Financial Intermediation and Economic Growth in Nigeria

Abstract

The aim of this study is to examine the relationship between financial intermediation 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 show that financial intermediation measures such as bank deposit, commercial bank loans to rural customers, commercial bank deposits from rural customers and gross national savings jointly have no causal effect on real GDP growth, but individually, only the effect of bank deposit ratio is significant. The study therefore recommends that the Central Bank of Nigeria should persuade deposit money banks to reduce the current interest rate margin by reducing the lending rate and increasing the deposit rates. This would significantly reduce the current high financial exclusion rate as cost of borrowing would decrease while the level of domestic savings would increase. Keywords: Financial Intermediation, Real Gross National Savings, Commercial Bank Deposit from Rural Customers, Commercial Bank Loan to Rural Customers, Bank Deposit and Economic Growth