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Ameerah Compl PRJ
Ameerah Compl PRJ
INTRODUCTION
The financial sector refers to the part of the entire economy which primarily comprises money
markets, banking institutions and brokers. It is a very important sector in most large and highly
developed countries, Igwebuike (2018). It is the framework within which the savings of some
members of society are made available to other members of the society for productive
investment through the process of financial intermediaries. Financial system development relates
to the number and variety of financial institutions, markets, and instruments available in the
financial system. Financial development simply means an increase in the supply of financial
assets in the economy. Therefore, the sum of all the measures of financial assets gives us the
approximate size of financial development. That means that the widest range of such assets as
broad money, liabilities of non-bank financial intermediaries, treasury bills, value of shares in the
stock market, money market funds, etc., will have to be included in the measure of financial
Similarly, Creane, Mushiq, and Randa (2004) a modern financial system promotes investment by
identifying good business opportunities, mobilize savings, and monitors the performance of
mangers enables the trading, hedging, and diversification of risk and facilitates the exchange of
financial sector through policies and reform initiatives aimed at stabilizing operations in the
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sector. The sector was highly regulated with the government as a key player and regulator. The
indigenous reforms, 1972-1976, in the Nigerian Enterprises Promotion Act, 1972 was designed
to promote active participation of Nigerians and Nigerian government ownership and control of
banks. To consolidate on the gains of the indigenization policy, the Financial System Review
Committee, 1976 known also as Okigbo Committee was mandated to examine the adequacy,
relevance of financial institutions in the country as well as the capacity of the structure of the
For Nigeria, studying the relationship between financial development and economic growth is a
vital one considering the continuing progress in its financial sector performance. According to
the central bank of Nigeria statistical bulletin (CBN, 2014), the depth of the financial sector
showed some significant improvement as broad money supply to nominal GDP ratio increased
from 19.3 per cent in 2011 to 19.9 per cent in 2014. Recent macroeconomic and financial
developments Nigeria's economy grew by 3.6% in 2021 from a 1.8% contraction in 2020, (CBN,
2022) In addition; the increased use of the various electronic money products reflected the shift
Consequently, the ratio of currency outside banks to broad money supply fell further to 7.59
percent in 2014 from 9.39 percent at the end of 2011. Despite these improvements the Nigeria’s
economic growth has been dwindling and has still remained fragile not strong enough to
significantly reduce the prevailing level of poverty even though the various indicators used in
measuring financial development has been increasing steadily over the years.
In the words of Sanusi (2011), Well functioning financial system are able to mobilize household
savings, allocate resources efficiently, diversify risk, enhance the flow of liquidity, reduce
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information asymmetry and transaction costs and provide an alternative to raising funds through
In Nigeria, financial markets have not been developed to expectations and the underdeveloped
financial markets have furthered hindered the level of economic growth in Nigeria. Although the
Nigeria financial system recorded some progress in the last few years, like the national economy,
it has been faced with many challenges. The lack of adequate coordination and harmonization of
fiscal and monetary policies have even deteriorated the performance of the Nigerian financial
sector. The high cost of assessing funds has also discouraged investors from patronizing the
banking system. The development of the financial sector in Nigeria has been hindered by poor
state of infrastructure, utilized in the financial sector. These include power supply, problem of
telecommunication, which include difficulty in internet access etc. The excessive use of cash as
not enhanced the development of the financial sector in Nigeria. In addition, the competiveness
that resulted from the entry of new banks into the financial system and the liberalization of
interest rate brought about a sharp rise in nominal deposit and lending rates. Maximum lending
rate which averaged 12 percent in 1988 rose to 26.5 percent in 2003 (Nnanna, Englama and
Odoko, 2004).
According to Osuji (2015), suggests that financial development has a positive impact on
Nigeria’s economic growth in the long run. Therefore, policy makers should focus more on long
term policies like creation of modern, efficient and strong financial institutions that can drive
Nigeria’s economic growth. Efforts should be devoted to deepening the financial sector
especially the microfinance system in Nigeria. More so, legal reforms to fast track markets and
institutions for efficient credit system and finally regulatory and supervisory bodies of financial
system should be strengthened through capacity building and investing in human resources.
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1.2 Statement of the Problem
The low capital base, dominance of a few banks, over-dependence on public sector deposits and
weak corporate governance among others have necessitated banking reforms in the last few years
in Nigeria with the major objectives of ensuring price stability and facilitate rapid economic
development. The empirical growth literature has come with numerous explanations of cross-
country differences in growth, including factor accumulation, resource endowments, the degree
effectiveness, international trade and ethnic and religious diversity. The list of possible factors
continues to expand, apparently without limit. One critical factor that has begun to receive
considerable attention more recently is the role of financial development in the growth process
especially in the wake of the recent global economic and financial meltdown. The positive link
between the financial depth and economic growth is in one sense fairly obvious. That is, more
developed countries, without exception, have more developed financial markets. Therefore, it
would seem that policies to develop the financial sector would be to raise economic growth.
Indeed, the role of financial development is considered by many to be the key to economic
Another serious problem is that the literature is less consensual on the impact of financial
development and economic growth. There are studies that establish little or no significantly
positive relationship between financial development and economic growth. Some studies found
that financial development have negative impact on economic growth especially in the long-run
and that causality run from economic growth to financial development and not in reverse
direction. Other studies have also found support for a positive link between financial
development and economic growth. These conflicting results have been traced to orthodox or
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methodological challenges associated with the estimation method such as the Engle- Granger
two step procedures; Johansen reduced rank; and the Vector Auto Regressions (VAR) model; the
use of which dominated the empirical studies in this area. However, recent econometric
techniques have shown the strong limitations to these techniques and revealed that most
economic growth and financial development data have to be subjected to more rigorous analyses
involving both the short run and long run co-movement among a number of time series data to
This study therefore, intends to bridge the existing gap in the literature by empirically
investigating the impact of the financial sector development on economic growth of Nigeria. In
doing this, the current study will employ the recent techniques of econometrics in carrying out
the analysis.
The general objective of this study is to examine the impact of financial sector development on
2 To assess the causal relationship between financial sector development and economic
growth of Nigeria.
2 What is the direction of causal relationship between financial sector and economic
growth of Nigeria?
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1.5 Significance of the Study
This study will be of significance to the following: Government, students, researchers, as well as
As the authorities are recently more concern about revamping the Nigerian economy from its
mono-cultural state, the study would give an insight to the Nigerian policy makers as regards the
role play by financial sector toward accelerating the growth of the country’s economy for them
to come up with vibrant policies that will move the sector to the next level of development,
which in turn would result to rapid changes in the economy base of the nation.
The study would add to the information already available on financial sector contribution to the
economic growth of Nigeria for Academics, scholars, and researchers, and also a point of
reference for literature, research gaps and also serve as a basis for further research.
In particular, the Central Bank of Nigeria would find this work a useful guide when formulating
policies that will improve the working standard of the commercial banks and other financial
The study would use the time frame of 42 years from 1980 to 2021 to analyze the impact of
financial system development and economic growth in Nigeria. The scope of this study will be
define from three dimensions namely, time period, geographical area coverage and data. The
geographical scope of this study is Nigeria. The period sums up to 42years starting from 1980 to
2021, the study is restricted to secondary data. The study will also fill gaps which exist in
previous studies such as (Usman & Adeyemi, 2017), concentrated on investigating financial
system development and economic growth: A causality test and suggested that Nigeria
government needed to introduce more policies that would improve efficiency of financial sector
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which in turn would accelerate economic growth of the country but he failed to put into
consideration Foreign Direct Investment (FDI) of Nigeria thereby making some of his
The research work is structured into five chapters; chapter one is the introduction which gives a
background to the study, statement of the problem, objectives of the study, research questions,
Significance of the study, Scope of the study and definition of terms; Also Chapter two reviews
relevant literature on the topic in concept of financial system and current literature of the subject
matter with special reference to Nigeria; Similarly, Chapter three deals with methodology of the
study which include introduction, research design, variable description and measurement, sample
size and technique, method of data analysis, analytical tools and estimation procedures.;
Furthermore, Chapter four is concerned with empirical analysis of the collected data; And lastly,
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CHAPTER TWO
LITERATURE REVIEW
2.0 Introduction
This chapter discusses the conceptual framework, theoretical framework as well as literature
review.
