Re-examining the Impact of Financial Deepening on Economic Growth in Nigeria: Size or Level of Activity?

Abstract

This study examines the impact of financial deepening on economic growth in Nigeria between 1970 and 2015, using Vector Error Correction Model, Impulse Response Function, and Forecast Error Variance Decomposition, with a distinction between size and activity variables of financial deepening. The results show that financial deepening and economic growth have a stable long-run relationship, and that activity variables of the financial deepening have more stimulating effect on economic growth than the size variables. Also, the results support existing literature that financial structure has positive and significant impact on economic growth, with bank base exert more influence than market base. In light of this, appropriate regulatory and macroeconomic policies like reducing the cost of financial intermediation, improving institutional and legal framework, and raising access and efficiency of credit at any level of financial development need to be pursued to ensure favourable competition of all the components of the financial sector, to deepen the financial sector and accelerate economic growth.

Keywords: Financial deepening, economic growth, financial structure, financial institution