Financial Deepening and Economic Development of Nigeria: An Empirical Investigation (1981-2013)

Abstract

This research work examined financial deepening and economic development in Nigeria between 1981 and 2013. The central focus is that a high level of financial deepening is a necessary condition for accelerating growth in an economy. This is because of the central role of the financial system in mobilizing savings and allocating same for the development process. The study made use of secondary data, sourced for a period of 33 years. We specified four explanatory variables for the study based on theoretical underpinnings. We sought to establish a relationship between these variables and financial deepening index. The ordinary least squares analytical framework was used in the analysis. The result shows that 27% of the variables under consideration affect GDP per capita while 73% of other variables not captured in the model also affect GDP per capita and the adjusted R² of 16.7% show the robustness of the model. The unit root test revealed that GDP per capita, ratio of money supply relative GDP and inflation was found to be stationary at level I(0), which denotes rejection of null hypothesis that GDP per capita has a unit root and accept the alternative. The co integration test shows that there exists a long-run relationship of the variables. The vector error correction model test shows that 53% of the variables affect GDP per capita while 47% of the variable is not captured in this model.  A trend analysis was also done in the study. At the end of the study, we found that financial deepening index is low in Nigeria over the years. We also found that the four explanatory variables, as a whole were useful and had a statistical relationship with financial deepening. But three of the variables; trade openness(TROP), inflation rates(INFLA), and ratio of money supply relative to gross domestic product(M2/GDP) had a significant relationship with financial deepening based on GDP per capita. We concluded that, the financial system has not sustained an effective financial intermediation, especially credits allocation and a high level of monetization of the economy. Thus the regulatory framework should be restructured to ensure good risk management, corporate governance and stemming systemic crisis in the system as well as Federal government pro-active in areas of imports and exports so as to create trade openness in the economy in order to increase GDP per capita and better the lives of her citizens.

Keywords: Financial structure, financial deepening,  financial savings, , Inflation rate, Trade openness, economic development.