A Re-Examination of the Nexus between Financial Sector Development and Economic Growth in Nigeria

Abstract

The study examined the impact of financial sector development on Nigeria’s economic growth using time series data for the period of thirty nine (39) years from 1981-2020. Banking sector funding, market capitalization and financial sector liquidity were used as proxies for financial sector development while real gross domestic product represents economic growth. The augmented Dickey-Fuller unit root test results indicated that the data series achieved stationarity after first differencing at the order 1(1). The relative statistics of the estimated model shows that financial sector liquidity which is the ratio of M2 to GDP and stock market capitalization to GDP positively and significantly correlates with Nigeria’s economic growth (Real GDP) while banking sector funding which is the ratio of credit to private sector to GDP had positive but insignificant relationship with real GDP. This study therefore recommends that the managers of the Nigerian economy should increase the innovation in the financial sector to achieve increased economic prosperity. Managers of the Nigerian economy should conduct regular reviews of the various segments of the sector to assess their risk profile. Managers of the Nigerian economy should monitor the funding of the economy by the banks to check funds’ diversion.