Financial Reforms in Nigeria and Its Effect on the Performance of
Quoted Manufacturing Firms
NIMFA F. ZWALBONG, HAUWA L. ABUBAKAR AND UMAR ABBAS IBRAHIM
Department of Business Administration
Nile University of Nigeria
Cadastral Zone C-OO, Research & Institution Area, Airport Rd, Jabi 900001, Abuja
NIGERIA
Key-Words: - Financial Reforms, Capacity Utilization, Financial Deepening, Domestic Credit, liquidity, Market
Capitalisation, Exchange Rate and Interest Rate.
Received: September 28, 2021. Revised: July 18, 2022. Accepted: August 7, 2022. Published: September 6, 2022.
1 Introduction
Over the years, continued emphasis has been placed
by the Nigerian government under different
administrations on measures to stimulate the growth
of the economy's manufacturing sector, considered a
prerequisite and crucial to achieving an
industrialized and sustainable economic growth and
development. Among the numerous measures taken
by the Federal government are the financial reforms
and, more recently, closure of borders and import
prohibition of selected, manufactured goods into the
country. Among the strategic financial sector
reforms effected included interest rate and exchange
rate deregulation; banking sector reforms covering
free entry and exit, the increase of minimum
capitalization to 25 billion naira from 2billion naira
the 2004 consolidation exercise under Soludo as
CBN governor, to strengthen the existing banks in
terms of capital base and liquidity as against a
number of operating banks; hence the reduction of
banks to 22 banks down from 25 banks post-
consolidation and 89 banks pre-consolidation
respectively [2]. Further reform effected was the
injection of 620 billion naira to revive eight distress-
prone banks in 2009 under Sanusi as CBN governor
[2], an aftermath of the global financial crisis's
effect 2008. Other interrelated policies affected
included the institution of deregulation of the capital
market and the indirect monetary policy instruments
[3], [4].
The reforms primarily aimed at liberalizing the
financial sector to expand and deepen the system in
order to kindle an expanded, strong, and
irrepressible banking industry and reliable capital
market; thus enhancing their capacity to fund the
real sector to support manufacturing firms’ access to
needed capital to finance production [5]. The
resulting effect of the successful implementation of
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DOI: 10.37394/23207.2022.19.130
Nimfa F. Zwalbong, Hauwa L. Abubakar,
Umar Abbas Ibrahim
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Abstract: The study examined the effect of financial reforms on the performance of quoted manufacturing firms
in Nigeria. The study used an expo-facto research design. The study population comprises 44 manufacturing
companies quoted at [1], which include Agriculture, Conglomerates, Consumer goods, Healthcare /
Pharmaceuticals, Industrial goods, and Natural Resources. Thus, using a study period of 10 years (2010 – 2019)
data on financial sector reforms (financial deepening, domestic credit, liquidity, market capitalisation, exchange
rate and interest rate) carried out in Nigeria, being the independent variable and on performance (capacity
utilization). Panel structured secondary data were collected and analyzed using the Generalized Moment of
Methods (GMM) in STATA 15. The financial reform indicators: financial deepening (FDP), domestic credit,
market capitalization, liquidity and exchange rate have p-values less than 0.05 (5%) level of significance, thus
implying that the financial reforms’ indicators affect the performance as proxied by the capacity utilization of
the manufacturing firms in Nigeria. Although, the interest rate which is one of the indicators of financial reforms
returns a p-value greater than 0.05 (5%) and thus not having significant effect on the performance of the firms.
The study suggested that the manufacturing firms should put measures to optimize the use of accessible funds
to ensure optimal capacity utilization, as this will translate into increased productivity, profitability, and
financial stability. The government should vigorously pursue monetary policies to ensure the injection of funds
into the financial sector, to enhance the capacity of deposit money banks to allocate more credit to the sector at
affordable rates. This will enable the optimal operation of the manufacturing sector in Nigeria.
the series of financial sector reforms is the
achievement of a greatly enhanced degree of
financial deepening, increased availability of
domestic credits, and stronger market capitalization
in Nigeria, which is anticipated would have a
positive and significant effect on operations,
performance and growth of the manufacturing sector
in Nigeria. It is, however, saddening that in spite of
the numerous financial reforms implemented and
the gains already recorded from the financial
reforms, which seemingly stabilized the financial
system, enhanced efficient intermediation, and
supported rechanneling of scarce financial resources
to the highest priority economic alternatives; not
much is seen to have been achieved in realizing high
productivity and growth of the manufacturing
sector.
