An Econometric Analysis of Financial Sector Development and the Nigerian Economic Growth

Adekunle Ahmed Tobi, Nageri Kamaldeen Ibraheem, Muritala Taiwo Adewale,Oyeleye Aminat

Abstract

An efficient financial system is essential for building a sustained economic growth and an open
vibrant economic system. Countries with well developed financial institutions tend to grow
faster, especially the size of the banking system and the liquidity of the stock markets tend to
have strong positive impact on economic growth. Financial sector development has been one of
the unresolved, perturbing and persistent macroeconomic problems plaguing Nigeria for the
past four decades. This study undertakes an empirical investigation into the problem using time
series data from 1985 to 2014. The aim of this study is to investigate the impact of financial
sector development on economic growth in Nigeria. In analyzing the impact of financial sector
development on economic growth in Nigeria using time series data obtained from CBN
statistical bulletin (2014) and Nigeria Stock Exchange, Ordinary Least Square (OLS), units root
test, Johansen Co-integration Test and Error Correction Model (ECM) were used to analyse the
data. The financial development was proxied by ratio of liquidity liabilities to GDP (M2GDP),
real interest rate (INTR), ratio of credit to private sector to GDP (CPGDP) while the economic
growth was measured by the real GDP (RGDP).The study finds that only the real interest rate is
negatively related. All the explanatory variables are statistically insignificant at 5%. Though the
overall statistic shows that the independent variables were able to explain 86 percent variation
in the dependent variable, but contrary to a priori expectation, it is statistically insignificant. The
link between the financial and real sector still remains weak and could not propel the needed
growth towards the vision 2020. The paper recommends transparent and fair policy to all
players in the sector; and a vigorous sustainable human centred development capable of
achieving a structural transformation of the economy should be pursued. The study therefore,
concludes that government should ensure a robust supervision and strong instittutional
development of the financial sector to enable financial institutions provide the needed funds for
the growth and development of the Nigerian Economy.