Business Administration and Business Economics
Abstract
The study examined the determinants of financial sector development in Nigeria in an error
correction modelling framework, and with OLS for robustness checks, using data from 1980 to 2017.
The results show that, banking sector reform, gross capital formation, government expenditure, interest
rate spread, output size and trade openness were significant determinants of financial sector
development in both the short- and long run. Proxy for economic misery was only significant in the
ECM equation, while literacy and human development metric was significant in the long-run equation.
Natural resource dependence, proxy by ratio of natural resource rent to GDP, was negatively related to
financial sector development in Nigeria, though the coefficient was not significant at conventional
levels. Economic misery, interest rate spread and inflation were observed to undermine financial
development in Nigeria. The study recommends the continuation of the process of financial
liberalization because of its immerse benefits of promoting competition amongst financial institutions
with attendant positive effects of reducing interest rate gap. Domestic output, measured by the real
GDP, should be enhanced with appropriate stabilising policy, whether fiscal or monetary policy.
Additionally, efforts should be enhanced to limit the effects of macroeconomic instability on financial
sector development. Lastly, the study recommends efficient management of natural resources to enjoy
a non-declining contribution to the development of an inclusive financial system in Nigeria.
References
Akinlo, A.E. & Egbetunde, T. (2010). Financial Development And Economic Growth: The Experience
of 10 Sub-Saharan African Countries Revisited. The Review of Finance and Banking, Vol. 2, no. 1, pp.
17-28.
Ang, J.B. & McKibbin, W.J. (2007). Financial Liberalization, Financial Sector Development and
Growth: Evidence from Malaysia. Journal of Development Economics, Vol. 84, pp. 215-233.
Anyanwu, J.C. (1995). Structural Adjustment Programmes, Financial Deregulation and Financial
Deepening in Sub-Sahara African Economies: The Nigerian Case. Journal of Economic and Financial
Review, Vol. 1, pp. 1-23.
Asteriou, D. & Hall, S.G. (2007). Applied Econometrics. Revised Edition. New York. Palgrave
Macmillan.
Beck, T. (2011). Finance and Oil: Is There a Curse in Financial Development? European Banking
Centre Discussion Paper, No. 2011-004. Tilburg, Netherlands.
Beck, T.; Demirguc-Kunt, A. & Levine, R. (2002). Law, Endowments, and Finance. NBER Working,
Papers, w9089.
Bekaert, G.; Harvey, C.R. & Lundblad, C. (2005). Does financial liberalisation Spur Growth? Journal
of Financial Economics, Vol. 77, no. 1, pp. 3-55.
Blanco, L. (2009). The Finance-Growth Link in Latin America. Southern Economic Journal, Vol. 76,
No. 1, pp. 224-248.
Greenwood, J. & Jovanovic, B. (1990). Financial development, Growth and the Distribution of Income.
Journal of Political Economy, 98(5), pp. 1076- 1107.
Guiso, L.; Sapienza P. & Zingales, L. (2006). The Cost of Banking Regulation. NBER Working Paper
No. 12501. National Bureau of Economic Research, Cambridge, MA.
Hurlin, C. & Venet, B. (2008). Financial Development and Growth: A re-examination using a panel
Granger causality test. Working Paper Halshs-003199995_vl.
Iyare, S. & Moore, W. (2009). Financial sector development and growth in small open economies.
Applied Economics, Vol. 43, no. 10, pp. 1289-1297.
Iyoha, M.A (1992). Oil dependency and the Nigeria’s development Problematique: Strategies for Rapid
Socio - Economic Transformation by the year 2000. A lecture delivered at the civil service forum,
organised by the Edo State Government at Urhokpota hall, Kings Square, Benin City on September 25.
Iyoha, M.A (2004). Macroeconomics: Theory and Policy. Mindex Publishing, Benin City.
Jalilian, H. & Kirkpatrick, C. (2007). Does Financial Development Contribution to Poverty Reduction?
Journal of Development Studies, Vol. 41, No. 4, pp. 636-656.
Johansen S. & K. Juselius (1990), Maximum Likelihood Estimation and Inferences on Cointegrationwith
Applications to the Demand for Money, Oxford Bulletin of Economics and Statistics, Vol. 52, pp.
169-210.