According to Odife (1985), the financial system is the framework within which capital formation
takes place. It is the framework within which the savings of some members of society are made
available to other members of the society for productive investment through the process of
financial intermediaries. Financial system development relates to the number and variety of
financial institutions, markets, and instruments available in the financial system. Financial
According to Creane, Mushiq, and Randa (2004) a modern financial system promotes investment
by identifying and good business opportunities, mobilizes savings, and monitors the performance
of mangers enables the trading, hedging, and diversification of risk and facilitates the exchange
of goods and services. Financial development thus involves the establishment and expansion of
financial institutions, instruments and markets which supports the investment and growth process
through improvements in the quantity, quality, and efficiency of financial intermediary services.
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2.1.2 Concept of financial development
Financial development is the process that marks improvement in quantity, quality and efficiency
of financial intermediary services. This process involves the interaction of many activities and
institutions and possibly associated with economic growth. In other words, it implies the level of
development and innovation of traditional and non-traditional financial services, Adams et al.,
(2018). Many other authors have also defined financial development in various ways. The World
Economic Forum (2012) defines it as the factors, policies, and institutions that lead to effective
financial intermediation and markets, as well as deep and broad access to capital and financial
services. Noureen (2013) sees it as a catalyst in economic development and is widely recognized
by both the monetary and development economists. For Garba (2014) he perceived it as the
increased provision of financial services with a wider choice of services geared towards the
development of all sectors of the economy. According to the new growth theorists, a well-
developed financial system facilitates high and sustainable economic growth Hicks, (2017).
Oloyede (2019) remarked thus, “Financial development is the outcome of accepting appropriate
real finance policy such as relating real rate of return to real stock of finance”.
Financial systems play a vital role in economic development and, to be successful in the longer
term, countries must take a holistic view by identifying and improving long-term factors that are
crucial to their development. Such a process would allow countries to encourage economic
prosperity for all participants in the global economy. This approach is supported by empirical
studies that have generally found that cross-country differences in levels of financial
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2.1.3 Concept of Economic Growth
According to Olamide (2017) economic growth is defined as long term changes in an economy’s
productive capacity. The productive capacity of the economy is the output that could be
produced if all of the economy’s resources were fully and efficiently employed. This definition
tries to link economic growth to rate of growth of labour force and productivity.
The Wikipedia Encyclopaedia (2010) defines economic growth as an increase (or decrease) in
the value of goods and services that a geographic area produces and sells compared to an earlier
time. If the value of an area’s goods and services is higher in one year before, then we say the
economy experiences positive growth, which is called “Economic Growth” while in a year where
goods and services value lower than a year before it is produced and sold, we say it experiences
Financial sector refers to a section of the economy made up of firms and institutions that provide
financial services to commercial and retail customers. Financial sector is the set of institutions,
instruments, markets, as well as the legal and regulatory framework that permit transactions to be
made by extending credit. Okon (2016). The financial sector refers to businesses, firms, banks,
and institutions providing financial services and supporting the economy. It encompasses several
industries, including banking and investment, consumer finance, mortgage, money markets, real
Refers to an increase in the production of economic goods and services, compared from one
period of time to another. Also, it means an increase in the total amount of goods and services
produced per head of the population of a specific country over a year, it can be measured in
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terms of Gross Domestic Product (GDP). (Economic dictionary) Economic growth is an increase
in the capacity of an economy to produce goods and services, compared from one period of time
to another. It can be measured in nominal or real terms, the latter of which is adjusted for
product (GNP) or gross domestic product (GDP), although alternative metrics are sometimes
The literature on financial development provides some theoretical explanation on the relationship
between financial development and economic growth. The general view is that financial
development can improve long run growth. This section discusses selected theories that link
2.2.1 Supply -Leading Hypothesis: The supply-leading hypothesis suggests that financial
deepening spurs growth. The existence and development of the financial markets brings about a
higher level of saving and investment and enhance the efficiency of capital accumulation. This
hypothesis contends that well functioning financial institutions can promote overall economic
efficiency, create and expand liquidity, mobilize savings, enhance capital accumulation, transfer
resources from traditional (non-growth) sectors to the more modem growth inducing sectors, and
also promote a competent entrepreneur response in these modern sectors of the economy. The
recent work of Dernirguc-Kunt and Levine (1996) in a theoretical review of the various
analytical methods used in finance literature, found strong evidence that financial development is
important for growth. To them, it is crucial to motivate policymakers to prioritize financial sector
policies and devote attention to policy determinants of financial development as a mechanism for
promoting growth.
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2.2.2 Demand -Following Hypothesis: The demand-following view of the development of the
financial markets is merely a lagged response to economic growth (growth generates demand for
financial products). This implies that any early efforts to develop financial markets might lead to
a waste of resources which could be allocated to more useful purposes in the early stages of
growth. As the economy advances, this triggers an increased demand for more financial services
Some research work postulate that economic growth is a causal factor for financial development.
According to them, as the real sector grows, the increasing demand for financial services
stimulates the financial sector. It is argued that financial deepening is merely a by-product or an
outcome of growth in the real side of the economy, a contention recently revived by Ireland
(1994) and Demetriades and Hussein (1996). According to this alternative view, any evolution in
2.2.3 Stage of Development Theory: The theoretical basis of this study is anchored on stage of
development hypothesis of financial development by Hugh Patrick (1966) which states that the
direction of causality between financial development and economic growth changes over the
course of development. That is, at the early stage of development, the supply- leading impetus is
evident but as real growth occurs in the economy, it will spark demand for financial services.
This theory suggests a demand – following relationship between financial and economic
developments. High economic growth creates the demand for modern financial institutions; their
services, their assets and liabilities and arrangements, by investors and savers in the real
economy. The financial market in turn responds to such demands. In this case, the evolutionary
process of economic development. The level of demand for financial services depends upon
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growth of real output, and commercialization and monetization of agriculture and other
2.2.4 Financial Liberalization Theory: This hypothesis as postulated by Mckinnon and Shaw
(1973) sees the role government intervention in the financial markets as a major constraint to
savings mobilization, investment, and growth. The main critique of the financial liberalization
theory emanates from the imperfect information paradigm. This school of thought disagrees with
the proposition of these scholars and examines the problem of financial development in the
context of information asymmetry and costly that results in credit rationing. As observed by
Stiglitz and Weiss (1981), asymmetric information leads to two serious problems, first, adverse
selection and second, moral hazard. The implication is that the information asymmetries of
higher interest rates which actually follow financial reforms and financial liberalization policies
in particular exacerbates risk taking throughout the economy and hence threatens the stability of
the financial system, which can easily lead to financial crises while the feedback theory suggests
2.2.5 Financial Repression Theory: This hypothesis refers to the notion that a set of
government regulations, laws and other non-market restrictions prevent the financial
intermediaries of an economy from functioning at their full capacity. The policies that cause
financial repression include interest rate ceilings, liquidity ratio requirements, high bank reserve
requirements, capital controls, and restrictions on market entry into the financial sector, credit
domination of banks. Economists have commonly argued that financial repression prevents the
efficient allocation of capital and thereby impairs economic growth (Okpara, 2010; Darrat and
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2.2.6 Finance-Growth Hypothesis: Major theoretical hypothesis on financial development and
economic growth process postulate four distinguishable, but not mutually exclusive, effects of
financial activity and development on overall economic performance. The first is the provision of
an inexpensive and reliable means of payment. The second is the volume and allocation effect, in
which financial activity increases resources that could be channeled into investment while
improving the allocation of resources. The third is a risk management effect by which the
financial system helps to diversify liquidity risks, thereby enabling the financing of riskier but
more productive investments and innovations (Greenwood and Jovaovic, 1990; Bencivenga and
Smith, 1991). The fourth is an informational effect; according to which an ex antes information
about possible investment and capital is made available, ameliorating although not necessarily
The Cob-Douglas production function is a Neo-classical growth theory which accounts for
growth in output as a function of growth inputs, particularly capital and labor. The cob-Douglas
form was developed and tested against statistical evidence of Charles Cobb and Paul Douglas
during 1927-1947. The production function provides a quantitative technology link between
inputs and outputs. As a simplification, it is assumed that labor (N) and capital (K) are the only
important inputs. In its most standard forms of production of a single good with two factors, the
function is
Y = ALα Kβ
Where β α are the output elasticities of capital (K) and (L), respectively. These values are
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a + β = 1, the production function has constant returns to scale, meaning that doubling the usage
of capital K and labor L will also double output Y. If a + β < 1 returns to scale are decreasing,
and if a + β > 1, returns to scale are increasing. Assuming perfect competition and a + b = 1, and
More input means more output. In other words, the marginal product of labor, or MPL (the
increase in output generated by increased capital), and the marginal product of capital, or MPK
(the increase in output generated by increased capital), are both positive. Labor and capital each
contribute an amount equal to their individual growth rates multiplied by the share of that input
in income. The rate of improvement of technology, called technical progress, or growth of total
The growth of rate of total factor productivity is the amount by which output would increase as a
result of improvements in methods of production, with all inputs unchanged. In other words,
there is growth in total factor productivity when we get more output from the same factors of
production. Cobb and Douglas were influenced by statistical evidence that appeared to show that
labor and capital shares of total output were constant over time in developed countries.
