Banking Sector Development and Economic Growth in Nigeria

Abstract

The purpose of this study is to empirically examine the relationship between banking sector development and economic growth in Nigeria. The study examined the Central Bank of Nigeria quarterly data from 1981Q1 to 2017Q4 with the E-views software package (version 9.0). The Vector Auto Regression (VAR) methodology was used to analyse the data, while Block Exogeneity Wald test was used to test the hypothesis. The specified models included stationarity tests, reduced form VAR estimate and structural analysis. The Augmented Dickey Fuller Test indicates that the study variables are stationary at first difference or I(1). The VAR roots plot in relation to unit circle indicates that our specified reduced form VAR models are stable. The Lagrange Multiplier (LM) diagnostic tests indicate that our specified VAR models are correctly specified. The results from the granger causality wald test show that, at 5% significance level, conglomerate of indicators of banking sector development; commercial bank assets, central bank assets and banking system assets, has no significant effect on economic growth. The study therefore recommends that any strategy to further develop the banking sector should focus more on the quality of its asset than its size. To this end, the focus of micro prudential policies should be on reducing the current overconcentration of bank loans to the volatile oil and gas sector. This would allow the banking sector assets to be more evenly spread among the productive sectors, which in turn, would help reduce the high level of non-performing loans that is currently plaguing the banking sector.