Modeling MSMEs Financing and Economic Growth: Evidence from Nigeria

Abstract

MSMEs constitute the driving force in the attainment of industrial growth and development. Several previous studies have examined the relationship between MSMEs financing and economic growth in Nigeria but the results of these studies are still mixed. Therefore, this paper examines the causality between MSMEs financing and economic growth in Nigeria during the periods 1992 to 2013. However, the analysis technique of this study differs from the previous studies as the approaches of the previous studies are not adequate in obtaining robust estimates and drawing meaningful inference given the potential impact of MSMEs financing on economic growth. Unlike previous studies that totally relied on traditional methods for unit root testing, co-integration analysis, and causality test, our study relies on the ultra-modern econometric methods such as; the Ng-Perron modified unit root test, Autoregressive Distributed Lag (ARDL) Bound testing approach to co-integration, parsimonious ECM version of ARDL model, and the Toda – Yamamoto causality procedure. The empirical results indicate evidence of a stable long – run relationship among the chosen variables. The Toda – Yamamoto causality test show evidence of a unidirectional causality running from MSMEs financing to MSMEs output, a bi-directional causality between MSMEs output and economic growth, as well as, a unidirectional causality running from MSMEs financing to economic growth in Nigeria during the periods covered. The study therefore recommends that the government through the monetary authority (CBN) should energize the MSMEs by instituting a programme that will adequately promote the financing of MSMEs with relatively low interest rate for sustainable economic growth.

Keywords: MSMEs financing, economic growth, Ng- Perron, ARDL, Toda– Yamamoto