But for the sake of this research, the cob-Douglas production function model because it has all
the qualities that would be used for this research and it also try to explain financial system
mathematically. It is very significant also in the sense that it deals with financial development
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2.3 Empirical Review
Osuigwe and Oluchukwu (2022) examined the effect of financial innovation on economic
growth in Nigeria from 1980 to 2019. The authors employed Ordinary Least Square, Co-
integration and Philips-perrons test. The variables used were mobile banking, point of sale,
internet banking and automated teller machine. The findings showed that there is a positive
effect on financial innovation and economic growth. The authors recommend public education
and awareness on the benefits of Automated teller machine to enhance the benefit of financial
innovation in Nigeria.
Olajumoke, et al. (2022) investigated the nexus between financial development, trade
government expenditure, inflation rate and trade openness were used as dimensions of
independent variables while real gross domestic product was used as the dependent variables.
The authors employed Autoregressive distributed lag. The findings revealed that financial
development, government expenditure, trade openness, and real gross domestic product are all
stationary at first difference while inflation rate was stationary at level. It also showed that there
is a positive relationship between economic growth and financial development. The authors
diversification so as to reduce much emphasis on oil export and availability of funds from private
sector at competitive interest rate in order to produce internationally competitive products should
be encouraged.
Similarly, Oji-Okoro and Itodo (2019) examined the impact of the financial sector development
on economic growth in Nigeria from 2000Q1 – 2019Q4. The findings showed that while
financial deepening, banking system liquidity and all share indexes had positive and significant
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impact on the growth of real output in the long run. The authors recommend that the growth of
the money and capital markets should be prioritized by macroeconomic managers in Nigeria to
Iheanacho (2016) investigated the impact of financial intermediary development and economic
growth in Nigeria over the period 1981- 2011 using auto-regressive distributed lag. The findings
showed that there is a negative insignificant relationship between financial development and
economic growth in Nigeria both in the long run and short run.
Also, Usman and Adeyemi (2017) examined the relationship and direction of causality between
financial system development and economic growth in Nigeria from 1970 to 2013. The authors
used Augmented Dickey Fuller test, Philips- perrons test, Johansen Co-integration test and
granger causality test. The variables were Gross Domestic Product, bank deposit to GDP, broad
Money to GDP, Ratio of Bank deposit to GDP, and ratio to domestic credit to private sector to
GDP. The findings revealed that all variables were stationary at first difference and also showed
that there is a long run relationship between financial development variables and economic
growth. The rate of Broad money to GDP Granger caused GDP growth rate and also significant
at 5 percent, ratio of Bank deposit to GDP also granger caused GDP at 1percent. The authors
recommend that Nigeria government need to seek to introduce more regulatory policies that will
improve efficiency of financial sector which will in turn accelerate economic growth in the
country.
Obinna (2015) conducted a study on the relationship between financial development and
economic growth in Nigeria for the period 1960 to 2014. The variables used were output share of
investment, interest rate, GDP, Broad Money Stock, Ratio of total bank liability. The author
employed granger causality test, vector error Correctional Model/ The findings showed that there
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is a stable positive long run relationship between financial development and economic growth.
The author recommends the need to address the decay in the critical infrastructures which are
power; transport, security etc, as well as this will reduce the cost of funds for banks and also
Chude and Chude (2016) investigated the impact of financial development on economic growth
in Nigeria from 1980 to 2013. The authors used Vector Error Correction Model. They findings of
the study revealed that there exist a long run equilibrium relationship between financial
development and economic growth in Nigeria, it also showed that the ratio of broad money
supply to GDP have no significant impact on economic growth in Nigeria and lastly that the ratio
of domestic credit to private sector to GDP have no significant impact on economic growth in
Nigeria.
Olanrewaju, et al. (2015) studied the casual linkage between banking sector reforms and output
development and manufacturing output in Nigeria with annual data between 197 and 2008 were
used and co-integration and Granger causality techniques were also applied to ascertain
evidence. The findings showed that the manufacturing GDP and banking sector reforms
indicators move differently with one not preceding the other within the study period. It further
showed that the bank assets, lending interest rate with co-efficient, exchange rate and real rate
spread negatively and significantly impacted the manufacturing GDP in Nigeria. The authors
recommend that with proper banking policy formulation and guidance in the financial sector, the
Victor and Samuel (2014) conducted a study on the empirical assessment of financial sector
development and economic growth in Nigeria from 1990 to 2011. The authors used co-
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integration technique, augmented dickey fuller test, Vector Error Correction and Error
Correction Mechanism. The authors used variables like Real Gross Domestic Product, Interest
rate, liquidity ratio and credit the private sector. The findings showed that all the variables except
financial deepening were non stationary, but became stationary after the first difference was
taken. It also revealed that there exit a long run relationship among financial deepening, credit to
the private sector, liquidity ratio, minimum capital base, interest rate and the level of economic
growth. The authors recommend that further development of the financial sector should be
Alex (2012) determine the effect of financial sector reforms on the Nigerian Economy from 1980
to 2008 using variables like investment rate, lending rate, commercial bank loan and advances,
credit allocation to private sector. The author employed Ordinary Least Square. The finding
showed that the financial sector reform is significant to economic development and therefore
there is a positive relationship between banking reforms, and real sector financing measured by
loans and advances. The author recommends there should be appropriate planning before the
developments are carried out and there should be a body that supervises the reforms and ensure a
Hassan et al. (2016) empirically examined the impact of financial market development on
economic growth in Nigeria using annual time series data covering the period of 1981-2014.
The study employed a Vector Error Correction Model (VECM) as the econometric methodology.
The empirical results of the study shows that overall there is a positive effect of financial market
development on economic growth in Nigeria. Almost, all the financial markets, namely, stock,
capital and money market have been found to have a significant positive impact with the
exception of only foreign exchange market having a negative impact on economic growth.
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Ewetan and Okodua (2013) identified the long run and causal relationship between financial
sector development and economic growth in Nigeria for the period 1981 and 2011 using time
series data. A multivariate VAR and vector error correction model was employed to analyze the
data and the result support evidence of long run relationship between financial sector
development and economic growth in Nigeria. Granger causality test results also confirm the co
integration results indicating there exist causality between financial sector development and
economic growth in Nigeria. However, the nature of the causality depends on the variable used
to measure financial development, as this study employed real GDP, real interest rate and real
In another study, Agbo and Nwanko (2018) investigated the effect of financial sector
development on the economic growth of Nigeria with secondary data covering the period from
1981 to 2013.The study employed Dickey Fuller unit root test to confirm the stationarity of the
variables involved in the study which are Economic Growth, Banking Sector Credit, money
supply, Marginal Rediscount Rate, Market Capitalization, Exchange Rate, and Foreign Direct
Investment. Ordinary least squares technique was also employed to determine the extent to
which the variables impact on economic growth. The findings of the study showed that money
supply, minimum rediscount rate and exchange rate have positive and insignificant effect on
economic growth. On the other hand, banking sector credit, credit to the private sector, market
capitalization and foreign direct investment discovered to be having negative and insignificant
Okpara et al. (2018) researched on the extent to which financial development engenders
economic growth in Nigeria using a time series data from 1981 to 2014.The study employed a
vector error correction model to finding the long run impact of financial development variables
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on the growth of the economy. The results of the analyses show that there is a long run
relationship between financial development and economic growth in Nigeria and that besides the
metric for banking system financing of the economy variable which is significantly inadequate,
Imoagwu et al. (2019) investigated the relationship between financial development and economic
growth in Nigeria during the period of 1986 – 2017. Specifically, the study examined the effect
of financial deepening measured as the ratio of broad money supply to GDP, interest rate, stock
market recapitalization and credit to private sector to GDP on economic growth in Nigeria. The
study adopted recent econometric techniques such as Augmented Dickey-Fuller (ADF) and the
Phillip-Perron (PP), Unit Root Tests, co integration test as well as the Toda-Yamamoto causality
test was used to accomplish its objectives. The results revealed that financial development has
significant positive relationship on economic growth in Nigeria only in the short-run while
negative impact in the long-run and that causality runs from financial development to economic
growth. Furthermore, the study revealed that the stock market capitalization have significant
positive impact on economic growth in Nigeria in the short run while negative significant in long
run. The interest rate has positive insignificant effect on economic growth in Nigeria only in the
short run while negative significant effect in the long run. The ratio of domestic credit to private
sector to GDP have positive significant impact on economic growth in Nigeria only in the long
run while positive insignificant in the short run. Causality also runs from stock market
development in Nigeria.
