New Insights into Financial Sector Development and Economic Growth Nexus in Nigeria

Abstract

This paper examined the relationship between financial sector development and economic growth in Nigeria. The paper used the Principal Component Analysis (PCA), Autoregressive Distributed Lag Model (ARDL),Structural Break Test and the Pairwise Granger Causality Test (PGC) to examine the effect of financial development on economic growth in Nigeria and to establish which theory holds for Nigeria between the demand-following and the supply-leading theory. Annual time series data between 1981 and 2016 was used for the study. Data on real gross domestic product, broad money supply/gdp, inflation, credit to the private sector/gdp, total liquid liabilities, total stocks/shares traded and total stock market capitalization were sourced from the Central Bank of Nigeria (CBN) statistical bulletin. The structural break unit root test revealed that all the variables are stationary at their first difference except for inflation that was stationary in its level form; the bound test cointegration analysis established the existence of long run relationship among the variables. The ARDL revealed that financial development negatively and insignificantly affected economic growth in Nigeria during the period of study.