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AN EMPIRICAL STUDY ON THE INVESTMENT CULTURE OF THE NIGERIAN HOUSEHOLD
E.O. Oyatoye and O.F. Odesanya
Department of Business Administration, University of Lagos, Akoka Yaba, Lagos
This study seeks to understand the attitude of Nigerian households to investment beyond year 2007. It also aims at educating Nigerian households on factors to be considered when selecting an investment. The population for the study consisted of all households in Nigeria made up of at least one income-earning member. A sample of 2500 households was selected for the study. Questionnaires were distributed amongst various households dwelling in the cities of Lagos, Abuja, Port-Harcourt and Bonny. 752 of the questionnaires distributed were returned. The data collected were analyzed using percentages. Chi-square statistics and correlation analysis were employed to test the pre-stated hypotheses. Finding from the study showed that the level of investment undertaken by Nigerian households is directly influenced by their income level. Results obtained showed that Nigerians are conscious of the importance of investment and that they will save and invest more if their income level increases and if the government can put in place necessary incentives that could encourage saving. The study also discovered that Nigerians are very secretive about revealing details of their income and financial investments. A number of recommendations that will make Nigerian households develop more interest in investing a proportion of the earnings were made.
Keywords: Income; saving; investment; household.
Investment can be viewed as deferred consumption, that is, income earned but not consumed and kept for future consumption. The concept refers to the immediate commitment of resources, money or otherwise, in the expectation of reaping future benefits irrespective of the form it takes, its key attributes is the sacrificing of something of value now for future benefit later (Bodie, Kane and Marcus, 2001). An investment refers to any money or income not consumed but kept aside, either in financial institution or invested in the capital market, real estate or any other production activity with a view to generating higher future income and/or increasing its innate value in the future.
In economics, it has been observed that it is not possible to embark on investment without first embarking on saving. Although, it is acknowledged that savings do not always translate into investment, without savings there can be no investment. When an entrepreneur starts a venture with loan, he is primarily utilizing other peoples savings. Thus, savings is essential for investment.
- Is the Nigerian society primarily a consuming society?
- Why do more Nigerians keep their monies outside a formal system or institutions?
- What other forms of deferred consumptions do Nigerians favour?
The poor saving culture may not necessarily translate to poor investment culture. For the Nigerian household, the incentives to save were there but it required information on the part of the saver. In the traditional environment, savings with banks and other depository financial institutions was popular with Nigerians. Most Nigerians had the belief that the only way to defer consumption was to keep their income with banks. However, things began to change over time with inflation rate rising higher than the interest rate on bank deposit and increasing failure of banks and financial institutions, Nigerian household might have began to look in the direction of other forms of preserving their future.
If this assertion is true, this study may help identify those other forms of savings and investments preferred by contemporary Nigerians.
Statement of the Research Problem
Low level of savings may translate to low level of investment, and hence, low national productivity. A government should be concerned with how to encourage her citizens to embrace the culture of saving and with how to create an investment environment that give room for variety of saving/investment instruments. Regardless of the level of income of any household, it should be able to keep and invest part of these incomes for future consumption. The inability of house holds to lean and practice the act of saving and investing may constitute a major problem to the developmental goals o both the household and the society. This paper investigates the investment culture of the Nigerian household with a view to find out factors militating against the right attitude to investment.
The objectives of the study include:
· Investigating the current perception of the household members to investment and the future prospects of investing part of their income;
· Determine if there is an investment culture in the household, and if so, to what extent;
· Investigate what proportion of the income is invested;
· Find out the reasons why household invest;
· Find out the type of investment instruments or market that are favoured by households and why;
· Determine the underlying basis of the optimality of the decisions taken by the households.
Investments: Conceptual Framework
Bodie, Kane and Marcus (2001) refer to investment as the sacrifice of current resources (income) for future benefits. It is the commitment of money or other resources currently at ones possession to some other reliable assets with the expectation of reaping some benefits in future. Gordon and Bailey (2002) distinguish between investment and savings. While savings is viewed as foregone consumption, investment is restricted to real investments as the sort that increases national output in the future. However, economists believe that savings is equivalent to investment in any economy. Though a distinction can be made between savings and investment, both concepts are often used interchangeably.
Investment has two key attributes time and risk. The commitment of resources takes place in the present and is certain, while the reward comes later in the future, if at all it does, and the magnitude is generally uncertain. In some cases, such as government bond, the time element predominates, while in others (all options on common stock) the risk element is the dominant attribute.