Judith and Chijindu (2016) evaluated the relation between financial development and economic
growth in Nigeria, taking exception from existing literatures by integrating broad distinctive
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indicators of financial development into the model and using different econometric techniques to
assess the financial development - growth link between 1987 and 2014. The findings based on
the analysis indicate that financial development and economic growth move along together in the
long run. It was revealed that credit to the private sector, stock market capitalization and inflation
have negative and impact on the economy, while broad money supply, trade openness and
foreign direct investment exert positive influence on the economy. The error correction term in
the model availed us the correctional influence in the speed of adjustment which indicated that
errors of divergence from equilibrium was corrected at the speed of 86% each year.
Omoruyi and Ahmed (2014) examined empirically the short-run and long run relationships
between financial system development and economic growth in Nigeria. The study adopted a
multivariate OLS analysis for the estimation process, co integration analysis for long-run
equilibrium relationship and the associated error correction model to determine the short-run
impact of the variables. The Granger causality test was used to determine the direction of
causality among the variables. The findings of the study were that financial development
(measured by banking system and stock market development) positively influenced economic
growth in Nigeria; that causality runs from finance to growth in the finance-growth nexus.
Nwani and Orie (2016) empirically examined the independent effects of stock market and
banking sector development on economic growth in Nigeria over the period 1981–2014 using the
autoregressive distributed lag (ARDL) approach to co integration analysis. Controlling for the
possible effects of crude oil price and trade openness on economic activities in Nigeria, the study
found both stock market and banking sector development insignificant in influencing economic
growth in Nigeria. In general, the findings of the study highlight the weakness of the Nigerian
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financial sector in stimulating economic growth through resource mobilization and allocation
and the dominant role of the oil sector in economic activities in Nigeria.
Ogwumike and Salisu (2017) examined the short run, long run and the causal relationship
between financial development and economic growth in Nigeria from 1975 to 2008. Using the
Bound test approach, this study finds a positive long run relationship between financial
development and economic growth in Nigeria. Financial intermediation- credit to private sector,
stock market and financial reforms exert significant positive impact on economic growth in the
country.
Aneto (2019) examined the relationship between remittances, financial sector development, and
economic growth in Nigeria over the period 1981 to 2017. The study used the autoregressive
distributed lag (ARDL) model to analyze the long run and short-run relationships between the
variables. The results of the study showed that remittances have a negative and significant effect
on economic growth both in the long-run and short-run, also financial sector development has a
negative and significant impact on economic growth both in the long-run and short-run. Further,
the study confirmed the existence of complementarity between remittances and financial sector
development in influencing economic growth, inflation has a negative and significant effect on
economic growth both in the long-run and short run. However, the findings of the study showed
that trade openness, government expenditure, and population growth have no significant impact
Furthermore, Elijah and Hamza (2019) investigated the relationships between the financial sector
development and economic growth in Nigeria, using annual time series data for the period
between a time periods of 1981 to 2015. The research finds out that, there exist co integration
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among the financial development, trade openness and economic growth with structural break
date in 2010 and the results from the vector error correction model finds there is significant and
negative relationship between financial development and the economic growth in Nigeria in the
study period.
Thaddeus and Chigozie (2015) analyzed nature of relationship between financial system
development and economic growth in Nigeria using vector autoregressive model. The findings of
the study revealed among others that long run causality does not run from financial system
development indicators and economic growth, implying that financial system development seem
not to significantly catalyze economic growth trends in Nigeria. However, in specific terms, the
effect of financial system development on economic growth in Nigeria has been positively
Ojofedo and Edez (2014) examined financial sector development and economic growth in
Nigeria For the period 1990 to 2010. The study relied on historical time series for its secondary
data obtained from Central bank of Nigeria statistical bulletin for the period. The study employed
Vector Error Correction (VEC) model to ascertain the direction of causality between financial
sector development and economic growth in Nigeria between1990 to 2010. The findings of the
study showed a strong positive relationship between financial sector and economic growth and
causality runs from market capitalization, banking sector credits and foreign direct investment to
the real gross domestic product which supports the supply leading hypothesis. Therefore, it was
conclude based on the findings that market capitalization, banking credits and foreign direct
24
Olusegun et al. (2013) examines the impact of financial sector development and economic
growth in Nigeria. The OLS method of the regression analysis was employed for the analysis
where financial development was proxied by ratio of liquidity liabilities to GDP, real interest
rate, ratio of credit to private sector to GDP, while the economic growth was measured by the
real GDP. The findings of the study reveals that he link between the financial and real sector still
remains weak and could not propel the needed growth towards the vision 202020. There is
therefore the need for consistent, transparent, fair policy, and also a resilient& strong institutional
1 The Informal Sector: This sector comprises of the local money lenders, the thrifts and
savings associations etc. it is poorly developed, limited in reach, and not integrated into the
formal financial system, but plays a major role in the Nigeria financial system. The informal
sector in Nigeria refers to economic activities in all sectors of the economy that are operated
outside the purview of government regulation. This sector may be invisible, irregular, parallel,
activities. Such financial and economic endeavours of subsistence nature include retail trading,
local transport, restaurant management, repair services, financial intermediation and household
or other personal services. The informal sector covers a wide range of market activities. First, the
informal sector is formed by the coping behavior of individuals and families in an environment
in which earning opportunities are limited. Second, the informal sector is a product of rational
behavior of entrepreneurs that desire to avoid state regulations, which simply means they operate
25
outside the regulatory purview of the government. The informal sector engages in activities
which are not easily measured and it cuts across a wide range of areas of informality —
environmental, spatial, economic, and social, covering business activities, employment, markets,
settlements, and neighborhoods. These activities include casual jobs, subsistence agriculture and
unpaid jobs. Each of these areas have implications for public policy formulation and
implementation.
2 The Formal Financial System: - This system comprises of the capital and money
market institutions and these comprises of the banks and non-banks financial institutions. Formal
financial institutions is an institution which has a legal basis and subject to regulation by the
government. The formal financial sector such as banking institutions and cooperatives are
institutions that are subject to government regulation, while the informal financial institutions
have the characteristics of high flexibility and is not regulated by government regulation.
Some of the factors that affect economic growth in Nigeria are being discussed below:
1. Natural Resources: The discovery of more natural resources like oil, boost economic growth as
this increases the country’s Production Possibility Curve. But realistically, it is difficult to
increase the number of natural resources in a country. Country must take care to balance the
supply and demand for scarce natural resources to avoid depleting them.
2. Physical Capital: Increase investment in physical capital such as factories, machinery, and roads
will lower the cost of economic activity. Better factories and machinery are more productive
26
3. Population: A growing population means there is an increase in the availability of workers or
employees, which means a higher workforce. One downside of having a large population is that
4. Human Capital: An increase in investment in human capital can improve the quality of labor
force. This increase in quality would result in an improvement of skills, abilities and training.
5. Technology: Another influential factor is the improvement in technology. The technology could
increase productivity with the same level of labor, thus the accelerating growth and
development. This increment means factories can be more productive at lower rates.
