Abstract
The study assessed the relationship between Macroeconomic Variables and Development in the Nigerian Banking Sector using annual time series data. Models were specified using Ratio of Credits to Private Sector to Gross Domestic Product (GDP) as a proxy for Banking Sector Development. At the same time, GDP growth rate, Poverty, Exchange Rate, Oil Price, Poverty, Money Supply, Inflation, and Interest rates were the selected Macroeconomic Variables used in the study. Data used were sourced from the Statistical Bulletin of Central Bank of Nigeria (CBN) for various editions and estimated using ARDL Bound Test and Vector Error Correction Mechanism (VECM). The study found that there exists a long-run relationship between Macroeconomic Variables selected and Banking Sector Development. The VECM coefficients revealed that all variables except Interest Rates have negative effects on Banking Sector Development. The VECM (-1), which showed the speed of adjustment, was rightly signed and significant, indicating a long-run causality relationship running from macroeconomic variables to banking sector development. The Impulse response from restricted VAR revealed that Banking Sector responded to the Macroeconomic Variables of which GDPGR and INT were transmitting negatively to Banking Sector Development while others were transmitting positive impulses. However, the variance decomposition found that oil price, followed by GDPGR and poverty, caused more variation in Banking Sector Development. In contrast, inflation and money supply caused the least variation in Banking Sector Development. The study, therefore, concluded that selected Macroeconomic Variables have a significant long-run relationship with Banking Sector Development. It is therefore recommended, among others that, Macroeconomic indicators should be well monitored and controlled using macroeconomic instruments promptly since when they are well managed would lead to a better developed Banking Sector in Nigeria.
Highlights
Critical ValueFindings revealed that variables were integrated at difference order, that is at the level I(0) and at the first difference I(1)
It is a well-known fact the world over that a virile Banking Sector is the engine room of any economy, performing very important role such as deposit mobilization, credit facilities, maturity transformation, intermediation role and many others which enhance the growth and sustainability of any economy
The results showed that fluctuation in oil price is a major macroeconomic indicator causing variation in banking sector development
Summary
Findings revealed that variables were integrated at difference order, that is at the level I(0) and at the first difference I(1). The study, accepts the alternate hypothesis and rejects the null hypothesis, that series is free from unit root AEDL Bound test. Estimating the existence of a long-run relationship between Macroeconomic indicators and Banking Sector Development, the study made use of the ARDL bound test. In estimating ARDL, lag selection becomes very important, lag order selection criteria were done using lag order criteria structure from VAR environment.
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