Recent statistics show that the manufacturing
sector in Nigeria has been characterized by a severe
decline in productivity and export capacity, owing
to a drop in capacity utilization and overall industry
performance. This can be observed in the sequence
of recent negative performance -1.46 in 2015, -4.32
in 2016, -0.21 in 2017, and a rebound of 2.09
positive growth in 2018, preceded by positive
growths 21.80% in 2013 and 14.72% in 2014. These
negative performances have been attributed to series
of shocks in the harsh Nigerian business
environment, economic policy inconsistencies,
incessant exchange rate fluctuation, and the recent
recession in 2016, among other factors. Also,
statistics of contributions of the manufacturing
sector to the Gross Domestic Product (GDP) also
show a year-in-year-out of less than 10% input from
2000 to 2019.
The recent closure of borders and import
prohibition focused on discouraging the continuous
importation of consumable goods, reducing the
import dependency nature of the Nigerian economy,
and is expected to stimulate domestic production of
the manufacturing sector of the economy. While the
financial reforms being earlier measures introduced
by both previous and present administrations were
expected to support access to financial services and
products through the flow of funds, which drives
consumption and investments needed to stimulate
other sectors of the economy. These measures were
expected to increase employment, local production,
and export capacity, and industry productivity level,
thus improving the manufacturing sector's overall
performance and the economy [6]; however, much
is still left to be desired. Hence, this study
empirically evaluates the effect of financial reforms
on the performance of quoted manufacturing firms
in Nigeria.
1.1 Objective of the Study
The broad objective of this study is to empirically
evaluate the effect of financial reforms on the
performance of quoted manufacturing firms in
Nigeria from 2010 to 2020 (10 years), being the
period under review. The specific objectives are to:
i. evaluate the effect of financial deepening on
the capacity utilization of quoted
manufacturing firms in Nigeria
ii. determine the effect of domestic credit on the
capacity utilization of quoted manufacturing
firms in Nigeria
iii. evaluate the effect of liquidity on the capacity
utilisation of quoted manufacturing firms in
Nigeria.
iv. determine the effect of market capitalization on
the capacity utilisation of quoted
manufacturing firms in Nigeria
v. determine the effect of exchange rate on the
capacity utilisation of quoted manufacturing
firms in Nigeria.
vi. evaluate the effect of interest rate on the
capacity utilisation of quoted manufacturing
firms in Nigeria.
1.2 Statement of Hypotheses
H01: Financial deepening has no significant effect
on the capacity utilization of quoted manufacturing
firms in Nigeria
H02: Domestic credit has no significant effect on
the capacity utilization of quoted manufacturing
firms in Nigeria.
H03: Are they any significant effect of liquidity
on the capacity utilization of quoted manufacturing
firms in Nigeria?
H04: Does market capitalization have any
significant effect on capacity utilization of quoted
manufacturing firms in Nigeria?
H05: What is the extend of the effect of exchange
rate on the capacity utilization of quoted
manufacturing firms in Nigeria?
H06: To what extent does interest rate affect
capacity utilization of quoted manufacturing firms
in Nigeria?
2 Literature Review
2.1 Financial Reforms and Performance of
Manufacturing Firms
In Nigeria, [3], [5], [7]–[14] investigated the effect
of financial sector reforms (exchange rate, interest
rate, and financial inclusion) on the growth of small
businesses in Nigeria. To achieve this, research
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questions and hypotheses were posited in line with
the study's specific objectives. The study employed
secondary data on interest rates, exchange rates,
financial inclusion, business growth, Sectoral
Productivity, and Sectoral Capacity Utilisation from
1986 – 2017, being the period under review. The
expo-facto research design was adopted because the
events of the study had already taken place, and it is
also secondary in nature. Secondary data collected
were analyzed using time series analysis, while
posited hypotheses were tested using the Ordinary
Least Squares (OLS) multiple linear regression
technique. The findings revealed that financial
reforms have no significant effect on the business
growth of small businesses in Nigeria, owing to
high interest rates, fluctuating and high exchange
rates and inaccessibility to affordable credit
negatively affecting the productivity, capacity
utilization, and expansion/growth of small
businesses.