6. Law: An institutional framework which regulates economic rules and laws. There isn’t any
specific institution that promotes growth especially in developing countries like Nigeria.
7. Capital Formation: Involves land, building, machinery, power, transportation, and medium of
communication. Producing and acquiring all these manmade products is termed as capital
formation. Capital formation increases the availability of capital per worker, which further
increases capital/labor ratio. Consequently, the productivity of labor increases, which ultimately
8. Social and Political Factors: Play a crucial role in economic growth of a country. Social factors
involve customs, traditions, values and beliefs, which contribute to the growth of an economy to
a considerable extent. For example, a society with conventional beliefs and superstitions resists
the adoption of modern ways of living. In such a case, achieving becomes difficult. Apart from
27
9. Education: It is widely acknowledged that education is the primary means of growth. Greater
progress has been made in countries with widespread education. Education is critical for human
resource development because it increases labor efficiency and reduces mental barriers to new
10. Desire for Material Advancement: Desire for material advancement is a necessary but not
sufficient prerequisite for economic development. Societies that place a premium on self-
satisfaction, self-denial, and confidence in fate, for example, restrict risk and enterprise, so
In Order to measure the economic growth of any country, we use gross domestic product. Gross
domestic Product is the total market value of goods and services produced within a country’s
borders in a specific time period. Gross domestic Product can be measured using three
approaches and should yield same figures. These three approaches are expenditure, output and
Expenditure Approach
The expenditure approach is also known as spending approach. It calculates the spending by
different groups that participate in economy. This approach can be calculated using the following
formulae;
GDP = C + I + G + NX
28
Output Approach
The output approach is also known as production approach and is the reverse of expenditure
approach. Instead of measuring input costs that feed economic activity, the output approach
estimates the total value of economic output and deducts cost of intermediate goods that are
consumed in the process, like those of materials and services. The output looks backward from
consumption at factor – depreciation + net factor income from abroad – net indirect taxes.
Income Approach
The income approach equates the total output of a nation to the total factor income received by
citizens of the nation. The main types of factor income are employee compensation, interest
received, rental income and royalties paid for the use of intellectual property and extractable
GDP = compensation of employee + net interest + rental and royalty income + business
cash flow.
The Nigerian financial system includes financial markets (money and capital markets), financial
institutions including the regulatory and supervisory authorities, development finance institutions
(Urban Development Bank, Nigerian Agricultural and Rural Cooperatives bank) and other
finance institutions (insurance companies, pension funds, finance companies, Bureau de change,
and Primary Mortgage Institutions), among others. It also offers financial instruments (e.g.
treasury bills, treasury certificates, central bank certificates), The structure of the Nigerian
Financial System has been through remarkable changes, ranging from their ownership structure,
29
the length and breadth of financial instruments used to the number of institutions established,
within which they operate. The Nigerian Financial System also consists of interrelationships
among the persons and the bodies that make up the economy. Commercial banks are the most
relevant financial institutions in Nigeria to encourage and mobilize savings and also channel
Finance and banking operations are governed by rules and regulations which are reviewed
regularly to reflect the changing economic environment. Over the years some rules and statutes
which govern the operation of the banks were enacted which includes; the Central Bank of
Nigeria Decree No. 24 of 1999 as amended; Bank and other Financial Institutions (BOFI) Decree
No. 25 of 1991 as amended; the Dishonoured Cheque (Offenses) Decree of 1977; the Failed
Bank (Recovery of Debt) Decree No. 18 of 1994 as amended; and the Money Laundering Decree
No. 3 of 1995. The National Insurance Commission Decree No. 1 of 1997 and the Insurance
Decree No. 2 of 1977 provide the regulatory framework for the operation of the insurance
industry. The major regulatory/ supervisory authorities are the Federal Ministry of Finance
(FMF), Central Bank of Nigeria (CBN), Securities and Exchange Commission (SEC), National
Insurance Commission (NAICOM), Federal Mortgage Bank of Nigeria (FMBN), and the
National Board for Community Banks (NACB). The CBN is at the apex of all banking
institutions operating in the money market and has responsibility for controlling and supervising
all commercial, merchant and community banks, the microfinance banks, finance companies,
discount houses, primary mortgage institutions, bureaux de change, and all development banks.
30
2.9 Types of financial assets
• Tangible assets: These are the physical form of an asset. It includes both fixed and current
assets. The fixed assets are land, buildings, machinery whereas an example of current asset is
inventory. These assets are the spine of firms and enable them to carry on with production but
are not accessible to clients. Fixed assets can also be described as assets that have material form
such as cash, equipment, plant, property that could exist in physical form for a long period of
time. Its purchase is for the operation of the business and not essentially for sale to customers.
• Intangible assets: These are those assets that do not take physical form, like goodwill,
copyrights, trademarks, patents as well as brand recognition. They are long-term resources, but,
they cannot be touched or felt as they have no physical existence. Normally, these assets are
categorized into two broad groups namely: a. Definite or Limited-life intangible assets, such as
goodwill, copyrights and patents and b. Indefinite or Unlimited-life intangible assets, like
trademarks. In addition, intangible assets exist on the contrary to tangible assets like land,
vehicles, equipment, inventory, stocks, bonds and cash. An example of a firm's indefinite asset is
its brand name because it stays with it all through its period of operation.
31
CHAPTER THREE
METHODOLOGY
3.0 Introduction
This chapter presents the methodology adopted in conducting this study. The rest of this chapter
is constructed into research design, sources and method of data collection, sample size and
technique, variables description and measurement, model specification, method of data analysis
Secondary source was used for this study. Precisely, the aggregate annual time series data at
current prices for gross domestic product, and total net inflows for financial system covering the
period of 31 years from 1990 – 2021. The unit of measurement for both variables is the naira.
Aggregate annual time series were used because of its stationary characteristics. In addition
aggregate annual time series is normally useful in establishing long term econometric
relationship between variables. This research also employed multiple regression model in order
to examine the degree at which the impact of financial system development affect Economic
growth. The data were extracted from the Central Bank of Nigeria (CBN 2022), National Bureau
of Statistics (NBS 2022), seminar papers, Journals, Internet, Federal Ministry of Finance,
Securities and Exchange Commission (SEC). The reason why these sources are adopted is to
ensure a comprehensive and adequate research and to provide a basis for purposeful research
work.
32
3.2 Model Specification
This study is largely quantitative and build on existing research studies and methodologies. This
study adopted Ordinary Least Square (Gujaratti and Porter 2009) to estimate a system of six
endogenous equation and has been preferred choice in empirical studies with numerous system
of equation (Ghatak and Halicioglu, 2006). In this study ordinary least square (OLS) method was
adopted to test the hypothesis on the various relationships between financial system development
and economic growth also to avoid number of challenges and issues that crop up when
quantitative method are used in econometric studies. These include the issue of subjective and
bias responses and the inability to incorporate such biases in econometric model. In respect to
this study, the model specification used Gross Domestic Product (GDP) as the dependent
variable while Foreign Direct Investment (FDI), Market Capitalization (MCAP), Trade Openness
(TOP), Interest Rate (INT) and External Debt (EXB) as the independent variables. The modified
33
X5 = EDB = External Debt
This study consists of both dependent variable Gross Domestic Product (GDP) and independent
variables such as Foreign Direct Investment, Market capitalization, Trade Openness, Interest rate
Gross Domestic Product: This is a monetary measure of the market value of all final goods and
the sum of the gross value added to all resident and institutional units engaged in production and
services. Real GDP will be used to measure gross domestic product. It will also be measured
Foreign Direct Investment refers to the flow of capital and personnel from abroad for investment
based in another country. A foreign direct investment stock is used in the measurement of FDI at
any point in time, usually at the end of the year. It will also be measured using natural logarithm
which is IN_FDI.
Market Capitalization refers to the equal to the market price per common share multiplied by the
number of common shares outstanding. It is the total value of a publicly traded company’s
outstanding shares owned by shareholders. It will be measured using natural logarithm which is
IN_MCAP.
34
Interest Rate: this refers to the amount of interest due per period as a proportion of the amount
lent, deposited, or borrowed. It will be measured using natural logarithm which is IN_INT.
