Financial Development and Economic Growth in Nigeria: A Reconsideration of Empirical Evidence.

Abstract

This paper empirically investigated the impact of financial development on economic growth in Nigeria during the period 1986 – 2012.To achieve the purpose of this research, we estimated the real GDP as a function of the gross fixed capital formation, financial development (the ratio of private sector credits to GDP), liquidity ratio, and the interest rate. The methods used are: the Ordinary Least Squares (OLS) techniques, Augmented Dickey-Fuller unit root test, Johansen cointegration test, error correction technique, and the Granger causality test. The empirical results revealed that: all the variables used are integrated of the same order, I(1); there is evidence of the existence of a long run relationship among the variables used; the normalized cointegration coefficients revealed that financial development affects economic growth negatively in the long run. However, the short run impact of financial development on economic growth is positive. This goes to show that the finance-led growth hypothesis is valid in Nigeria only in the short run. There is also evidence of stability of both long run and short run relationship between the real GDP and financial development in Nigeria and the adjustment process to restore equilibrium after disturbance is effectively slow (6.50 percent of discrepancies is corrected in each period). Also, causality runs from economic growth to financial development and there is no bi-directional causality between growth and finance which lends support to the demand-leading hypothesis. Based on these findings, the study therefore recommends among other things that: the government should device a means to energise the micro finance sector so as to make credits available and accessible to micro entrepreneurs who are often deprived of credits by the conventional credit markets. This will help boost the private sector development and investment which is the engine of growth.

Keywords: Financial Development, Economic Growth, Unit Root, Cointegration, Causality.