Econometrics Analysis of Financial Development and Economic Growth: Evidence from Nigeria
Journal of Finance and Accounting
Volume 6, Issue 1, January 2018, Pages: 26-34
Received: Jan. 26, 2018;
Accepted: Feb. 11, 2018;
Published: Mar. 14, 2018
Views 1498 Downloads 125
Godwin Chigozie Okpara, Department of Banking and Finance, Abia State University, Uturu, Nigeria
Anne Nwannennaya Onoh, Department of Management, Abia State University, Uturu, Nigeria
Benson Mbonu Ogbonna, Department of Economics, Abia State University, Uturu, Nigeria
Eugene Iheanacho, Department of Economics, Abia State University, Uturu, Nigeria
Iheukwumere Kelechi, Department of Economics, Abia State University, Uturu, Nigeria
This work explored the relationship between financial development and economic growth in Nigeria. Specifically it investigated the extent to which financial development engenders economic growth. It also verified the existence of supply leading and/or demand following hypotheses in Nigeria. To evaluate these, the researchers firstly determined the stationarity of the variables which informed the use of cointegration and then the vector error correction model to finding the long run impact of financial development variables on the growth of the economy. The diagnostic test was employed to determine the authenticity and stability of our model. The researchers also employed the Granger Causality test to investigate the existence of supply leading and/or demand following hypothesis. The results of the analyses show that there is a longrun relationship between financial development and economic growth in Nigeria and that besides the metric for banking system financing of the economy variable which is significantly inadequate, all other financial development indicators engender economic growth. Our diagnostic test shows that the model is adequate, plausible, and stable. The short run causality test shows bidirectional causality between capital market liquidity or economic volatility and the growth of the economy while market capitalization ratio, broad money velocity and the banking system rate of financing the economy drive economic growth with no feedback effect. On the basis of the findings, the researchers call on the government to articulate reform packages (such that may involve vigorous financial inclusion) capable of enhancing the banking sectors’ involvement in the financing of the economy so as to achieve enormous economic growth.
Godwin Chigozie Okpara,
Anne Nwannennaya Onoh,
Benson Mbonu Ogbonna,
Econometrics Analysis of Financial Development and Economic Growth: Evidence from Nigeria, Journal of Finance and Accounting.
Vol. 6, No. 1,
2018, pp. 26-34.
Robinson, J. 1954. The production function and the theory of capital. Review of Economic Studies 21: 81-106.
McKinnon, Ronald I. (1973) Money and Capital in Economic Development, Was hington, DC: Brookings Institution.
Bađun M.(2009) Financial Intermediation by Banks and Economic Growth: a Review of Empirical Evidence. Financial Theory and Practice 33 (2) 121-152.
Levine, R; Loayza, N. and Beck, T. (2000) Financial intermediation and growth: Causality analysis and causes. Journal of monetary economics 46(1), 31-37.
World Bank (2009).Making Finance Work for Nigeria. World Bank Publication. November.
Sanusi J.O (2002) The Importance of Financial Intermediation in Sustaining Economic Growth and Development: The Banking Sector Review. Akeynote address delivered at the banking seminar, organized by the institute of directors, on Thursday, June 13, 2002. at the Le'Meridien Hotel, Victoria Island.
Soludo, C. C (2009) Banking in Nigeria at a time of global Crises. Being apresentation made in the special interactive session on the banking system at the Eko Hotel and Suites, Victorial Island Lagos, 30th March.
Onwumere J. U. J. and Modebe N. J. (2007), The Capital Market and Nigeria's Quest for Economic Self-Reliance. Nigerian Journal of Economics and Financial Review,. 1 (3):1-16.
NSE (2005), Nigerian Stock Exchange Fact Book.
Schumpeter, J. (1911). The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest and Business Cycle. Cambridge, MA: Harvard University Press.
Jalloh, M. (2009) The role of financial markets in economic growth Accra: MEL Publishers.
Sanusi, L. S. (2011) Banks in Nigeria and National economic development- acritical review Keynote address presented at the seminar on Becoming an economic driver while applying banking regulations organized by the Canadian High Commission in joint collaboration with the Chartered Institute of Bankers of Nigeria (CIBN) and Royal Bank of Canada (RBC) Lagos.
