Journal of Economics and Sustainable Development www.iiste.org ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online) Vol.6, No.6, 2015 37 Banking Sector Reforms in Nigeria’s Fourth Republic: A Review of Evidence Chris U. Kalu Economics Department, Nnamdi Azikiwe University, Awka cu.kalu@unizik.edu.ng(corresponding author) Onyinye. O. Mgbemena Economics Department, Michael Okpara University of Agriculture, Umudike, Umuahia Onyinye02@yahoo.co.uk Abstract One of the most outstanding debates in recent times is whether government banking sector reforms promotes growth and development. Objectively, this study is quite significant as it empirically re-investigates the role of the Nigerian banking sector reforms especially of the fourth republic (2000-2010) on the economy. The study adopts the Granger-causality and Johansen co-integration econometric approaches in the estimation procedure. Overall, evidence from the study shows that there is no link between fourth republic banking sector reform and economic growth in Nigeria, thereby contradicting the finance-growth nexus of Mckinnon and Shaw (1973) hypothesis. The study, therefore, concludes that any serious effort to ensure the strengthening of the banking sector should be preceded by the narrowing down of the interest rate spread. Moreover, the reform programmes of the Nigerian banking sector should be sustained so as to channel resources from the surplus sector (savings) to the deficit sector (investment) by putting in place appropriate macroeconomic policies that will engender productive activities and ensure sustainable economic growth. Keywords: Governance, Banking sector reform, economic growth, co-integration. 1. Introduction Regulatory reforms would benefit all G20 countries. The economic cost of excessive government regulations is substantial. In some cases, simply complying with regulations is costly for small and medium-sized companies. In other cases, uncertainty over future regulatory changes results in postponed investment decisions and slower job creation. For many, excessive regulations prevent market signals from being fully received by consumers and investor (Robert Fauver, 2011). There is no gain saying that personal savings are the most reliable source of investment capital, however, it is doubtful whether investors and entrepreneurs would be able to save enough of their personal income to meet the investment capital needs of their investments. However, since the savings and investment functions are carried out by different households and firms for different purposes, there is the need for a vibrant banking sector, to mobilize funds from the surplus (savings) segment of the economy and lend to the deficit (investment) segment of the economy in the form of loans and advances Moreover, it is generally accepted that a well developed banking sector contributes to economic growth by mobilizing savings and efficiently allocating them among the competing investment projects and other demands for funds. The existing positive correlation between indicators of financial development and economic growth reflects the importance of the deposit money banking sector in particular and the financial system in general. The financial system of most developing countries, including Nigeria, is dominated by the banking sector, especially the deposit money bankings which provide the foundation for the development of the financial system. The International Monetary Fund (IMF) (1996:68) contends that financial intermediation through the banking system, whether measured by the ratio of deposit money bank liabilities to gross domestic product (GDP) or by the ratio of private sector bank credit to GDP, has a strong positive relationship with economic growth. Similarly, the credit component of the deposit money banks constitutes a major link between the monetary sector and the real sector of any economy, Nigeria inclusive. An economic reform on the other hand, refers to the process of getting policy incentives right and restructuring key implementation institutions. As part of economic reforms, banking sector reform focus mainly on restructuring financial banking institutions and markets through various policy measures. In the same vein, the reforms seek among others to get the incentives right for the sector to take its leading role in financial intermediation and to enable the bank to contribute to economic growth. The Nigerian banking sector has witnessed five distinct phases of banking sector reforms (Anyanwu, 2010). Chronologically, the first occurred during 1986 to 1993, when the banking industry was deregulated in order to allow for substantial private sector participation. Before then, the industry was dominated by banks which emerged from the indigenization programme of the 1970s, which left the Federal and State governments