Jung, W.S. (1986). Financial Development and Economic Growth: International Evidence. Economic
Development and Cultural Change, Vol. 34, no. 2, pp. 333-346.
King, R.G. & Levine, R. (1993). Financial and Growth: Schumpeter might be Right. The Quarterly
Journal of Monetary Economics, Vol. XXXII, pp. 513-42.
Kose, M.A.; Prasad, E.S. & Terrones, M.E. (2003). Financial Integration and Macroeconomic
Volatility. IMF Working Paper WP/03/50. Washington, DC: International Monetary Fund.
Kose, M.A.; Prasad, E.S.; Rogoff, K. & Wei, S. (2006). Financial Globalisation: A Reappraisal. IMF
Working Paper WP/06/189. Washington, DC: International Monetary Fund.
Kurronen, S. (2012). Financial Sector in Resource-Dependent Economies, BOFIT Discussion Papers
6.2012. Bank of Finland, Institute for Economies in Transition.
La Porta, R.; Lopez de Silanes, F. & Shleifer, A. (2002). Government Ownership of Banks. Journal of
Finance, Vol. 57, no. 1, pp. 265–301.
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A. & Vishny, R. (1998). Law and Finance. Journal of
Political Economy, Vol. 106, pp. 1113–155.
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A. & Vishny, R. (1997). Legal Determinants of External
Finance. Journal of Finance, Vol. 52, pp. 1131–1150.
Law, S.H. & Habibullah, M.S. (2009). The determinants of financial development: institutions,
openness and financial liberalisation. South African Journal of Economics, Vol. 77, no. 1, pp. 45-58.
Levine, R. (2005). Finance and Growth: Theory and Evidence in Aghion, P and S.N. Durlauf. (eds.),
Handbook of Economic Growth, London: Elsevier 1A, pp. 865-934.
Levine, R.; Loayza, N. & Beck, T. (2000). Financial Intermediation and Growth: Causality and Causes.
Journal of Monetary Economics, Vol. 46, no. 1, pp. 31–77.
Levine, R. (1997). Financial Development and Economic Growth: Views and Agenda. Journal of
Economic Literature, Vol. XXXV (June 1997), pp. 688–726.
Levine, R. & Zervos, S. (1996). Stock Market Development and Long-Run Growth. The World Bank
Economic Review, Vol. 10, no. 2, pp. 323-339.
Levine, R.; Loazya, N. & Beck, T. (2000). Financial Intermediation and Growth: Causality and Causes.
Journal of Monetary Economics, Vol. 46 (August 2000), pp. 31-77.
Levine, Ross (2005). Finance and Growth: Theory and Evidence. In Philippe Aghion and Steven
Durlauf (eds.). Handbook of Economic Growth. Amsterdam: Elsevier Science.
McKinnon, R. (1973). Money and Capital in Economic Development. Washington, DC: Brookings
Institution.
Mckinnon, R.I. (1973). Money and Capital in Economic Development. Washington, DC: The
Brookings Institution.
Murinde, V. & Eng, F.S.H. (1994). Financial Development and Economic Growth in Singapore:
Demand- Following and Supply-Leading? Applied Financial Economics, Vol. 4, no. 6, pp. 391-404.
Ndikumana, L. (2000). Financial Determinants of Domestic Investment in Sub-Saharan Africa:
Evidence from Panel Data. World Development, Elsevier, Vol. 28, no. 2, pp. 381-400.
Obstfeld, M. (2009). International finance and growth in developing countries: What have we learned?
IMF Staff Papers, Vol. 56, no. 1, pp. 63-111.
Odhiambo, N.M. (2004). Is Financial Development Still a Spur to Economic Growth? A Causal
Evidence from South Africa. Savings and Development, Vol. 28, pp. 47-62.
Odhiambo, N.M. (2008). Financial Depth, Savings and Economic Growth in Kenya: A Dynamic Causal
Linkage. Economic Modelling, Vol. 25, No. 4, pp. 704-713.
Oke, B.O.; Uadiale, O.M. & Okpala, O.P. (2011). Impact of Workers’ Remittances on Financial
Development in Nigeria. International Business Research, Vol. 4, no. 4, pp. 218-225.
Oyaromade, R. (2005). Financial Sector Reforms and Financial Savings in Nigeria. Selected papers
from the Nigerian Economic Society Conference, The Nigerian Journal of Economic and Social
Studies.
