunities to benefit from this global trend rather than enjoying the
monopoly of local franchisors. It is therefore the purpose of this article to empirically analyze franchising
in developing economy visualizing the Nigeria fast food sector.
Historically, according to Gates 2010, Franchising has been traced back to the middle Ages, when the
Catholic Church granted franchise to the tax collectors. They would receive a portion of the revenue and
turned over what remained to the Pope. This was also noticed during the feudal times. Gates (2010:8)
posits that, individuals were also given franchises to sponsor markets and fairs, and observed further that,
in 18th century England, royalty and parliament awarded franchises to noblemen who agreed to meet
specific responsibilities. Risner (2001: 18) reiterated further that this concept was extended to the kings
granting a franchise for all manner of commercial activities and over time the regulations governing
franchise became a part of European common law. The concept of franchising dates back to the middle
Ages, but the widespread use of franchise strategies began in the United States around 1850 when Singer
Sewing Machines, located in New England, decided to market its products throughout the United States
(Seid 2017). At that time, the “franchising” element (Product and Brand) consisted only of the right to use
the brand name at the store and sell the product.
Towards the end of the century General Motors and Coca-Cola began to use the franchising concept to
expand the markets to which they could sell their products. Throughout the twentieth century, franchising
expanded gradually into other industries. In 1917 the first franchised grocery store, the Piggy Wiggly
went into business while Hertz began franchising automobile rentals in 1925, the first fast-food franchise,
A & W opened in the same year (Seid 2017). The largest expansion of franchising occurred in the late
1940’s at the end of World War II when many veterans returned home desiring to open their own
businesses. In the 1950’s, major fast-food chains like Burger King, McDonald’s and Dunkin Donuts
began to appear. By the 1960’s onward, these and other American fast food chains began their expansion
into international markets. This paper is however, restricted to some fast food firms operating in Lagos,
Abuja and Port Harcourt. Furthermore, it covered mainly the aspects relating to the application of
franchising in the Nigerian fast food firms with its implications on the socio-economic values of the
service Business environment. However other sectors of the economy as it relates to franchising have
exempted from the study. Relevant data was obtained from 250 respondents with the use of wellBingham University Journal of Accounting and Business (BUJAB)
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structured questionnaires distributed in the three cities. However data was also sourced from secondary
sources from ranging 2007 and 2017
2.
Literature Review
In this section, the concept of franchising, international franchising, benefits of franchising, franchising in
developing economies, fast food franchising in Nigeria and the theoretical framework of franchising will
be examined.
2.1
The Concept of Franchising
In recent times there has been a growing interest in the concept of franchising as a new distribution
paradigm and new market entry strategy in the marketing environment. Few historians believed that the
word franchising comes from old French meaning privilege of freedom from servitude (Bassuk, 2000:8).
The American Express (2017) provides that when you buy a franchise, you are buying the right to use a
specific trademark or business concept. The business you run is essentially the same as all other business
being run under the same name. In order to do this, you may have to buy things like products, tools,
advertising assistance, and training from the franchisor (the company that owns the rights to the business).
While you own the business, its operation is governed by the terms of the franchise agreement. For many,
this is the chief benefit of franchising -- you are able to capitalize on business format, trade name, and
support system provided by the franchisor. The oft-quoted line is that franchising allows people to go into
business for themselves, not by themselves (American Express 2017).
Gates 2010 further posited that franchising is an agreement between organizations where a producer of
product or service grant rights to independent business men to conduct business in a specified way,
designated place and at a certain period of time. It is a very specific method or way of distributing goods
and services. He further argued that franchising is not a business itself, but a way of doing business. No
wonder she draws a conclusion that it is essentially a marketing concept and franchising as a concept is an
innovative method of distributing good and services. The Franchise Council of Australia (FCA) viewed
franchising as a business relationship in which the franchisor assign to the franchise the right to market
and distribute the franchisors goods and services, and to use the business name for a period of time.
Meanwhile, the International Franchise Association defines franchising as a continuing relationship in
which the franchisor provides a licensed privilege to do business, plus assistance in organizing training,
merchandising and management in return for a consideration from the franchisee. Om Sai Ram, in
Haying, 2005 posits that in the past 50 years “business format” franchising has come to be predominant in
the developed economy like USA and in more than 80 countries. Generally, franchising in the business
environment is composed of three elements viz: the franchisor (owner of business and name in the
system); the system (the business in which investment is made) and franchisee (the investor who purchase
the right of ownership). The interaction between these elements is carried out under a contractual
agreement (Preble, 2002), from which we identify three different types of franchising, including: (1)
Product franchise where a producer granted a right to sell its products to the franchisee (2) Name and
process franchise, where the franchisee is granted the right to use the name and process of the business
and (3) Business format model, where the franchisee is not only granted the rights above but, involves the
transfer of ways of doing business by the franchisor. Bassuk (2000) concluded that, business format
franchising is what franchising is all about today and essentially why franchising is the most successful
method of distributing goods and services in the business world. This is evident in the number of business
models among which we have manufacturer –retailer, manufacturer – wholesaler, wholesaler – Retailer
and retailer – retailer. These models helps to make franchising the fastest growing marketing strategies in
our business today.
2.1.1 Benefits of Franchising
The concept of franchising is ensured when the franchisor sells a proven business package to the
franchisee that then duplicates the business. It is pertinent to note that franchising is conceived on that
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benefit: the franchisor achieves rapid expansion with limited capital outlay; the individual franchisee
equally benefits by owning and operating a business which utilizes proven methods and procedures;
because the franchisor makes his expertise available in a multitude of areas. In line with this, American
Express 2017, highlighted the following advantages and disadvantages of franchising:






Reduced risk - Franchises traditionally have a much lower failure rate than other start-up
businesses. The reason? You're buying a business concept where most of the kinks have already been
worked out by someone else.
You get a complete package - The guesswork usually associated with starting a business is taken
care of. You total package can include trademarks, easy access to an established product; a proven
marketing method; equipment; inventory; etc.
Strength in numbers - When you're become a franchisee, you have the buying power of the entire
network, which can help you get product and compete with larger national chains.
Business processes - Many franchisors provide their franchisees with various proven systems
including financial and accounting systems; ongoing training and support; research and development;
sales and marketing assistance; planning and forecasting; inventory management; etc. They'll show
you the techniques that have made the business successful and help you utilize them in developing
your own business.
Financial and site selection assistance - Some companies will help you finance your initial
franchise, letting you get by with as little upfront cash as possible. They also may help with site
selection, making sure that your business is located in an area where it can thrive.
Advertising and promotion - Not only will you benefit from any national or regional ad and
promotional campaigns from the franchisor, but they may also help out in other areas -- from
providing camera-ready copy for your own advertising efforts to developing in-store point-of-sale
materials designed to drive customers through your business. It would cost you a great deal to develop
these materials on your own.
Other benefits of franchising as a way of growing business are: the capital needed to expand the business
is provided by the Franchisee; Trained, motivated management is part and parcel of franchising;
Franchise units tend to be better run, therefore more efficient and profitable than company owned units;
Rapid Expansion; Achievement of optimum size – maximum profits are realized by getting very large;
Great buying power – The large number of units allowed by franchising enables the company to buy for
the entire system and at great savings to the individual franchisees. This greatly enhances profit margins
and gives the franchisees a very strong advantage over all competitors; and Maximum Income- Franchise
fees, made up of franchise royalties, equipment sales, supplies, materials sales, sales of Services, and
property rental.
2.1.2 International Franchising
International franchising has grown significantly since the 1960s because of both push and pull factors
which Alon (2006) described as domestic saturation, increased competition and diminishing profits as the
push factors while, favorable macroeconomic, demographic and political conditions abroad are the pull
factors that influenced foreign franchisors. Franchising in developed economy is most pronounced in
U.S.A. They have experienced an explosion in business format franchising in the last two decades since
this is the most efficient business model for the distribution of goods and services. Bassuk (2000:5)
argued that with the fall of communism and the move away from socialism and towards free market
economies, the world is becoming franchise driven. Om sai Ram in (Haying, 2005) observed that onethird of all retailing in U.S.A. are franchise-related and that there are more than 3,000 franchise
companies, trading in about 521,215 outlets. In view of this success story in U.S.A, the companies choose
to franchise abroad and today the developed economies have not only adopted franchising but
institutionalized it through regulations. International Franchisors have not responded into Nigeria
(compare their response into Asia) largely because of ignorance of immense market opportunities,
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Assessing Business Growth through Franchising in Developing Economies
absence of Franchise -specific legal and regulatory framework and the imminent security challenges and
instability of government policies relating to infrastructure and economic development Olumide (2007)
and Dasuki (2014).
2.1.3 Franchising in Developing Economies
Assessing the economic potential in developing economies is important for international franchisors who
wish to prioritize markets for expansion, choose an appropriate mode of entry, and select a proper fee
structure for their franchise system. The economic rate of growth, level of population and G.D.P per
capita are variables considered while entering emerging markets (Bassuk, 2000 and Frantino, 2006:28).
China with a population of more than 1.3 billion people, Brazil with a population of over 500 million and
Nigeria (170 million) is the most populous black Nation in the world. Franchising is a relatively new
model in these countries where it was first noticed in the early 1970s. Today, China has about 2,500
chains using franchising through more than 50 industries including fast food and has employed about 1.8
million people in almost 170,000 stores. On the other hand Brazil is the fifth largest country of franchises.
The Brazilian market has revenue worth $12 billion dollars and generates 22,000 jobs through 894
franchisors and 46,534 franchise units (Risner, 2001). She revealed further that 94% of the business
format franchises are Brazilian, while 6% are foreign. Gunasrkara (2007:49) argued that, franchising was
the primary guarantee of success for a foreign brand in Brazil but, due to the complex business
environment, more than 90% of them failed in the 1980s. This was also true of china where difficulties
with quality control, weak legal system, uncertainty of regulations and Intellectual Property (IP) risks are
stumbling blocks to foreign franchisors. Ordish (2006:31) reiterated that franchising is a new business
model in developing countries and thus, requires a great deal of education at all levels. Despite the great
success recorded today in Asian countries most especially fast food franchising which Risner (2001)
concluded to be the largest sector in the franchising industry; African market is yet to fill the impact of
this job creation and money spinning distribution concept. While, South Africais said to have enjoyed
from this global trend Nigeria with the largest population in Africa and the 6th crude oil producing Nation
in the world is still grappling in the dark.
Hoffman and Preble (2002:38), posits that franchising has until recently been an uncommon world in
business lexicon in Nigeria hence, the conspicuous absence of foreign franchisors in the country. The
earliest form of franchising in Nigeria had been product marketing franchising through Texaco, Total,
Agip, Coca cola, and Peugeot etc. But, the earliest business format franchise in Nigeria according to
Olumide (2007) is through Dura clean U.S.A. in 1980s. And since then business format franchising has
grown significantly, especially in the fast food sector.
This is as a result of the sensitization efforts of the National Office for Technology Acquisition and
Promotion (NOTAP) and the Nigeria International Franchise Association (NIFA). Today one could
conclude that franchising is steadily becoming understood and accepted as attractive business model in
Nigeria. Suffice it to say that, while the developed market is becoming saturated with franchising model
that of developing economies is just opening up and even with its attendant challenges, the emerging
markets constitute potential pot of opportunities. Franchise in the food sector is adjudged the largest area
of investment in the developing or emerging markets.
2.1.4 Fast Food Franchising in Nigeria
Franchise in the food sector came into the National focus in 1970s when giant companies like Kingsway
snacks in Broad Street, Leventis snacks in Marina, UAC snacks among others established in the Nigeria
market. JAI (2004) revealed that the trend changed in 1986 when UAC lunched her fast food unit called
MR. BIGGS. The Nigerian fast food industry has been growing rapidly since then, judging from recent
report which had shown that the Nigeria fast food sector had a growth rate of 40% per annum within the
last six years (Chamberlain, 2006:6).
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Table 1: Some fast food companies and their market shares in Nigeria
Fast Food Companies
Market Share (%)
MR. BIGGS
45
Tantalizers
10
Sweet Sensation
10
Tasty fried Chicken
5
Chicken licken
5
Others in and outside Lagos
25
Total
100%
Source: Fast track (2006)
Some in the list that made up the 25% are Big Treat, The Kitchen, Charlie’s, Kas Chicken etc. which are
family owned. Nigerians according to Olumide (2007) embraced the MR. BIGGS concept whole
heartedly and this has made them to open branches in different parts of the country. MR. BIGGS
pioneered the restaurant concept of providing good ambience and a relaxing family atmosphere that is
neat and hygienic. They went a step further to combine cultural and local food in their menu especially,
jollof rice, moin-moin, salad and chicken, pounded–yam, Eba among others. Unlike other operators MR.
BIGGS had put into consideration the cultural tastes of the country hence, the success story recorded.
Unarguably, Lagos, Port Harcourt and to a high degree, Abuja are currently the prime targets of these
emerging markets. It is difficult to escape noticing the colorful edifices and bill boards of these fast food
outlets. One is probably just around the comer of your street. The list is endless; Mr. Briggs, Tantalizers,
Tastes Fried Chicken (TFC), Sweet Sensation, Big Treat, Favorites, Kas Chicken, Frenchie’s, Chiquita,
Gina’s Fast Food, Delite, Kigstine Jo Snacks & Burger, The Friends Kitchen, Charlie’s and new entrants
like Quarter Jack in Ogunlana Drive, Surulere, The Triangle along Kodesho Street, Ikeja, Trendy’s and
Domino Dina both in Sabo, Yaba, Choppies in Ojuelegba among others too numerous to mention.
Nworah (2010) argued that due to the competitive nature of the market, many of the outlets have started
to blend their menus with African cuisines like Pounded Yam, Amala, Moin Moin, Eba, Semovita, Fufu
etc. Other unexplored areas are in core Nigerian ‘fast food’ and snacks (possibly covering the over 300
varied ethnic nationalities within Nigeria). These include Boil (roasted plantain) & Epa (ground-nuts),
Isusisun (roasted yam) & Epo (palm oil) with dry pepper, Dundun (fried yam), fried plantain (Dodo),
boiled and roasted corn (congealed, unflavored custard) & Akara (beans cake), Ogi (unflavored custard)
& Moin Moin, EranIgbe,Asun (barbecued goat meat), Suya (grilled cow meat) and many others.
Ibru (2007:10) posits that these records has placed Nigeria in a vantage position with its economic
potential worth $220 million which only local franchisors are enjoying with less than 20% from South
Africa. There are three distinct segments in the Nigerian fast food market: the indigenous brands led by
Mr. Biggs; the international franchises led by South Africa with brands such as Steers, Chicken Licken,
and St. Elmos; and myriad neighborhood outlets. Chamberlain (2006) observed that franchising fast food
companies from the developed countries – McDonald, KFC, Pizza Hut etc. had deliberately avoided
Nigeria market unlike other developing economies or emerging markets. Olumide (2007:8) argued that
many of the consumers expresses desire to buy American fast food franchises but the franchisors are not
willing to do business with the Nigerians. Chamberlain (2006) reiterated the reasons for the inability to
attract American fast food franchises to include relatively newness of franchising, lack of understanding
of the concept and techniques of business format franchising, high cost of acquisition, and culture. Ibru
(2007) adding to these challenges highlighted competition, franchise discipline and failed contracts,
legislation and registration networks at developing stage, corruption, bad image, capital (considering the
exchange rate) and of course, security challenges centered on insurgency, kidnapping and frequent attacks
by herdsmen
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2.2
Theoretical Framework
Three confronting theories are presented in this paper to explain the franchising phenomenon; namely, the
resource scarcity theory, the agency theory, and the plural form theory. The Resource Scarcity Theory
developed by Oxenfeld and Kelly (1969) known explains that the reason for the franchisor to use the
franchising system originates in having access to a resource possessed by the franchisee necessary for
growing the business. That is, the financial resource. Implicit in the Resource Scarcity Theory is the fact
that the franchisor is using the franchising system because he has no access to financial resources. In
other words, if the franchisor had easy access to these resources, he would not use franchising, but would
prefer growing with a company-owned configuration. As a consequence, franchising would be a
temporary organizational resource used to deal with the difficulty to access the basic resources necessary
for growth; and once the franchisor had access to those resources, he would change to company-owned
growth. As developed by Oxenfeld and Kelly (1969), it is also known as ―ownership redirection, which
predicts that the franchisor will stop franchising once he has the necessary resources to fund growth, and
eventually the franchisor will re-buy the once-franchised stores from the franchisees.
The Agency Theory argues the situation where franchisors continue franchising even though they have
plenty of resources. Thus, when these companies are using franchising, it is not because they face
financial resource scarcity, but because franchising gives additional advantages to the franchisor. They
have highlighted that franchising system has indeed a more important aspect than financial resources -the
motivation of the franchisee. The idea is that the franchisees are risking their own money in the
franchised business; they are the owners of the business, so they have all the incentives to work hard and
make it a profitable operation. The motivation of the franchisees is superior to the motivation of the
company managers, even when the company managers may have a variable salary dependent upon their
performance -the motivation of risking their own money is higher than any variable compensation we
might think about. Agency Theory explains that the franchising system reduces the principal -agent
problem because the franchising contract aligns the interests of both the franchisor and the franchisee and
sets a common goal that both share.
Bradach (1997) formulated his Plural Organization Theory, which explains that the mix of companyowned and franchised properties under the same brand; namely, the Plural Form, is what gives the
organization a competitive advantage over systems that are fully franchised or fully company owned.
Bradach (1997) found that most of the franchising chains have a mix of company-owned and franchised
establishments. One of the reasons he gave for this is that some establishments are more suited to one
form of ownership than others. The other reason is that the existence of one kind of outlets has positive
impacts on the other kind of outlets, and vice versa. Under this theory, the reason to franchise is to have
simultaneous access to the most important advantage of the company- owned structure -uniformity - and
the most important advantage of the franchised structure –adaptation.
3.
Methodology
Considering the above findings in the body of knowledge (literature), we thus, made the following
hypotheses:
HO1:
Fast food franchising is not accepted in Nigeria.
HO2:
Fast food franchising does not yield good profit in the Nigeria business environment.
HO3:
Adaptation does not influence the propensity of fast food franchising in Nigeria.
The survey approach provides wider information that characterizes all organizations in the population
from which the sample was selected. It is therefore a more beneficial design for theory building. Since
this study was designed to investigate franchising in a developing economy thus, the survey approach was
selected for use in this study. This avails us the opportunity of reliability, generalization and growth
(Ahiauzu, 2010). The population of study includes all franchised fast food restaurant business operating
in Nigeria. Nwankwo (1999:6) noted that the population of any research study is the universe of such
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group of people or objects which a researcher is interested. In order to obtain our sample size from the
population, we had recourse to the Nigeria franchise association (NIFA) report and through a random
sampling exercise had 10 firms selected for the study.
We had in these firms obtain a sample of 250 respondents which also means 25 respondents from each
selected fast food company through a probabilistic sampling techniques. Our primary data were acquired
through the use of questionnaire, personal observation and interview. The primary instrument used for
gathering data for the study is the questionnaire. The questionnaire were designed in open and close
ended patterns and administered directly on the operators of the franchised fast food companies directly.
Furthermore, in order to ensure a reduced possibility of questionnaire missing in transit or misplaced the
questionnaire were retrieved in same manner, which they were administered. The data so obtained were
presented in tables and analyzed using non-parametric simple percentages and the chi- square (x)
statistical technique was applied in order to confirm the stated hypotheses.
3.1
Validity and Reliability of Research Instrument
The validity of an instrument refers to the extent to which it measures what it was intended to measure.
The validity of the scales utilized in this study was assessed for content and construct (convergent)
validity. The correlation among the components of the performance scale and the correlation among the
components of the market orientation constructs provide evidence of convergent validity to the extent that
they are high, that is they are converged on a common underlying construct. After the survey had been
completed the reliability of the scales was further examined by computing their coefficient alpha
(Crombach Alpha). All scales were found to exceed a minimum threshold of 0.7 as suggested by
Nunnally (2000).
4.
