Effect of Financial Sector Deregulation on Economic Growth of Nigeria

Abstract

The study investigated the effects of financial sector deregulation on economic growth of Nigeria using annual data spanning from 1970 to 2015. Real Gross Domestic Product (RGDP) were made as a function of Credit to Private Sector (CPS), Financial Sector Deepening (FDP), Real Interest Rate (RINTR), Real Exchange Rate (REXGR) and Financial Policy Shift (FPS). Data for the study were sourced from various issues of Central Bank of Nigeria Statistical Bulletin, National Bureau of Statistics. The data were analyzed using Co-integration for the existent of long-run relationship and Vector Error Correction Mechanism (VECM) for short-run dynamic of the model. Results derived from the Ordinary Least Square (OLS) indicated that real interest rate and real exchange rate are positive and insignificant, credit to private sector exhibit significant (prob < 0.05) relationship while financial sector deepening and financial policy shift are negatively related to gross domestic product. The long run model derived from the co-integration test revealed that there exists a long-run relationship between the variables. CPS, FDP and RINTR are negatively related to RGDP while REXGR and FPS are positively related to RGDP. The study concluded that the gain from financial sector deregulation in Nigeria has remained low in spite of the various reforms and institutional changes put in place by the monetary authorities. The study thus recommended an enhancement of private sector investment through financial sector credits and through a combination of macroeconomic stabilization policies which would surely enhance the performance of economic growth in Nigeria.