Perkins, D.H.; Radelet, S. & Lindauer, D.L. (2006). Economics of Development. W.W. London: Norton
and Company Ltd..
Rehman, M.I.; Ali, N. & Nasir, N.M. (2015). Linkage between Financial Development, Trade Openness
and Economic Growth: Evidence from Saudi Arabia. Journal of Applied Finance and Banking, Vol. 5,
no. 6, pp. 127-141.
Rioja, F. & Valev, N. (2004). Finance and the Sources of Growth at Various Stages of Economic
Development. Economic Inquiry, Vol. 42, no. 1, pp. 127-140.
Robinson, J. (1952). The Rate of Interest and other Essays. London: Macmillan
Roubini, N. & Sala-i-Martin, X. (1992). Financial Repression and Economic Growth. Journal of
Development Economics, Vol. 39, pp. 5 – 30.
Saaed, A.J. & Hussain, M.A. (2015). The Causal Relationship among Trade Openness, Financial
Development and Economic Growth: Evidence from Kuwait. Journal of Emerging issues in
Economics, Finance and Banking, Vol. 4, no. 1, pp. 1385-1409.
Sami, J. (2013). Remittances, Banking Sector Development and Economic Growth in Fiji. International
Journal of Economics and Financial Issues, Vol. 3, no. 2, pp. 503-511.
Senbet, L.W. & Otchere, I. (2005). Financial Sector Reforms in Africa: Perspectives on Issues and
Policies. Paper prepared for the annual World Bank conference on development economics
(AWBCDE), Dakar.
Serhan C. & Mohammad, R. (2013). Searching for the Finance-Growth Nexus in Libya, IMF Working
Paper WP 13/92. Washington: International Monetary Fund
Shahbaz, M.; Rehman, I.U. & Muzaffar, A.T. (2014). Re-Visiting financial development and economic
growth nexus: the role of capitalization in Bangladesh. South African Journal of Economics, Vol. 83,
no. 3, pp. 452-471.
Shaw, E. (1973). Financial Deepening in Economic Development. Oxford University Press.
Soyibo, A. (1994). Financial liberalisation and bank restructuring in SSA: Some lessons for sequencing
and policy design. Presented at the plenary session of the workshop of the AERC, Nairobi, December
4-9.
Todaro, M.P. & Smith, S.C. (2011). Economic development. 11th Edition. Pearson Education, New
York.
Tressel, T. & Detragiache, E. (2008). Do financial sector reforms lead to financial development?
Evidence from a new dataset, IMF Working Paper WP/08/265.Washington: International Monetary
Fund.
Zhang, R. & Naceur, S.B. (2019). Financial development, inequality, and poverty: Some international
evidence. International Review of Economics & Finance, Vol. 61, pp. 1-16.
of 10 Sub-Saharan African Countries Revisited. The Review of Finance and Banking, Vol. 2, no. 1, pp.
17-28.
Ang, J.B. & McKibbin, W.J. (2007). Financial Liberalization, Financial Sector Development and
Growth: Evidence from Malaysia. Journal of Development Economics, Vol. 84, pp. 215-233.
Anyanwu, J.C. (1995). Structural Adjustment Programmes, Financial Deregulation and Financial
Deepening in Sub-Sahara African Economies: The Nigerian Case. Journal of Economic and Financial
Review, Vol. 1, pp. 1-23.
Asteriou, D. & Hall, S.G. (2007). Applied Econometrics. Revised Edition. New York. Palgrave
Macmillan.
Beck, T. (2011). Finance and Oil: Is There a Curse in Financial Development? European Banking
Centre Discussion Paper, No. 2011-004. Tilburg, Netherlands.
Beck, T.; Demirguc-Kunt, A. & Levine, R. (2002). Law, Endowments, and Finance. NBER Working,
Papers, w9089.
Bekaert, G.; Harvey, C.R. & Lundblad, C. (2005). Does financial liberalisation Spur Growth? Journal
of Financial Economics, Vol. 77, no. 1, pp. 3-55.
Blanco, L. (2009). The Finance-Growth Link in Latin America. Southern Economic Journal, Vol. 76,
No. 1, pp. 224-248.
Greenwood, J. & Jovanovic, B. (1990). Financial development, Growth and the Distribution of Income.
Journal of Political Economy, 98(5), pp. 1076- 1107.