In Nigeria, [9], [15] conducted an empirical
assessment of the effects of financial sector reforms
on industrialization in Nigeria using annual time
series data over 1981 - 2015. Using an
autoregressive distributed lag (ARDL) model, the
findings show that financial reforms positively
impact industrialization.
Also, [7], [4], [10], [13], [16], [17] investigated
the causal effects, shock effect, and long-run impact
of the financial sector on manufacturing sector
performance. This adopted market capitalization,
broad money stock (financial deepening), domestic
credit to the private sector, prime interest rate, and
deposit liability as proxies for the financial sector,
while output in the manufacturing sector and
manufacturing employment are used as proxies for
manufacturing performance. The study adopted the
Granger Non-Causality, Vector Error Correction
Model, and Dynamic Ordinary Least Square
method, respectively, in testing the posited
hypothesis. The results showed unidirectional
causality, confirming the hypothesis of the 'supply-
leading view' and 'demand-following view' except
for market capitalization and output in the
manufacturing sector, where independence was
observed. The variance decomposition showed that
the forecast error shock of credit to the private
sector and prime interest rate show more variations
in manufacturing sector performance than other
financial indicators. The long-run result using
output in the manufacturing sector as a dependent
variable showed a significant positive relationship
with other financial sector indicators, except for
broad money stock and deposit liability.
[7], using Vector Autoregressive Model (VAR)
through descriptive statistics, investigated the effect
of the financial reforms on manufacturing sector
productivity growth in Nigeria. The statistical and
econometric results show that the financial sector's
pre-reform performance was lower than in the post-
reform era. Remarkably, the manufacturing sector
productivity growth indicator was small in the post-
reform era. The correlation coefficient of the
financial indicators was equally low, suggesting that
manufacturing sector development after Nigeria's
various financial reforms has not been positively
impactful (an indication of low capacity utilization).
The study concludes that the manufacturing sector's
minimal contribution does not fully support
Nigeria's Gross Domestic Product (GDP) growth.
2.3 Theoretical Foundation
In the endogenous growth model, the link between
the financial and real sectors has been established
[see [18]–[29]); Acemoglu and [18]–[29].
Furthermore, academics have looked into the
relative relevance of bank-based and market-based
financial systems in the manufacturing sector [30]–
[32].
The endogenous growth model can be used to
describe how the real sector can be advanced to
support long-term growth. Investment and
intermediary financial services such as risk
diversification, savings mobilization, and liquidity
production are all based on the growth model. The
endogenous growth model, according to [18],
suggests that there is an implied positive
relationship between financial intermediation and
economic growth through these services. The
influence of model reforms might arise as a result of
government action, which can damage or strengthen
financial institutions [30]-[18]. As a result, the
theoretical framework for this study is based on the
standard growth model (AK endogenous growth
model).
3 Research Methodology
3.1 Research Design
For the purpose of this thesis, the quantitative
research method, which involves the measurement
of variables and determining the correlations
between variables [33] in order to establish patterns,
relationships, or causal associations [34] would be
adopted; this would support the neutrality and
objectivity in acquiring statistical data for the study
[35].
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3.2 Population of the Study
The population of the study comprises 44
manufacturing companies quoted at [1], which
include Agriculture, Conglomerates, Consumer
goods, Healthcare / Pharmaceuticals, Industrial
goods, and Natural Resources. Members of the
entire population with accessible data for the
financial period under review were studied.
Therefore, the population of this study comprises
ten years (2010 – 2019) data on financial sector
reforms (financial deepening, domestic credit,
liquidity, exchange rate, interest rate, and market
capitalization) carried out in Nigeria, being the
independent variable and also ten years (2010 –
2019) data on performance (capacity utilization) of
quoted manufacturing firms in Nigeria, being the
dependent variable. Thus, the population comprised
ten years of data of financial sector reforms and data
from financial statements of 44 manufacturing firms
in Nigeria.
