Finance-Growth Nexus: The Primal Case for the Role of Governance in Nigeria

Abstract

Over the years, divergent views on finance-growth nexus have shaken the confidence of policymakers in developing the essential blueprint of financial sector policies fundamental for overhauling the economic structures in most African countries. In view of this, this paper largely evinces the critical development challenge plaguing Nigeria in terms of building effective regulatory framework that could engender a developed and well-functioning financial system. With the use of ARDL bounds test approach and the pairwise Granger causality test, the joint effect of financial development and the quality of institutions on Nigerian economy is examined between 1984 and 2017. In the long run as well as in the short run, the study establishes that financial development has no substantial effect on economic growth in Nigeria. Further findings indicate that the quality of institutions in the country does not significantly affect the economy. Regarding the interaction term, evidence reveals that the joint effect of financial development and governance on the growth of the economy is adverse and insignificant. The implication of this is that pervasive weak institutions and ineffective financial system could be harmful to economic performance. The study suggests that building a robust structure through sustainable policy and regulatory measures would enhance the potential role and effectiveness of the financial sector in the economy, and thus engender entrenched modern finance frontier in Nigeria.