Okpara, G.C. (2012) Fundamentals of Corporate Financial Management (Uyo: Donil Publishers).
Patrick, H. T. (1966), Financial Development and Economic Growth in Underdeveloped Countries in Economic Development and Cultural change. 141(2) 174-189.
Isu, Hamilton Oand Okpara, G.C (2013) Does financial deepening follow supply leading or demand following hypothesis?: A look at the Nigerian evidence. Asian Journal of Science and Technology, 5(1).
Clarke,G.,Xu, L.,Fou, H.F. (2002), Financial and income inequality: test of alternatives theories, World Bank Policy Research Paper, WPS 2984, The World Bank, Washington, DC.
Wadud, M.A. (2005), Financial development and economic growth: cointegration and ECM approach for South Asian countries, paper presented at International conference of the Asian Law and Economic Association at Seoul National University, South Korea on 24-25 June, 2005.
Nnanna, OJ (2004). Financial Sector Development and Economic Growth inNigeria: Economic and Financial ReviewSept.42(3):91-124.
De Gregorio, J. and Guidotti P.E. (1995).Financial development and economic growth. World Development, 23(3): 433-48.
Guiso, Luigi, Paola Sapienza and Luig Zingales (2002). Does Local Financial Development Matter? NBER Working Paper W 89223, National Bureau of Economic Research, May.
Gelb, A. H. (1989) Financial policies, growth and efficiency. World Bankworking paper, WP5 202.
Ghani, E. (1992) How financial markets affect long-run growth: A cross-country study, World Bank working paper. PPR working paper series No. 843.
King, Robert G. and Levine, Ross, (1993), Finance and Growth: Schumpeter Might Be Right, The Quarterly Journal of Economics, 108(3): 717-737.
Levine, R. and Zervos, S. (1996), Stock market development and long-run growth. The world economic review, 110(2): 323-340.
Nwezeaku N. C. and Okpara G. C. (2014) Financial Development and Economic Growth of Emerging Economies (Evidence from Nigeria) A Toda Yamamoto Causality Approach. A paper presented at the 2014 2nd International Conference on Financial and Management Science (ICFMS 2014) December 17-18, 2014, in Las Vegas, USA.
Odhiambho, N. M. (2004), Financial deepening and economic growth in Tanzania: Adynamic causality test, African finance journal, 7(1).
Guryay, E. O. V. Safakli and Tuzel, B. (2007) Financial development and economic growth: evidence from Northern Cyprus. International research journal of finance and economic (8).
Shan, J.Z., Sun, F. and Jianhong, L. (2006), Does financial development lead to economic growth? The case of China. Annals of economics and finance 1,231-250.
Arestis, P., P. and Demetriades (1997) Financial development and economic growth: Assessing the evidence. The economic journal, 107, 783-793.
Murinede, V. and Eng, F. (1994), Financial development and economic growth in Singapore: demand following or supply-leading? Applied financialeconomics,4, 391-404.
Demetriades, P. O. and Hussein K. A. (1996), Does financial development cause economic growth? Time-series evidence from 16 countries. Journal of development economics, December, 387-411.
Luintel, K. B and Khan (1999) A quantitative reassessment of finance –growth nexus: evidence from a multivariate VAR. Journal of developmentEconomics,60(2):381-405.
Adelakun, O. J. (2010), Financial Sector Development and Economic Growth in Nigeria. International Journal of Economic Development Research andInvestment1(1).
Akinlo, A.E. and Egbetunde, T. (2010) Financial development and Economic growth: the experience of 10 sub Saharan African countries revisited. The review of finance and banking, 2(1) 017-028.
Odeniran S. O. and Udeaja E. A (2010), Financial Sector Development and Economic Growth: Empirical Evidence from Nigeria. Central Bank of Nigeria Economic and Financial Review. 48(3).
Altay Oguzhan and Musa Atgur (2010), VAR model approach to the financial deepening and economic growth relationship in Turkey during theperiod1970-2006 paper presented at Istatisik Arastirma Sempozyumu, Ankara, 6-7, Turkey.