article · UMYUK JOURNAL OF ECONOMICS AND DEVELOPMENT
An analysis of Nigerian economic data from 1986 to 2023 demonstrates that foreign direct investment significantly boosts domestic financial development, measured by bank credit extended to the private sector. Statistical modelling reveals that each unit increase in foreign direct investment corresponds to a 3.21 unit rise in financial development over the long run, alongside a 0.37 unit rise in the short run. Gross domestic product and exchange rates also exert positive effects on financial development. Conversely, inflation, trade openness, and interest rates generate negative long-run impacts. The speed of adjustment toward long-run equilibrium following disruptions is rapid, reaching 87 per cent within the first year. Expanding private sector credit and attracting external capital therefore rely heavily on sustaining economic growth, curbing inflation, and improving domestic financial sector efficiency.
Understanding how external capital influences banking credit helps policymakers and financial institutions structure environments that support private sector lending. By demonstrating the specific long-term drag of inflation and high interest rates alongside the benefits of foreign direct investment, the research provides clear empirical evidence to guide monetary policy, macroeconomic stabilisation programmes, and efforts to deepen national financial markets.
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This study investigates the impact of foreign direct investment on financial development in Nigeria from 1986 to 2023. The data used for this research were sourced from World Bank Development Indicators and the CBN Statistical Bulletin. The data was analyzed using the autoregressive distributed lag (ARDL) model. Domestic credit to the private sector by banks was used as a proxy for financial development. The study findings reveal that FDI has a positive and significant impact on financial development. Financial development (FD) increased by 3.21% and 0.37% units in the long run and short run respectively per unit change in FDI. The study also indicates that GDP and EXRT have a positive impact on financial development, while inflation, trade openness, and interest rate reveal a negative impact in the long run. The error correction model results confirmed the earlier long-run relationship among the series and showed a speed of adjustment towards long-run equilibrium to be 87% in the first year. To enhance financial development and attract FDI in Nigeria, the study recommends prioritizing sustained economic growth, improving financial sector efficiency, and creating a favorable investment climate.
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DOI: 10.70861/ujed20250202022
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