Research Findings and Analysis
In the course of this study 220 questionnaire were distributed to both the franchisors and franchisees in
order to elicit the success of franchising in Nigeria vis-à-vis the developing markets most especially in the
fast-food sector of the economy. Overall, the contribution was obtained from franchised respondents
operating within Nigeria main cities like Lagos, Port Harcourt, Enugu, and Ibadan among others. A total
of 192 of the questionnaire were returned out of which 185 was found to be valid and useful for our study.
This represents 84% which is good enough, as it is reliable and generalizable. The questionnaire was
analyzed after which the stated hypotheses were further analyzed for confirmations.
4.1
Research Hypotheses Testing
Our hypothesized statements were tested using the chi-square statistical tool as earlier stated. The tests are
conducted at 95% confidence interval and 0.05 significant levels while, the degree of freedom of each
stated hypothesis was determined appropriately and came up to be 4. Following the decision rule of
accepting or rejecting null hypothesis i.e. if calculated x2 is less than the critical x2,we accept, if not we
reject, we thus hypothesized as follows;
Ho1: Fast food franchising is not accepted in Nigeria,
Table 2: Chi-square Table for Hypothesis 1 testing
O
E
O-E
(O-E2)
(O-E2)
E
Very great extent
53
37
16
256
6.919
Great extent
94
37
57
3249
87.811
Moderate extent
15
37
-22
-484
-13.081
Small extent
20
37
-17
-289
-7.810
Very small extent
3
37
-34
-1156
-31.243
Total
185
42.596
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X2 calculated = 42.596
Df
=
k-1
=
5–1
=
4
As shown in table 2, the calculated x2= 42.596 is greater than the critical x2= 9.488 using a
degree of freedom (Df) 4. We thereby reject the null hypothesis, in order words; the fast food
franchising is well accepted in Nigeria.
Ho2: Fast food franchising does not yield good profit in the Nigeria business environment.
Table 3: Chi-square Table for Hypothesis 2 testing.
O
E
O-E
(O-E2)
(O-E2)
E
Strongly Agreed
102
37
65
4225
114.189
Agreed
59
37
22
484
13.081
Neutral
18
37
-19
-361
-9.756
Disagreed
6
37
-31
-961
-25.973
Strongly Disagreed
37
-37
-1369
-37
Total
185
54.539
Calculated X2 = 54.539
Df
=
k-1
=
5–1
=
4
The above table shows that the calculated chi-square (x 2) = 54.539 is greater than the critical chi-square
(x2) = 9.488 and at a degree of freedom of 4. This therefore made us to reject the stated hypothesis, that is,
fast food franchising yield good profits in the Nigeria business environment. This finding was supported
by literature and further buttressed in our discussion of findings.
Ho3:
Adaptation does not influence the propensity of fast food franchising
in Nigeria.
Table 4: Chi-square Table for Hypothesis 3 testing
O
E
Very High
High
Moderate
Low
Very Low
Total
122
46
14
3
185
37
37
37
37
37
O-E
(O-E2)
85
9
-23
-34
-37
7225
81
-529
-1156
-1369
(O-E2)
E
195-270
2.189
-14.297
-31.243
-37
144.919
Calculated X2 = 114.919
Df
=
k-1
=
5–1
=
4
Table calculation has proved our stated hypothesis to be wrong by revealing that, the calculated chisquare (x2) = 114.919 is greater than the critical chi-square (x2) = 9.488 at a degree of freedom of 4. In
view of this result, we hereby reject the stated hypothesis it thus, means that adaptation does influence the
propensity of fast food franchising in Nigeria.
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4.2
Discussion of Findings
The result of our research work as regards fast food franchising in Nigeria revealed that fast food
franchising began in the late 1990s when Mr. Bigg’s, due to its high level of patronage expanded into
many cities outside Lagos where it started from. The franchise quickly grew and branches sprang up with
many other brands like Tantalizer, chicken licken, chicken republic and many more entering the
franchising business model thereby increasing the number to a well over 480 outlets today. The result
goes to prove that there is enormous interest in fast food franchising among Nigeria entrepreneurs. Ibru
(2007:10) posits that Mr. Bigg’s success story has inspired late entrants into this business and claimed
that there are over 100 different indigenous fast food franchises in Nigeria. Matanmi and Awodun
(2005:18) as corroborated by our study showed that out of the 100 branded players in the Nigeria fast
food industry, only 10 could said to be major players which accounted for about 75% of the market with
MR. Bigg’s having the majority market share of 45%, and Tantalizers coming second with only a 10%
share.
In the course of investigation, we discovered that foreign franchisors in the fast food sector in Nigeria
were less than 20%. Some of these are chicken licken, Domino, Chicken Republic, Tetrazinni among
others. They are mainly located in Lagos and Abuja with a number of outlets, increasing brand visibility,
equity, turn over and number of customers that stands them out as major competitors. Hoffman and
Preble (2002:38) concluded that fast food restaurants could easily use their brand reputation as leverage
and expand their operations. The study revealed further the acceptability of fast food franchising in
Nigeria. Fast food restaurant is springing up every day in Nigeria; due to its acceptability, franchisees are
taking the restaurants to their local government areas hence, the presence of Mr. Biggs at Ughelli in Delta
– State, Owo and Ore both in Ondo – State. This acceptability has led to a high level of competition
among players in the market in a bid to attract new customers while planning retention of old ones.
Matanmi and Awodun (2005:22) highlighted competitive weapons employed in Nigeria to include taste,
prices, environment, class sensation, visibility and availability of parking space. Suffice to say also that
this high level of awareness was not unconnected to the economic benefits associated with fast food
franchising in Nigeria. Ibru (2007:12) argued that the potential market for fast food franchise alone in
Nigeria is about $220 million; our study revealed that the Nigeria fast food industry is a profitable market
largely due to her population and economic indices such as profitability, wealth creation, employment
generation among others. This impressive record is enjoyed due to the high level of patronage,
professionalism, and brand reputation associated with franchised fast food companies in Nigeria. It is
pertinent to appreciate the fact that foreign franchisors have avoided Nigeria market despite her huge
economic gain unlike, the presence of fast food giants like McDonalds in other developing countries such
as, China; Brazil and South Africa. This absence is largely due to poor regulations, political instability,
corruptions among others as revealed by our study.
Conclusively, fast food franchising in Nigeria is a booming business that is yet to be fully exploited most
especially foreign franchisors like McDonalds, Pizza Hut and KFC. Local franchisees are smiling to the
banks daily as the few foreign franchisors from South Africa could not compete with local players like
MR. Biggs and Tantalizers who are market leaders and whose brands are house names in Nigeria. The
fear of the foreign franchisors could be allayed with the recent government fight against corruption, the
new democratic structure and the economic reforms of the present government. The entry of these
franchisors will not only give the teeming Nigeria population an opportunity to make choice between
foreign and local fast food it will also help create heavy competition that would lead to quality and better
services.
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Assessing Business Growth through Franchising in Developing Economies
Conclusion and Recommendations
Based on the findings of the study, we recommend as follows; that government of Nigeria should
strengthen the Nigeria International Franchise Association (NIFA) and NOTAP towards efficient and
effective regulations of the sector. There should be legislation that would provide rules and laws for the
franchising industries. Foreign franchisors should be encouraged to enter into the local market by creating
conducive atmosphere and giving tax holiday, just as in the case of the newly established TINAPA
business resort in Cross River state. The process of adaptation and standardization should be made easy
and attractive. Foreign franchisors should take advantage of the Nigeria market by relating with Nigeria
business men and women. Nigeria government should encourage her business citizen to franchise with
foreign franchisors in the fast food industry by creating specialized loan facilities with the Nigeria banks
with reduced interest rates and complex terms and conditions.
A study of this nature usually gives rise for further research toward a better understanding of the
franchising business model. It is thus, recommended that a work is carried out to further ascertain the
influence of culture on foreign franchising. Emphasis could also be paid on comparative analysis of
foreign franchising and local franchising in Nigeria. This is to ascertain influence of international and
local experience as input in the franchising of fast food in the developing market like Nigeria. As well as,
a comparative analysis of company owned and franchised fast food in Nigeria with focused placed on
economies of scale.
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Contemporary Issues in Computer Forensics and Accounting
Contemporary Issues in Computer Forensics and Accounting
Lambe Isaac
Department of Accounting
Bingham University,
Karu, Nasarawa State.
E – Mail: talk2ice@yahoo.com, Phone No: 08027629054
Abstract
The preceding line of reasoning regarding the contemporary issues in computer forensics has been well received in
many disciplines, most especially in the field of accounting. Computer forensics is a new and fast growing field that
involves carefully collection and examination of electronic evidence that not only assesses the damage to computer
infrastructures as a result of computer crimes, but also to recover lost information and prosecute criminals. Given
that digital attacks on organizations are becoming increasingly common and more sophisticated, there is a need for
accountants, to explore more innovative ways of providing data security and having an effective means to respond
to cybercrimes, since accountants are sufficiently empowered with important investigative and requisite analytical
skills that serve to uncover fraud in forensic investigations. This paper therefore seeks to examine the contemporary
issues in computer forensics and accounting, as well as its application within an increasingly complex digital age.
The paper concludes that every organization should consider its vulnerabilities and assess the benefits of having a
basic forensic skill set capable of proactively managing fraud risks, detecting fraud, and putting in place a robust
and responsible process, to respond to allegations of cybercrimes and the knowledge of when to engage a forensic
professional to take over the investigation and carry it to a productive conclusion. Moreover, the forensic
accountant has an obligation to adhere to all applicable professional standards, laws and regulations when
performing professional services that include the use of computer forensics.
Keywords: Computer Forensic, Fraud, Cybercrime, Accounting, Investigation
1. INTRODUCTION
Computer forensics, which is otherwise referred to as computer forensic science is a branch of digital
forensic science pertaining to evidence found in computers and digital storage media. The goal of
computer forensics is to examine digital media in a ‘forensically’ sound manner with the aim of
identifying, preserving, recovering, analyzing and presenting facts and opinions about the digital
information. Given that increased reliance on both technological and accounting skills has been
recognized in research (Albrecht & Sack, 2000; Cory & Pruske, 2012), and overtime, routine accounting
tasks are becoming highly automated, an accountant’s value is more likely to be determined by higher
order skills such as those needed in forensic analysis (Hunton, 2002), thus creating a link between
computer forensics and accounting.
According to Nelson, Philips & Steuart (2010), computer forensics is the process of applying scientific
methods to collect and analyze data and information that can be used as evidence. In other words,
computer forensics addresses the methods and procedures necessary to investigate possible criminal and
non-criminal conduct involving digital data. However, from an organizational perspective, investigations
should initially proceed with the assumption that the case may be of a criminal nature so that all steps
meet the statutory rules for admission of evidence. An understanding of computer forensics allows the
accountant to make knowledgeable decisions regarding what steps to take and how to proceed during an
investigation and not taint the evidence (Kearns, 2010).
Computer forensics is considered by some to be dominated by IT and law-enforcement. Although both
play important roles, accountants can also be a vital forensic resource. Accountants, in particularly
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Contemporary Issues in Computer Forensics and Accounting
auditors, are highly familiar with corporate information systems (IS), policies and internal controls, and
often possess advanced analytical skills. They possess a broad understanding of the overall systems and
databases, access rights, organizational roles and responsibilities which are critical to an effective forensic
investigation. They are in a position to recognize the normal routines of organizational agents and to
recognize suspicious and unusual activities. IT specialists are primarily concerned with establishing
defenses against external attacks and in maintaining and securing the internal environment through
authorizations and access rights. Regardless of technical knowledge, organizational agents who inspect
digital evidence must be forensically trained or they could taint evidence by opening and inspecting
suspect files without first creating a mirror image and following chain-of evidence procedures. Lawenforcement agents may have priorities that do not parallel and could even conflict with organizational
goals.
Computer forensics and the use of forensic technology have become more commonplace in today’s
complex business environments and as such, business and industry, government, and not-for-profit
organizations can all benefit from a fundamental understanding of computer forensics as it may apply to
fraud prevention, investigations, litigation and dispute matters, and other forensic-related services. The
initial discovery of fraud, or at least the suspicion of fraud, can sometimes be determined by company
personnel without the involvement of outside professionals capable of in-depth forensic analysis. Every
organization needs to consider its vulnerabilities and assess the benefits of having a basic forensic skill set
capable of proactively managing fraud risks, detecting fraud, and putting in place a responsible process to
respond to allegations of fraud and the knowledge of when to engage a forensic professional to take over
the investigation and carry it to a productive conclusion. These basic skills may include records
management practices and the impact on investigations; knowledge of legal issues that may impact the
investigation of potential fraudulent conduct; understanding basic evidence preservation practices so as to
not compromise the integrity or contaminate evidence; and the development of protocols to address
instances of alleged fraudulent conduct. The increasing digitalization of information and resulting
complex and disparate technology environments; the overwhelming amounts of digital information; and
the ever changing investigative landscape, underscore the importance of forensic accountants having a
base-level understanding of computer forensics and the benefits of using data analytic and technology
tools.
Cybercrimes and data breach can result in extensive losses in both profits and reputation for
organizations, whether private or public in nature. For example, the target data breach that affected as
many as 110 million customers in the US in the year 2014, received substantial adverse publicity and
expectedly, the total dollar loss was high (Tsu, 2014). In 2014 alone, hacks were perpetrated on a large
number of companies including Neiman Marcus, AT&T, J.P. Morgan and Home Depot (Walters, 2014).
In most cases, the attacks compromised confidential and financial information. The modern digital
environment offers new opportunities for both perpetrators and investigators of fraud. In many ways, it
has changed the way fraud examiners conduct investigations, the methods internal auditors use to plan
and complete work, and the approaches external auditors take to assess risk and perform audits. While
some methods, such as online working papers, are merely computerized versions of traditional tasks,
others, such as risk analysis based on neural networks, are revolutionizing the field. Many auditors and
researchers find themselves working amid an ever changing workplace, with computer based methods
leading the charge. Perhaps the most difficult aspect to computer based techniques is the application of a
single term to a wide variety of methods like digital analysis, electronic evidence collection, data mining,
and computer forensics. Indeed, computer based fraud detection involves a plethora of different
technologies, methodologies, and goals. Some techniques require a strong background in computer
science or statistics, while others require understanding of data mining techniques and query languages.
Although computer forensics is most often associated with the investigation of a wide variety of computer
crime, computer forensics may also be used in civil proceedings. The discipline involves similar
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Contemporary Issues in Computer Forensics and Accounting
techniques and principles to data recovery, but with additional guidelines and practices designed to create
a legal audit trail. Evidence from computer forensics investigations is usually subjected to the same
guidelines and practices of other digital evidence.
2. LITERATURE REVIEW
In today’s world, almost every financial fraud incorporates the use of a computer, whether the fraud is
falsifying invoices or electronic money laundering (Smith, 2005). In the case of financial statement fraud,
entries usually exist as electronic journal entries, login records found in log files, and electronic
correspondence between individuals involved. In recent years however, auditors find themselves
increasingly involved in evidence collection through computer forensics. As it pertains to fraud detection,
computer forensics is the process of imaging data for safekeeping and then searching cloned copies for
evidence (Gavish, 2007; Dixon; 2005). Perhaps the most common example is seizing the computer of a
suspect for analysis. In gaining access to or auditing the data on a digital device, computer forensics also
involves hacking, password and encryption cracking, key logging, digital surveillance, and intrusion
detection.
2.1 Conceptual Framework
The term 'forensic' is usually associated with the world of forensic medicine. It conjures images of
forensic pathologists, battered corpses, and blood-splattered implements at the scenes of crime and
autopsies and post mortems. Nothing can be further from the truth as forensic accounting shares only one
thread in common with forensic pathology. That common denominator is the pursuit of evidence that will
stand the rigorous scrutiny that the rules of evidence and procedure demand for its admission as evidence
before the courts. Forensic comes from the Latin word for public and specifically to forum. The forum
was where the ancient Romans were thought to gather to do business and settle disputes among other
things. Forensic now relates to courts of law (Wells, 2005). It basically refers to legal concerns and crime
solving is essentially the focus. Forensic relates to the application of knowledge to legal problems such
as crimes and it is science based. The Webster's Dictionary defines the term ‘forensic’ as belonging to,
used in or suitable to courts of judicature or to public discussion and debate.
Forensic investigation on the other hand refers to the use of science or technology in the investigation and
establishment of facts or evidence to be used in criminal justice or other proceedings (Kearns, 2010).
Forensic investigation is the practice of lawfully establishing evidence and facts that are to be presented
in a court of law. It is the search and examination of the particulars of an event to determine the hidden,
unique, or complex facts surrounding the event. Oremade (1988), posits that it is a deliberate search and
review of records in accordance with the laid down and agreed policies in order to ascertain if and why
the keeping of the records resulted in a gap and the responsible person. In most cases, fraud investigations
are investigations of white collar crime, which involves surveillance and careful consideration of
complicated financial records.
2.2 Concept of Computer Forensics
The U.S. Department of Justice (2008) defines computer forensics as the use of scientifically derived and
proven methods toward the preservation, collection, validation, identification, analysis, interpretation,
documentation and presentation of digital evidence derived from digital sources for the purpose of
facilitating or furthering the reconstruction of events. This suggests that the tools and methods of
computer forensics are scientific and are verified scientifically, but their use necessarily involves
elements of ability, judgment and interpretation. According to Nelson, Philips & Steuart (2010), computer
forensics is the process of applying scientific methods to collect and analyze data and information that
can be used as evidence. Computer forensics therefore encompasses discussions on the technologies and
methodologies that can be used to evaluate the data once acquired; considering completeness and
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accuracy of the data prior to processing it for review; formatting and cleansing issues; and data analysis
tips along with describing tools that can help the forensic accountant.
Digital media comes in many forms, including the hard drives found in personal computers, external
drives, telephones, smartphones, PDAs and telephone voice mail systems. Computer forensics typically
are performed to determine what activity took place on a particular device by a user or to restore
previously deleted or corrupted data. Computer forensics is commonly performed during a fraud
investigation because the results can provide a roadmap as to what the key players involved likely knew,
when they were likely to know it, the documents to which they had access, actions taken, with whom they
communicated, and whether they appeared to try to hide their actions. The Internet history, web-based
email, lost or deleted files, logging and registry files are examples of data the forensic accountant can
utilize as evidence in their engagements. Computer forensics is essentially a means for gathering
electronic evidence during an investigation. In order to use this information to prosecute a criminal act
and to avoid suppression during trial, evidence must be collected carefully and legally. It is particularly
important to be aware of the privacy rights of suspects, victims and uninvolved third parties.
2.3 Concept of Forensic Accounting
Forensic accounting is a specialized mode of accounting analysis that is suitable to the court which will
form the basis of discussion, debate and, ultimately, for dispute resolution whether before the courts or
other decision-making tribunals (Albrecht, 2008). Forensic accounting from the foregoing can be broadly
classified into two categories encompassing litigation support and investigative accounting. These two
major categories form the core around which other support services, which traditionally come within the
sphere of investigative services, revolve - including corporate intelligence and fraud investigation
services.
Litigation support is the provision of assistance of an accounting nature in a matter involving existing or
pending litigation. It is primarily focused on issues relating to the quantification of economic damages,
which means a typical litigation support assignment would involve calculating the economic loss or
damage resulting from a breach of contract (Warren, 2002). However, it also extends to other areas
involving valuations, tracing assets, revenue recovery, accounting reconstruction and financial analysis, to
name a few. Litigation support also works closely with lawyers in matters involving, but not limited to,
contract disputes, insolvency litigation, insurance claims, royalty audits, shareholders disputes and
intellectual property claims.
Investigative accounting on the other hand is concerned with investigations of a criminal nature. A typical
investigative accounting assignment could be one involving employee fraud, securities fraud, insurance
fraud, kickbacks and advance fee frauds (Michael, 2000). No doubt in many assignments, both litigation
support and investigative accounting services are required. In many cases, the combination of these
services will not be adequate to address the problem unless there is in place an effective programme for
fraud risk management and control. Creating an ethical work environment with a vigorous anti-fraud
culture, implemented seriously by senior management through the promotion of a clear anti-fraud policy,
is the only viable option if management is serious about preventing or reducing the recurrence of
corporate fraud in its various guises.
