Financial Liberalization and Access to Finance the Case of Manufacturing Firms in Nigeria (2007-2014)

Abstract

The study examined the impact of financial liberalization on Nigerian manufacturing firms' access to finance, using firm-level data of 3801 manufacturing firms from World Bank Enterprise Survey from 2007-2014. Although, cross-country literature extensively discussed on the effect of financial liberalization on credit constraints, the studies significantly overlooked the Nigerian case. To achieve this goal, the current research developed a model, based on the New Keynesian Theory of Credit Constraints and categorized the firms into four different constrained groups. The result indicates that financial liberalization reduces the probability of being credit constrained, with the strongest effect for Deterred Investors and Active Investors. Increase in the degree of liberalization decreases the probability of being credit constrained by between 2 and 3 percent depending on the constraint definition. Furthermore, the result also provides evidence indicating that firms are new to use financial system; New Entrants, which do not benefit from financial liberalization. Thus, this points to the relevancy of information asymmetry in the Nigerian financial market a significant factor exacerbating market imperfection especially in the developing countries. Such effect of financial liberalization on financial constraints can be linked to weak institutional environment.