3.3 Method of Data Analysis and Model
Specification
For this study, the panel cross-sectional and time-
series secondary data collected were analyzed using
the Generalized Moment of Methods (GMM),
which is used to estimate the dynamic panel data.
The study’s model specification is adopted from the
study of [3], who recently investigated the effect of
financial reforms on the productivity of small
businesses in Nigeria. Therefore, the panel
regression (Generalized Least Square) model that
used to test the posited hypotheses is stated as:
Dependent Variable
Y = Manufacturing Sector Performance (MSP)
MSP = f(CUT)
Independent Variable
X = Financial Reforms (FSR)
FR = f(FDP, DCR, LQD, MCP, EXR, INT)
The functional form of the econometric model is
therefore given as:
Y = f(X1 Х2 X3 X4 X5 X6)
The explicit forms of the models for the six
hypotheses are stated thus:
𝐶𝑈𝑇𝑖𝑡 = 𝛼0+ 𝛼1𝐹𝐷𝑃
𝑖𝑡 + 𝛼2𝐷𝐶𝑅𝑖𝑡 + 𝛼3𝐿𝑄𝐷𝑖𝑡 +
𝛼4𝑀𝐶𝑃𝑖𝑡 + 𝛼5𝐸𝑋𝑅𝑖𝑡 + 𝛼6𝐼𝑁𝑇
𝑖𝑡 + 𝛼7𝐿𝐴𝐵𝑖𝑡 +
𝛼6𝐶𝐴𝑃𝑖𝑡 + 𝜇𝑡 ... (1)
Where:
CUTt = Capacity Utilisation at time t; FDPt =
Financial Deepening at time t; DCRt = Domestic
Credit at time t; LQDt = Liquidity at time t; MCP =
Market Capitalization at time t; EXRt = Exchange
Rate at time t, and INRt = Interest Rate at time t; α0
= Model Constant; λ1-6 = Coefficients of
Explanatory Variables; U = Error Term.
4 Results and Discussion of Findings
4.1 Determination of GMM Model
Before delving proper into the analysis of the impact
of effect of financial reforms on performance of
quoted manufacturing firms in Nigeria, the
researcher has to decide on the most appropriate
GMM technique for the estimation. Hence, as has
earlier been highlighted, this dissertation will be
following [31], [36], [37] rule of Thumb for
deciding between difference and system GMM.
First the autoregressive model is estimated by
Pooled OLS for the coefficient of lagged dependent
variable (φ) which is considered an upper-bound
estimate, while the estimated corresponding fixed
effects estimate is considered a lower-bound
estimate. The results of the estimation are reported
in appendices III and IV and Tables 4 while table 3
reports a summary of estimated coefficient of the
lagged dependent variable.
Table 1. Summary: Difference or System GMM
ESTIMATORS
Coefficients
Pooled OLS
0.978
Fixed Effects
0.83
One-Step Diff. GMM
1.416
Two-Step Diff. GMM
1.36
One-Step Syst. GMM
0.947
Two-Step Syst. GMM
0.948
Source: Author's estimation (2020)
Secondly, the difference GMM is estimated for
both One-Step Difference and Two-Step Difference
GMM, and the results are reported in Table 2.
Likewise, system GMM is estimated for both One-
Step System and Two-Step System GMM, and the
results are reported in table 2. Based on the
underlying assumptions, the estimated coefficient of
the lagged dependent variable seems to favour the
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use of one-Step System GMM. Both one-step
Difference and Two-step difference GMM failed to
satisfy the criteria as stated in Chapter three. The
coefficient of the estimated lagged dependent
variable in both models are more than the
coefficient estimated with fixed effect. In other
words, the obtained results are above the fixed
effects estimate, this suggests that both One-Step
Difference and Two-Step Difference GMM estimate
are upward biased because of weak instrumentation
and therefore a system GMM should be preferred
instead.