A forensic accountant's primary duty is to analyze, interpret, summarize and present complex financial
and business-related issues in a manner that is both understandable by the layman and properly supported
by the evidence. Forensic accountants are engaged by both government and private agencies cutting
across industries ranging from insurance companies, banks, police forces, regulatory agencies and other
financial and business organizations. The services rendered by forensic accountants cover a wide
spectrum of which the following are commonly provided: investigation and analysis of financial
evidence; development of computerized applications to assist in the analysis and presentation of financial
evidence; communication of findings in the form of reports, exhibits and collections of documents; and
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assistance in legal proceedings, including testifying in court as expert witness and preparing visual aids to
support trial evidence. To properly carry out these functions, the forensic accountant must also be familiar
with legal concepts and procedures, including the ability to differentiate between substance and form
when grappling with any issue (Leigland, 2004).
3. EMERGENCE OF COMPUTER FORENSICS
The proliferation of electronic commerce has led to increasing rates of electronic fraud in recent times,
which in turn has meant an increasing demand for forensic IT services aimed at identifying unauthorized
or unethical IT activities. As posited earlier, computer forensics is simply the application of computer
science to the investigative process. As investigative accounting is an important aspect of forensic
accounting, computer forensics and its sub-disciplines are important tools for the forensic accountant in
his task of retrieving and analyzing evidence for the purposes of uncovering fraud or challenging any
financial information critical to the outcome of any dispute. Sub-disciplines of computer forensics, like
computer media analyses, imagery enhancement, video and audio enhancements and database
visualization, are tools, techniques and skills which are becoming more critical in the field of forensic
accounting in general and investigative accounting in particular. Fraud detection services and the
techniques of data matching and data mining would be impossible without the application of computer
forensics.
3.1 Techniques of Forensic Process
A number of techniques are used during computer forensics investigations and much has been written on the many
techniques used by law enforcement in particular (Albrecht, et. al., 2008). Some of these techniques includes, but
not limited to those enumerated below:
i. Cross-drive analysis: A forensic technique that correlates information found on multiple hard drives.
The process, still being researched, can be used to identify social networks and to perform anomaly
detection.
ii. Live analysis: The examination of computers from within the operating system using custom forensics
or existing sys-admin tools to extract evidence. The practice is useful when dealing with Encrypting File
Systems, for example, where the encryption keys may be collected and, in some instances, the logical
hard drive volume may be imaged (known as a live acquisition) before the computer is shut down.
iii. Deleted files: A common technique used in computer forensics is the recovery of deleted files.
Modern forensic softwares have their own tools for recovering or carving out deleted data. Most
operating systems and file systems do not always erase physical file data, allowing investigators to
reconstruct it from the physical disk sectors. File carving involves searching for known file headers
within the disk image and reconstructing deleted materials.
iv. Stochastic forensics: A method which uses stochastic properties of the computer system to investigate
activities lacking digital artifacts. Its chief use is to investigate data theft.
v. Steganography: One of the techniques used to hide data is via steganography, the process of hiding
data inside of a picture or digital image. An example would be to hide pornographic images of children or
other information that a given criminal does not want to have discovered. Computer forensics
professionals can fight this by looking at the hash of the file and comparing it to the original image (if
available.) While the image appears exactly the same, the hash changes as the data changes.
vi. Volatile data: When seizing evidence, if the machine is still active, any information stored solely in
RAM that is not recovered before powering down may be lost. One application of ‘live analysis’ is to
recover RAM data prior to removing an exhibit. Capture gateway, bypasses Windows login for locked
computers, and allowing for the analysis and acquisition of physical memory on a locked computer.
3.2 Nature of Computer Forensic Investigation
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Computer technology is the major integral part of everyday human life, and it is growing rapidly, as are
computer crimes such as financial fraud, unauthorized intrusion, identity theft and intellectual theft. To
counteract those computer-related crimes, Computer forensics plays a very important role. Computer
forensic investigation involves obtaining and analyzing digital information for use as evidence in civil,
criminal or administrative cases (Nelson, B., et al., 2008). Wells (2002), opines that a computer forensic
investigation generally investigates the data which could be taken from computer hard disks or any other
storage devices with adherence to standard policies and procedures to determine if those devices have
been compromised by unauthorized access or not. Computer Forensics Investigators work as a team to
investigate the incident and conduct the forensic analysis by using various methodologies and tools to
ensure the computer network system is secure in an organization. A successful Computer Forensic
Investigator must be familiar with various laws and regulations related to computer crimes in the host
country and the various computer operating systems. According to Nelson, B., et al., (2008), public
investigations and private or corporate investigations are the two distinctive categories that fall under
computer forensics investigations. Public investigations will be conducted by government agencies, and
private investigations will be conducted by private computer forensic team.
3.3 Steps in Computer Forensic Investigation
Computer forensics involves the preservation, identification, extraction, documentation and interpretation
of computer data (Walters, 2014). The three main steps in any computer forensic investigation includes;
acquiring, authenticating, and analyzing of the data. Acquiring the data mainly involves creating a bit-bybit copy of the hard drive. Authentication is the ensuring that the copy used to perform the investigation is
an exact replica of the contents of the original hard drive by comparing the checksums of the copy and the
original. Analysis of the data is the most important part of the investigation since this is where
incriminating evidence may be found (Davis, Schiller & Wheeler, 2007).
Part of the analysis process is spent in the recovery of deleted files. The job of the investigator is to know
where to find the remnants of these files and interpret the results. Any file data and file attributes found
may yield valuable clues. Data recovery is only one aspect of the forensics investigation. Tracking the
hacking activities within a compromised system is also important. With any system that is connected to
the internet, the activities of hacker attacks are almost certain. Although it is impossible to completely
defend against all attacks, as soon as a hacker successfully breaks into a computer system the hacker
begins to leave a trail of clues and evidence that can be used to piece together what has been done and
sometimes can even be used to trail a hacker. Computer forensics can be employed on a compromised
system to find out exactly how a hacker got into the system, which parts of the system were damaged or
modified and with the help of computer forensics, administrators are able to learn about mistakes made in
the past and help prevent incidents from occurring in the future.
3.4 Computer Forensic Investigation Process
According to Winston (2016), the overall computer forensic investigation involves a number of processes
encompassing the acquisition of the evidence, the authentication of the recovered evidence, and the
analysis of the evidence. Although each forensic investigator may add their own steps in the forensics
process, these three steps within a computer forensic investigation process (acquisition, authentication,
and analysis) are essential to any forensic investigation.
3.4.1 Acquiring evidence
Acquiring evidence in a computer forensics investigation primarily involves gaining the contents of the
suspect’s hard drive (O’Donnell and Moore, 2005). But other aspects may be involved in the acquisition
of evidence. Photographs of the computer screen and the entire computer system in its installed
configuration may yield useful information to the investigator. In addition, some forensic investigators
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believe in gathering evidence before shutting down the suspect’s computer; this is a source of arguments
within the forensics community - whether to shut down the computer immediately and preserve the exact
state that it was found, or to gather evidence before shutting down in order to gain any volatile data that
might be destroyed on shutdown. Ideally, the forensic analysis is not done directly on the suspect’s
computer but on a copy instead. This is done to prevent tampering and alteration of the suspect’s data on
the hard drive. The contents of the hard drive are copied on one or more hard drives that the investigator
will use to conduct the investigation. These copies, or images, are obtained by coping bit by bit from the
suspect’s hard drive to another hard drive or disk. The hard drive containing the image of the suspect’s
hard drive obtained in this manner is called a bit-stream backup. The reason why hard drives must be
copied bit by bit is because doing so ensures that all the contents of the hard drive will be copied to the
other. Otherwise, unallocated data (such as deleted files), swap space, .bad sectors, and slack space will
not be copied. A goldmine of evidence may be potentially held in these unusual spaces on the hard drive
and the investigator must ensure that the hard drive or disk used to hold the copy is completely free of any
data so that the evidence will not be tainted.
3.4.2 Authentication of the Evidence
According to the report of the USA Forensic Technology Task Force (2010-2012), the authentication of
the evidence is the process of ensuring that the evidence has not been altered during the acquisition
process. In other words, authentication shows that there are no changes to the evidence that occurred
during the course of the investigation. Any changes to the evidence will render the evidence inadmissible
in a court. Investigators authenticate the hard drive evidence by generating a checksum of the contents of
the hard drive. This checksum is like an electronic fingerprint in that it is almost impossible for two hard
drives with different data to have the same checksum. By showing that the checksums of the seized hard
drive and the image are identical, the investigators can show that they analyzed an unaltered copy of the
original hard drive.
3.4.3 Analysis of the Evidence
The last and most time-consuming step in a forensics investigation is the analysis of the evidence. It is in
the analysis phase that evidence of wrongdoing is uncovered by the investigator (Kearns, 2010). In
general, forensic investigators rely on special forensics tools to analyze the huge amounts of data on the
hard drive (the size of hard drives continues to get larger and larger). These range from a hex editor (a
text editor that views the data in hexadecimal format) to full-blown forensic toolkits like Encase. It is
important that the chain of custody is maintained throughout the investigation. The chain documents
everything that happens to the evidence: who handled it, where and how it was handled, and how it was
stored. It preserves the integrity of the evidence. Even if the suspect was guilty, if the chain is not
maintained, a lawyer can argue that the chain of custody was not properly established, casting doubt on
the damning evidence acquired during the analysis phase (Sonia, Michelle and Jenghuei, 2002).
4.
CURRENT ISSUES IN COMPUTER FORENSICS
In today’s contemporary and globalized world, a number of issues have been brought to the fore, as it
relates to the twin issue of computer forensics and the practice of accounting. Forensic accounting
represents an integration of accounting, auditing and investigative skills that support the acquisition,
maintenance, and analysis of relevant information in a manner that would be acceptable for judicial
review and meet the requirements of professional oversight. It also extends to the formulation and
presentation of findings in formal reports and court testimony as an expert witness. Thus, forensic
accountants should command a set of skills that transcends the traditional expectations of accountants.
These skills are acquired and enhanced through audit experience and increased investigative training.
This allows the forensic accountant to analyze and interpret more complex business and nonbusiness
issues in a manner that meets the highest requirements of reliability and integrity. This also implies that,
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forensic accountants may be employed in a public or private capacity and play important roles in internal
auditing departments of banks and insurance companies, governmental and law enforcement agencies,
and as self-employed contractors for individuals and attorneys. Hence, the market for forensic
accountants and the required skill sets are very well defined.
Consequently, the dominant issues for the forensic accountant in playing their expected role within the
purview of computer forensic activities encompass a number of contemporary issues enumerated below.
Cybercrime poses a potentially significant risk that should be considered by most organizations and as
such may find it helpful to utilize specialists in information security to devise and maintain
countermeasures to mitigate the security risks of doing business electronically.
Also, fraud often is perpetrated by an organization’s own employees and may include fraudulent financial
reporting, asset misappropriation or general fraudulent misconduct. Individuals who perpetrate fraud have
access to confidential information and the systems employed by the organization in the normal course of
business. They understand the vulnerabilities of an organization’s system of internal controls. There are
typically three conditions present when a fraud occurs: opportunity, pressure or incentive and
rationalization. A well-designed internal control system therefore should include controls to prevent,
detect and respond to fraud risks and it is an effective way to mitigate fraud risks. While the possibilities
of overriding internal controls always are present, the use of computer forensics in analyzing electronic
information and transactional activity may be useful in the detection of fraudulent activities. Even an
organization with a well-designed system of internal controls may fall victim to fraud if they do not
establish effective monitoring and detection measures.
Additionally, in conducting electronic surveillance, the forensic accountant may design computer-assisted
audit techniques known as continuous monitoring to proactively analyze financial transactions and
identify anomalies in the transactional data such as excessive activities or amounts of electronic fund
transfers as they are being processed. In conducting undercover operations, ‘ honeypots’ can be designed
and incorporated into information security protection strategies to deceive potential electronic thieves and
gather evidence to support further prosecution. When analyzing financial transactions, data mining
techniques also can be used to identify relationships between data examined, enabling the discovery of
suspicious trends or improprieties. The analysis of financial transaction patterns to credit card activity is
an example of this type of investigative technique that can help prevent and reduce the potential for fraud.
Closely related to the above is also the fact that rather than focusing on technology, the forensic
accountant should clearly define the engagement objectives, and based on the scope, determine how
computer-assisted data analysis can be used to conduct or facilitate the engagement. Forensic accountants
sometimes believe data analysis can only be used when extensive amounts of information are examined.
Although cost benefits should be considered, many data analysis tools provide the forensic accountant
with high-level analysis information with only minimal need for programming experience. These types of
analyses can assist the forensic accountant in determining the direction or relevancy of further detailed
data analysis strategies to support the engagement’s objectives.
Furthermore, in our contemporary times, digital sophistication has been greatly enhanced, such that with
the emergence of more powerful software, the technological ability to extract large amounts of data,
100% of the population of information can now be analyzed. Data can be retrieved from a company’s
general ledger system, sales databases, time and expense systems, network drives, user files, various types
of logs such as web logs, building access logs, and essentially anywhere electronic data resides and
extensive analysis performed on company’s financial and non-financial records.
Some of the other current issues relating to computer forensics and accounting, which are usually
beneficial in nature include:
- The ability to reduce or even eliminate sampling risk.
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-
The comparison of relevant types of data from different systems or sources to show a more
complete picture.
The ability to easily trend relevant data over periods of time; fluctuations in trending lines can be
analyzed further for false positives and potential risk factors.
The quick identification and extraction of certain risk criteria from the entire data population for
further analysis.
The testing for effectiveness of the control environment and policies in place by identifying
attributes that violate rules.
The identifying trends of which company personnel, consultants and forensic accountants were
unaware.
Perhaps, one of the dominant components relating to the issue in question relates to the fact that forensic
accountants can use computer forensics by electronically analyzing manual journal entries, and using
analytical tools to identify anomalies and potential areas of risk. Forensic accountants may also assist in
the testing of supporting documentation for the higher risk manual journal entry areas to better understand
the potential risks. Doing so also helps further tailor data analyses to either gain comfort that the journal
entries were recorded properly, or identify errors or irregularities. In certain higher risk scenarios, forensic
accountants may even design procedures associated with the review of emails. Such procedures may
include developing the list of search terms and custodians as well as analyzing the actual output of the
email searches.
However, a number of factors also subsist, which act as contributing elements to the increasing
complexities of computer forensic services, especially as it relates to accounting practices. Predominant
among these challenges are national and international privacy laws and regulations. Such regulations
require that the forensic accountant carefully evaluate the need to obtain confidential personal
information. If required, the forensic accountant may need to implement safeguards to mitigate the risk of
data breaches, and gather only the data that may be considered incidental to the engagement. If such
information is obtained, the forensic accountant will need to implement appropriate data security and
protective strategies to minimize the threat of unauthorized disclosure and use of such information.
5.
CONCLUSION AND RECOMMENDATION
It is clear from the issue in question that computer forensic being the use of scientifically derived and
proven methods toward the preservation, collection, validation, identification, analysis, interpretation,
documentation and presentation of digital evidence derived from digital sources for the purpose of
facilitating or furthering the reconstruction of events is of great relevance in contemporary times. Equally
of great significance is the fact that, the forensic accountant must possess not only multiple skills but
should have the qualities of curiosity, persistence, creativity, discretion, organization, confidence and
sound professional judgment, required to content with the whole activity of computer forensics. As such,
forensic accountants do not work in isolation, but they bring to bear the collective experience and varied
skills of their team, which comprises not only accountants but also investigators, attorneys, financial
analysts and computer forensic specialists. It can be concluded therefore that, forensic accountants are
becoming increasingly familiar with forensic technology and methodologies used in both proactive and
reactive forensic engagements. As the use of computer forensic analysis, e-discovery and forensic data
analysis often is a necessary component of a forensic engagement, and the forensic accountant is expected
to always consider various contemporary issues and challenges as discussed above.
It is recommended therefore, that given the importance of computer forensics in every facet of life,
forensic accountant must possess the skill set that best positions them to evaluate the requirements and to
identify appropriate resources as necessary for effectiveness in their core responsibilities and to remain
relevant in today’s digital world. Every organization should equally consider its vulnerabilities and assess
the benefits of having a basic forensic skill set capable of proactively managing fraud risks, detecting
fraud, and putting in place a robust and responsible process to respond to allegations of fraud and the
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knowledge of when to engage a forensic professional to take over the investigation and carry it to a
productive conclusion.
References
Albrecht, C. C., Albrecht, W. S., and Dunn, J. G. (2000). Conducting a ProActive Fraud Audit: A Case
Study. Journal of Forensic Accounting, II, 203218.
Beasley, M. S., and Jenkins, J. G. (2003). The Relation of Information Technology and Financial
Statement Fraud. Journal of Forensic Accounting, 4, 217232.
Bell, T. B., and Carcello, J. V. (2000). Research Notes, A decision aid for assessing the likelihood of
fraudulent financial reporting. Auditing: A Journal of Theory and Practice, 19(1),169175.
Coglitore, F. J., and Matson, D. M. (2007). The Use of Computer Assisted Auditing Techniques in the
Audit Course: Further Evidence. Journal of Forensic Accounting, VIII, 201226.
Conan C. Albrecht (2008). Fraud and Forensic Accounting in a Digital Environment. White Paper for the
Institute for Fraud Prevention. Marriott School of Management, Brigham Young University.
conan@warp.byu.edu.
Eining, M. M., Jones, D. R., and Loebbecke, J. K. (1997). Reliance on Decision Aids: An Examination of
Auditors' Assessment of Management Fraud. Auditing: A Journal of
Theory and Practice, Vol.
16(2).
Hermanson, D. R., Moran, B., Rossie, C. S., & Wolfe, D. T. (2006). Continuous Monitoring of
Transactions to Reduce Fraud, Misuse, and Errors. Journal of Forensic Accounting, VII, 1730.
Hill, T. P. (1995). A Statistical Derivation of the Significant Digit Law. Statistical Science, 10, 354363.
Kearns, G. S., (2015). Computer Forensic Projects for Accountants. Journal of Digital
Forensics,
Security and Law, Vol 10 (3), pp 7-34.
Leigland, R., (2004). A Formalization of Digital Forensics. Retrieved online 13 August, 2016.
Michael, G. N., Mark, M. P., and Lawrence A. P. (2000). Recovering and Examining Computer
Forensic Evidence. Retrieved online 13 August, 2016.
Oremade, T. (1988). Auditing and Investigations. West African Book Publishers, Lagos - Nigeria.
Ron, B., Margaret, D., Carl, H., Joel, L., Charles, R., and Donna, T., (2012). Computer Forensic
Services and the CPA Practitioner. White Paper of 2010-2012 Forensic Technology
Task
Force for the Institute for AICPA: Forensic and Valuation Service Section.10
Sonia, B., Michelle, E., and Enghuei, L. (2003). Issues in Computer Forensics. Online Journal of
Computer Forensics, COEN pp. 1-35.
Others
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www.resources.infosecinstitute.com/comp.
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gdp.asp.
Endnote Exhibit adapted from Harvey R Kelly, Accounting Irregularities and Financial Fraud Ch 6
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Retrieved-August 12, 2016 from justice.gov/usao/eousa/foia_reading_room/usab 5601.
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2016
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Effects of Price-To-Book Value and Price-To-Earnings Ratios on Stock Market Returns of
Consumer Goods Companies in Nigeria.