Real Investment and Financial Investment
Real investments are investments in real or tangible assets such as land, machineries or factories. On the other hand, financial assets such as securities and are contracts written on papers. Bodie et al. opined that the material wealth of a society is ultimately determined by the productive capacity of its economy, that is, goods and services its members can create. This capacity is a function of the real assets of the economy the land, building, and knowledge that can be used to produce goods and services. The constituent of real investment is therefore the real assets, which determine the productive capacity of any economy.
In contrast to real assets are financial assets. These are contracts written on paper and constitute claims on real assets or the income generated by them. Though they do not contribute directly to the productive capacity of the economy, but are means by which individuals hold their claims on real assets. Thus, while real assets generate net income to the economy, financial assets simply define the allocation of income or wealth among investors. The table below presents the various types of real and financial assets.
Table 1.1: An Overview of Investment Alternatives
Most real assets investments that are capable of generating substantial income also require substantial financing. A single individual may not be able to own banks, however, this individual may invest in the securities of a firm established to carry out these productive activities. Thus, by buying the shares of First bank Plc or Oando, an individual is carrying out financial investments in these organizations, which can then carry out real investments in office buildings, machineries, computers, technology and so on. The incomes produced by these real assets and the real assets can be laid claim on by owners of the financial assets.
The distinction between real and financial assets is apparent when one compares the balance sheet of United States households, shown in Table 2, with the composition of national wealth in the United States presented in Table 3.
Table 2: Balance Sheet of U.S. Households
Source: Balance Sheet for the U.S. Economy, 1945-1994, Board of Governors of the Federal Reserve System, June 1955.
Table 3: Domestic Net worth, U. S.
Source: Balance Sheet for the U.S. Economy, 1945-1994, Board of Governors of the Federal Reserve System, June 1955.
Household wealth includes financial assets such as bank account, corporate stock or bonds. These securities however, are liabilities of the issuers of the securities. Thus the financial assets of households, cancel out the liabilities when the balance sheet is aggregated, leaving only real assets as the net wealth of the economy. National wealth comprises of structures, equipment, inventories and land.
Selecting Investment Alternatives
In selecting an investment alternative, the investor should consider what his/her investment objectives are. Hirt and Block (2003) consider the following as the investment objectives of any investor and should guide in the selection of the investment.
Risk and Safety of Principal
The investor must first consider the amount of risk he is prepared to assume. The measure of the degree of risk an investor is prepared to assume is called risk tolerance. Where an investor prefers high returns high-risk assets, he is regarded as a risk-lover, while an investor who prefers to assume low risk is referred to as a risk averter.
The risk tolerance of an investor will determine the type of investment he or she dabbles into. Investors who wish to assume low risk will probably confine a large portion of their portfolio to short-term debt instrument issued by the government or a major corporation. Some very conservative investors may choose to invest in a money market fund in which the funds of numerous investors are pooled and reinvested in high- yielding, short-term instruments. More aggressive investors may look toward longer-term debt instruments and common stock.
Current Income vs. Capital Appreciation
In purchasing stocks, the investor with a need for current income may opt for high-yielding mature firms in such industries as public utilities. Those searching for price gains may look towards smaller, emerging firms in high technology, energy, or electronics, which may not pay cash dividends but the investor hopes for an increase in value to provide the desired return. An investor needs to understand that there has to be a trade-off between growth and income, as finding both in one type of investment is most unlikely.
Liquidity is measured by the ability of the investor to convert an investment into cash within a relatively short time at its fair market value or with a minimum capital loss on the transaction. Most financial assets provide a high degree of liquidity, whereas real assets are difficult to convert to cash.
Ease of Management
Ease of investment management is another factor worth considering in investment selection. The amount of time and effort the investor has to devote to his portfolio should determine the type of assets he invests in.
An investor in a high tax bracket may prefer government bonds (as interest is not taxable), real estate, or investments that provide tax credits or tax shelters.
Other factors work considering in asset selections are:
ό Short-term versus long-term orientation;
ό Retirement and estate planning consideration.
The population for this study consisted of all households in Nigeria made up of at least one income-earning member. A sample of 2500 households was selected for the study. Members of these households came from a broad range of categories of the Nigerian Society. The selection of households was done using random sampling method in the cities of Lagos, Abuja, Port Harcourt
and Bonny. The sample was classified on the basis of income, as income has been found to be one of the factors influencing the level of household investment, as well as aggregate investment of any nation. Further in Nigeria, certain jobs or profession are associated with high income while others are regarded as low income yielding jobs. Thus in the use of income to select the samples, jobs and profession formed the basis. Also, because the level of education may affect the type of investment preferred by a particular household and the amount of income invested, qualification was adopted as a criterion for classifying the selected sample.
