Financial Development Indicators and Economic Growth in Nigeria

Abstract: This study examined the causal relationship between selected financial development indicators and economic growth in Nigeria. The motivation behind the study is to contribute to the debate whether financial development leads economic growth or is the reverse in Nigeria and also close the gap in literature on the near consensus that financial development was one of supply leading, demand following or bidirectional. Specifically, the study analysed the causation between ratio of money supply to GDP (M2/GDP), ratio of private debt to total debt securities (P/TDS), lending-deposit spread (LDS), liquidity ratio (LR) and stock market returns (SMR) against economic growth. Secondary data were sourced from the Central Bank of Nigeria Statistical Bulletin. The data were checked for unit root and diagnosed for serial correlation, heteroskedasticity, and stability. The data were also subjected to E-GARCH, Johansen Cointegration, vector error correction model, and Granger causality tests.The study found bidirectional causation between financial development and economic growth when ratio of money supply to GDP (M2/GDP) was applied. It also found that financial development leads economic growth using lending-deposit spread (LDS) and liquidity ratio (LR) while economic growth leads financial development when ratio of private debt to total debt securities (P/TDS) and stock market returns (SMR) was used thus providing evidence to support supply-leading hypothesis, demand-following hypothesis and bidirectional relationships between the variables. The study therefore concludes that financial development exhibits unidirectional and bi-directional causality all at the same time depending on the variable under consideration. Thus, the study recommends among others financial sector reforms that engender financial access, real sector growth, sound corporate governance and ease of doing business in Nigeria.