Effects of Price-To-Book Value and Price-To-Earnings Ratios on
Stock Market Returns of Consumer Goods Companies in Nigeria
Uwaleke Uchenna Joseph, Ph.D
Department of Banking and Finance,
Nasarawa State University, Keffi
Phone No. +2348035865566
and
AKWE, James Ayuba
Department of Accounting,
Nasarawa State University, Keffi
E-Mail: ayubest2007@yahoo.co.uk, Phone No: 08065446226
Abstract
This study set out to examine the effects of market-to-book value and price-to-earnings ratios on stock market
returns in Nigeria, particularly the consumer goods sector. This is because most studies focused on financial
services sector and limited empirical works in Nigeria. Hence, the study investigated the effects of market to-book value and price-to-earnings ratios on stock market returns of quoted companies in Nigeria from 2007
– 2016. The population comprises all quoted consumer goods companies on the NSE, out of which seventeen
(17) quoted consumer goods companies represent the sample of the study. The study adopted ex-post facto
research design and the sampling technique is purposive. The study used primarily secondary data obtained
from the audited accounts of the sampled firms and the NSE fact book. Analysis of data was carried out
using several options of multiple panel data regression. The findings revealed that market-to-book value
ratio and firm age have significant negative effects on stock market returns of quoted consumer goods
companies in Nigeria; while the effect of price-to-earnings ratio on stock market returns of quoted consumer
goods in Nigeria is significantly positive. The study recommends that Board of Directors of consumer goods
companies should put measures in place to ensure that financial statements are devoid of material misstatements
since they (data) explain stock market returns. Also, regulatory authorities (like the Securities and Exchange
Commission and the Central Bank of Nigeria) should design and implements more stringent supervisory rules and
regulations that will ensure that firms provide quality financial reports that are true and fair. It is also
recommended that older firms may restructure or acquire and/or merge with others with a view to producing
synergies and economies of scale.
Keywords: Market-to-book Value ratio, Price-to-earnings ratio, Firm age, Stock market.
1.
Introduction
Stock market returns is a critical indicator used in determining investments that have superior yields
(Moridi & Mousavi, 2009). The categorization of financial market returns could be in form of expected
(normal) returns and uncertain (abnormal) returns (Ross & Westerfield, 1999). Returns on the common
stock market are gains or returns that the investing public makes from trading (buying and selling) in
stocks in a market that is efficient. That is, stock returns reflect both private (hidden) and public (open)
information. These returns they could be profit or dividends in nature depending on the market. The
returns are not fixed but floating and they are a function of the market imposed risks. Price-to-book value
ratio, is a financial valuation metric used to evaluate a company’s current market value relative to its book
value. On the other hand, price-to-earnings ratio is the ratio for valuing a company that measures its
current share price in relation to its per-share earnings.
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Effects of Price-To-Book Value and Price-To-Earnings Ratios on Stock Market Returns of
Consumer Goods Companies in Nigeria.
The principal purpose of every business is the Maximization of shareholders’ wealth (CFA, 2016).
Interestingly, some factors (internal and external) impede the maximization of this wealth, thereby
hindering firms from meeting their objectives. In other words, performance is the capacity of a
firm/company or firm to grow/develop and control its resources in a way to build up advantages that are
competitive. The ratio of Market/book value has been referred to in different ways and in various studies.
It is referred also to as (1) Ratio of market value of Equity to Book value or MV/BV or ME/BE, and (2)
Price-to-Book value ratio or P/BV (Panu, Peng & Dennis, 2007). Some researchers use its reversal as a
parameter/variable, giving rise to contrary interpretation. For consistency, this study shall make use of
the expression, Market-to-Book Value Ratio hereinafter. On the other hand, the price per share-toearnings per share (P/E) ratio shows number of times investor pay for earnings of the previous twelve
(12) months
Related literatures in the area have been reviewed as shown in section 2. From the reviews, the study
identified the following research gaps. Most of the scientific studies conducted in Nigeria in the area
drawn their sample from all the firms quoted on the Nigerian Stock Exchange trading floor. The studies
focused not on a specific section and outcomes arising there from seem too generic. Previous studies
such as Adedoyin (2011), Uwubanmwen and Obayagbona (2012), Okoro and Stephen (2014), did not
give credence to sectoral differences. As you are aware, financial statements comparison across different
sectors may be challenging and the results misleading. This study expands the frontier of knowledge by
using quoted consumer goods companies of the Nigerian economy. Also, the most studies conducted in
this area in Nigeria did not factor in dividend payments in the determination of the dependent variable.
Capital appreciation and dividends are a major determinant of stock market returns. This study breaches
this gap by incorporating dividend payments in the dependent variable (stock market determinations).
The main objective of the study is to examine the effects of market-to-book value and price-toearnings ratios on stock market returns in Nigeria. The specific objectives of the study are as
follows, they are to:
i. Assess the effects of market-to-book value ratio on stock market returns of quoted consumer goods
companies in Nigeria.
ii. Evaluate the effects of firm’s ratio of price-to-earnings on stock market returns of quoted
consumer goods companies in Nigeria.
As such, the study hypothesized in null form as follows:
H01: Market-to-book value ratio has no significant effect on stock market returns of quoted
consumer goods companies in Nigeria.
H02: Price-to-earnings ratio has no significant effect on stock market returns of quoted consumer
goods companies in Nigeria.
The findings of this study will be useful in its policy implication for the regulators and/or policy
makers. The findings will be of huge importance to regulators like the Securities and Exchange
Commission (SEC), the Financial Reporting Council of Nigeria (FRCN), the Corporate Affairs
Commission (CAC), etc. The findings may form the basis for new policy formulation and direction.
The remaining parts of the paper are organized as follows: Section 2: literature review and theoretical
framework; section 3: describes the methodology used and model specification; section 4: examines
the results of the statistical analysis; and section 5: conclusion and recommendations.
2.
2.1
2.1.1
Literature Review and Theoretical Framework
Conceptual Framework
Market-to-Book Value ratio and Stock Market Returns
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Effects of Price-To-Book Value and Price-To-Earnings Ratios on Stock Market Returns of
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According to Panu, Peng & Dennis, 2007, Market-to-Book value ratio is important a n d c r i t i c a l i n
s t o c k r e t ur n s d e t e r m i n a t i o n b e c a u s e i t is a powerful measure that divides stocks into growth
a n d value stocks (other valuation measures include ratio of P/E and sales per share-to-price per share
ratio). Value stock is a stock with ratio of Market-to-Book value that is low and growth stock is
characterized by ratio of Market-to-Book value that is high. Ratio of Market-to-Book value that is low
means value for the reason that for every common stock acquires by the investors, they emphasize
superior underlying assets as shown in the stock book value (Panu, Peng & Dennis, 2007). Contrary to
the argument for value stock, growth stock, which has higher ratio of Market/Book, signifies the
reverse. Those factors that drive stock price to higher level when compared with per share book value are
collectively called growth indicators (Panu, Peng & Dennis, 2007). The query a r i s i n g f r o m why
the value-growth difference may possibly transmit to r e t u r n s o n t h e stock market is still not
clear as s t u d i e s c o n d u c t e d o v e r t i m e d o n o t c o l l e c t i v e l y c o m e t o
c o n s e n s u s on what r a t i o o f Market-to-Book value essentially assesses.
However, ratio of Market-to-Book value is an explanatory variable/parameter that is strongest for
returns on the stock market as discovered by several researchers. Stattman (1980), Rosenberg, Reid and
Lanstein (1985), Jacobs and Levy and Reinganum (1988), Fama and French (1992) and Daniel and
Tittman (1997) established that ratio of Market/Book value and returns on the stock market have
significantly negative relationship, that is, high ratio of Market/Book stocks (growth) have lower or less
returns on the stock market than low ratio of Market/Book stocks (value).
Additionally, Fama and French (1992) in their studies, confirm that relative to other variables
investigated, ratio of Market-to-Book value explains more relationship (strongest relation) with stocks
market returns. The variables examined by Fama and French are earning-price ratio, MVE, debt-toequity ratio (financial leverage) and beta for returns on the stock market. Fama and French (1992) in
addition, present two choices for the predictive ability of ratio of Market/book value. First, high ratio of
Market/Book value (growth) stocks is associated with lower return because high ratio of market/book
value is associated with to low risk. As a result, lower returns should be anticipated. In contrast,
Capaul, Rowley and Sharp (1993) reveal that growth stocks (high ratio of Market/Book value) have on
average higher betas than value stocks (low ratio of Market-to-Book value). Consequently, using beta
as an evaluation of risk may be inappropriate if this risk agreement is legitimate. Secondly, low ratio of
Market/Book (value) is related to stocks that are under-priced. Therefore, high returns are possible if we
correct mispricing of these stocks.
Dhatt Kim and Mukherji (1999) used the Russell 2000 index which is the measure of how well smallsize stocks perform in the USA are in agreement with the above results or findings. They argue that the
investing community tends to earn stock returns that are higher as they engage in the purchase of value
stocks, that is, stocks with low ratios of Market/Book value. In contrast to Fama and French (1992)
findings that ratio of Market/book value has the most explanatory or predictive ability for returns on the
stock market vis-à-vis other predictive variables investigated, Dhatt Kim and Mukherji (1999) found that
price-to-sales ratio has more predictive power than ratio of market-to-book value for small-size firms’
stocks.
Loughran (1997) study reveals that between 1963 and 1995, high market/book value (growth) stocks
have lower returns in January than low market/book (value) stocks. Loughran assessed the seasonality
effect of Market-to-Book ratio. He also states and explains that if we exclude January from the sample,
cross-sectional difference in market returns cannot be elucidated by Market-to-Book and size for three
largest size quintiles. This according to him explains or accounts for 90% and more of total market
capitalization, from 1963 – 1995.
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Effects of Price-To-Book Value and Price-To-Earnings Ratios on Stock Market Returns of
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2.1.2
Price-to-Earnings Ratio and Stock Market Returns
Vorek (2009) carried out a research using data of corporations on the Czeck stock market between 1997
and 2007. Company fundamentals used were price/earnings ratio, price/sales ratio, price/cash flow ratio
and price/book value ratio. Employing regression analysis, the study established that between 1 and 3
years (short run), low price/earnings investments yielded superior returns when compared to
corporations with high price/earnings ratio. They concluded that in the long run, ratio of P/E is not a
good measurement of future returns. Using the Composite Index of Kuala Lumpur and its ratio of price/
earnings in the Malaysian Stock Exchange, Ong, Yichen and The (2010) established that a scientific
relationship between stock returns of corporations and price/earnings ratio on the Malaysian Stock
Exchange. The period was from 1994 – 1998, with regression analysis as the statistical tool used.
Kelly, McClean, and McNamara (2011) studied the industrial sector of the stock exchange in Australia.
Data were collected from 1310 industrial companies from 1998 – 2006. The purpose of the study was to
determine the association between stock returns and price/earnings ratios, where it was noted that
industrial firms in Australia experience low price/earnings effect. The results revealed that positive
significant correlation between stock market returns and price/earnings ratio. These findings are in
contrast with the efficient market hypothesis, in which Australia stock exchange is regarded to have.
Pettersen (2011) studied corporations quoted in Stockholm Stock Exchange from 2000 – 2009. The
study computed portfolio return for every year for 10 years, using Jensen index to adjust for risk. The
findings showed that deploying the price/earnings ratio can result to abnormal returns.
Becker, Lee and Gup (2012) investigated relationship P/E ratio and stock returns using the Standard and
Poor’s (S&P) 500. Their findings supported conclusions that ratio of P/E and stock market returns are
correlated. Leim and Sautma (2012) used the price/earnings ratio to predict stock market returns. They
examined whether stocks with high and low price/earnings ratios record low and high future stock
returns respectively. Historical data between 2005 and 2010 from quoted Indonesia firms were used. The
study established a significance association (within 6 months) between corporations with high and low
ratio of price/earnings. Conversely, the study established no significance association (for stock held for
more than 6 months) between stock returns and the ratio of price/earnings. They concluded that
price/earnings ratio does not have good predictive power for long term returns.
Kihara (2009) studied whether growth of earnings can be estimated using earnings/price ratio of the
firms on the Stock Exchange of Nairobi and the Exchange demonstrates same conclusions as in
Australia and USA. He computed and allocated into quintiles, the earnings/price ratios for corporations
with December 31st as their financial year end. Kihara concluded a positive connection between
earnings/price ratio and growth of investment exists. Osano (2010) examined the extent of explanatory
power of price/earnings and price/book value in predicting share returns in the future. He used firms on
the Nairobi Stock Exchange (NSE) from 1998 – 2002. The main thrust of the study was firms which had
superior/higher price/earnings and price/book ratios and those that had inferior/lower price/earnings and
price/book ratio during -the study period. The study did not consider corporations with median
price/earnings and price/book ratios. T-tests and coefficient of variation were used to verify whether
there was significant connection between stock returns for the two portfolio sets (low and high
price/earnings and price/book firms). The findings indicated that firms that have low price/earnings and
price/book ratios achieved superior returns when compared to firms with high price/earnings and
price/book ratios. He found that firms with low price/earnings and price/book ratios have more
predictive abilities than high price/earnings and price/book ratios.
The study of Githinji (2011) determined the connection between prices of share of corporations and
ratios of P/E on the Nairobi Stock Exchange (NSE) between 2007 and 2010. The data of 50 quoted firms
on the NSE were evaluated using descriptive, correlation and regression analyzes. The study found that
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Effects of Price-To-Book Value and Price-To-Earnings Ratios on Stock Market Returns of
Consumer Goods Companies in Nigeria.
the ratio P/E does not significantly impact on stock performance of corporations on the NSE, but rather a
combination of factors used to value stocks for investment.
2.1.3
Firm age and Stock market returns
While some theoretical models considered the firm size as linearly related to firm age (Greiner, 1972), the
others postulated specific predictions regarding the influence of firm age on its performance. Coad,
Segarra, and Teruel (2013) summarized these predictions in three categories: selection effects, learningby-doing effects, and inertia effects, depending on whether firm performance (expressed as a firm
productivity) remains the same, increases or decreases over time. In empirical sense, firm age has been
researched in different contexts. Starting with the influential work of Gibrat (1931) and finding that
smaller, younger firms are more likely to grow faster than larger, older firms (in terms of the number of
employees or amount of sales), a large number of researches have tried to explore the relationship
between firm size and growth rate (Babirye, Niringiye & Katerega, 2014; Bentzen, Madsen, & Smith,
2012; Palestrini, 2007; Evans,1987), as well as the relationship between firm age and growth rate (Carr,
Haggard, Hmieleski, & Zahra, 2010). While former relationships have usually turned out to be negative,
no clear–cut has been made between firm age and survival (Bartelsman, Scarpetta, Schivardi, 2005;
Farinas and Moreno, 2000). Recently, some researchers were exploring a moderating effect of firm size
or age on the relationship of analyzed variables of interests like for example, relationship between
institutional quality and export performance (LiPuma, 2013).
2.2
Empirical Review
The age of firm is essential in stock market returns as studies has shown that younger firms are more
vulnerable to high risk of failure or incur losses in their early years of operations compared to older
firms as such prices of their shares might be underpriced. For example, Reber and Fong (2006)
discovered that underpriced shares result in heavy trading in the secondary market. Similarly, Lowry,
Officer and Schwert (2008) discovered that information asymmetry affect both the level of the offer
price and the precision of the price- setting process reporting that shares of younger companies are
mostly underpriced. The hypothesis that Corporate Firm age does not significantly impact stock returns
emanates from these findings. Adedoyin (2011) used firm age as a control variable. He found that firm
age does not affect stock market returns significantly. The explanatory variables used by Adedoyin
(2011) were firm growth, firm profitability, firm risk and firm size. Al-qaisi, Tahtamouni and Al-Qudah
(2016) and Ahmed and Hamdan (2015) also used firm age as a control variable and found a statistically
significant effect between firm age and stock market returns. This study therefore, used firm age as a
control variable to determine its effect on the outcome variable.
2.3
Theoretical Framework
2.3.1
Financial Economic Theory
A way of connecting firm specific Characteristics and stock market returns is by means of arbitrage
pricing theory (APT) (Ross, 1976), where multiple risk attributes explain asset returns. While early
scientific studies on arbitrage pricing theory centered on single returns of security, it may possibly be
applied in the entirety/sum of the stock market structure, in which a change in a particular firm-specific
variable may perhaps be looked at as reflecting a change in an underlying systemic risk factor affecting
future returns. The generality of the scientific studies on arbitrage pricing theory, connecting the macroeconomy and returns on the stock market, are described by modeling a relationship in short run between
the price of stock and macroeconomic attributes or variables relative to first difference, presuming trend
stationarity.
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Effects of Price-To-Book Value and Price-To-Earnings Ratios on Stock Market Returns of
Consumer Goods Companies in Nigeria.
Present value model (PVM) or discounted cash flow (DCF) is another alternative but consistent approach
to the study/review of association between external/macroeconomic or firm unique attributes and returns on
the stock market. In this model, the stock of price is related to discount or hurdle rate of these cash flows
and future expected cash flows. Again, stock price is influenced by all external or macroeconomic
variables/factors that affect expected future cash flow or the discount or hurdle rate by which these
cash flows are discounted. When assessing a relationship in long run between external/macroeconomic
parameters/variables and returns on the stock market, present value model can be deployed. Campbell and
Shiller (1988) investigated earnings, prices of stocks and expected dividends relationships. In their
study, they discovered that dividends can be predicted using a long term earnings estimate moving
average and the ratio of this earning variables to price of share is strong in explaining returns on the
stock market over many years. They come to the conclusion that these facts cause prices and returns of
stock much volatile to accord with a simple present value model.
3.
Methodology
This study examines the effects of price-to-book value and price-to-earnings ratios on stock market
returns of quoted consumer goods companies on the Nigerian Stock Exchange (NSE). The data were
collected from annual reports and audited accounts of consumer goods companies, and the NSE fact
book. In undertaking this study, ex-post facto research design was adopted. The population of this study
is the totality of number of quoted consumer goods companies on the NSE floor. However, the study
covers 17 consumer goods companies listed on the Nigerian Stock Exchange (NSE) because they are
quoted and their data are consistent during the study period. The period of sample is ten (10) years; from
2007 – 2016. This sample period of 10 years in our opinion, is sufficient to draw reliable and verifiable
conclusions and/or findings. Therefore, the companies selected are 7-Up Bottling Company Plc,
Champion Breweries Plc, Honeywell Flour Mill Plc, Northern Nigeria Flour Mills Plc, Nigerian
Enamelware Plc, Vitafoam Nigeria Plc, Cadbury Nigeria Plc, Dangote Flour Mill Plc, Dangote Sugar
Plc, Flour Mills Plc, NASCON Allied Industries Plc, P.Z Industries Plc, Guinness Nigeria Plc,
International Breweries Plc, Nigerian Breweries Plc, Nestle Foods Nigeria Plc, and Unilever Nigeria Plc.
The study is based on secondary and panel data. Panel data was used because the study wanted to
determine the time series effects, indicated by subscript i; and the cross sectional effects indicated by
subscript t. The main data source is the Nigerian Stock Exchange (NSE) fact book, and the annual
published accounts or statements of affected companies. Multiple regression technique was adopted using
panel data methodology. As such, the empirical results of the study are based on the following regression
model:
SMRit= β0 + β1MBVit + β2PEit + β3AGEit +µit
Where:
SMRit:
MBVit:
PEit:
AGEit:
β0:
β1- β2:
β3:
µit:
represents stock market returns of the consumer goods company in time t;
represents ratio of market/book value of the consumer company firm in time t;
represents ratio of price/earnings of the consumer goods company in time t;
represents the number of years between year of incorporation and current year
of the consumer company firm;
represents individual effect taken to be constant over time and specific to the
individual cross-sectional unit;
represents the coefficient of the explanatory variables;
represents the coefficient of the control variable; and
represents error term of random disturbance.
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Effects of Price-To-Book Value and Price-To-Earnings Ratios on Stock Market Returns of
Consumer Goods Companies in Nigeria.
Variables
SMR
MBV
PE
AGE
Table 3.1: Variable Measurements
Measurements
(P1-P0)+D0 x 100
P0
P1 represents market price of stock in current year as quoted at the financial year end.
P0 represents market price of stock in last financial year end. D0 represents dividend
payment and other distributions in last financial year end.
Ratio of Market-to-Book Value per share
Ratio of Price-to-Earnings per share
The number of years between year of incorporation and current year
4.
Results and Discussions
Table 4.1 presents descriptive statistics of the variables of the study. The mean, maximum, minimum,
standard deviation and the Jarque-Bera statistic have been used to describe the data.
Table 4.1: Descriptive Statistics
Market Returns
Mean
31.67874
Median
30.45987
Maximum
2371.014
Minimum
-100.0000
Std. Dev.
