Impact of Financial Sector Development on Economic Growth in Nigeria (1981 - 2021)

Abstract

This work focused on impact of financial sector development on economic growth in Nigeria (1981 - 2021). The research design for this work is the ex-post facto research design. The data used in this work are annual time series secondary data obtained from CBN Statistical Bulletin 2021 online edition for the period 1981 to 2021. The time series data include Real Gross Domestic Product (RGDP), proxy growth, ratios of broad money stock to GDP (FDBMS), private sector credit to GDP (FDPSC), market capitalization - GDP (SMC), Prime Interest Rate (PIR), Foreign Direct Investment (FDI), and Trade Openness (OPEN). Econometric methodology was employed in analyzing the data. Thus, Unit root test, co-integration test were used to carry out the diagnostic tests of the time series data. Autoregressive Distributed Lag (ARDL) technique and Granger causality approach are the models for analyzing the work. The ARDL-Bound Testing summary for long run relationship of the variables in the model revealed that there is no long run relationship between financial sector development (ratios of broad money stock to GDP, private sector credit to GDP and market capitalization to GDP) and economic growth in Nigeria for the period 1981 to 2021. This means that financial sector development and economic growth do not move together in the long run in Nigeria. The results of the Short Run ARDL Model showed that none of the financial sector development indicators: ratios of broad money stock to GDP, private sector credit to GDP, market capitalization to GDP, in the model has statistically significant impact on economic growth in Nigeria over the period studied. In other words, financial sector development has no significant impact on economic growth in Nigeria over the specified period. The study therefore concludes that financial sector development  (ratios of broad money stock to GDP, private sector credit to GDP, market capitalization to GDP) had statistically insignificant impact on economic growth in Nigeria over the period studied; hence the need for improvement and stakeholders effectiveness. The study, based on findings, recommends that, to accelerate economic growth in Nigeria, government should adopt, implement and maintain sound financial policy geared towards improving financial depth in Nigeria. In other words, the Monetary Authorities should deepen the financial system enough by way of innovations, adequate and effective regulation and supervision, efficient funds mobilization and making such funds available for productive investment, as well as improved services. Government should through policy, encourage banks to give loans to local industrial investors at low interest rate. Government at all levels should encourage savings mobilization drive to boost savings in Nigeria. Government should make policy efforts towards removing obstacles undermining the growth of credit to the private sector, and restoring investors’ confidence in the stock market operations.