Openness to Trade: This refers to the outward and inward orientation of a given country
economy. Outward orientation refers to economies that take significant advantages of the
opportunities to trade with other countries. While inward orientation refers to countries or
economies that are independent by developing countries. The openness index is used to measure
trade openness and is calculated as the ratio of a country’s total trade merchandise trade (import
+ export) to GDP as a proxy for index of trade openness, using natural logarithm to measure the
variable in IN_TOP.
External debt refers to the portion of a country debt that is borrowed from foreign lenders,
including interest, must usually be paid in the currency in which the loan was made to earn the
needed currency, the borrowing country may sell and export goods to the lender country. It will
The study adopted the regression and correlation analysis. In this study emphasis were made on
ordinary least square regression analysis in order to ascertain whether or not there is relationship
between independent variable (FDI, MCAP, INT, TOP,EDB) and the dependent variable (GDP)
and the correlation analysis throw more light on the degree of the relationship existing between
econometric variables. The data used for the study will be processed using the E –views 10.0
econometric software.
35
3.5 Estimation Technique
The ordinary least square method (OLS) of classical linear regression model will be used to
carry out this study; this is because the equation is specified in a linear form. The OLS was
3. Finally, the Parameters estimation the OLS methods have some desirable optical
The Granger test is applied to know the direction of causality of variables included in the model.
Generally, causality between two variables has been tested using Granger and Sims causality test
(Granger 1969). A variable X is then said to cause a variable Y. if at time t the variable help to
predict the variable YT-1. While predictability in its self is merely a statement about stochastic
dependence, it is precisely the axiomatic imposition of a temporal ordering that allow one to
36
CHAPTER FOUR
4.0 Introduction
This chapter presents analysis and interpretation of the empirical results of the study. This
comprises of different preliminary test conducted which includes unit root test, Ordinary Least
The summary of the statistics used in the empirical study is presented in Table 4.1.1, as observed
from the Table, FDI has the lowest mean value of 0.085872 and RGDP has the highest mean
value of 29.40258 whereas the mean value of MCAP, TOP INT and EXB are 25.68941,
3.453738, 2.803119 and 3.087027 respectively. The result also shows the maximum and
minimum of RGDP as 32.80193 and 24.64067. It also indicates the maximum and minimum of
FDI as 1.756279 and -1.69379. Furthermore, it reveals the maximums and minimums of MCAP,
TOP and INT as 30.66259 and 21.48524, 4.19565 and 2.804218, and 3.454738 and 2.131994
respectively. The result of EXB maximum and minimum is 4.794429 and 1.599552 from the
descriptive statistics.
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4.2 Ordinary Least Square
Regression analysis was employed in the analysis of data to assess the impact of financial system
development and economic growth in Nigeria. The estimation of the parameter in the formulated
model as obtained after running multiple regression analysis with the use of ordinary least square
Table 4.2.1 shows the ordinary least square estimation of the equation as:
38
-0.05544EXB
(-1.32636)
R2 = 0.996231
Adj. R2 = 0.995566
F-stat = 1497.739
DW = 1.367355
From the above regression line, it can be deducted that the Gross Domestic Product (GDP) is
1.40536 holding all repressors to be zero. A unit increase in Foreign Direct Investment (FDI) on
average will lead to a decrease in GDP by coefficient of -0.00581. Similarly, a unit increase in
0.01306. However, a unit increase in Trade Openness (TOP) on average will lead to an increase
in GDP by coefficient of 0.072211. In addition, a unit increase in interest rate (INT) will lead to
an increase in GDP by the coefficient of 0.165347. Furthermore, a unit increase in External Debt
39
From statistical point of view, the result from the estimated regression shows the slopes of the
coefficients are found to be significant at 5% and all the independent variable are in line with a
prior expectation.
However, the above table 2 indicates that all variables were found to be jointly significant base
on the value of F-statistics which stood at1497.739. Nevertheless, the value of R-squared and
respectively. This implies that 99 percent of variation in Gross Domestic Product (GDP) is
explained by the variation in all independent variables, while the remaining 1 percent is
accounted for by the error term (e t). The high value of R-squared shows that the model is a good
fit. This implies that the dependent variable considered in the model does account to a large
The hypothesis for this study are stated in chapter one, but the need for it arises to test the
statistical significance of the Ordinary Least Square (OLS) estimate, standard error test is
employed.
HO1 Financial Sector Development has no impact on the economic growth of Nigeria
Ho2 Financial Sector Development has impact on the economic growth of Nigeria
V1 = k-1
V2 = N-k
Where
40
N= Number of observation
K= Number of variables
Hence,
V1 = (5-1) = 4
V2 = (42-5) = 37
Standard Error test enable us to determine the degree of confidence. However, in order to
achieve this significantly, it begins by stating the null hypothesis against the alternative
hypothesis.
H0: Ais= 0
H1: Ais≠ 0
Decision Rule
In order to accept or reject the null hypothesis or alternative hypothesis, the following conditions
must be made;
i. If S.E (A1) < A1/2 reject the Null hypothesis thereby accepting the alternative hypothesis
ii. On the contrary, if S.E A1 >A1/2 accept the null hypothesis and therefore accepting that
the population parameter is equal to zero (i.e A 1 = 0). Hence, we conclude that the estimate is not
significantly significant. Therefore the test A1, A2 and A3 can be expressed below:
41
For S.E (A1) = 0.047983 while A1/2 = (-0.00581/2) = -0.002905, since S.E (A1) is greater than
A1/2, hence, accept the null hypothesis (H0) therefore we conclude that (A1) is not statistically
For S.E (A2) = 0.011551 while A2/2 = (-0.01306/2) = -0.00653, since A2 is greater than A2/2, we
accept the null hypothesis (H0) therefore we conclude that A2 is not statistically significant by
For S.E (A3) = 0.1173 while A3/2 = (0.072211/2) = 0.0361055, since A3 is greater than A3/2, we
accept the null hypothesis (H0) therefore we conclude that A 3 is statistically not significant at 5%
For S.E (A4) = 0.171567 while A4/2 = (0.165347/2) = 0.0826735, this shows that A4 is greater
than A4/2, hence, we accept the null hypothesis (H 0). Therefore we that A4 is not statistically
For S.E (A5) = 0.041796 while A5/2 = (-0.05544/2) = -0.02772, since A5 is greater than A5/2, we
accept the null hypothesis (H0) therefore we conclude that A5 is not statistically not significant at
a) If F calculated (F*) is less than the F- tabulated, we accept null hypothesis and conclude
b) If F calculated (F*) is greater than F-tabulated, we reject null hypothesis and conclude the
42
Given our empirical F-calculated (F*) as obtained in the result of estimated regression is
1497.739, while that of F-tabulated at 5% level of significance V 1 = (k-1 = 5-1 = 4) and V 2 (N-k
= 42-5 = 37), is found to be (2.61) which is less than 1497.739 for F*. Therefore, since F-
calculated (F*) > F-tabulated (i.e 1497.739 > 2.61) alternative hypothesis (H1) is accepted and
It should be noted that the application of F-statistics is to determine the general statistical
significance and reliability of the regression model used for this study. The outcome of the study
depicts that the model used is statistically significant and equally reliable with the coefficient of
Durbin Watson test explains whether the auto-correlation exists by comparing the empirical
value of Durbin Watson with the calculated value from the regression result at a given level of
Decision Rule:
i. If d* (calculated value) is less than d L (dlower tabulated), reject the null hypothesis (H 0) if
no auto-correlation and accept the alternative hypothesis (H1) with presence of auto-correlation.
ii. If d* (calculated value) is greater than d L (d tabulated), we accept the null hypothesis H0
From the tabulated result d* calculated is 1.367355, and from DW table at 5% of significant, k=5
N=42. Thus, the DW table dL = (1.111) and du = (1.583) this depicts that d* > dL (i.e 1.367355 >
1.111) therefore we accept the null hypothesis (H 0) and conclude that there is no auto-correlation
43
4.8 Pair-wise Granger Causality Test
The idea of this test is to determine if the indices of financial sector development provide
significant statistical information about the economics of Nigeria. Causality occurs when there is
a lift in an index of Financial Sector Development that leads to a latter increase in GDP and vice
versa. In establishing Granger Causality at threshold value of 5% the p-value must not exceed
0.05 (p-value, ≤ 0.05). Table 4.9.1 shows the outcome of the causality test conducted on a two
lag length.