195.7995
Skewness
10.23358
Kurtosis
121.5052
M/BV
25.50862
23.02114
4732.850
-1322.875
377.2909
11.25529
145.2068
PE
20.55359
18.15100
342.0457
-163.2219
48.14852
2.699372
22.22094
Firm Age
45.73529
48.00000
93.00000
1.000000
19.93378
-0.267252
3.422770
Jarque-Bera
Probability
1.024420
0.457896
1.468340
0.346808
2.823354
0.218758
3.289711
0.193040
Sum
Sum Sq. Dev.
5385.386
6479027
4336.465
24056885
3494.110
391789.3
7775.000
67153.09
170
170
170
170
Observations
Source: The Author, 2017
The Jarque-Bera Statistic of 1.024, 1.468, 2.823 & 3.290 and its corresponding P-values of 0.457, 0.346,
0.218 & 0.193 which are greater than the level of significance of 0.05 indicate that the data are normally
distributed.
From the table above, SMR (stock market returns) has a mean of 31.6787. The range is from the
minimum of -100.0000 to a maximum of 2371.014. This shows that on average, the stock of the sample
firms was able to yield market returns of 32% on the ordinary shares invested by shareholders. The
minimum value is an indication that some shareholders lost stock to the extent of 100% during the period.
On the other hand, some investors gain up to 2371% as market returns. The standard deviation of
195.7995 signifies greater volatility in the stock market and the data deviate from the mean value from
both sides by 196% which implies that the data is widely dispersed from the mean. This also proved that
stock market returns differ from one company to another. Furthermore, the result shows price-to-book
value ratio has a mean ratio of 25.50862, with standard deviation of 377.2909, and the minimum and
maximum of 4732.850 and -1322.875 respectively. This shows that on average, market participants earn
N25.51 per share during the period 2007-2016. However, the minimum of (N1,322.86) is an indication
that some participants incurred loss per share to the tune of that amount, while the maximum is a clear
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Effects of Price-To-Book Value and Price-To-Earnings Ratios on Stock Market Returns of
Consumer Goods Companies in Nigeria.
indication that some participants were able to gain N4,732.85 per share. Price-to-earnings has a mean of
20.554, while the range is from the minimum of -163.222 to a maximum of N342.046. Firm age has a
mean of 45.735, while the range is from the minimum of 1.000 to a maximum of 9.000.
Table 4.1.2: Correlation Matrix
Variables
SMR
M/BV
SMR
1.000000
M/BV
0.036045*
1.000000
P/E
0.055872*
0.229469
AGE
-0.043644*
0.011200
Source: The Author, 2017
*5% level of significance
P/E
AGE
1.000000
0.167046
1.000000
The correlation result indicates that both M/BV and PE are positively correlated to SMR. This implies
that SMR increases as M/BV and P/E increase. However, a negative correlation is revealed between AGE
and SMR.
Post Diagnostic Test
To avoid making some wrong inferences, some tests were conducted and the summary of the statistical
result can be depicted from table 4.3 below:
Table 4.1.3: Summary of Post Diagnostic/Robustness Test
Statistics
Breusch-Pagan-Godfrey Test
0.6213
Breusch-Godfrey Serial Correlation LM Test 1.2550
Mean Variance Inflation Factors
1.057
Hausman Chi-square
7.8973
Source: The Author, 2017
P-values
0.8915
0.5339
0.1018
To test whether there exist heteroskedasticity in the data, the study used “The Breusch Pegan-Godfrey
Test of Heteroskedasticity”. The null hypothesis assumes that the variance of the residuals is constant.
The test suggests absence of heteroskedasticity, as the chi-square value is 0.6213 and the p-value is
0.8915. Thus the p-value of 0.8915 makes the study to accept the hypothesis that the residuals are not
heteroskeadasticity but homokesdasticity and the model is good. In addition, the study used “The
Breusch-Godfrey Serial Correlation LM Test” to check for problem of autocorrelation. From the results,
the observed R-squared of 1.2550 and P-value of 0.5339, indicates that the data have no problem of
autocorrelation. Also, multicollinearity test was conducted using the Variance Inflation Factors (VIF).
The mean VIF is 1.057 with the VIFs for M/BV, PE and AGE as 1.056, 1.086 & 1.029 respectively. This
indicates that, the mean VIF is less than 10. Thus, the study concludes that there is no problem of
multicollinearity and suggest the appropriateness of the model in fitting the independent variables of the
study. Multicollinearity exists only when the VIF is greater than 10.
Data for the study is panel in nature and panel data may lead to error that are clustered and possibly
correlated overtime. This is because each company may have its own entity specific characteristic that
can influence its stock market price. This may bias the outcome variables or even the explanatory
variables, and as such fixed effect and random effect regressions were ran. The Hausman Specification
Test indicates that Fixed Effect Model is most appropriate to Random Effect Model given the Chi-Square
value of 7.87 and its corresponding P-value of 0.0181 which is less than the critical value of 0.5000. This
suggests no entity specific attributes affect the outcome variable.
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Effects of Price-To-Book Value and Price-To-Earnings Ratios on Stock Market Returns of
Consumer Goods Companies in Nigeria.
Table 4.1.4: Summary of Regression Result
Variables
OLS Regression
Coefficients
T-values
P-values
Constant
563.4697
2.3338
0.0209
M/BV
-0.0018
-0.0408
0.9675
P/E
0.3637
8.0686
0.0001
AGE
-11.7900
-2.2326
0.0271
R2
0.1198
2
Adj. R
0.0083
F-Stat
38.0745
0.003
Source: The Author, 2017
Market-to-Book Value Ratio and Stock Market Returns
From the table above, the t-value of M/BV is -0.0408 and a coefficient of -0.0018 with a p-value of
0.9675. The implication of this is that market-to-book value has a significant negative effect on SMR of
listed consumer goods companies in Nigeria at 5% level of significance. The coefficient indicates that an
increase in market-to-book value ratio by 1naira will lead to reduction in stock market returns by 0.018.
This implies that growth stocks (high ratio of market-to-book value) have lower returns on the stock
market than value stocks (low ratio of market-to-book value). This provides evidence for us to accept the
null hypothesis earlier formulated, which states that market-to-book value ratio does not have significant
effect on stock market returns of quoted consumer goods companies in Nigeria. The finding is in line with
those of Stattman (1980), Rosenberg, Reid and Lanstein (1985), Jacobs and Levy and Reinganum
(1988), Fama and French (1992) and Daniel and Tittman (1997).
Price-to-Earnings Ratio and Stock Market Returns
The coefficients and t-value of price-to-earnings ratio are 0.3637 and 8.0686 respectively, with p-value of
0.0001. This shows that price-to-earnings ratio has a strong and significant positive impact on stock
market returns of quoted consumer goods companies in Nigeria at 5% significant level. The coefficient of
0.3637 explains that increase in price-to-earnings ratio by 1 naira can lead to increase in stock market
returns by 0.3637%. The implication of this finding is that the higher the price-to-earnings ratio, the
higher the stock market returns. This finding is in tandem with the a priori expectation that earnings
should have incremental and significant effect on stock market returns. This provides evidence to reject
the null hypothesis stating that price-to-earnings ratio does not have significant effect on stock market
returns of quoted consumer goods companies in Nigeria. The finding has gotten empirical support from
the works of Kihara (2009), Vorek (2009), Ong, Yichen and The (2010), Kelly, McClean, and McNamara
(2011), Pettersen (2011), Becker, Lee and Gup (2012), and Leim and Sautma (2012).
Firm Age and Stock Market Returns
Firm age has been introduced as a control variable, which is an alternative cause of stock market returns.
From the table above, the t-value of firm age is -2.2326 and a coefficient of -11.790 with a p-value of
0.0271. The implication of this is that firm age has a significant negative effect on SMR of listed
consumer goods companies in Nigeria at 5% level of significance. The coefficient of -11.790 explains
that increase in firm age by 1 year can lead to decrease in stock market returns by -11.790%.
Cumulative result shows that the coefficient of determination (R 2) has a value of 0.1198. This implies that
explanatory variables (M/BV, P/E and Age) were able to explain the variation in the dependent variable
(SMR) to the extent of 12%. The other 88% is explained by other factors not captured in the model. This
could be macro and micro variables that also explain change in stock market returns. The regression result
reveals fitness of the model for having F-statistics of 38.0745 and a p-value of 0.003. The implication of
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Effects of Price-To-Book Value and Price-To-Earnings Ratios on Stock Market Returns of
Consumer Goods Companies in Nigeria.
this result is that the overall impact of the explanatory variables on the dependent variable is significant at
5% level, with 95% level of confidence.
5.
Conclusion and Recommendations
The study examines the effects of market-to-book value, price-to-earnings ratios and firm age on stock
market returns of quoted consumer goods in Nigeria for the period 2007 – 2016. The population
comprises all the twenty-one (21) consumer goods companies quoted on the floor of the Nigerian Stock
Exchange (NSE) as at December 31, 2016. The study used seventeen (17) firms as its sample cause in
view of the fact that they have complete and consistent data set for the study period. The study adopted
ex-post facto research design. The data for the study was purely from secondary sources obtained from the
NSE fact book and the annual report of the sampled firms. Data were analyzed using several options of
multiple panel data regression. All the variables of the study opposed to the stated hypotheses. Based on
this, the study has concluded that it has achieved its objective as the findings revealed that market-to-book
value ratio and firm age have significant negative effects on stock market returns of quoted consumer
goods companies in Nigeria; price-to-earnings ratio was found to have significant positive effect on stock
market returns of quoted consumer goods companies in Nigeria.
Based on the findings of the study, it is recommended that Board of Directors of consumer goods
companies put measures in place to ensure that financial statements are devoid of material misstatements
since they explain (data) explain stock market returns. Also, competent authorities (like the Securities and
Exchange Commission and the Central Bank of Nigeria) should design and implements more stringent
supervisory rules and regulations that will ensure that firms provide quality financial reports that are true
and fair. It is also recommended that older firms may restructure or acquire and/or merge with others with
a view to producing synergies and economies of scale.
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Effectiveness of Capital Expenditure on the Growth of Nigeria Economy.
Effectiveness of Capital Expenditure on the Growth of Nigeria
Economy
Bature, Nakah Bitrus Ph.D
Department of Economics,
University of Jos, Plateau State, Nigeria
E-Mail: Baturen_unigrenoble@yahoo.fr
Awogbemi Petson Olanrewaju Ph.D
Head, Computer Security / Forensic Unit
Independent Corrupt Practices Commission (ICPC),
Garki, Abuja
E-Mail: gbemiola910@gmail.com
and
Bitrus, Mavenke Nakah
Post-Graduate Student,
Department of Economics,
University of Jos
mavinakah@yahoo.com
Abstract
Government capital expenditure has been identified as a key determinant of the size of the economy and of
economic growth of any nation. However, government activities in Nigeria sometimes produce misallocation of
resources and hinder the growth of national output. Increasing the government expenditure may result to reduction
in the performance of the economy due to the fact that the government increases tax of individuals which often leads
to reduction in productivity. The paper thus investigates the effectiveness of capital expenditure on economic growth
in Nigeria between 1986 and 2016 using symmetrical Autoregressive distributive lag (ARDL) Approach. Unit root
test was conducted using Augmented Dickey-Fuller (ADF) to identify the level of stationarity among the variables;
while bounds test result showed that government capital expenditures has a long-run equilibrium relationship with
economic growth in Nigeria. Findings from the study revealed that capital expenditure on education has had a
significant effect on the growth of Nigeria’s economy. More so, capital expenditure on agriculture was discovered
to have had a significant effect on economic growth in Nigeria. This indicates that spending on agricultural
research and extension substantially improves agricultural output and the level at which it contributes to national
income in Nigeria. However, capital expenditure on health was discovered to have had no significant influence on
the growth of Nigeria economy. Suggestive from the empirical analysis therefore is that there is the need for policy
makers to re-examine and evaluate the policies and expenditures in health sector with a view to finding why the
policies are not growth enhancing. This would help place the expenditures in this sector to become meaningful and
productive in nature.
Keywords: Government Capital Expenditure, Economic growth, Agriculture, Education, Health
1.
Introduction
Government expenditures play key roles in the operation of all economies. It refers to expenses incurred by the
government for the maintenance of itself and provision of public goods, services and works needed to foster or
promote economic growth and improve the welfare of people in the society. Government (public) capital
expenditures are generally categorized into expenditures on administration, defense, internal securities, health,
education, foreign affairs, etc. and has both capital and recurrent components. Capital expenditure refers to the
amount spent in the acquisition of fixed (productive) assets (whose useful life extends beyond the accounting or
fiscal year), as well as expenditure incurred in the upgrade/improvement of existing fixed assets such as lands,
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Effectiveness of Capital Expenditure on the Growth of Nigeria Economy.
building, roads, machines and equipment, etc., including intangible assets. Expenditure in research also falls within
this component of government expenditure. Capital expenditure is usually seen as expenditure creating future
benefits, as there could be some lags between when it is incurred and when it takes effect on the economy.
The annual budget spells out the direction of the expected expenditure, as it contains details of the proposed
expenditure for each year, though the actual expenditures may differ from the budget figures due, for example, to
extra-budgetary expenditures or allocations during the course of the fiscal year. Government expenditure is a major
component of national income as seen in the expenditure approach to measuring national income. This implies that
government expenditure is a key determinant of the size of the economy and of economic growth. However, it could
act as a two-edged sword: It could significantly boost aggregate output, especially in developing countries where
there are massive market failures and poverty traps, and it could also have adverse consequences such as unintended
inflation and boom-bust cycles (Wang and Wen, 2013). The effectiveness of government expenditure in expanding
the economy and fostering rapid economic growth depends on whether it is productive or unproductive.
For decades, capital expenditures have been expanding in Nigeria, as in any other country of the world. Akpan
(2005) opines that the observed growth in public spending appears to apply to most countries regardless of their
level of economic development. This necessitates the need to determine whether the behaviour of Nigerian capital
expenditure and the economy can be hinged on the Wagner’s (1883) Law of Ever-increasing State Activity, or the
Keynesian (1936) theory and Friedman (1978) or Peacock and Wiseman’s (1979) hypotheses. This increases in the
finances of the Federal Government have thus led to a number of theoretical and empirical investigations of the
sources of such increases. Researchers have particularly questioned whether increases in the size of the federal
budget tend to be initiated by changes in expenditures followed by revenue adjustments or by the reverse sequence,
or both (Baghestani and McNown, 1994; Akpan, 2005). Friedman (1978), for example, argues that governments
adjust expenditures to the level of revenues, so that control of taxation is essential to limit growth in government.
Abu and Abdullah (2010) observe that government capital expenditure continued to rise due to the huge receipts
from production and sales of crude oil, and the increased demand for public goods like roads, communication,
power, education and health. Besides, there is increasing need to provide both internal and external security for the
people and the nation.
Government activities in Nigeria sometimes produce misallocation of resources and hinder the growth of national
output. Increasing the government expenditure may result to reduction in the performance of the economy due to the
fact that the government increases tax of individuals which leads to reduction in productivity. Government in power
siphoned public fund and divert to unproductive projects. That is another way in which corruption can be viewed in
Nigeria, and due to the fact that they invest in unproductive projects, it involves little part of the government revenue
generated from the general public, and there will be nothing to show for it. Available statistics show that total
government expenditure and its components have continued to rise in the last three decades. In the same manner,
composition of government expenditure shows that expenditure on defense, internal security, education, health,
agriculture, construction, transport and communication increased during the period under review. Furthermore, the
various components of capital expenditure that is, defense, agriculture, transport and communication, education,
power, and health also show a rising trend between 1960 and 2016. For instance, while government capital
expenditure on economic services, social and community services, and transfers increased from N15.5 million N1.4
million and N100.7 million respectively in 1970 to N809120.5 million, N120049.2 million and N211758.1 million
respectively in 2009, recurrent expenditure on same services increased from N25.95 million, N43.55 million and
N511.42 million respectively in 1970 to N340193.77 million, N346071.95 million and N911171.10 million
respectively in 2015 (CBN, 2016).
However, for a resource- and cash- rich country having nearly 70% of its population living in relative poverty
conditions, whose infrastructures are in a state of decay, whose health, education and other growth-promoting and
welfare - enhancing institutions are in near state of near-collapse, whose roads (most of them) have become death
traps due to their deplorable conditions, and whose power sector is in a state of moribund, one would expect that the
share of capital expenditure in total expenditure dominates that of recurrent expenditure, considering the role it plays
in economic growth and human development, but this has not been the case for Nigeria. The very high rates of
unemployment, illiteracy rate, poverty rate (evidenced in the number of people living in shanties, with little or no
access to quality education, medi-care, potable water, etc.), low human development index, etc., do not match the
ever-growing expenditures dominated by recurrent expenditure, though statistics have shown that the growth rate of
the nation’s economy had been impressive in recent times. This goes to show that the country has been experiencing
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Effectiveness of Capital Expenditure on the Growth of Nigeria Economy.
jobless growth and growth without development. Government capital expenditures on these and other services or
sectors would be expected to generate a corresponding growth trend in the economy and this necessitates the
research interest for empirical quantitative measure of effect of government capital expenditure on growth of the
economy. Thus, answers were provided to the following research questions:
i.
To what extent has capital expenditure on education affected the growth of Nigeria’s economy?
ii.
What effect does capital expenditure on agriculture have on economic growth in Nigeria?
iii.
What effect does capital expenditure on health have on the growth of Nigeria economy?
The hypotheses given below were tested empirically as to weigh the impact on the research questions raised as
against the research problem already stated.
H01: Capital expenditure on education has no significant effect on the growth of Nigeria’s economy
H02: Capital expenditure on agriculture have no significant effect on economic growth in Nigeria
H03: Capital expenditure on health has no significant influence on the growth of Nigeria economy
2.
Literature Review
2.1
Conceptual Framework
2.1.1
Concept of Government Expenditure
The concept of public expenditures arises from the thinking that expenditures undertaken by the government is
public. Government expenditures are also called public sector spending or government purchases. Government
expenditure has been growing over the years and is very large. Therefore, the determination of the size of the public
sector is done by dividing the total expenditures of government by the total national output (GDP). This ratio is
defined as the size of the public sector; it is this ratio that was used in this thesis. Public expenditures can be
disaggregated or classified into subheadings, such as recurrent expenditures and capital expenditures. The recurrent
expenditures are expenditures or purchases of stationeries, wages and salaries of workers, fuel, electricity bills and
other bills, etc. Capital expenditures are constructions undertaken by the government on roads, bridges, health
centres, military installations and hardware, etc.
Government capital expenditure is an important instrument for government to control and manipulate the economy.
It plays an important role in the functioning of an economy whether developed or developing. Chude and Chude
(2013) observed that some scholars have argued that increase in government spending can be an effective tool to
stimulate aggregate demand for a stagnant economy and to bring about crowed-in effects on private sector. Keynes
(1936) however raised the idea that during depression, the use of fiscal policy will heighten economic activities. He
therefore postulated that government should be involved by increasing government expenditure to stimulate
aggregate demand, which will culminate in economic growth. In the neoclassical growth model of Solow (1956),
productive government expenditure may affect the incentive to invest in human or physical capital, but in the longrun this affects only the equilibrium factor ratios, not the growth rate, although in general there will be transitional
growth effects. Government expenditure in an economy can clearly be categorized into recurrent and capital
expenditure. The recurrent expenditure are government expenses on administration such as wages, salaries, interest
on loans, maintenance etc. whereas expenses on capital projects like roads, airports, health, education,
telecommunication, electricity generation etc. are referred to as capital expenditure (Obinna, 2003).
Government capital expenditure which is also referred to as public expenditure can be defined as expenses incurred
in the public sector. It is the expenses incurred by the government at various levels which include the federal, state
and local government levels (Siyan, 2000). Public expenditure is used to provide public goods and service to the
populace through which economic growth in induced. The two broad types of government expenditure are recurrent
and capital expenditures. Recurrent expenditures are payments, which includes all consumption items that occur in a
year, they are non-payable transactions such as salaries, wages and allowances. Capital expenditure relates to
payments for the use of non-financial assets used in production which contributes to long-term development.
