Abstract
Purpose: This paper explores the relationship between financial development and output of the service sector in Nigeria over the period 1981-2019. It presents an analysis of the long-run and short-run impacts of financial development on the performance growth of the service sector, as well as the cointegration between the variables. Approach/Methodology/Design: We test the time series for stationarity using Phillips-Perron and Augmented Dickey-Fuller unit root tests. We adopt the Auto-Regressive Distributed Lag (ARDL) approach to analyze the relationship between financial development and service sector performance in Nigeria. Market capitalization, monetization ratio, and the ratio of credit to the private sector to GDP represent the indicators of financial development. Findings: The results of the study show that market capitalization and monetization ratio have significant positive impacts on service sector output, respectively. However, the effect of credit to the private sector on service sector performance is insignificant and negative. We find no cointegration among the investigated variables; while, the result of the error correction estimation indicates that it takes about two years to restore the long-run equilibrium after a deviation. In light of the findings made, this paper concludes that financial development exerts a significant positive effect on service sector performance in Nigeria. Practical Implications: This study is valuable at this period of economic uncertainties in Nigeria. With input from this paper, policymakers in the public sector via the formulation and implementation of effective policy measures such as fiscal measures can channel the benefits of financial sector development to the service sector to create an enabling business environment for the sector, especially as it concerns the provision of private credit to the sector. Originality/value: Based on literature review, this paper for the first time investigated the link between financial development and the performance of the service sector in Nigeria as defined by the CBN Statistical Bulletin 2019 edition.
Highlights
This paper examines the relationship between financial development and the service sector performance in Nigeria
The functional expression of the model becomes: InSGDPt = β0 + β1InMKTCt + β2M2GDPt + β3 InCPSGDPt + ε t where InSGDP represents the natural logarithm of the services sector divided by gross domestic product (GDP); InMKTC stands for the logarithm of market capitalization; M2GDP denotes monetization ratio; InCPSGDP stands for the natural logarithm of credit to the private sector divided by GDP; and, εt denotes the error term
We examine the variables for unit roots using two unit root tests -- Phillip- Perron unit root test and the Augmented Dickey-Fuller (ADF) unit root test
Summary
This paper examines the relationship between financial development and the service sector performance in Nigeria. Several studies on financial sector development and growth nexus maintain the opinion shared by Schumpeter concerning the favourable effect of financial development on output. Previous studies on financial development in Nigeria concentrated more on the overall economic growth (Bassy & Effiong, 2020; Iheanacho, 2016; Audu & Okumoko, 2013; Hashim, 2011; Madichie, Oguanobi, Maduka, & Ekesiobi, 2014; among others). Given this situation, sectoral analyses become important in the on-going debate to ascertain the level of impact from financial development on identified sectors of the economy in Nigeria
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