Financial Deepening and Economic Growth in Nigeria: An Empirical Analysis

Abstract

The importance of financial deepening in economic growth has long been recognised in economics literature. The financial sector is seen as the central nervous system of any economy, hence its importance in the economic development of any nation. The financial system plays a key role in the mobilisation and allocation of savings for productive purposes, provides the needed structures for monetary management and serves as the basis for managing liquidity in the economy. This paper examines the role of financial deepening in Nigeria’s economic growth using time series data. For the analysis, the unit root test was conducted using the Augmented Dickey-Fuller (ADF) and Phillips-Perron methods to test for stationarity of the variables. Thereafter, the co-integration test was performed and the Error Correction Model (ECM) estimated. The result shows that though there is a long-run relationship between the development of the financial sector and economic growth in Nigeria, the impact of financial development comes with a lag. The paper suggests that the central bank of Nigeria and government should consistently formulate and implement policies that would promote financial development in the country. Policy direction should emphasize financial inclusion and the provision of credits at affordable rates to the productive sector of the economy in order to increase the impact of the financial sector on economic development of the country.