Example includes spending agriculture, health, education, roads and electricity.
Government capital expenditure is also referred to as outflow of resources from government to other sectors of the
economy (Nurudeen & Usman, 2010). Samuelson and Nordhaus (2003) added that nowhere can the changes in
government’s role be seen more clearly than in the area of government spending. Karla (2006) opined that there was
a time when public expenditure was considered the economy’s revenue and so the best policy was considered one
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Effectiveness of Capital Expenditure on the Growth of Nigeria Economy.
which kept the public expenditure to its absolute minimum. Public policy is the most essential instruments of
government expenditure policy. Public finance started when Musgrave identified the three functions of fiscal policy
which are; allocation, distribution, and stabilization of resources. According to Musgrave and Musgrave (1984),
government in any economy ensures effective utilization of limited resources, equitable distribution of income and
stability of economic development by means of fiscal policy. Heald and Mcleod (2002) view public expenditure as a
concept that denotes the dispensation by the state on non-market criteria of economic resources that is has acquired
from firms and households.
Considering various definitions of government expenditures in the reviewed literature, it appears that a host of the
authors gave narrow definition to the concept of government expenditure by focusing on public expenditure alone
whereas this might not give a comprehensive meaning of government expenditure until it is viewed as all
government expenses to all sectors of the economy as posited by Nurudeen &Usman (2010). Consequently, this
work adopts the concept of government capital expenditure by Nurudeen and Usman because according to economic
expectation, government outflow of resources to different sectors of the economy such as the agricultural, education,
health, transport etc lead to economic growth.
2.1.2
Concept of Economic Growth
For the purpose of measurement, economic growth of a nation may be defined as a sustained increase in its
population and product per capita (Kuznets, 1955) in Shearer, no date). In a limited sense, economic growth is an
increase of the national income per capita which involves the analysis (in quantitative terms) of the process that
generates economic, and social, quantitative and qualitative changes that cause the national economy to
cumulatively and durably increase the real national product (Haller, 2012). In a wider sense, it involves the increase
of gross domestic product, gross national product and national income, and therefore, of the national wealth
including the production capacity expressed in both absolute and relative size per capita, encompassing also the
structural modifications of the economy. Economic growth is the process of increasing the size of national economic
and macro-economic indications, especially the GDP per capita, in an ascendant but not necessarily linear direction
with positive effect on the economic-social sector. Economic growth is obtained by an efficient use of the available
resources and by increasing the capacity of production of a country. It also facilitates the redistribution of incomes
between population and society.
Economic growth is an increase in an economy’s capacity to produce goods and services, compared from one period
to another. It is a vital ingredient for achieving sustainable development in any economy. Economic growth brings
about a better standard of living of the people through provision of better infrastructure, health, housing, education
services, and improvement in agricultural productivity and food security (Loto, 2011). Jhinghan (2006) views
economic growth as an increase in a country’s per capital income or output accompanied by expansion in its labour
force, consumption, capital and volume of trade. According to Ogundipe and Oluwatobi (2010), economic growth
must be sustained for a developing country to break the circle of poverty. Countries usually pursue fiscal policy to
achieve accelerated growth. Ochejele (2007) on another perspective posits that the main characteristics of economic
growth are high rate of structural transformation, international flows of labour, goods and capital. It is a long-term
expansion in the productive potential of the economy for the satisfaction of the wants of individuals in the society.
Economic growth stimulates government finances by enhancing tax revenues.
2.2
Empirical Review
Many writers agree that capital expenditure is an important tool that government uses not only to control but also
boost the economy. Even though government capital expenditure has growth-enhancing potential there are certain
public expenditures that are growth-retarding. For instance, Maku (2009) has maintained that certain government
expenditure items such as transport, electricity, telecommunications, water, health and education can retard growth.
However, whether public spending enhances or retards economic growth, the issue is that there exists some sort of
relationship between government expenditure and economic growth as are revealed by empirical literature.
Al-Shatti (2014) examined the impact of public expenditure on economic growth in Jordan between 1993 and 2013.
The tool of analysis was ordinary least square multiple regression model. The study examined the contribution of
each one of the capital and recurrent expenditure on education, health, economic affairs and housing and community
utilities in the total expenditure; and then identifies the impact each one of them has on economic growth in Jordan.
Results indicated that there is a statistically significant impact of recurrent expenditure on health, economic affairs
and housing and community utilities and capital expenditure on health and economic affairs on economic growth.
There is no statistical significant impact of recurrent expenditure on education and of the capital expenditure on
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Effectiveness of Capital Expenditure on the Growth of Nigeria Economy.
education, housing and community facilities on economic growth in Jordan. The joint effect of these components of
(capital and current) public expenditure on economic growth is statistically significant as indicated by the computed
F-statistics and its probability. The study therefore submits that there is an impact of public expenditure on
economic growth.
Fanand, et al (2004) utilized data from Uganda to test the effect of selected sectoral spending on agricultural growth
(proxy for economic growth). Results indicated that spending on agricultural research and extension substantially
improves agricultural output; spending on rural roads had substantial effect on rural poverty reduction; spending on
education also has effect on agricultural production; but spending on health did not have significant effect on output
nor reduction in rural poverty. Dauda (2011) utilized Nigerian data to analyze the effect of government expenditure
on education on schooling output (proxy for economic growth). It was found that spending on education has positive
effect on economic growth.
Yildirim, et al (2011) used data from Turkey to investigate the effect of government expenditure on economic
growth for the period 1973-2009. The tool used in the analysis was Tota and Yamamoto (1995) causal test to
examine the causal relationship between public education expenditure and economic growth. The results showed
that there is unidirectional causal relationship from economic growth to educational spending. Olabisi (2012)
examined the relationship between the composition of public expenditure and economic growth in Nigeria between
1960 and 2008. The tool adopted for analyzing the data was vector autoregressive models. The results revealed that
expenditure in education does not enhance economic growth, while expenditure on health and agriculture
contributed positively to economic growth.
Patricia (2013) studied the effects of public expenditure on education on economic growth in Nigeria for 1977-2012.
It was found that total expenditure on education has significant and positive effect on economic growth. It was noted
that recurrent expenditure on education does not highly correlate with economic growth in Nigeria. Safdari, Mehrizi
and Elahi (2013) investigated the effect of health expenditure on economic growth in Iran. The tool adopted was
vector autoregressive (VAR) model. Result indicated that health expenditure has positive effect on economic growth
in Iran. Musaba, Chilonda and Matchaya (2013) examined the impact of government sectoral expenditure on
economic growth. The study adopted cointegration and error correction models in the analysis of data. Vector error
correction model (VECM) showed no significant relationship between government sectoral expenditure and
economic growth in the short-run. Long-run results indicated that expenditures on agriculture and defense have
significant and positive impact on economic growth in Malawi. Expenditure on education, health and social
protection and transport and communication were significantly but negatively related to economic growth. Oyinlola
and Acaroglu and Ada (2014) examined the relationship between human capital (i.e. education and health) and
economic growth in 15 MENA countries for the period 1990-2011. The model adopted was that of Knowles and
Owen’s (1995) which is based on Mankiw, et at (1992) augmented Solow model. Human capital consists of health
and education. The results showed that public expenditure on human capital, neither in terms of health nor
education, does not have any significant effect on economic growth. However, the results suggest that if the quality
of health is improved the GDP per capital would equally increase.
Qadri and Waheed (2011) examined the effect of human capital on economic growth in Pakistan. It was found that
education and health expenditures have significant effect on economic growth. Abas (2001) revealed that increase in
human capital variables (education and health) in any economy attracts investment in physical capital which in turn
increases output. Education affects output through various channels. The knowledge gained from education
increases the capacity to produce more in relatively smaller time. Increased level of education, no doubt, leads to
better health. Education provides one with awareness of the benefit of healthy living. A healthy person has a better
and greater productive capacity. Akbari, Moayedfar and Jouzaryan (2012) examined the short-run and long-run
effects of human capital on the economic growth in Iran for the period 1959-2007. The study adopted autoregressive
distribution lag (ARDL) model. Results showed that human capital has positive and significant effect on economic
growth in Iran.
Beskaya, et al (2010) analyzed the impact of education on economic growth in Turkey for the period 1923-2007
using (ARDL) model. They found that there is cointegration between education and real income and there is
bilateral Granger-causality between education and economic growth. Halder and Mallik (2010) examined the time
series behaviour of investment in physical capital and human capital for the period 1960-2006 on economic growth
in India. The tool adopted was cointegration frame-work to test the long-run effect. The result indicated that physical
capital expenditure has no long-run and short-run effect on the growth of the economy. However, human capital
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Effectiveness of Capital Expenditure on the Growth of Nigeria Economy.
expenditure has significant long-run effect on economic growth measured in terms of GNP per capital. The
theoretical framework adopted by the study was endogenous growth theory of Lucas (1988). The theory is an
extension of Solow (1956) neoclassical growth model. Oyinbo, Zakari and Rekwot (2013) investigated the link
between agricultural budgetary allocation and economic growth in Nigeria for the period 1980-2010. The results of
the study indicated that the relationship between agriculture expenditure and economic growth is positive but not
significant in the long-run. However, the relationship is positive and significant in the short-run. The study adopted
cointegration and vector error correlation model.
Loto (2011) examined the impact of government sectoral expenditure on economic growth in Nigeria. The results of
the study showed that expenditure on education was negatively and significantly related to economic growth;
expenditure on agriculture was negatively related to economic growth; but expenditure on health was positively
related to economic growth. The study adopted cointegration and vector error correlation models.
Adewara and Oloni (2012) used vector autoregressive models to examine the relationship between the composition
of public expenditure and economic growth in Nigeria between 1960 and 2008. They found that expenditure on
education does not enhance economic growth; and expenditure on health and agriculture contributed positively to
economic growth.
Udoh (2011) analyzed Nigerian data on public expenditure and economic growth for the period 1970-2008 using
bounds test and autoregressive distribution lag model and vector error correlation model. The results indicate that
public expenditure has positive effects on the growth of agricultural output.
Wang (2011) used international total health care expenditure data of 31 countries from 1986-2007 to examine the
causality between health care expenditure and economic growth. Tools used were panel and quartile regression
analysis. The results of the study showed that health expenditure growth enhances economic growth; but economic
growth reduces health care expenditure growth.
2.3
Theoretical Framework
2.3.1
The Keynesian Theory of Economic Growth
The Keynesians are the twentieth century economists who embraced and also broadened John Maynard Keynes’s
principle in the existence of incessant unemployment equilibrium, dissimilar to the classical economists idea on
say’s law of market arguing that market economy are self-adjusting therefore there is no need for the government
involvement in the economy. They believe that fiscal policy and not monetary policy is the most powerful policy
measure to make the economy stable and move it forward. They are sometimes referred to as Demand-side
Economists. Keynes accepts that the forces of demand and supply could not attain full employment condition.
Keynesians therefore insisted that only government interference (public sector) through the use of unrestricted
policy measures would take the free enterprise economy out of depression and ensure steady growth. Variations in
savings and investments are responsible for modifications in business activities and employment in an economy.
2.3.2
The Wagner Theory
This theory postulates that government expenditure increases as a result of industrial and economic growth in a
country. Adolph Wagner, who is a German Economist, in 1883, formulated the law of increasing state activity
commonly referred to as Wagner’s law. This theory emphasizes that economic growth is the fundamental
determinant of public sector growth. Wagner’s law states that as per capita income in a country rises, the relative
size of the public sector also increases. The increase in per capita income is associated with an increase in the
demand for public services such as transport and communication networks, waste disposal, etc. As a result of this
demand for public services, new functions are continuously being undertaken and old ones are being performed
efficiently and on a larger scale that increases the spending of the government. Thus, social progress brings about an
increase in state activity which in turn means more government expenditure (Henrekson, 1993 in Verma and Arora,
2010). The three functions of the state that Wagner recognized are: Providing administration and protection;
ensuring stability; and providing for the economic and social welfare of the society as a whole.
2.3.3
Peacock and Wiseman’s Theory
Peacock and Wiseman’s (1961) study is assumed to be one of the best known analyses of the time pattern of public
expenditure. The main thesis is that public expenditure does not increase in a smooth and continuous manner, but in
jerks or step-like fashion. The analysis was founded on the political theory of public expenditure determination, ‘that
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Effectiveness of Capital Expenditure on the Growth of Nigeria Economy.
governments like to spend more money, that citizens do not like to pay more taxes, and that governments need to
pay some attention to the wishes of their citizens’.
To them, as the economy and incomes grew, tax revenue would rise, thereby enabling the public expenditure to
grow in line with the GNP. In normal times, public expenditure would show a gradual upward trend, even though
within the economy there might be a divergence between what people regarded as being desirable level of public
expenditure and a desirable level of taxation. During the periods of social upheaval, this gradual upward trend in
public expenditure would be disturbed, and would coincide with war, famine, or some large scale social disorder
which would require a rapid increase in public expenditures. In order to finance the public expenditure rise, the
government would be forced to raise taxation levels, which would, however, be regarded as acceptable to the
electorates during the crisis periods. This is what Peacock and Wiseman called the displacement effect.
3.
Methodology
3.1
Research Design and Data Sources
The research design adopted for this work is the non-experimental research design. The reason is that nonexperimental research design combines the theoretical exposition with empirical observation. The data for this
research study were adequately sourced using the secondary methods of data collection basically sourced from
Central Bank publications, statistical bulletin, journals, magazines, newspapers, internet and other relevant
publications.
3.2
Model Specification
The Keynesian theory assumes that increase in government capital expenditure leads to increase in output through
the multiplier effect. That is to say that an increase in government capital expenditure enhances national income
growth. Thus, from theoretical perspective, an increase in economic growth (GDP) depends on government capital
expenditure. Thus, following the position of Al-Shatti (2014) with some modifications, the following model was
formulated:
RGDP  f (CEE , CEA, CEH )
(1)
Thus, linearizing equation (1), we obtain:
RGDP  0  1CEE   2CEA  3CEH  t
(2)
Where;
0 =
The intercept or autonomous parameter estimate
1 to 3 are the slope of the coefficients of the independent variables to be determined
RGDP = Real Gross Domestic Products;
CEE = Capital Expenditure on Education;
CEA = Capital Expenditure on Agriculture;
CEE = Capital Expenditure on Education;
CEH = Capital Expenditure on Health
 = Error term (or stochastic term).
3.3
Method of Estimation
In order to investigate and appropriately determine the efficacy of capital expenditures on economic growth in
Nigeria, the study employed symmetrical Autoregressive Distributive Lagged (ARDL)-Bounds testing approach.
This test was developed by Pesaran and Shin (1999) and later extended by Pesaran, Shin and Smith (2001). The
symmetrical ARDL model as:
p
k
qj
t  0   i t  i   X j , t  1' j , i  t
i 1
(3)
j 1 i 0
Capturing equation (2) in an ARDL model of equation (3), we have:
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Effectiveness of Capital Expenditure on the Growth of Nigeria Economy.
m
n
o
p
i 0
j 0
k 0
l 0
RGDPt  0   1i RGDPt  i    2i CEEt  j    3i CEAt  l    4i CEH t  l   5 RGDPt  1   6CEEt  1
 7CEAt  1   8CEH t  1  t
(4)
After establishing cointegrating relationship between capital expenditures and economic growth, the paper proceeds
to examine the long-run effect and the short-run dynamics using ECM equation given as follows:
m
n
o
p
i 1
j 0
k 0
l 0
RGDPt  0   1i RGDPt  i    2i CEEt  j    3i CEAt  k    4i CEH t  l  ECTt  1   t
(5)
Where;
 =
First difference operator
ECTt-1 = lagged Error correction term
4.
Results and Discussion
4.1
Unit Roots Test
The paper examined the order of integration of the selected variables. Although the ARDL bounds test is applicable
irrespective of whether the variables are purely I(0), purely I(1) or fractionally integrated, the presence of the I(2)
variables renders the computed F-statistics by Pesaran et al. (2001) invalid. This is because the bounds test assumes
that the variables are either I(0) or I(1). Therefore, unit root testing becomes mandatory to ensure that no variable is
integrated at an order I(2) or beyond. The conventional Augmented Dickey–Fuller (ADF) test of Dickey and Fuller
(1981) unit roots test which allows a mild assumption on the distribution errors and controls for higher serial
correlation and heteroscedasticity was utilized for the stationarity testing and the results are presented in Table 1.
Table 1: Summary of Unit Root Test Results
Variables
ADF Test Statistic(at first difference)
RGDP
-4.526535 (-3233456)***
CEE
-4.179866(-3.243079)**
CEH
-6.418621 (-4.273277)***
CEA
-6.114546 (-4.988177)**
Order of Integration
I(1)
I(1)
I(0)
I(1)
Notes: ***, ** and * significant at 10%, 5% and 1%, respectively.
Source: Authors Computation, 2017 (Eviews-10)
From the Table 1, it was discovered that RGDP was found stationary at first difference and at order one at
10% level of significance. However, two other three variables used in the analysis were found stationary
at first difference. That is, CEE and CEA were both found stationary at 5% level respectively; while CEH
was found stationary at levels and at 10 percent. Since they were all found stationary at mixed orders, the
variables met the criteria for bound test approach.
4.2
Cointegration Analysis
The paper tested for the presence of a long-run relationship between the variables using the bounds testing approach.
The lag length selection was determined using the SIC. Due to large sample size, a maximum lag length of four was
allowed in which the optimal length was found to be three. Bounds testing was carried out by estimating Equation
(2) through the ARDL procedure and computed the F-statistics for the joint significance of the lagged levels of
variables to compare with the critical values provided in Pesaran et al. (2001). As presented in Table 2, the
computed F-statistics of 6.96 exceeds both the lower and upper critical values, respectively, at various levels of
significance. Therefore, a long-run relationship exists among the variables in Equation (4).
Table 2: Bound Test Result
F-Bounds Test
Test Statistic
Value
F-statistic
6.965957
Signif.
10%
Null Hypothesis: No levels relationship
I(0)
I(1)
2.37
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Effectiveness of Capital Expenditure on the Growth of Nigeria Economy.
k
3
5%
2.5%
1%
Source: Authors Computation, 2017 (Eviews-10)
2.79
3.15
3.65
3.67
4.08
4.66
Symmetrical ARDL Long-run and Short-run Estimates
Having found a long-run relationship between capital expenditures and economic growth, the study proceeds to
estimate the long-run coefficient estimates in Equation (2).
Table 3: Parsimonious ARDL(3,1,3,3)-ECM Results
Variable
Coefficient
D(RGDP(-1))
0.472852**
D(RGDP(-2))
0.283734
D(CEH)
-19.1272*
D(CEE)
-7.06501
D(CEE(-1))
11.46902*
D(CEE(-2))
15.43204*
D(CEA)
-2.6242
D(CEA(-1))
-63.7517*
D(CEA(-2))
-54.6423*
ECT(-1)
-0.084806*
R-squared
0.890798
Adjusted R-squared
0.836197
Durbin-Watson stat
2.276316
t-Statistic
2.696877
1.65187
-2.8848
-1.42357
2.992877
4.39508
-0.33184
-5.11182
-4.87183
-6.691872
Prob.
0.0174
0.1208
0.012
0.1765
0.0097
0.0006
0.7449
0.0002
0.0002
0.0000
Notes: ***, ** and * significant at 10%, 5% and 1%, respectively.
Source: Authors Computation, 2017 (Eviews-10)
As expected, the lagged error correction terms are negative and statistically significant at 5 percent level.
The ECT value of 0.08 thus shows that once there is disequilibrium within the system, it takes an annual
average speed of 8 percent to restore equilibrium relationship between capital expenditures and economic
growth.
The coefficient of determination (R-square), used to measure the goodness of fit of the estimated model,
indicates that the model is reasonably fit in prediction, that is, 89.07percent change in RGDP was due to
CEE, CEH and CEA collectively, while 10.93 percent unaccounted variations was captured by the white
noise error term. It showed that CEE, CEH and CEA had strong significant impact on the growth of the
Nigerian economy.
The stability tests in Figure 1 revealed that the model is stable and the regression equation is correctly
specified as the plots from CUSUM and CUSUMQ charts lie within the critical bounds at 5% significant
level.
