Economic Growth in Nigeria: Evidence from the Appraisal of Financial Sector Reforms and its Causal Effects

Abstract

The growth of financial system, as the central hub of every economy is paramount for economic development. The reformation of the financial sector is the bedrock for building a formidable, transparent and efficient financial system that could supports the mobilisation of domestic and foreign savings for investment. Conversely, it deepens and broadens financial intermediation, and enforces strict regulations with prudential guide for increase in business activities. Thus, the aim of the study is to investigate the causal relationship between financial sector reforms and economic growth in Nigeria. The study also established the impact of financial sector reforms on economic growth to ascertain if financial sector reforms in Nigeria promote growth. To establish this, financial sector reforms is measured with the ratio of banking sector domestic credit, domestic credit to the private sector and Capital flow proxied with foreign direct investment while economic growth is captured with Per capita GDP. Using generalised linear regression method, with quarterly time series data that spans the periods 1981Q1 to 2010Q4, the following findings on granger causality test were noticed; (a) bidirectional relationship between banking sector domestic credit and per-capita GDP; (b) unidirectional causation running from foreign direct investment to per-capita GDP and; (c) unidirectional causation running from per-capita GDP to domestic credit to the private sector. However, from the findings, banking sector domestic credit and foreign direct investment are the major policy variables that can be adjusted for economic growth. Finally, the estimated regression results show that the explanatory variables accounted for approximately 63.45 percent variation in economic growth. Hence, financial sector reform promotes economic growth in Nigeria.