Primary data were collected using questionnaires as data collection instrument. The questionnaire was divided into four parts to capture the background information about respondents, employment and source(s) of income, investment culture of households and government incentives and use of professional(s) services.
The reliability of the responses of households was tested by redistributing the same questionnaire to a smaller sample of 80-households out of the initial sample in the four cities after three weeks of collecting the first set of questionnaires. Further, since the questions or statement contained in the questionnaire elicit responses in respect of households attitudes to investments, the research instrument was seen be valid.
The analyses of the responses were done by using percentages and weighted mean, while Chi-squared statistics was employed in validating the hypotheses.
Presentation and Analysis of Data
A total of 2500 questionnaires were distributed but only 752 of these questionnaires were returned. Out of the returned questionnaires, 35 were badly or sparsely completed while another 67 were found to be unusable because of the ambiguity in the responses. Hence, only 650 questionnaires were accepted as properly completed and the analysis is based on this figure.
Analysis of Respondents Background Information
Gender and Age Distribution
A large proportion of the respondents were young and upcoming people who are more likely to be favourably disposed towards investing to secure their future. Of the 650 respondents, 85 percent fell in the age bracket 21 40years, probably because they have several years to retirement and should ordinarily embrace investment culture early; 13 percent of the respondents were between 41 and 50years; 0.6 percent fell in the age bracket 51 60; 0.3 percent was between 71 and 80 years old, while 9 respondents failed to indicate their age bracket.
The gender distribution of respondents was relatively balanced with 57 percent being male and 43 percent female. This distribution is considered appropriate, though the investigation does not seek to examine the role of sex distribution in investment practice. In theory, however, the marital status of an individual might have an impact on his/her investment pattern.
409 or 63percent of the respondents were married, with a large proportion of this being female, while 235 or 36percent were singles and mainly males. This shows that it takes an average male Nigerian a longer time to get married compared to their female counterparts; the males are thus expected to have a higher inclination towards investing more than the females. Although it is yet to be supported with an empirical study, it is expected that the singles should be able to save more than married people who have more responsibilities to bear.
52 percent of the respondents were holders of first degree (or its equivalent); 13 percent had a second degree; 1.5 percent had doctorate degrees; 22 percent possessed ordinary national diplomas; 9.5 percent had secondary education; while 0.3 percent had only primary education. Furthermore, 7 percent of the various categories above also possessed professional qualifications; while 98 percent of the respondents were found to have a minimum of secondary education. 1.7 percent of the respondents did not respond to the question on qualification. Also among the 409 married respondents with spouses, the spouses of 275 of this sub-group
possessed first degrees, the spouses of 65 had a second degree, 4 were with doctorate degrees, while the spouses of 45 and 20 respondents had ordinary national diplomas and secondary education, respectively.
Analysis of Respondents Employment Profile
The general theory of investment presumes that other things being equal, the higher the income level, the higher the level of aggregate savings and by extension, the higher the investment level. Hence, it is important to understand the income generating capacity of Nigerians as a prerequisite to understanding their investment inclinations.
519 respondents were employed (with 463 in paid employment and 56 self-employed) and had the capacity to generate income and also to save and invest. 214 of those in paid employment were employed in the oil and gas industry, 120 were in the financial services industry, 59 were in the educational service industry, 43 were working in the trading industry, 17 were in the manufacturing sector, while the other 66 were in one industry or the other, such as management consulting, law practice and so on. Also, of the 650 responses, 12 respondents were unemployed, 109 were students and 10 did not respond to the question relating to employment.
On the issue of income distribution, 141 respondents earned between 0.1Million 0.5Million Naira, 98 respondents earned from 0.5Million 1Million, 139 earned between 1Million 5Million, 56 earned between 5Million 10Million, while 11 earned between 10Million and 50Million a year. 205 respondents would not disclose their earning power.
Using a mean value analysis, the average income of respondents may be determined on a weighted basis as shown in table 4.
Table 4: Average Income of Respondents on a Weighted Basis.
Weighted mean value
The mean value of 2.32 corresponds to an average income
Table 5: Other Sources of Income of Respondents
Source: Field Survey
Dividend incomes from stocks investment ranked the highest source of other income, while interest on bank deposits constituted the second best source of extra income. Also,
for a detailed understanding of the total income generation capacity of Nigerians, respondents were asked to compare their income from other sources as a percentage of their employment income. Table 6 presents the responses of respondents to this question.
