Economic Growth in the Wake of Nigerian Financial System Development: A Model of ARDL Bounds Test

UKPABI, INNOCENT OGBU¹, ONU CALISTUS², ABDUL-MALIQ YEKEEN³

Department of Banking and Finance, University of Nigeria Nsukka
Department of Banking and Finance, University of Nigeria Nsukka
Department of Banking and Finance, University of Abuja, Nigeria

Abstract

This paper assesses the relationship between financial system development and economic growth in Nigeria. Using the ARDL bounds testing approach, the study establishes both short-run and long-run relationships between financial system development and economic growth in Nigeria for the period 1990-2020. The findings reveal that the financial development index (FDI) and money supply (MS) have a non-significant positive impact on Nigeria’s real GDP. The policy implications suggest that the development of the financial system is crucial for economic growth in emerging economies like Nigeria. Based on these results, the researchers recommend the monetary authority to replace the financial inclusion secretariat with a financial system development secretariat to expand policies on financial inclusion and deepen financial system access, efficiency, and security. Policies on cybersecurity should be aggressively pursued to address contemporary issues in the global financial system, and plausible monetary tools should be adopted for optimal money supply in the economy.

Indexed Terms: Economic Growth, Financial System, Development.

Introduction
The critical role of the financial system in developing countries positions it as a strategic pathway for economic emancipation. As a national economic hub and a crucial tool for attaining a sustainable economy, financial system development has become a global phenomenon, playing a catalytic role, especially in emerging economies.

Ighoroje and Egedi (2015) assert that the Nigerian economy revolves around the hub of an active financial system. Over time, the financial system has witnessed significant dynamism, driven by financial performance and innovative practices, especially in emerging markets like Nigeria. Financial system development stimulates the increase in the number of financial institutions and markets, sophisticates the payment system, and provides alternatives to holding money. This dynamism results mainly from technological advancements and increased competition as the number of institutions grows (Kibaara, 2015).

Hayat and Ahmad (2018) highlight that the relationship between financial development and economic growth has been a significant research interest for decades. Developing countries have committed to the notion that economic growth is achievable through financial sector development. According to Ebiringa and Duruibe (2015), numerous studies have documented evidence on the fundamental role of financial system development in economic growth. However, existing studies have explored segmented components of financial system development, focusing either on specific financial institutions or markets and developed economies. This focus limits the area of coverage, leaving a gap in understanding the aggregate financial system’s impact on emerging economies like Nigeria.

Consequently, this paper aims to assess the relationship between financial system development and economic growth in Nigeria.


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