Resolving the Capital Scarcity in Nigeria

16 Pages Posted: 23 Jul 2007

See all articles by Ayo Teriba

Ayo Teriba

Economic Associates

Adedoyin Salami

Lagos Business School

Date Written: July 2007


Nigerian businesses, federal and state governments alike have historically tended to look abroad to fund large projects. Facts on the outstanding values of bonds, loans and equity confirm that Nigerian capital markets are thin, compared with the sub-Saharan African average; some segments have even become thinner in the last two-and-a-half decades. The current global liquidity glut however offers Nigeria an easy opportunity to transit from a net origin of capital to a net destination of capital. We identify fiscal, monetary, and balance of payment leakages from the Nigerian financial system, and suggest that these leakages can be plugged to make capital more available to government, businesses and consumers in Nigeria.

Specifically, we uncover and discuss two main problems that could explain the lack of depth in the Nigerian financial system:

a.) Inadvertent but substantial diversion of government owned financial resources away from the domestic financial market by the government and the central bank as they tried to achieve some other policy objectives. With broad money (M2) amounting to a mere 17.6 percent of GDP in 2005, while government kept idle deposits of 21 percent of GDP at the central bank in the name of liquidity management, and 25 percent of GDP in external reserves abroad in the name of fiscal stabilization, we do not need to travel far to see what problems need to be fixed, and by who, to substantially ease the capital scarcity in Nigeria. Nigerian financial system can easily be much deeper, than it has been at any point in the past, if the government manages the re-injection of these dearly needed loanable funds carefully.

b.) Negative real interest rates that drive private financial resources away from Nigeria towards positive real returns abroad. Net private capital outflow of 14 percent of GDP in 2005 alone, compared to total domestic bond market of 7 per cent of GDP in the same year, or 12.5 percent of GDP in bank loans, shows that Nigerian financial system could be deeper if it could retain capital originating from it by offering attractive positive real returns on domestic bank deposits and bonds, and perhaps attract some of the surplus liquidity in other emerging markets as well.

Keywords: Cash, deposits, loans, bonds, equities, external reserves, liquidity, interest rates, inflation, Nigeria

JEL Classification: D78, E42, E58

Suggested Citation

Teriba, Ayo and Salami, Adedoyin, Resolving the Capital Scarcity in Nigeria (July 2007). Available at SSRN: or

Ayo Teriba (Contact Author)

Economic Associates ( email )

1st Floor Lindev Plaza, 16 Amodu Ojikutu Street
PO Box 70909
Victoria Island Lagos
+234 1 461 0802 (Phone)
+234 1 461 0805 (Fax)


Adedoyin Salami

Lagos Business School ( email )

Km 22 Lekki Epe Expressway
+234-1-4616170 (Phone)
+234-1-4616173 (Fax)


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