Financial Development and Economic Growth in Nigeria

Audu, Nathan Pelesai, Okumoko, Tubo Pearce


The study empirically evaluates the impact of financial development on economics growth in Nigeria. The paper employed annual times series data spanning through a period of 43 years (1970 to 2012). The finding of our study suggests that the theoretical modelling requirements for all the variables used in the regression satisfy the statistical requirements which determine the choice of our model. The result of the co-integration estimates in the study revealed that the selected independent variable used in this study explains long-run relationship between financial development and economic growth between the period under consideration. The result from the estimated long–run Parsimonious Error Correction Model (ECM) shows that all the variables used in the study were statistically significant. The study also reveals that lending rate did not conform to our theoretical expectation but impacts significantly on gross domestic product. Commercial bank credit to private sector has the expected a priori expectation sign and also positively affected financial development and economic growth in our study. Contrary to our expectation, MGDP negatively influenced financial development and economic growth in Nigeria. The study also indicates that commercial bank credit to non-financial private firm did not conforms to a priori expectation but significantly influenced or stimulated financial development and economic growth in the Nigerian economy. The ratio of commercial bank deposit to gross domestic product (RDEP) appeared with the right sign and also impacts significantly on financial development and economic growth in Nigeria. The evidence from our study shows that the entire model is stable within the period of study. We therefore recommend that monetary authorities should endeavour to make policies that will impact positively on the overall growth of the economy. The significant impact of lending rate on GDP does not no mean that government embark on policies measures that would improve lending rate but focus policies that would lead to employment generating, increase in income as well as conducive atmosphere for businesses to operate. Given the strong positive evidence of bank credit to private sector, government should make policies as well as provide a conducive business environment that would ensure banks provide more credit to private sector (loans) for businesses, who will invest such funds for productive purposes that will yield the desired or required return and this will lead to an improvement in the GDP growth.

Keywords: Financial development, Economic growth, ECM, Stability, Granger causality.Classification Code: C22, C87,  E44, F62, O47

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