Empirical Study of Financial Sector Development on Economic Growth in Nigeria (1990-2010)

Abstract

The linkage between financial sector and economic growth has been controversially debated in finance and economic literatures. This research examines 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 between 1990 to 2010. Recent econometric technique Eviews 4.0 software was used to test for the stationaries properties of the data, co-integration and direction of causality between the dependent and in dependent variables. The study found 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. The conclusion that emerged from this study is that market capitalization, banking credits and foreign direct investment impact significantly on real gross domestic product. We therefore, recommend the adoption of policies and actions that will develop the financial sector in form of increase banking credits to the private sectors, robust and efficient capital market as well as increase flow of foreign direct investment to the
financial sector of the economy. This will ultimately impact significantly and positively on the real gross domestic product in the form of economic growth.