Financial Development and Real Sector Growth: An Empirical Investigation of Nigerian Economy (1970-2022)

Abstract

The implementation of several banking sector reforms in Nigeria were undertaken to enhance accessibility of finance to especially, the real sector of the Nigerian Economy, but surprisingly the sector is still bedevilled with inadequate access to finance especially from the deposit money banks that warehoused about 90% of the total financial sector assets. High nominal interest rate is the major cause for many firms to avoid bank-borrowing. These myriad financing challenges facing the real sector calls for the assessment of finance-growth nexus in Nigeria. In this regard, this study examines the long run relationship between selected financial development indicators and real sector growth in Nigeria over the period 1970-2022. Based on the nature of the study, correlational research design was adopted while secondary data source was mainly employed. Johansen and Juselius’ (1990) approach to cointegration and Vector’s Error Correction Modelling (VECM) was used to determine the extent of the relationship between the variables. The findings of the study revealed that in the short-run, liquid liabilities of deposit money banks, trade openness and credit to the private sector exert statistically significant influence on the real sector of Nigerian Economy while in the long-run, liquid liabilities of deposit money banks, trade openness, credit to the private sector, interest rate spread and government expenditure exert statistically significant influence on the real sector of Nigerian Economy. Conclusively, the study affirmed that the Mckinnon and Shaw (1973) theory of Financial Liberalisation can explain the paucity of funding to the real sector of the Nigerian economy. The policy implications of the study are; financial reforms should focus providing low-cost credit and liberalising the interest rate. Also, government and deposit money banks should direct their on-lending activities and credit facilities towards encouraging and financing entrepreneurs to increase investment and in turn real sector growth.