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Effectiveness of Capital Expenditure on the Growth of Nigeria Economy.
1.4
12
1.2
8
1.0
0.8
4
0.6
0
0.4
0.2
-4
0.0
-8
-0.2
-0.4
-12
03
04
05
06
07
08
CUSUM
09
10
11
12
13
14
15
16
90
92
94
96
98
00
02
CUSUM of Squares
5% Significance
04
06
08
10
12
14
16
5% Significance
Figure 1:
Stability Tests
Source: Authors Computation, 2017 (Eviews-10)
4.3
Statistical Test of Hypothesis
The hypotheses formulated in this paper were approached and tested using the Wald-statistics. The Waldstatistics is used to denote whether the joint impact of the explanatory (exogenous/ independent variables)
actually have a significant influence on the dependent variable. The decision rule for accepting or
rejecting the null hypothesis for any of these tests will be based on the Probability Value (PV). If the PV
is less than 5% or 0.05 (that is PV < 0.05), it implies that the regressor in question is statistically
significant at 5% level; otherwise, it is not significant at that level.
Table 4: Wald-Statistics Results
Variable
Test Statistic
Value
CEE
F-statistic
5.621778
CEA
F-statistic
5.800218
CEH
F-statistic
1.164639
Source: Authors Computation, 2017 (Eviews-10)
df
(3, 14)
(3, 14)
(1, 14)
Probability
0.0096
0.0086
0.2987
The Wald-test in Table 4 indicated that the calculated F-value for capital expenditure on education (CEE)
is 8.28 and its probability value is 0.0096. Since the probability value is less than 0.05 at 5percent level of
significance, it thus falls in the rejection region and hence, the first null hypothesis (H01) was rejected.
The result thus shows that capital expenditure on education has a significant effect on the growth of
Nigeria’s economy between 1986 and 2016.
In addition, the Wald-test in Table 4, indicated that the calculated F-value for capital expenditure on agriculture
(CEA) was found to be 5.80 and its probability value is 0.008. Since the probability value is less than 0.05 or
5percent level of significance, which fell in the rejection region also and hence, the paper rejects the second null
hypothesis (H02) and conclude that capital expenditure on agriculture have a significant effect on economic growth
in Nigeria 1986 and 2016
Lastly, from the Wald-test in Table 4, this indicates that the F-value for capital expenditure on health (CEH) was
found to be 1.16 and its probability value is 0.298. Since the probability value is greater than 0.05 or 5percent level
of significance, and fell in the acceptance region, the paper accepts the third null hypothesis (H03) and concludes
that capital expenditure on health has no significant influence on the growth of Nigeria economy between 1986 and
2016.
4.4
Discussion of Findings
Findings from the study revealed that capital expenditure on education had a significant effect on the growth of
Nigeria’s economy. The implication of this result is that the knowledge gained from education increases the capacity
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Effectiveness of Capital Expenditure on the Growth of Nigeria Economy.
to produce more in relatively smaller time. Increased level of education, no doubt, leads to better health. Education
provides one with awareness of the benefit of healthy living. A healthy person has a better and greater productive
capacity. This is agreement with Patricia (2013) and Qadri and Waheed (2011) whose results showed that total
expenditure on education has significant and positive effect on economic growth. The findings however, contradicts
the results of Al-Shatti (2014) who found that there is no statistical significant impact of recurrent expenditure on
education and of the capital expenditure on education, housing and community facilities on economic growth in
Jordan. More so, Patricia (2013) found that recurrent expenditure on education does not highly correlate with
economic growth in Nigeria.
Furthermore, capital expenditure on agriculture was discovered to have had a significant effect on economic growth
in Nigeria. This agrees with Fanand, et al (2004) whose results indicated that spending on agricultural research and
extension substantially improves agricultural output; spending on rural roads had substantial effect on rural poverty
reduction; but spending on health did not have significant effect on output nor reduction in rural poverty. In
addition, Musaba, Chilonda and Matchaya (2013) results indicated that expenditures on agriculture and defense have
significant and positive impact on economic growth in Malawi. However, capital expenditure on health was
discovered to have no significant influence on the growth of Nigeria economy. The findings here contradict the
results of Loto (2011) and Wang (2011) whose study showed that expenditure on health was positively and
statistically related to economic growth. The results of their study showed that health expenditure growth enhances
economic growth; but economic growth reduces health care expenditure growth.
5.
Conclusion and Recommendations
The impact of capital expenditures of government on economic growth revealed mixed results. Education and
agricultural capital expenditures have strong contributions to economic growth in Nigeria. However, capital health
expenditure was found not to have contributed immensely to economic growth in Nigeria within the period under
review. Following the discussions of research findings, it becomes expedient that deductions from the findings be
made to support or advice policy makers and implementers on the best way(s) to handle policy issues and
programmes. In the light of this, the following policy recommendations and suggestions are germane to ensure
progress and growth of the Nigerian economy:
i.
ii.
There is the need for policy makers to re-examine and evaluate the policies and expenditures in health
sector with a view to finding why the policies are not growth enhancing sectors.
Since government revenue is a key factor in determining the size of public sector, the revenue base should
be expanded beyond oil sector to include other unexploited solid minerals, agricultural exports and other
avenues that could increase the revenue base.
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Appendix
ARDL Error Correction Regression
Dependent Variable: D(RGDP)
Selected Model: ARDL(3, 1, 3, 3)
Case 2: Restricted Constant and No Trend
Date: 11/29/17 Time: 20:16
Sample: 1986 2016
Included observations: 28
ECM Regression
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Effectiveness of Capital Expenditure on the Growth of Nigeria Economy.
Case 2: Restricted Constant and No Trend
Variable
Coefficient
Std. Error
t-Statistic
Prob.
D(RGDP(-1))
D(RGDP(-2))
D(CEH)
D(CEE)
D(CEE(-1))
D(CEE(-2))
D(CEA)
D(CEA(-1))
D(CEA(-2))
CointEq(-1)*
0.472852
0.283734
-19.12723
-7.065008
11.46902
15.43204
-2.624195
-63.75172
-54.64227
-0.084806
0.175333
0.171765
6.630360
4.962897
3.832106
3.511207
7.907919
12.47143
11.21595
0.012673
2.696877
1.651870
-2.884795
-1.423565
2.992877
4.395080
-0.331844
-5.111823
-4.871834
-6.691872
0.0174
0.1208
0.0120
0.1765
0.0097
0.0006
0.7449
0.0002
0.0002
0.0000
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat
0.890798
0.836197
607.2867
6638348.
-212.9966
2.276316
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
1846.995
1500.491
15.92833
16.40412
16.07378
* p-value incompatible with t-Bounds distribution.
F-Bounds Test
Null Hypothesis: No levels relationship
Test Statistic
F-statistic
K
Value
Signif.
I(0)
I(1)
6.965957
3
10%
5%
2.5%
1%
2.37
2.79
3.15
3.65
3.2
3.67
4.08
4.66
Wald Test CEH:
Equation: Untitled
Test Statistic
t-statistic
F-statistic
Chi-square
Value
df
Probability
-1.079185
1.164639
1.164639
14
(1, 14)
1
0.2987
0.2987
0.2805
Value
df
Probability
5.621778
16.86533
(3, 14)
3
0.0096
0.0008
Wald Test CEA:
Equation: Untitled
Test Statistic
F-statistic
Chi-square
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Effectiveness of Capital Expenditure on the Growth of Nigeria Economy.
Wald Test CEE:
Equation: Untitled
Test Statistic
F-statistic
Chi-square
Value
df
Probability
5.800218
17.40065
(3, 14)
3
0.0086
0.0006
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Mobile Banking and Consumer Satisfaction: Evidence from Nigeria
Mobile Banking and Consumer Satisfaction: Evidence from Nigeria
Mwanse, Hannatu
Department of Business Administration
Bingham University, Karu, Nasarawa State
E-Mail: hannatumwanse@gmail.com
Dabwor, T. Dalis
Department of Economics
University of Jos
E-Mail: tongnandalis@yahoo.com
Ezie, Obumneke
Department of Economics
Bingham University, Karu, Nasarawa State
E-Mail: eobumneke@gmail.com
and
Kolo Ruth Fatima
Department of Entrepreneurship and Business studies
FUT Minna, Niger State.
E-Mail: Ruth.kolo@futminna.edu.ng
Abstract
Mobile phones have created a platform to expand commercial transactions in a very easy manner and have created
a wide array of business opportunities through the expansion of wireless communication. These developments
facilitate business transactions, trading, and purchasing of goods and services without much effort. Hence, it is
clear that mobile banking would be an astrictive way of providing banking services and it also could contribute to
the development of the nation through promotion of better financial services. However, determining the
characteristics of mobile banking services and how banks could achieve a proper relationship with customers
through mobile banking is vital for development of mobile banking. The study thus undertakes an empirical analysis
to examine the effect of mobile banking services on customer satisfaction in Nigeria, using Nasarawa metropolitan
city in Nigeria as a study. Ordinary Least Square (OLS) regression method was employed to examine how mobile
account balance updates, mobile funds transfer and transaction, and mobile bill payment has influenced ease of use,
privacy and convenience. The findings from the analysis showed that mobile balance updates and mobile bill
payments do not a significant effect on Privacy/security and convenience due to network out of order problems and
inadequate awareness on how customers could use their phones to perform simple banking operations. Customers
were found to be satisfied with the use of mobile fund transfer which was found to have a significant relationship
with ease of usage. Suggestive from the analysis therefore are that bankers should consider raising consumer
awareness and acceptance of new technology-based mobile banking services more, through advertising and
promotion rather than word-of-mouth communication. Security, trust and reliability should also be focused by
banks by enhancing security of transactions, ensuring proper network system and timely service provision.
Keywords: Mobile banking, Customer Satisfaction, Mobile Balance Updates, Mobile funds.
1.
Introduction
The emergence of Global System for Mobile (GSM) has led to improvements in efficiency and
productivity, reductions in transaction costs, increased service innovation and better quality of life for
most customers. The advent of mobile phone with high quality of technology has enabled new ways to
conduct banking businesses, resulting in creation of new institutions, such as mobile banks, mobile
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brokers and wealth managers. In the present banking system, excellence in service delivery is the most
important tool for sustainable business growth. (Perng, 2007). Customer Complaints are part of the
business life of any corporate entity. This is more so for banks because they are service organizations. As
a service organization, service delivery and customer satisfaction should be the prime concern of any
bank. The bank believes that providing prompt and efficient service is essential not only to attract new
customers, but also to retain existing customers.
However, banks minimize instances of customer complaints and grievances through proper service
delivery. Service Delivery is an important mechanism that shows how to measure service results with
meaningful metrics and using the metrics to drive continuous service improvement. Service Delivery
fosters a corporate behavior of responsible use of Information Technology services to maximize corporate
profits. Most importantly, Service Delivery fosters true business-Information Technology partnerships to
the benefit of the company as a whole. Service delivery has been described to be one of key performance
indicators of an organization. The extent to which customer are satisfied with the service rendered has
great influence on the overall performance and must be taken seriously by players in the commerce.
In today’s environment the satisfied customer are more loyal to the organization otherwise they switch to
other organizations. So the dependent variables that are directly affect the customer satisfaction are ease
of use, privacy/security, and convenience. While account balance update, bill payment, funds transfer and
transaction verification are Variables that affect independent variable. The emergence of GSM has led to
improvements in efficiency and productivity, reductions in transaction costs, increased service innovation
and better quality of life for the rural dwellers. Mobile Banking has become an important issue, not only
to retain customers but also gaining a competitive advantage while maintain and growing overall
effectiveness. In the present banking system, excellence in customer service is the most important tool for
sustainable business growth.
Modern management science philosophy considers customer satisfaction as a baseline standard of
performance and a possible standard of excellence for any business organization. Especially, banks due to
similar services compete together in order to achieve customer satisfaction. They try to create eases for
their customers. The bank believes that providing prompt and efficient service is essential not only to
attract new customers, but also to retain existing ones. However, banks minimize instances of customer
complaints and grievances through proper service delivery and review mechanism and to ensure prompt
redress of customer complaints and grievances. Service delivery has been described to be one of key
performance indicators of an organization. The extent to which customers are satisfied with the service
rendered has great impact on the overall performance and must be taken seriously players in the industry.
In Nigeria, customers of banks today are no longer talking about safety of their funds and increase returns
on their investments only. Customers demand efficient, fast and convenient services. Customers want a
Bank that will offer them services that will meet their particular needs (personalized Banking) and
support their Business goals. Mobile banking came into existence in order to fill the vacuum created by
adoption of traditional techniques afore adopted in the Nigeria banking system such as delay of service,
lack of information backup, lack of interconnectivity and networks failure. Furthermore, the conclusion of
(Salem & Rashid, 2011) that customer satisfaction has not been studied specifically for banking sector
firms with respect to technology adoption called for informed empirical investigation. Evidence from the
literature shows that GSM has considerable impact on the economy being an emerging communication
industry in Africa, with Nigeria rated as one of the fastest growing market in this field of communication
(Buhalis, 2003). Mobile banking is expected to improve banks operations in term of service delivery. The
extent to which the use of mobile phone by banks customers can improve service delivery merit
investigation. The effects of mobile phone on banks service delivery has not been greatly explored in a
developing economy like Nigeria. Also, the recent proposed cashless policy of the Central Bank of
Nigeria (CBN, 2012) has created challenges for the bankers and other players in commerce on attainment
customer service satisfaction in cashless society.
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Few studies in Nigeria focus on mobile banking while more on IT, ATM and Internet Banking, This is
because mobile banking service is just expanding in Nigeria. It is therefore imperative to determine the
effects of mobile banking services and customers satisfaction in Nigeria so as to guide policy design and
implementation aimed at encouraging its usage.
Thus, the major objectives of this paper are to:
i.
Examine the relationship that exists between mobile accounts balance updates and privacy/security of
customers
ii.
Analyze the extent to which mobile bill payment had influenced conveniences of customers
iii.
Examine how mobile fund transfer and transaction verifications had impacted on the ease of usage by
customers
Based on the research objectives stated above, the following null hypothesis is formulated for the study:
H02:
H03:
There is no significant relationship between mobile accounts balance updates and
privacy/security
of customers
Mobile bill payment has not significantly influenced the conveniences of customers.
Mobile fund transfer and transaction verifications have not impacted on the ease of usage by customers.
2.
Literature Review
H01:
2.1
Concept of Mobile Banking
Mobile device is commonly known as cell phone and users commonly use it for communication and as a wireless
delivery channel. The term mobile “refers to applications, which are designed for users on the move” (Anckar. &
D’Incau. 2011). Mobile banking is also known as m-banking. According to Amin; Baba; and Muhammad, (2007)
m-banking is defined as “a form of banking transaction carried out via a mobile phone”. Moreover, it is defined as a
“type of execution of financial services in the course of which - within an electronic procedure- the customer uses
mobile communication techniques in conjunction with mobile devices”( Pousttchi & Schurig, Cited in Sinkkonen,.
Laukkanen, . Kivijarvi, & . Laukkanen. 2007). The technologies generally used for mobile banking are Interactive
Voice Response (IVR), Standalone Mobile Application Clients, Short Messaging Service (SMS) and Wireless
Application Protocol (WAP) (Tiwari & Buse 2006).
The Federal Reserve survey defines mobile banking as “using a mobile phone to access your bank account, credit
card account, or other financial account. Mobile banking can be done either by accessing your bank’s web page
through the web browser on your mobile phone by text messaging or by using an application on downloaded to your
mobile phone”. The customers are required to follow a pre-determined process and procedure to get the services
offered by the bank such as: depositing, withdrawals, checking of statement, balance inquiry as well as transfers
within and outside the country requires verification, authentication and finally transaction (Jepleting, Oscar,&
Bureti, 2013). Mobile banking can help to make full access to the details and transactions of personal bank accounts,
making credit installment, utility bill payments, and transferring funds. customers who use mobile banking must
register for all service through bank website and download the mobile banking application to their phones, once the
application are install you can use this service free of charge the only cost you have to pay is the normal
communication by the mobile operators (Al-Jabri & Sohail,2012).
Mobile services are more attractive than current online services due to service ubiquity, a unique characteristic
exclusive to the mobile environment (Tojib & Tsarenko, 2012). In Iran, the most important services provided in
mobile banking system are : balance enquiry, last three accounts transactions enquiry, draft, approved of Check
amount, Check status enquiry, blocking card, buy prepaid recharge, installments payment, bills payment, received
messages archives, ability of receiving various customer accounts information, shopping ability, hotel expenses
payment, stock market status enquiry. Mobile banking services can be classified based on the originator of a service
session, either push or pull”. Push it means when the bank sends out the information based on agreed set out of rules
such as: the banks send out an alert when the account balances goes below a threshold level. In a meanwhile pull
means when customer explicitly requests a service or information from the bank requesting the last five transactions
(Masrek, Omar, & Khairuddin, 2012). Today, most banks offer basic mobile banking services for their customers,
the most common services available today are: Account alert, security alerts and reminders, Account balances
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Mobile Banking and Consumer Satisfaction: Evidence from Nigeria
updates and history, Customer service via mobile, Branch or ATM location information, Bill pay; deliver online
payments by secure agents and mobile application, Funds transfers and Transaction verification. (Anand, 2007)
2.1.1
Concept of Customers’ Satisfactions
Satisfaction can be reflected as a feeling of pleasure when a person attains his or her wants, goals or motivation
(Boonlertvanich, 2011).
Customer satisfaction can be defined as a feeling of customers by using a service or product (Metawa and
Almossawi, 1998). Customer satisfaction is key factor of customer’s desires for future purchase (Mittal &
Kamakura, 2001). Besides, the satisfied customers will probably share their good experiences with others (Jamal &
Naser, 2002). Customer satisfaction considered as an essential factor of long-term behavior of customers (Ndubisi,
2004).The satisfaction of the customer especially in the service business had a great importance because the
satisfaction of the customer directly linked with the customer loyalty or the repetition of using the services the
modern banking has provided (Ravichandran, Prabhakaran, & Kumar,2010). Customer satisfaction is much vital in
internet based companies. Good quality products and services are demanded by customers and if they don’t get the
desired services they can easily move away towards another option. All the online businesses are compelled to
isolate and focus customer’s need for their satisfaction (Kadir, Rahmani, & Masina, 2011). Customer satisfaction
measures how well a product or a service supplied by a firm meets customer expectation.
2.1.2
Customers Satisfaction in Banking Sector
In line with Tsoukatos & Rand (2006), customer satisfaction is a key to long-term business success. To
protect or gain market shares, organizations need to outperform competitors by offering high quality
product or service to ensure satisfaction of customers. In proportion to Magesh (2010), satisfaction means
a feeling of pleasure because one has something or has achieved something. It is an action of fulfilling a
need, desire, demand or expectation. Customers compare their expectations about a specific product or
services and its actual benefits. As stated by Kotler & Armstrong, (2010), satisfaction as a person’s
feelings of pleasure or disappointment resulting from the comparison of product’s perceived performance
in reference to expectations. Customer’s feelings and beliefs also affect their satisfaction level. Along
with Zeithaml (2009), satisfaction or dissatisfaction is a measure or evaluation of a product or service’s
ability to meet a customer’s need or expectations. Razak, (2007) also reported that overall satisfaction is
the outcome of customer’s evaluation of a set of experiences that are linked with the specific service
provider. It is observed that organization’s concentration on customer expectations resulted into greater
satisfaction. If the customers of an organization are satisfied by their services the result is that, they will
be loyal to them and consequently be retained by the organization, which is positive for the organization
because it could also mean higher profits, higher market share, and increasing customer base (Karatepe,,
Yavas, & Babakus, 2005). Customer satisfaction has become important due to increased competition as it
is considered very important factor in the determination of bank’s competitiveness (Berry, Seiders, &
Grewal, 2002). Continuous measurement of satisfaction level is necessary in a systematic manner
(Chakravarty, Widdows, & Feinberg, 1996). Because satisfied customer is the real asset for an
organization that ensures long-term profitability even in the era of great competition. Cronin, Brady, &
Hult, (2000) mentioned in their study that satisfied customer repeat his/her experience to buy the products
and also create new customers by communication of positive message about it to others. On the other
hand, dissatisfied customer may switch to alternative products/services and communicate negative
message to others. Customer satisfaction is a set of feeling or outcome attached with customer’s
experience towards any product/ service (Solomon, 1998). Hence, organizations must ensure the customer
satisfaction regarding their goods/services.