44
INT does not Granger Cause FDI 40 3.06328 0.0594
FDI does not Granger Cause INT 0.57073 0.5703
The test for causality as revealed in the table shows the existence of a causal link between FDI
and RGDP i.e FDI doest granger cause GDP as indicated by the p -value (0.0001). This means
that Foreign Direct Investment does influence economic growth (GDP), but RGDP does not
granger cause FDI as revealed by the p-value (0.6252), this means that there is a uni-directional
relationship between FDI and RGDP. MCAP does not granger cause RGDP as indicated by the
p-value (0.9314), also RGDP does not granger cause MCAP as indicated by the p-value (0.146).
45
TOP does granger cause RGDP as indicated by the p-value (0.0242) but RGDP does not have
any causal link with TOP as indicated by the p-value (0.5834). This means that there is a uni-
directional link between TOP and RGDP and also implying that trade openness influence
economic growth. INT does not granger cause RGDP as indicated by the p-value (3.0006), also
RGDP does not granger cause INT as indicated by the p-value (0.3317). EXB does granger cause
RGDP as indicated by the p-value (0.0003) also RGDP does granger cause EXB as indicated by
the p-value (0.0239). This suggests that there is a bi-directional link between EXB and RGDP.
In summary, Indices like FDI and TOP from the Pair-wise Granger Causality Test indicates a
causation on RGDP, but RGDP have causation on both of them, indicating a uni-direction link
between them. But variable like INT has no causation on RGDP and RGDP does not produce
any causation on it as well. However, EXB found to have a bi-directional relation with RGDP.
The study assesses the impact of financial sector development on the economic growth in
Nigeria, using annual time series data from 1989 to 2021. The finding of this study reveals that
Trade openness (TOP) has a positive and significant relationship with GDP, meaning a 100%
increase in TOP will lead to a 0.072 percent increase in GDP for the period under review. Its
contribution to both the financial sector is statistically significant under this period. This
The Regression result also show that Market capitalization (MCAP) has a negative and
insignificant relationship with GDP, meaning a 100% increase in MCAP, will lead to a 0.013
percent decrease in GDP for the period under review. Its contribution to financial sector
development is not statistically significant. Furthermore, External Debt (EXB) has a negative and
insignificant relationship with GDP meaning a 100% increase in EXB will lead to a decrease in
46
GDP, while a reduction in external debt will stimulate economic growth. This study also reveals
that Foreign Direct Investment (FDI) has a negative and insignificant relationship with GDP,
meaning a 100% increase in FDI will lead to a 0.005 % increase in GDP indicating that for more
financial sector development the government needs to discourage investment from international
bodies. Moreover, the result indicates that there exists a positive and significant relationship
between interest (INT) and GDP, meaning a 100% increase in interest will leads to
0.165% in GDP, indicating that for more financial sector development, government needs to
CHAPTER FIVE
47
5.0 Introduction
This chapter is design to give a brief overview of the study. It contains summary of the major
findings. Moreover, the chapter contains the conclusion based on the literature reviewed and the
findings of the study as well as policy recommendations that will help in enhancing financial
5.1Summary of Findings
The study assess the impact of financial sector development on the economic growth in Nigeria,
various econometric techniques such as Ordinary Least Square (OLS), Granger Causality test
and Unit Root Test were employed on time series data from 1989 – 2021. In order to ensure the
fulfilment of this goal, data on financial sector development variables such as Trade openness
(TOP), External Debt (EXB), Foreign Direct Investment (FDI), Market Capitalization (MCAP),
and Interest rate (INT), were collected from Central Bank of Nigeria (CBN) bulletin, National
Bureau of Statistics (NBS), Debt Management Office and World Development Indicators (WDI).
In line with the research, Conceptual framework was discussed, these includes concept of
financial system, categories of financial system, Factors that affect financial system in Nigeria,
Problems associated with financial system in Nigeria, concept of economic growth, factors
affecting economic growth in Nigeria and Measurement of economic growth. The empirical
review of related literature was discussed. The methodology adopted in the research was
discussed and the variables used were Gross Domestic Product (GDP) as the dependent variable
and TOP, FDI, MCAP, EXB and INT were employed as Independent variables.
48
1 Stationary test using augmented dickey fuller shows that some variables are stationary at
level I(0) ( i.e FDI, MCAP, and TOP) while some were found to be stationary at first
2 From the regression analysis the result obtained shows that MCAP has a negative and
insignificant relationship with GDP, meaning a 100% increase in MCAP, will lead to a 0.013
percent decrease in GDP, the negative means that Market capitalization do not stimulates
economic growth and also do not encourage productivity in financial system development.
3 The regression result shows that TOP has a positive and a significant relationship with GDP,
meaning that a 100% increase in TOP will lead to a 0.072 percent increase in GDP, and the
positive relationship means that Trade openness stimulates economic growth and encourages
productivity in financial sectors under review. This study is in line with Onayemi and
Akintoye (2009).
4 Furthermore, the result obtained shows External Debt EXB has a negative and insignificant
relationship with GDP, meaning that the higher the External Debt, the lower the GDP.
5 In addition, the regression result shows that Foreign Direct Investment (FDI) has a negative
and insignificant relationship with GDP, meaning a 100% increase in FDI will lead to a
0.005 % increase in GDP. This findings is in accordance with Mojekwu and Ogege (2012).
6 The Granger causality test reveals the presence of causal link between TOP and GDP and
also FDI and GDP as a uni-directional link. The findings is in line with Benedict and
Chinizea (2017).
7 The Granger causality test reveals that there is no causality between INT and GDP.
8 The granger causality test reveals a bi-directional relationship between EXB and RGDP.
49
5.2 CONCLUSION
In line with the findings of this study which is a significant addition to existing literature, the
empirical evidence from the study reveals that the proxy of financial sector development used in
this study was Gross Domestic Product. It focuses on the period of 1989 to 2021 and used time
series data obtained from African Development Bank (AFDB), Central Bank of Nigeria (CBN),
World Bank and Federal Office of Statistics. Some statistical method: Ordinary Least square,
Unit Root Test and Granger Causality test were used for correlation and direction of causality.
The study reveals that financial system development is very essential in every country for it to
attain economic growth and its of paramount important especially to the Nigerian system as it
helps to go hand in hand in enhancing economic growth and also has a direct relationship which
encourages investment and productivity in goods and services. This implies that the growth
which has been experienced in the country for the past years has been partly due to the immense
Undoubtfully, the findings of this study goes a long way in bridging the gap and enabling policy
makers to plan and formulate both short and long term policies from an informed perspective.
Nigeria as an example of a third world economy needs to know that engaging in trade between
nations and reduce importation but increasing exports and borrowing of loans from international
bodies to foster the economy is of paramount importance if they economy needs to grow given
The Nigerian Economy was reformed through the help of the APEX bank the Central Bank of
Nigeria using the structural adjustment program launched in 1986, which had some main
objectives. These objectives include minimizing state intervention, establishing a free market
50
economy and integration of the economy and integration of the economy with the global
economic system.
It can be concluded that market capitalization, foreign direct investment and trade openness are
variables that Nigeria needs to consider and put more effort in ensuring that financial system
5.3 Recommendations
Based on the findings of the study and by considering the result of the regression models, the
1. Need for Privatization: The privatization of inefficient stated-owned enterprise will boast
more productivity. Since Nigeria has now recognized that the privatization of corporations is
necessary to reduce government fiscal deficit. Also to spread and sustain growth in Nigeria,
the evidence has point to three key objectives: avoiding collapses in growth, accelerating
increasing the number of variety of firms and farms that can compete and produce more
goods and services in the global economy. This implies pushing more export, increasing
connectivity to regional and global markets through deeper and regional integration.
2. Diversification of the economy: Countries like Nigeria rely on exportation of crude oil for
foreign exchange earnings; this exposes them to significant terms of trade shocks.
Diversification of the economy and exploring other sectors like the educational sector or
manufacturing sector will enable them to cushion the effects of shocks, reduce country risk
and also have an increased human capital development. This reduction in country risk will
increase the attractiveness of foreign investors to invest in the tertiary and secondary sectors.