From table 1, which summarized the estimated
results, there is an indication that both One-Step
System and Two-Step System GMM are appropriate
for the estimation. In other words, the
interpretations of the results and hypothesis will
depend on both one-step system and two-step
system GMM. To validate the efficiency of the
internal instruments that are included in the SGMM
technique, and to ensure that such instruments are
not over-identified, the test for autocorrelation (AR
(1) and AR (2)) and Sargan test for are performed
for respectively the absence of autocorrelation and
validity of instruments. The instrument ratio for the
different estimations is expected to be greater than
1, in order to satisfy the condition that the
instruments are not proliferated [37]. This research
satisfies the condition in all cases.
4.2 Test of Hypotheses
Table 2 shows result of one-step and two-step
Generalized Moment of Methods (GMM) which is
used to estimate the dynamic panel data. The table
showed the result of Arellano & Bond estimates for
the dynamic panel data. The concept of a dynamic
panel data analysis is to capture the dynamic
effect/adjustment speed in the stated model. It is to
estimate the rate at which capacity utilization for the
manufacturing firms for the previous year is able to
adjust to the equilibrium in the current year. If the
coefficient of the lag (is greater than 1, it means that
it adjusts quickly; if (is equal to 1, it means that
adjustment is simultaneous and if (is less than one, it
implies that there are no simultaneous adjustments.
VARIABLES
Onestep Sys
Twostep Sys
L.CUT
0.947***
0.948***
(0.0201)
(0.0205)
FDP
0.112*
0.105*
(0.0809)
(0.0817)
DCR
-0.00039*
-0.0002775*
(0.000167)
(0.000160)
LQD
0.00530
0.0100
(0.00644)
(0.0106)
EXR
-0.000189**
-0.000143**
(0.00140)
(0.00127)
INT
0.409**
0.381***
(0.785)
(0.773)
MCP
0.0207*
0.0200**
(0.0274)
(0.0253)
LAB
-0.0178*
-0.0149
(0.209)
(0.199)
CAP
0.0552*
0.0499**
(0.173)
(0.169)
Constant
-4.183
-3.855
(4.667)
(4.504)
Observations
391
391
Number of code
44
44
Year Dummies
Yes
Yes
AR(1)
0.256
0.268
AR(2)
0.527
0.507
Sagan Test
0.025
0.025
Hansen Test
0.561
0.561
Observations
118
118
Instruments (i)
24
22
Number of Companies
(n)
44
44
Instrumental Ratio (n/i)
1.8333
2.00
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
The results of table 2 above revealed previous
year’s capacity utilization for the manufacturing
firms impacts positively to its current year. It shows
that there is a significant relationship between the
capacity utilization and its lagged value with a
coefficient of 0.947 for one step system GMM and
0.948 for two-step system GMM. This means that
the capacity utilization for the manufacturing firms
for previous year does not adjust at the same time
and equally in the current year. It takes (1 a slow
speed of about 5.3% (1- 0.947) or 5.2 (1-0.948) for
capacity utilization to adjust depending on whether
it is one-step system GMM or two-step system
GMM.
5 Conclusion and Recommendation
5.1 Conclusion
Premised on findings for hypothesis one, which
established that financial deepening has a positive
and significant correlation with capacity utilization.
Therefore, concludes that, financial deepening has a
significant effect on capacity utilisation of quoted
manufacturing firms in Nigeria. Thus, the study
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agrees with the study of Folarin (2019) that financial
reforms have a positive and significant impact on
industrialisation, which is premised on enhanced
capacity utilisation. The finding agrees with the
study of [38] that, financial deepening has a positive
significant effect on the performance of
manufacturing sector out.
Considering the findings for hypothesis two, which
established that domestic Credit (DCR) as a
component of financial reforms has a positive and
significant effect on capacity utilization. This study
therefore concludes that, domestic credit has a
significant effect on capacity utilisation of quoted
manufacturing firms in Nigeria during the period
under review. The findings corroborate the studies
of [39], [10], [12], [40] that, there is positive
significant relationship between bank credits,
domestic money supply and growth (capacity
utilisation and productivity) of the industrial sector;
[39] that bank credit has a significant positive effect
on the performance of manufacturing sector in
Nigeria and so on.
