ABSTRACT

This study provided an empirical analysis of causality between financial development and economic growth in Nigeria. Time series data from 1981 to 2019 relevant to the study were collected from the Central Bank of Nigeria statistical bulletin, Volume 30. The ordinary least squares (OLS) method of multivariate regression was utilized in analyzing the semi-log model. The Augmented Dickey-Fuller unit root test was employed to establish the stationarity of the variables while the Autoregressive Distributed Lag (ARDL) model was used for testing for the existence of long-run and short-run equilibrium conditions while the Granger causality test was applied to ascertain the direction of influence between financial development indicators and economic growth in Nigeria. Financial development indicators used in the study were financial depth (measured by broad money supply to GDP ratio), private sector credit to GDP ratio, stock market development (measured by market capitalization to GDP ratio), banking sector development (measured by total banks assets to GDP ratio), savings rate (proxied by national savings to GDP ratio) and informal finance which was proxied by the ratio of currency outside the banks (measured by M1 to M2 ratio). On the other hand, economic growth was measured by real gross domestic product. In consonance with the demand following hypothesis, the results of the Granger causality test revealed a causal relationship from real gross domestic product to financial depth, private sector credit ratio, market capitalization ratio and banking sector ratio. The ARDL bounds test indicated that a long-run cointegrating relationship existed between financial development indicators and economic growth in Nigeria. From the ARDL estimates, it was found that financial depth had a negative and significant influence on economic growth in the short run with positive but insignificant influence in the long run. Also, the private sector credit ratio had a negative influence on economic growth in both the long-run and short-run, but it was only significant in the short-run. In the long-run and short-run, the market capitalization ratio had a positive and significant influence on economic growth. Again, savings rate and informal finance (measured by the rate of currency outside the banks) were found to exert a negative and significant influence on economic growth in both the long-run and short-run. It is therefore recommended that government carry out subsequent efforts towards developing the financial sector in conformation with global standards. As such, factors that could hinder the growth of the flow of financial resources to economically productive sectors should be mitigated and controlled.