The Impact of Financial Deepening on Economic Growth: Evidence from Nigeria

Abstract

This paper examined the impact of financial deepening on economic growth in Nigeria. Adopting the supply-leading hypothesis using variables such as broad money velocity, money stock diversification, economic volatility, market capitalization and market liquidity as proxies for financial deepening and gross domestic product growth rate for economic growth, we found that broad money velocity and market liquidity promote economic growth in Nigeria while money stock diversification, economic volatility and market capitalization did not within the period studied (1992-2008). Government policy should therefore be geared towards strategically increasing money supply and promoting efficient capital market that will enhance overall economic efficiency, create and expand liquidity, mobilize savings, enhance capital accumulation, transfer resources from traditional sectors to growth inducing sectors (such as manufacturing and industry, agriculture and the services sectors) and also promote competent entrepreneurial response in various sectors of the economy.

Keywords: Financial Deepening, Economic Growth, Supply-leading Hypothesis