FINANCIAL SECTOR PERFORMANCE AND ECONOMIC GROWTH VIS-A-VIS DEVELOPMENT IN NIGERIA: A GRANGER CAUSALITY APPROACH

Abstract

The study was undertaken with the objective of examining the causal relationship between financial sector performance and economic development vis-a-vis growth of Nigeria. The variables used were GDP, Human Development Index (HDI), which represents the dependent variables for the two models. For the independent variables, Credit to the Private Sector (CPS) which represents the credit activity of the financial sector; Interest Rate Spread (IRS) which represents the efficiency, competition and concentration of the financial sector; Market Turnover Ratio (TR) which represents the liquidity of the financial sector; Other variables that influence economic growth and development were introduced Inflation (INF) and Total Government Expenditure (GE). Moreover, the study period covers 1996 to 2016 and the data collected within the period was analysed using ADF Test and Granger Causality Test. The results showed that IRS causes economic growth which conforms to the supply leading hypothesis theory; but GDP causes financial sector performance through the Credit to Private Sector (CPS), which means the more the economy grows financial sector performance through its credit allocation function increases. This conforms to the demand following hypothesis theory. However, the overall financial sector performance couldn’t facilitate effective economic growth vis-à-vis economic development in Nigeria. Thus, regulatory bodies of the financial sector should set or implement monetary policy program that would be favourable for the efficient operations of financial institutions.