Table 6: Comparison of Income from other Sources to Employment Income
Source: Field Survey
Out of the 351 respondents who had other sources of income, 250 or 71.23 percent disclosed that income from other sources was not more than 10 percent of their employment income, 70 respondents believed that they made between 11 percent and 20 percent of their income from other sources, 11 respondents generated between 21 and 30 percent of their paid income from other sources, while 20 respondents made above 30 percent of the employment income from other sources. The income from other sources expressed as a percentage of employment income base on earning range is presented in table 7.
Table 7: Other Income Expressed as a Percentage of Employment Income Base on
Source: Field Survey
Out of the 141 respondents with employment income of N100,000 N500,000, 66 or 47 percent had other income sources which generated additional income of up to 10 percent of their employment income. 17 respondents within this same income range made about 20 percent of the employment income from other sources. However, 58 respondents or 41 percent of this income level group had no other source of income. This may be due to their low level of education. Respondents in the high-income brackets are those whose investment generated 30 percent or more of their employment income as additional income. For instance, 4 or 36 percent of the respondents in the N10Million income bracket generated investment incomes of more than 30 percent of their employment income, while another 3 respondents (or 27 percent) in this group generated investment income of about 20 percent of their official income. These distribution and analysis clearly indicate that level of income do have a direct and significant impact on the investment culture of people.
Analysis of Respondents Banking Culture
The study revealed that banking culture is very high among a large majority of our sample. This contradicts the popular believe that banking culture is poor among Nigerians. However, the observed high
frequency may be due to the fact that most of the respondents are literates and all of them lived in the city. Another reason that can be adduced to this is the fact that they actually worked to earn their income, rather than stealing from public or private treasuries. As shown in. Table 8 through 10, 598 or 92% of the total respondents claimed to have a bank account. Most of the respondents operated two or more types of accounts. Savings and Current Accounts had the highest patronage, while Fixed Deposit, which is believed to have a high yield rate, had a relatively low patronage. Also, a large proportion of the respondents maintained accounts in commercial banks.
Table 8: Reponses on Banking Culture
Source: Field Survey
Table 9: Types of Accounts Operated by Respondents
Source: Field Survey
Table 10: Types of Banks Patronage by Respondents
Source: Field Survey
Appraisal of Investment Culture of Nigerian Households
549 respondents responded to the questions on their investment culture. Out of this, 426 responded in the affirmative, showing that Nigerian households had a good investment culture. Several reasons were adduced as factors responsible for not investing by those respondents that had negative response. The most important factors given were the low level of their income and high cost of living. For instance, 80% of the 123 respondents claimed that their level of income was a highly relevant factor for not investing. This thus implies that if their level of income rises, they would likely invest a part of it.
422 out of the 650 respondents claimed that their level of investment would increase if their income level rises, while 134 respondents or 21 percent opined that their investment level would not necessarily rise with their income level owing to other commitments.
Another factor identified as being responsible for not investing is the lack of trust in banks and financial institutions. 54 percent of the respondents who dont invest claimed that their lack of trust in financial institutions was responsible for their not investing. This shows that government needs to intensify efforts at boosting public confidence in financial institutions by completely sanitizing the banking industry. Respondents that claimed to have been investing part of their income identified provision for childrens education and legacy, as well as their retirement period as factors for doing so.
The role of government in encouraging investment was also assessed by the survey. 291 or 45% of the respondents affirmed that the government has encouraged people to save, while 263 respondents claimed that government has not done enough to encourage investment. Among the latter group, it was generally agreed that government could encourage people to save by ensuring bank loan failures do not affect savings; prosecuting bank loan defaulters publicly; creating a workable national mortgage policy; and granting some tax relief to investors. They agreed that they would save or invest more if the suggested incentives were implemented.
Finally, the investment preference of respondents was assessed so as to understand the investment option(s) people usually prefer. The results of the responses gathered were expressed in points as some respondents indicated more than one investment type. Investment in stocks appeared the most preferred option, with 361 points out of a total of 1335 points observed. Thus, investment in stocks was ranked as the most preferred investment option. Also, 359 respondents claimed to have professionals, such as investment advisers, bankers and stockbrokers, from whom advice was sought before investing. However, 17% of the respondents claimed that the advice of professionals was not needed before making their investment decisions. This group saw professionals as exploiters.
Test of Hypotheses
Null Hypothesis, H0: The literacy level of Nigerian Households is not significant to their investment culture.
Alternative Hypothesis, H1: The literacy level of Nigerian households is significant to their investment culture.
This hypothesis is tested at 5 per cent significance level and 5 degrees of freedom.
Table11: Respondents Educational Qualification
Table 12: Observed frequency between the amount invested and level of employment income.