Nexus between Bank Credit and Economic Growth in Nigeria: Evidence from VEC Model

Abstract

The study examines the relationship between bank credit and economic growth in Nigeria by considering the total bank credit extended to the production sector (which comprises manufacturing, agriculture, fishery and forestry, mining and quarrying, real estate and construction), general commerce sector (comprising: bills discounted, domestic trade, exports and imports) and services sector (comprising: public utilities, transport and communication, credit to financial institutions). Time series data from 1983-2012 were fitted into the regression equation using various econometric techniques such as stationarity test using Augmented Dickey Fuller (ADF) and Johansen Multivariate Co-Integration Test. Ordinary Least Square Regression (OLS) and VEC Models were used to analyse the relationship between the independent variables (total credits to production, general commerce and services sectors) and dependent variable (real gross domestic product). The result of the OLS shows that total bank credit to production, general commerce and services sectors has a positive relationship with the gross domestic product. Similarly, the VEC model result shows that causality runs from bank credit to the GDP. This result is consistent with a number of earlier studies reviewed in the literature that find causality running from bank credit to gross domestic product.