Development of Financial System and Economic Growth: An Empirical Evidence from Nigeria.

Abstract

The chief aim of the study was to ascertain the relationship between banking system development and stock market development (financial system development) and economic growth. Secondary data relating to market capitalization (MCP), value of shares traded (VLT), government expenditure (GOV) Investments (INV), Inflation (INF), real GDP per capita and credit to the private sector (PSC) were  extracted from CBN Statistical Bulletins and used for the study. The Cointegration Technique was used for the data analysis. The technique comprises of ordinary Least Square regression (OLS) Unit Root Test (URT), Error Correction Mechanism (ECM) and the Augumented Dicky Fuller Test Approach to establish the short run and the long run results. The results revealed that market capitalization, has short run and long run positive impact on economic growth; that credit to the private sector by banks also has a positive impact on GDP; that the value of share traded in stock market, the turnover ratio, the investments all have positive influence on economic growth; that inflation and government expenditure are strong policy variables in the long run. On a final note, the financial system can be considered as a tool for short run and long run economic growth.

Key words: Development, Financial System.