The Relationship Between Financial Development and Economic Growth in Nigeria

Abstract

This study aims to investigate the complex relationship between financial development and economic growth in Nigeria, examining the short-run and long-run dynamics through a comprehensive time series analysis spanning 1981 to 2023. The research seeks to evaluate the impact of financial development on economic growth while considering critical macroeconomic factors. The study employs a robust methodological approach, utilising the autoregressive distributed lag (ARDL) model complemented by bounds testing. The investigation incorporates control variables, including government expenditures, investment, trade openness, oil prices, and labour force, to provide a comprehensive economic assessment. The empirical results reveal a subtle relationship between financial development and economic growth in Nigeria. Despite confirming long-run cointegration among variables, the financial development index does not demonstrate statistically significant impacts on economic growth in either short- or long-run scenarios. However, the labour force emerges as the primary catalyst for economic expansion, with a 1% increase associated with a substantial 16.77% increase in real Gross Domestic Product (GDP) in the short term and a 1.48% increase in the long run. The study conclusion challenges conventional wisdom regarding the finance-growth nexus in developing economies. The findings highlight the critical role of human capital in Nigeria’s economic trajectory while revealing potential inefficiencies in financial sector development and capital allocation. This research contributes to the ongoing discourse on financial development and economic growth by providing a comprehensive, contemporary analysis of Nigeria’s economic landscape.