2.2
Empirical Literatures
Empirical studies on mobile banking are sparse because it is a newly implemented policy of the CBN. Mobile
banking is adapted by the banks as means to provide customers swift and easy access to their bank accounts.
Customers adopt a technology when they find it easy to understand and implement. Numerous researchers have
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Mobile Banking and Consumer Satisfaction: Evidence from Nigeria
investigated perceived usefulness and perceived ease of use as a valid construct to measure customer satisfaction
level. According to Kadir, e’tal,(2011) “ease of use, security, low transaction costs, and wide applicability of the
solutions increase perceived customer value and should be managed by mobile payment solution provider.
Adewoye (2013) empirically studied the impact of mobile banking on service delivery in the Nigerian
Commercial Banks through the use of questionnaire. He found out that the introduction of e-banking
services has improved banking efficiency in rendering services to customer. His findings shows that
mobile banking improve banks service delivery in a form of transactional convenience, savings of time,
quick transaction alert and save of service cost which has recuperate customer’s relationship and
satisfaction. To this end, he recommended that banks management should create awareness to inform the
public about the benefits derived on the e-banking service products, collaboration among banks should
perfectly maintained, skilled manpower and computer wizard should be employed by every banks, in
order to prevent fraudulent personal and hackers from manipulating the banks data and stealing money
from the banks accounts. Finally, provision and maintenance of public network system such as telephone
(Nitel) and the availability of these basic infrastructures is fundamental to the efficient functioning of the
mobile banking services.
Olatokun and Igbinedion (2009) used Diffusion of Innovation theory to investigate the adoption of mobile banking
in Nigeria. They found out that constraint such as relative advantage, complexity, observability, compatibility and
trialability were positively related to attitude to the use of mobile phones in Nigeria. Olorunsegun (2010) used
cluster sampling technique to study the impact of electronic banking in Nigerian banking system. He found out that
a bank has an effective electronic banking system which has improved its customer’s relationship and satisfaction.
James (2013) used Rogers Diffusion of Innovation theory to investigate the determinants of the adoption of mobile
banking in Nigeria. The study empirically showed that age, educational qualification, relative advantage,
complexity, compatibility, observability and trialability were important determinants of the adoption of mobile
banking. This therefore makes it imperative for relevant stakeholders to make efforts to positively influence these
independent variables so as to make mobile banking more popular.
Egwali (2008) used consumer acceptance theory to investigate customers ‟ theory perception of security
indicators (SI) in online banking sites in Benin, Nigeria. He found out that SI were not very effective at
alerting and shielding users from revealing sensitive information to fool e-banking sites in Nigeria.
(Humphrey & Berger 1990). In another study, Olorunsegun (2010) undertook a research on “the impact
of electronic banking in Nigeria banking system”. The main objective of his research work was to
examine the impact of electronic Banking in Nigeria banking system on how different channels could
enhance the delivery of consumers and retails products, and also how Banks choose to support their
Electronic Banking component/services internally, such as internet services provider, Internet banking
software, Core banking vendor, Managed security service provider, Bill payment provider, Credit
Business and Credit scoring company. He used both the primary and secondary data in his study. The
primary data were collected through the use of questionnaire which was administered to credit officers of
Unity Bank Plc. while the secondary data were data collected from CBN electronic banking guideline,
annual report of Unity Bank Plc. and CBN annual report etc. The study used both descriptive and
inferential statistics in analyzing the data. Also, simple frequency counts, percentages and the chi-square
were used in the data analysis. He concluded that the electronic banking system in Nigeria has made
banking transaction to be easier by bringing services closer to its customers.
Onyedimekwu and Oruan (2013) examined the Empirical Evaluation of Customers’ Use of
mobile banking Systems in Nigeria. The objective of their research work was to empirically
evaluate the success of mobile banking systems in Nigeria, and to access customers’ readiness
for mobile banking. The methodology employed in this study was positivistic, quantitative and
hypothetic-deductive. Hypotheses were derived from the extant literature on Information
Systems’ Evaluation using D & M IS Success Model. The collected data were analyzed based
on descriptive statistics (frequency and percentage) and correlation analyses using the
statistical package for social sciences (SPSS) version 18. They came to the conclusion using
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Mobile Banking and Consumer Satisfaction: Evidence from Nigeria
DeLone & McLean (2003) IS Success Model to show that most bank customers will use mobilebanking systems more often if the system quality, information quality and service quality is
improved.
2.3
Theoretical Framework
Customers adopt a technology when they find it easy to understand and implement. As proposed by
Wessels and Drennan,(2010), the Technology Acceptance Model depicts that perceived usefulness and
perceived ease of use determines an individuals’ intention to use a system. Adoption of a technology in
customer’s point of view is the ease and usefulness he considers to avail from it. Similarly, Task
technology Fit model “focuses on the match between user task needs and the available functionality of the
IT” ( Dishaw & Strong 1999). Technology innovation bridges the gap between customer's expectation
and their perceived experience of performance. The technology advancement increases the usefulness
which leads to higher customer satisfaction. Furthermore, the theory of planned behavior is a theory about
the link between attitudes and behavior of customer. The model assumes behavioral intention to use as
customer satisfaction determined by usefulness, risk and trust. According to Baba, and Muhammad 2007;
Aldas-Manzano, and Ruiz-Mafe; (2009) perceived usefulness has a positive effect on the behavior of
customers. The current study extends its applicability in context to mobile banking adoption.
2.3.1
Technology Acceptance Model (TAM) Theory
Technology Acceptance Model is one of the models that have been developed to provide a better understanding of
the usage and adoption of information technology. It is presently a prominent theory used in modeling technology
acceptance and adoption in Information systems research. Fred Davis in 1985 proposed the TAM in his doctoral
thesis at the MIT Sloan School of Management. TAM is an information systems theory that models how users come
to accept and use a technology that will encourage economic growth. The model suggests that when users are
presented with a new technology, a number of factors influence their decision about how and when they will use it.
The factors are; perceived usefulness (PU) and perceived ease-of-use (PEOU). According to TAM, one’s actual use
of a technology system is influenced directly or indirectly by the user’s behavioral intentions, attitude, perceived
usefulness of the system, and perceived ease.
2.3.2
Diffusion of Innovation (DOI) Theory
Diffusion of Innovation theory seeks to explain how, why, and at what rate new ideas and technology spread
through cultures. This theory was developed by Gabriel and Rogers (a professor of rural sociology), popularized the
theory in their 1962 book Diffusion of Innovations. He said diffusion is the process by which an innovation is
communicated through certain channels over time among the members of a social system. Rogers explained the
process of Innovation diffusion as one which is dictated by uncertainty reduction behavior amongst potential
adopters during the introduction of technological innovations. Diffusion of Innovation (DOI) Theory consists of six
major components: innovation characteristics, individual user characteristics, adopter distribution over time,
diffusion networks, innovativeness and adopter categories, and the individual adoption process. Arguably the most
popular of the six components of DOI centers on the characteristics of the innovation itself. After analyzing a variety
of previous innovation diffusion studies, Rogers singled out the following five characteristics of innovations that
consistently influence the adoption of new technologies.
2.3.3 Perceived Risk Theory (PRT)
Perceived risk also has some serious points to be considered on mobile banking. Earlier studies have suggested that
the user’s perception on risk is a main factor in the adoption of new technology. When the new innovation is done, it
helps to develop the life style of the users and it will be more if the adoption increases satisfaction. It is also a fact
that a progressive image could be created among the community using mobile banking services and they get selfrespect and it will play a great role in adoption of the technology. On the other hand McLean and DeLone also
updated the modern view and they considered the user’s satisfaction as the key measure in assessing the
successfulness on a system.
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3.
Methodology
3.1
Research Design
The paper applied a descriptive research design. Descriptive research design is a systematic, empirical
inquiry into which the researcher does not have direct control of independent variables as their
manifestation has already occurred or because they are reflecting the state of happenings and qualify the
obtained findings through the use of quantitative analysis (Mugenda & Mugenda, 1999). Questionnaire
was administered to raise data meant for the analysis and the results analyzed to establish the relation
between mobile banking services and customer satisfaction of some selected bank in Nasarawa state
(First Bank, UBA, Zenith Bank, fidelity bank, GT Bank and FCMB banks).
3.2
Procedure for Data Analysis and Model Specification
Quantitative analysis was used for the purpose of this study, because quantitative analysis results provide
support for anticipated directions of the association between independent and dependent variables
therefore, the study used regression analysis (OLS) to address the three hypothesis of this study since the
study is addressing relationship between the various variables. This was achieved by the use of statistical
package for social science (SPSS) and E-views. The major statistical analysis that was used in this study
is the ordinary least square (OLS) regression analysis- the simple regression analysis. This analysis was
used in order to find the linear relationship between the independent variables, which are: mobile account
balance updates, mobile funds transfer and transaction, and mobile bill payment; while the dependent
variable which is Consumer satisfaction is Proxied by ease of usage, privacy and convenience.
The model specifications here are formulated to tests the three hypotheses and they are as follows:
Pi  0  i MBU  t        1
Ci  0  i MBP  t        2
EU  0  i MFT  t       3
Where;
MBU =
Mobile account balance updates: Account information involves sending bank Mini statements to
the customer, checking account history, alerts on account activity or passing of set thresholds Monitoring of term,
deposits access to loan statements, access to card statements Status on cheque, stop payment on cheque etc
P
=
Privacy/security: The concerns for securing the mobile channel mirror, the risks seen in the
online environment, including authenticating the consumer’s identity and protecting transmission of data from
interception enabled by viruses, malware, and phishing attacks.
MBP =
Mobile Bill payment: The Federal Reserve survey defined mobile payments as “purchases, bill
payments, charitable donations, payments to another person, or any other payments made using a mobile phone.
Mobile payments can be used by accessing a web page through the web browser on your mobile device, by sending
a text message (SMS), or by using a downloadable application on your mobile device.
C
=
Convenience: Strategic implications and customer perception of m-banking services are explored
(Laukkanen, 2005) with a focus on the consumer value creation and a better understanding about the customerperceived value of m-banking services
MFT =
Mobile fund transfer: This involves the transfer of cash/money from customer’s own
accounts to another customer’s account either within the same bank or to another different bank. it
supports person to person transfers with immediate availability of funds for the beneficiary.
EU
=
Ease of usage: Ease of use means the level to which the customer perceived that modern
banking is easy to recognize and manage. All type of modern banking usually has user friendly
appearance, so this quality makes it more easy to use for customer, that’s why customer has positive
feeling towards them (Lin, 2011).
4.
Presentation of Result and Discussion of Findings
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Mobile Banking and Consumer Satisfaction: Evidence from Nigeria
4.1
Normality Statistics (Descriptive Statistics)
The normality statistics for the variables: C, EU, MBP, MBU, MFT and P are as shown in Table 4.1
below. The mean for C, EU, MBP, MBU, MFT and P are all different. This indicates that the variables
exhibit significant variation in terms of magnitude, suggesting that estimation of the variables in levels
will introduce some bias in the results. The Jarque-Bera statistic for all the variables is significant; hence
we reject the null hypothesis and conclude that the series are normally distributed (or have a normal
distribution).
Table 4.1: Summary of Normality Statistics
C
EU
MBP
Mean
4.485455
4.363636
4.363636
Median
4.670000
4.330000
4.330000
Maximum
5.000000
5.000000
5.000000
Minimum
4.000000
3.330000
3.330000
Std. Dev.
0.431656
0.505851
0.460071
Skewness
-0.044120
-0.524245
-0.891663
Kurtosis
1.383027
2.601193
3.377642
Jarque-Bera
1.201928
0.576757
1.522981
Probability
0.048283
0.049478
0.006970
Sum
49.34000
48.00000
48.00000
Sum Sq. Dev.
1.863273
2.558855
2.116655
Observations
399
399
399
Source: Authors Computation, 2015 (E-views 7.0)
4.2
4.2.1
MBU
4.120000
4.000000
4.670000
3.330000
0.342783
-0.776666
3.902620
1.479301
0.007281
45.32000
1.175000
399
MFT
3.970000
4.000000
4.670000
3.330000
0.482721
0.162312
1.769856
0.741874
0.000087
43.67000
2.330200
399
P
2.726364
2.670000
3.670000
2.000000
0.534458
0.458901
1.942901
0.898250
0.008186
29.99000
2.856455
399
Test of Hypotheses and Interpretation of Results
Hypothesis One: H01: There is no significant relationship between mobile accounts balance
updates and privacy/security of customers
Model one
:
Pi  0  i MBU  t        4
Table 4.2.1: Regression result on Privacy/security and Mobile account balance updates
Dependent Variable: P
Method: Least Squares
Date: 08/31/15 Time: 17:01
Sample: 399
Included observations: 399
Variable
Coefficient
Std. Error
t-Statistic
Prob.
B0
MBU
4.521826
-0.147386
0.577090
0.208067
7.835567
-0.708356
0.0000
0.4967
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.052808
-0.052436
0.351655
1.112951
-3.008481
0.501769
0.496659
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat
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4.120000
0.342783
0.910633
0.982978
0.865030
2.210508
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Mobile Banking and Consumer Satisfaction: Evidence from Nigeria
P 4.52  0.14 MBU                5
SEE =0.57 0.20
t * = 7.83 -0.70
F * = 0.50; Prob(F-statistic)=0.49
R 2 0.05; Adj.R 2  0.05
DW 2.21
From the regression result in table 4.2.1, the calculated t-value for mobile balance updates of customers (for
privacy/security model) is -0.70 and the tabulated value is ±1.96. It falls in the acceptance region and hence, we
accept the first null hypothesis (H01). The conclusion here is that there is no significant relationship between
mobile accounts balances updates and privacy/security of customers.
The F-statistics which is used to examine the overall significance of regression model equally showed that the result
is insignificant, as indicated by a very low value of the F-statistic, 0.50 and it is insignificant at the 5.0 per cent
level. That is, the F-statistic value of 0.49 is greater than 0.05.
2
The R (R-square) value of 0.05 shows that the mobile accounts balance updates has a very poor impact. It
indicates that about 5 per cent of the variation in privacy/security of customers is explained by mobile accounts
balance updates, while the remaining 99.5percent is captured by the error term.
The model also indicates that there is no autocorrelation among the variables as indicated by Durbin Watson (DW)
statistic of 2.21. This shows that the estimates are unbiased and can be relied upon for policy decisions.
4.2.2
Hypothesis Two: Mobile bill payment has not significantly influenced the conveniences of
customers.
Model two
:
Ci  0  i MBP  t         6
Table 4.2.2: Regression result on Convenience and Mobile Bill Payment
Dependent Variable: C
Method: Least Squares
Date: 08/31/15 Time: 17:03
Sample: 399
Included observations: 399
Variable
B0
MBP
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
Coefficient
Std. Error
t-Statistic
Prob.
3.977549
0.086075
1.595040
0.354115
2.493698
0.243072
0.0342
0.8134
0.006522
-0.103864
0.483374
2.102850
-6.508014
0.059084
0.813399
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat
4.363636
0.460071
1.546912
1.619256
1.501308
2.258277
C 3.97  0.08MBP                7
SEE =1.59 0.35
t * = 2.49 0.24
F * = 0.05; Prob(F-statistic)=0.81
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Mobile Banking and Consumer Satisfaction: Evidence from Nigeria
R 2 0.006; Adj.R 2  0.103
DW 2.25
From table 4.3, the calculated t-value for MBP is 0.08(Convenience model) and the tabulated value is given as
±1.96, under 95% confidence levels. Since the calculated t-value is less than the tabulated value (0.08 < 1.96), we
therefore, accept the null hypothesis (H02). We conclude that Mobile bill payment has not significantly influenced
the conveniences of customers.
Also, by examining the overall fit and significance of the convenience model (C) model, it can be observed that the
model does not a have good fit, as indicated by the relatively low value of the F-statistic, 0.05 and it is insignificant
at the 5.0 per cent level. That is, the F-statistic value of 0.81 is greater than 0.05 probability levels.
2
More so, the R (R-square) value of 0.006 shows that the model does not have a good fit too. It indicates that about
0.6 per cent of the variation in C is explained by Mobile Bill payment (MBP), while the remaining 99.4percent is
captured by the error term.
Durbin Watson (DW) statistics which is also used to test for the presence of autocorrelation indicates that there is no
autocorrelation among the variables as captured by (DW) statistic of 2.25. This shows that the estimates are
unbiased and can be relied upon for policy decisions.
4.2.3
Hypothesis three: Mobile fund transfer and transaction verifications have not significantly
impacted on the ease of usage by customers.
Model three:
EU  0   i MFT  t        8
Table 4.2.3: Regression result on Ease of usage and Mobile Fund transfer
Dependent Variable: EU
Method: Least Squares
Date: 08/31/15 Time: 17:07
Sample: 399
Included observations: 399
Variable
B0
MFT
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
Coefficient
Std. Error
t-Statistic
Prob.
7.187406
0.737322
0.886535
0.201935
8.107300
3.651293
0.0000
0.0053
0.596990
0.552211
0.323023
0.939094
-2.074284
13.33194
0.005307
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat
3.970000
0.482721
0.740779
0.813123
0.695176
2.275979
EU 7.18  0.73MFT                9
SEE = 0.88 0.20
t * = 8.10 3.65
F * = 13.33; Prob(F-statistic)=0.005
R 2 0.59; Adj.R 2 0.55
DW 2.27
The calculated t-value for MFT was found to be 3.65(table 4.2.3) and also by rule of thumb, the tabulated value is
±1.96 under 95% confidence interval levels. The calculated MFT value is found to be greater than the tabulated
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Mobile Banking and Consumer Satisfaction: Evidence from Nigeria
value (that is; 3.65< 1.96), we thus, reject the third null hypothesis (H0 3). In conclusion, Mobile fund transfer and
transaction verifications have significantly impacted on the ease of usage by customers.
Also, by examining the overall fit and significance of the EU model, it was found to have a good fit, as indicated by
the high F-statistic value of 13.33 and it is significant at the 5.0 per cent level. That is, the F-statistic value of 0.005
is less than 0.05.
2
More so, the R (R-square) value of 0.59 shows that the model have a very good fit also. It showed that about 59
per cent of the variation in EU is explained by Mobile fund transfer, while the remaining huge 41percentage
unaccounted variation is captured by the error term.
Durbin Watson (DW) statistics which is also used to test for the presence of serial correlation indicates that there is
no autocorrelation among the variables as captured by (DW) statistic of 2.27, and as thus the estimates are unbiased
and can be relied upon for sound policy decisions.
4.3
Discussion of Findings
Based on the result found in model two, which is the Privacy/security model, it could be observed that the MBU of
customers insignificantly influences Privacy/security. It further showed that MBU has a negative relationship with
Privacy/security. This result as found here is in conformity with the works of Aghdaie (2012) who observed in his
empirical analysis that fraudulent activities from computer wizard and hackers has not been properly checkmated
and as such there has been high manipulations of banks information and stealing of money from the bank accounts
of customers without their knowledge. Major problems envisaged to hamper the implementation of the policy are
cyber fraud and illiteracy. The result thus showed that a unit change in MBU (holding other factors constant), on the
average, reduces privacy/security by 0.14units
Moreso, in model two, Convenience was also found to be insignificantly influenced by MBP. The finding generally
supports the result of previous research. Ravichandran et al. (2010) examined influence of mobile service quality on
customer satisfaction in banking industry stated that the reason could be deduced from the fact that most Nigerian
does not use their telephone lines for transaction activities due to network out of order problems. This product
(MBP) has also experienced low patronage due to inadequate awareness and education of the customer on how to
maximally use their phone to transact simple bank payments operations, and as a result has not contributed
immensely to customer satisfactions.
However, in model three, MFT was found to have positive relationship with EU, and statistically significant. This is
due to aggressive marketing strategies adopted by banks when a customer opens acc