Effects of Financial Development on Economic Growth

Abstract

In this study, the effect of Nigeria's financial sector development on economic growth is examined. Data was mostly gathered methodologically from the CBN statistical bulletin, 2021 edition, using a quantitative design. Market capitalization-GDP ratio (SMCY), broad money stock-GDP ratio (BM2Y), credit to private sector GDP ratio (CRPSY), insurance intermediation ratio (captured by total asset of insurance company divided by nominal gross domestic product), prime interest rate (IRS) (as control variable), and dummy were used to measure the financial sector's development. Real GDP was used to measure economic growth. The data were analyzed using descriptive and inferential statistics, including cointegration and the Error Correction Model (ECM), as well as Unit Root tests (Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) statistics). To ensure the robustness of findings, confirmatory tests such as multicollinearity test (using Correlation Diagnostic Test), heteroscedasticity test, and the test of serial correlation etc., were also conducted. First, it was found out that private sector credit and broad money supply have significant effect on the gross domestic product of Nigeria both in the short and long runs. However, it was revealed that Insurance intermediation and market capitalization has positive but insignificant impact on the gross domestic product in both periods. Consequently, it was recommended that Government should continue to develop (deepened) the financial sector, through effective regulations and institutions so as to ensure its meaningful contributions to the economic growth.

Keywords: Financial Sector Development, Economic Growth, Broad Money Supply, Market Capitalization, Insurance Intermediation, Private Sector Credit

DOI: 10.7176/JESD/14-14-04

Publication date:August 31^st 2023