Abstract
This study investigated the role of financial structure in explaining economic growth dynamics in Nigeria using annual time series from 1981-2017. The study employed the vector error correction model (VECM) in the analysis of the data. As lead up to financial structure and economic growth relationship analysis, the competing theoretical views of bank and market based financial system and economic growth were explored. The result of the study showed that economic growth, financial development variables and the underlying control variables are cointegrated. The result of the economic growth effect of financial development showed that stock market and bank-based have a significant effect on growth. This implies that both bank-based and market-based matter in explaining economic growth dynamics. On the relationship between financial structure and economic growth, the study revealed that economic growth, financial structure and the underlying control variables have a long run relationship. The study also revealed that financial structure which captures the combination of stock market-based and bank-based has a positive significant effect on growth. A significant coefficient of financial structure implies that financial structure matters in explaining growth. Therefore, the study posits that the overall financial structure is the most useful way to assess the financial systems since both bank and stock market system matter in explaining economic growth as against bank-based versus market-based debate. Based on the empirical evidence, the study therefore recommends that there should be continuous holistic reforms of both banking and stock market simultaneously, as the development in one sector has a neglect effect on the other.
Highlights
There has been debate among scholars over the role of the structure of the financial systems to economic growth
This is deduced from the fact that the absolute values of the Augmented Dickey Fuller (ADF)/PP test statistics of the variables at levels are less than the absolute value of the critical values of the ADF/PP at 1 or 5 percent significance level
Recommendations This study examined the relationship between financial structure and economic growth in Nigeria
Summary
There has been debate among scholars over the role of the structure of the financial systems to economic growth. The debate is about the relative importance of bank-based and market-based financial systems in stimulating economic growth (Gerschenkron, 1962, Stiglitz, 1985, Allen and Gale, 1999 and, Levine, 2002). Empirical studies (Hoshi et al, 1991, Mork and Nakkamura, 1999, Weinstein and Yafeh, 1998 and, Arestis et al, 2001) from developed economies of the world- the United States of America and United Kingdom show that financial structure matters in explaining economic growth. Luintel and Khan (2002) showed that panel estimates often do not correspond to country-specific estimates. This could be as a result of cross-country differences and, measurement, statistical, and conceptual problems.
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