FINANCIAL DEEPENING AND ECONOMIC GROWTH IN NIGERIA: AN EMPIRICAL ANALYSIS

Abstract

This paper examined the relationship between financial development and economic development in Nigeria using annual time series between 1981 and 2018. Financial development was captured with financial deepening indicator measured as a ratio of credit to the private sector to gross domestic product (GDP). The data were obtained from the 2018 Central Bank of Nigeria statistical bulletin. The study employed an econometric approach by incorporating Granger causality test, unit root test, Bounds test, and the error correction mechanism. Findings from the Granger causality test revealed that there exists a unidirectional causality that flows from financial development to economic development in Nigeria, implying that the supply-leading finance hypothesis was prevalent. Also, there exist both a shot-run and long-run positive and significant relationship between financial development (measured as a ratio of credit to private sector to GDP) and economic growth in Nigeria within the study period. It is in this light that the paper recommended that there is need for more financial market development that favours more credit to the private sector in order to stimulate economic growth. This can be achieved through strengthening the micro finance sector so as to make credits available and accessible to the micro entrepreneurs who are often deprived of credit by the conventional credit markets.