Financial Sector Development and Economic Growth: Empirical Evidence from Nigeria

The paper examines the relationship between financial sector development and economic growth in Nigeria. It tests the competing finance-growth nexus hypothesis using Granger causality tests in a VAR framework over the period 1960-2009. Four variables, namely; ratios of broad money stock to GDP, growth in net domestic credit to GDP, growth in private sector credit to GDP and growth in banks deposit liability to GDP were used to proxy financial sector development. The empirical results suggest bidirectional causality between some of the proxies of financial development and economic growth variable. Specifically, we find that the various measures of financial development grangercause output even at 1per cent level of significance with the exception of ratio of broad money to GDP. Additionally, we find that net domestic credit is equally driven by growth in output, thus indicating bidirectional causality. The variance decomposition shows that the share of deposit liability in the total variations of net domestic credit is negligible, indicating that shock to deposit does not significantly affect net domestic credit. The findings from the paper indicate that the current reforms in the Nigerian banking sector should not be emphasized unilaterally. Rather, attention should be given to the complimentary and coordinated development of financial reforms and changes in the real sector of the economy.