Considering the findings for hypothesis three, which
established the existence of a mixed result between
financial sector liquidity and capacity utilisation of
quoted manufacturing firms in Nigeria, evidenced
by both positive coefficient value. This study
however made its conclusion based on the p-value
that; financial sector liquidity has a significant effect
on capacity utilisation of quoted manufacturing
firms in Nigeria. The findings of hypothesis three
aligns with the study of [8], [21], [16], [41], which
adopted the panel multiple regressions and
established that, liquidity has a substantial effect on
the performance of manufacturing companies in
Nigeria.
From the results for hypothesis four, which firmly
established that Market capitalization with a
coefficient value which is positive and significantly
correlates to capacity utilization of quoted
manufacturing firms. This, study based on the
results of the p-value concludes that, market
capitalization has a significant effect on capacity
utilisation of quoted manufacturing firms in Nigeria.
However, the finding of hypothesis affirms the
result of [10]–[14], [42].
Premised on the findings for hypothesis five which
established that Exchange rates have a positive and
significant relationship to capacity utilisation of
quoted manufacturing firms in Nigeria. However,
considering that the results, this study concludes
that, exchange rates have a significant effect on
capacity utilisation of quoted manufacturing firms in
Nigeria. The findings supports the works of [6], [9],
[42] that exchange rate volatility has negative effect
on aggregate manufacturing output in Nigeria,
among others.
Finally, premised on the findings for hypothesis six
which established that, interest rate is positive and
not significant to capacity utilization of quoted
manufacturing firms in Nigeria. This study
concludes that, interest rates have no significant
effect on capacity utilisation of quoted
manufacturing firms in Nigeria.
This findings contradicts the findings of [5]–[7], [9],
[40], [42] that interest rate has negative impact on
manufacturing value added and manufacturing
capacity utilisation in Nigeria; and support the
findings of [8] which established that, interest rate
reduction does not concurrently stimulate capacity
utilisation in manufacturing firms in the United
States. The finding further contradicts the results of
[43] that, interest rate has an insignificant impact on
growth; nevertheless, the growth can be enhanced
by lower the interest rate in order to stimulate
increased investments.
5.2 Recommendation
Owing to the strategic importance of the
manufacturing sector in achieving economic growth
and development, the government should make
concerted efforts to sustain increased money supply
into the economy to further deepen the financial
sector, this will enhance the sectors’ capacity to
stimulate performance of the manufacturing sector
in Nigeria.
The government should vigorously pursue monetary
policies to ensure injection of funds into the
financial sector, to enhance the capacity of deposit
money banks to allocate more credit to the real
sector at affordable rates. This will enable the
optimal operation of the manufacturing sector in
Nigeria.
The government, through the apex bank (CBN)
should encourage banks to advance more credits to
the productive sectors of the economy, which in turn
will improve their liquidity positions through
profits, dividends and other bankable incomes.
The government through the regulatory agency
(Securities and Exchange Commission) need to
restore confidence to the market by putting in place
mechanisms to guarantee fair trading, transparent
transactions and dealings in the stock exchange.
This will in turn encourage optimal capacity
utilisation and increased productivity of the
manufacturing sector in Nigeria.
The federal government through the monetary
authorities should ensure that in the discharge of
exchange rate management, primary focus should be
on ensuring exchange rate stability through the use
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of appropriate monetary policy tools as well as
support export diversification programmes in order
to enhance foreign exchange inflow.
The government through appropriate monetary
policies should lower interest rates in order to
stimulate increased investments, capacity utilisation
and productivity of the manufacturing sector.
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Contribution of Individual Authors to the
Creation of a Scientific Article (Ghostwriting
Policy)
Nimfa Zwalbong carried did the conceptualization
and preparation of manuscript
Hauwa L. Abubakar supervised and reviewed the
article.
Umar Abbas Ibrahim was responsible for the
Statistics.
Conflict of Interest
The Authors have no conflict of interests to declare.
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Scientific Article or Scientific Article Itself
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funding agency in the public, commercial, or non-
for-profit sectors.
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(Attribution 4.0 International, CC BY 4.0)
This article is published under the terms of the
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WSEAS TRANSACTIONS on BUSINESS and ECONOMICS
DOI: 10.37394/23207.2022.19.130
Nimfa F. Zwalbong, Hauwa L. Abubakar,
Umar Abbas Ibrahim
E-ISSN: 2224-2899
1451
Volume 19, 2022