The Nexus between Financial Sector Development and Economic Growth in Nigeria: A Cointergration Approach

TLDR: In this paper, the authors examined the nexus between financial sector development and economic growth in Nigeria and found that there is a relationship between the financial sector and economic development, indicating that a growth in financial sector will cause the same in the economy.

Abstract: This research examined the nexus between financial sector development and economic growth in Nigeria. The study employed credit to private sector, total bank deposit, prime lending rate, market capitalization, money market instruments as proxy to measure financial sector development, while GDP was used to capture economic growth, using annual data from 1981 to 2016. All the variables were stationary at first difference using the Augmented Dickey Fuller (ADF) and Phillip Perron (PP) tests. The Johansen Cointegration test result showed that a long-run relationship between financial sector development and economic growth existed. The research shows that out of the five proxies for financial sector development, four exhibited significant relationship with economic growth. These findings therefore imply that a relationship exists between financial sector development and economic growth, indicating that a growth in the financial sector will cause same in the economy. Finally, the study recommends that the government formulate policies that will enhance credit to the private sector, such as not operating the Treasury Single Account (TSA) Policy in a holistic manner, so that banks will have fund to propel their credit delivery function effectively; considering the fact that the public sector drives the Nigerian economy as it stands now. However for capital market development, investors’ protection policies should be enhanced in order to strengthen and improve public confidence in the capital market, such as reducing charges for the purchase and sale of securities and reduction of listing requirements for new companies on the exchange.