Poverty Incidence in Nigeria: Does Financial Deepening Matter?

Abstract

Economic policies in every nation strive to attain basic macroeconomic goals, one of which is poverty reduction. The paper examines empirically whether or not financial deepening has played a significant role in poverty alleviation effort in Nigeria for the period 1990 to 2013. Utilizing both quantitative and descriptive analyses, the paper estimated three models in which poverty rates for the rural areas, urban areas as well as national poverty rates were regressed on financial development indicators. Based on the estimated parameters, the paper found that the coefficient of ratio of broad money supply to GDP reduces poverty rate in Nigeria. The ratio of market capitalization to GDP and ratio of foreign direct investment in equities to GDP have positive impact on rural and urban poverty reduction respectively. However, the ratio of credit to the private sector and the ratio of total stock traded to GDP revealed opposite impact on poverty alleviation at all levels. The descriptive analysis indicated that poverty rate in Nigeria has been unacceptably high in spite of abundant natural and human resources. The paper therefore, recommends the need for urgent reforms in the financial sector that would facilitate development in both the money and capital markets to improve liquidity; reduce interest rate spread to attract deposits and broaden financial access to the poor.