Private Sector Financing and Economic Growth in an Emerging Market Economy: Evidence from Nigeria

Abstract

This study investigated the impact of private sector financing by the banking sector on economic growth in Nigeria using the augmented growth model which was estimated via the Ordinary Least Square (OLS) techniques. The annual time series data employed in the estimations covered the period from 1980 to 2013. The study employed unit root tests, co-integration analysis and Error Correction Mechanism to ascertain the short run dynamics of the explained variable visa-avis the explanatory variables. The results revealed that there exists a positive linear relationship between private sector financing by the banking sector and economic growth in both the long run and in short run. However, only the long run relationship was significant. The results further revealed that interest rates and inflation rates in Nigeria during the study period under investigation were consistently high. The study recommends the provision of long-term investment loans through the banking sector to the productive private sector. The study further recommends financial system development to ensure it plays its intermediary role effectively. Policies that will reduce the interest rate in Nigeria should be promoted to ensure that micro, small and medium scale enterprises that constitute a greater percentage of the private sector have access to bank credit.

Keywords: Private sector financing, Banking sector, Capital Formation, Economic Growth, Emerging market economy