51
3. Trade Liberalization: Openness to trade will signal commitment to outward-looking market-
oriented policies and enhance, trading opportunities thereby attracting foreign investors’
4. Birth Rate Control: Population is essential in labour productivity in both the agricultural and
industrial sector but too much population will lead to a negative outcome or social vices into
the society like unemployment, poverty, crime etc. So it necessary to control population and
make it to a positive advantage rather than a negative one. The government should adopt the
use of contraceptive by its citizens to control the rate of birth from not escalating. The
5. Borrowings: Government should be encouraged to borrow more funds from the international
bodies like International Monetary Fund. This would help in developing the sectors which
needs funding, as it will in the future brings about high GDP, high per capita income and
6. Agricultural and Industrial Sector has very essential in our country as it also have a positive
and significant impact and thus government should try and implement policies that will
encourage farmers and companies to key into the sector. Things like tax holiday, subsidy,
and services. Government should build more companies, ensure adequate infrastructure are
in place and provide more jobs that are production based and employ experts that will help
8. Spurring Innovation: This will require investment in information technology and skill
52
of low wages in Nigeria is too often nullified by low productivity. Survey shows that labor is
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Akintola, A. A, Oji-okoro, I. and Itodo, A. (2019). Financial Sector Development and Economic
Growth in Nigeria: An Empirical Re-examination.
Benecivenga V. and Smith B. D (1991). Financil Intermediation and Endegenous Growth, the
Review of economic studies, 58(2).
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Mckinon, R. I. (1973). Money and Capital in Economic Development Washington DC: The
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Mohan, R. (2005). Financial Sector Reforms: Policies and Performance Analysis. Economic
Political Weakly, Special Issue on Money, Banking and Finance. Vol. 40, Pp. 1106-1112.
Nnanna, O. J. Englama, A. and Odoko, F.O. (2004). Financial Market in Nigeria. A central Bank
of Nigeria Publications, Printed by Kas. Arts Science.
Odife, D. O. (1985). Understanding the Nigerian Stock Market, New York: Vantage Press
Osuji C. (2015). “An empirical Assessment of Financial Development and Economic Growth in
Nigeria: A causality Test.” Department of Banking and Finance, Delta State University,
Asaba Campus.
Oyindamola, O. A and Chinonso, T. (2022). The Nexus between Financial Development, Trade
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Ray, D. (1998). Development Economics. Princeton: Princeton University Press.
Robinson J. (1952). “The generalization of the general theory. In the Rate of Interest and Other
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APPENDICES
APPENDIX 1
55
1982 25.72756 -1.198610 27.84009 2.984892 2.255231 2.135751
1983 25.79060 -0.979927 28.12907 3.147918 2.300249 2.903065
1984 25.83437 -1.357039 27.86495 3.363042 2.326464 3.197087
1985 25.95881 -0.417863 28.14022 3.369104 2.244250 3.244653
1986 26.01215 -1.042579 28.35696 2.819380 2.298493 3.728504
1987 26.22322 0.147618 28.24555 3.063775 2.636315 4.055693
1988 26.47779 -0.270895 28.58412 3.150518 2.810406 4.099125
1989 26.75121 1.454441 28.68702 3.473237 3.017575 4.274733
1990 26.92710 0.084296 28.70854 3.571631 3.230804 4.180747
1991 27.10349 0.371783 28.80250 3.767293 2.997813 4.274584
1992 27.53234 0.629151 28.99855 3.742001 3.209162 4.169887
1993 27.85989 1.578523 21.48524 4.139244 3.454738 4.794429
1994 28.20132 1.756279 21.81428 3.858069 3.019612 4.655124
1995 28.76250 -0.271552 22.77446 3.843104 3.007331 4.400407
1996 29.03860 -0.022736 23.26601 3.789411 2.987532 4.163797
1997 29.11687 -0.148179 23.25371 3.814871 2.878918 3.998437
1998 29.20071 -0.600356 23.05751 3.552969 2.900551 4.069813
1999 29.33256 0.526241 21.80153 3.632360 3.010128 3.917091
2000 29.58586 0.495756 30.44978 3.755593 3.057494 3.969245
2001 29.73935 0.491965 30.59919 3.706313 3.154373 3.876553
2002 30.07349 0.678837 21.58782 3.290265 3.209667 3.696400
2003 30.23792 0.649519 30.66259 3.505727 3.030818 3.744232
2004 30.52826 0.322355 23.48744 3.660663 2.953912 3.561540
2005 30.77180 1.042498 23.82534 3.702348 2.887497 2.883559
2006 31.04465 0.710866 24.21462 3.576566 2.826919 1.722770
2007 31.17707 0.774356 25.16468 3.596039 2.829628 1.770177
2008 31.31876 0.881177 24.59576 3.692074 2.717065 1.625477
2009 31.40290 1.064797 24.19596 3.425149 2.943956 1.928707
2010 31.63128 0.495960 24.64616 3.553699 2.867046 1.705234
2011 31.77629 0.757585 24.38756 3.725672 2.773838 1.703111
2012 31.91256 0.421196 24.75228 3.575527 2.820883 1.599552
2013 32.02559 0.067228 25.11289 3.338517 2.816755 1.622108
2014 32.13235 -0.201531 24.86268 3.336106 2.806285 1.689665
2015 32.18677 -0.475617 24.63477 2.957599 2.824301 1.922543
2016 32.26162 -0.158532 24.11752 2.833848 2.825419 2.199528
2017 32.37508 -0.442882 24.34005 3.003577 2.865244 2.531167
2018 32.49151 -1.693790 24.17391 3.200876 2.827544 2.660714
2019 32.61215 -0.664767 24.50567 3.268995 2.732846 2.628423
2020 32.66961 -0.594400 24.75873 2.804218 2.613155 2.829190
2021 32.80193 -0.285580 24.75873 3.110339 2.440879 2.889396
APPENDIX 2
DESCRIPTIVE STATISTICS
Date: 01/14/23
Time: 14:11
Sample: 1980 2021
56
Std. Dev. 2.520357 0.801137 2.626743 0.344180 0.307929 1.028509
Skewness -0.279533 -0.104236 0.297518 -0.111632 -0.572950 -0.100927
Kurtosis 1.677670 2.580897 1.943717 2.411822 2.877585 1.559337
Observations 42 42 42 42 42 42
APPENDIX 3
REGRESSION RESULT
APPENDIX 4
57
t-Statistic Prob.*
t-Statistic Prob.*
58
Variable Coefficient Std. Error t-Statistic Prob.
t-Statistic Prob.*
59
Null Hypothesis: TOP has a unit root
Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=9)
t-Statistic Prob.*
t-Statistic Prob.*
60
Method: Least Squares
Date: 01/14/23 Time: 13:58
Sample (adjusted): 1982 2021
Included observations: 40 after adjustments
t-Statistic Prob.*
61
F-statistic 12.77874 Durbin-Watson stat 1.834289
Prob(F-statistic) 0.000060
APPENDIX 5
MULTICOLONIALITY TEST
APPENDIX 6
Test Equation:
Dependent Variable: RESID
Method: Least Squares
Date: 01/14/23 Time: 14:07
Sample: 1981 2021
Included observations: 41
Presample missing value lagged residuals set to zero.
62
RESID(-1) 0.052942 0.181121 0.292302 0.7719
RESID(-2) -0.075127 0.184666 -0.406824 0.6868
APPENDIX 7
HETEROSCEDASTICITY TEST
63
Test Equation:
Dependent Variable: RESID^2
Method: Least Squares
Date: 01/14/23 Time: 14:09
Sample: 1981 2021
Included observations: 41
Test Equation:
Dependent Variable: RESID^2
Method: Least Squares
Date: 01/14/23 Time: 14:15
Sample (adjusted): 1982 2021
Included observations: 40 after adjustments
64
APPENDIX 8
STABILTY TEST
Value df Probability
t-statistic 2.161078 33 0.0380
F-statistic 4.670256 (1, 33) 0.0380
Likelihood ratio 5.426894 1 0.0198
F-test summary:
Mean
Sum of Sq. df Squares
Test SSR 0.110848 1 0.110848
Restricted SSR 0.894102 34 0.026297
Unrestricted SSR 0.783254 33 0.023735
LR test summary:
Value
Restricted LogL 20.24643
Unrestricted LogL 22.95987
APPENDIX 9
65
NORMALITY TEST
APPENDIX 10
66
FDI does not Granger Cause INT 0.57073 0.5703
67