Abstract
In this study, we analyze the determinants of environmental quality in Nigeria, focusing on the role of financial development. It is a time series analysis covering the period from 1981 to 2016. The study uses the ARDL bounds testing approach to analyze data on urbanization, per capita income, environmental degradation, energy consumption, trade intensity, and capital investment. We generate the environmental degradation index using principal component analysis (PCA). Empirical results suggest that income, financial development, energy consumption, and trade are significant in explaining environmental quality, whereas investment and urbanization are insignificant in the model. Moreover, we find no causality between the capital investment, financial development, and environmental quality, although urbanization and income unidirectionally cause environmental degradation. Also, there exists a bidirectional causality between energy consumption and environmental degradation. Therefore, to ensure efficient credit allocation to low carbon emitting firms, financial sector operators should adequately screen investment proposals before committing funds to them.
Highlights
Without a doubt, the financial sector plays a significant role in mobilizing and using savings, in facilitating business transactions, and in monitoring resources for economic advancement (Nasreen et al, 2017)
Empirical results suggest that income, financial development, energy consumption, and trade are significant in explaining environmental quality, whereas investment and urbanization are insignificant in the model
EC is the amount of energy consumed; IN V represents the volume of capital investment, proxied by the gross fixed capital formation; T I is the trade intensity ratio, calculated as total trade divided by the gross domestic product (GDP); and U BN is the rate of urbanization
Summary
The financial sector plays a significant role in mobilizing and using savings, in facilitating business transactions, and in monitoring resources for economic advancement (Nasreen et al, 2017). It plays a vital role in the growth and development of the economy because when efforts are made to develop the financial sector properly, it promotes effective mobilization and allocation of economic and financial resources (Adekunle et al, 2013). Financial sector improvement can impact the environment by encouraging the private sector to increase investments in new technologies. The authors of a number of empirical studies have concluded that financial performance is essential in stimulating activity related to promoting or protecting environmental quality (Charfeddine and Khediri, 2016; Maji et al, 2017; Mahalik et al, 2017; Shahbaz et al, 2017; Salahuddin et al, 2018)
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