FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH IN NIGERIA: AN EMPIRICAL INVESTIGATION (1980-2012)

T he economic literature posits that a well-functioning economy needs a financial system that moves funds from people who save to people who have productive investment opportunities. In other words, a sound financial system acts as a conduit for sustainable economic growth. This work empirically investigated the link between financial development and economic growth in Nigeria. Secondary data on gross domestic product (GDP), used as a proxy for economic growth; broad money supply as a ratio of GDP (M2GDP) and domestic credit to private sector as a measure of GDP (DCPGDP) which represented the explanatory variables, and sourced mainly from CBN publications were first tested for the presence of unit root using the Augmented Dicey Fuller test while Johansen co integration test was used to test for long run relationship between the dependent and independent variables.  The ADF results indicated that all the variables were stationary and at the same wave length after second difference at 5 and 1 percent level of significance and the Johansen co integration test revealed the presence of a long run relationship among the variables. Equally, the result from pairwise granger causality test showed a unilateral relationship from GDP to financial development. Ordinary least square (OLS) technique was employed to estimate the individual parameters and the result indicated that only DCPGDP has a positive relationship with GDP while M2GDP has a negative relationship, contrary to economic expectation.  The study concluded that money supply as a ratio of gross domestic product equally show that broad money supply actually help to deepen the financial sector but has failed to cause economic growth in Nigeria and equally that financial deepening in Nigeria follows demand following hypothesis in line with the findings of Isu and Okpara (2013) and recommended among others that the current reforms in the Nigerian banking sector should not be emphasized unilaterally instead that  attention should be given to the complimentary and coordinated development of financial reforms and changes in the real sector of the economy for the country to translate the positivity of the financial sector into the real sector to achieve economic growth.