Guiso, L.; Sapienza P. & Zingales, L. (2006). The Cost of Banking Regulation. NBER Working Paper
No. 12501. National Bureau of Economic Research, Cambridge, MA.
Hurlin, C. & Venet, B. (2008). Financial Development and Growth: A re-examination using a panel
Granger causality test. Working Paper Halshs-003199995_vl.
Iyare, S. & Moore, W. (2009). Financial sector development and growth in small open economies.
Applied Economics, Vol. 43, no. 10, pp. 1289-1297.
Iyoha, M.A (1992). Oil dependency and the Nigeria’s development Problematique: Strategies for Rapid
Socio - Economic Transformation by the year 2000. A lecture delivered at the civil service forum,
organised by the Edo State Government at Urhokpota hall, Kings Square, Benin City on September 25.
Iyoha, M.A (2004). Macroeconomics: Theory and Policy. Mindex Publishing, Benin City.
Jalilian, H. & Kirkpatrick, C. (2007). Does Financial Development Contribution to Poverty Reduction?
Journal of Development Studies, Vol. 41, No. 4, pp. 636-656.
Johansen S. & K. Juselius (1990), Maximum Likelihood Estimation and Inferences on Cointegrationwith
Applications to the Demand for Money, Oxford Bulletin of Economics and Statistics, Vol. 52, pp.
169-210.
Jung, W.S. (1986). Financial Development and Economic Growth: International Evidence. Economic
Development and Cultural Change, Vol. 34, no. 2, pp. 333-346.
King, R.G. & Levine, R. (1993). Financial and Growth: Schumpeter might be Right. The Quarterly
Journal of Monetary Economics, Vol. XXXII, pp. 513-42.
Kose, M.A.; Prasad, E.S. & Terrones, M.E. (2003). Financial Integration and Macroeconomic
Volatility. IMF Working Paper WP/03/50. Washington, DC: International Monetary Fund.
Kose, M.A.; Prasad, E.S.; Rogoff, K. & Wei, S. (2006). Financial Globalisation: A Reappraisal. IMF
Working Paper WP/06/189. Washington, DC: International Monetary Fund.
Kurronen, S. (2012). Financial Sector in Resource-Dependent Economies, BOFIT Discussion Papers
6.2012. Bank of Finland, Institute for Economies in Transition.
La Porta, R.; Lopez de Silanes, F. & Shleifer, A. (2002). Government Ownership of Banks. Journal of
Finance, Vol. 57, no. 1, pp. 265–301.
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A. & Vishny, R. (1998). Law and Finance. Journal of
Political Economy, Vol. 106, pp. 1113–155.
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A. & Vishny, R. (1997). Legal Determinants of External
Finance. Journal of Finance, Vol. 52, pp. 1131–1150.
Law, S.H. & Habibullah, M.S. (2009). The determinants of financial development: institutions,
openness and financial liberalisation. South African Journal of Economics, Vol. 77, no. 1, pp. 45-58.
Levine, R. (2005). Finance and Growth: Theory and Evidence in Aghion, P and S.N. Durlauf. (eds.),
Handbook of Economic Growth, London: Elsevier 1A, pp. 865-934.
Levine, R.; Loayza, N. & Beck, T. (2000). Financial Intermediation and Growth: Causality and Causes.
Journal of Monetary Economics, Vol. 46, no. 1, pp. 31–77.
Levine, R. (1997). Financial Development and Economic Growth: Views and Agenda. Journal of
Economic Literature, Vol. XXXV (June 1997), pp. 688–726.
Levine, R. & Zervos, S. (1996). Stock Market Development and Long-Run Growth. The World Bank
Economic Review, Vol. 10, no. 2, pp. 323-339.
Levine, R.; Loazya, N. & Beck, T. (2000). Financial Intermediation and Growth: Causality and Causes.
Journal of Monetary Economics, Vol. 46 (August 2000), pp. 31-77.
Levine, Ross (2005). Finance and Growth: Theory and Evidence. In Philippe Aghion and Steven
Durlauf (eds.). Handbook of Economic Growth. Amsterdam: Elsevier Science.
McKinnon, R. (1973). Money and Capital in Economic Development. Washington, DC: Brookings
Institution.
Mckinnon, R.I. (1973). Money and Capital in Economic Development. Washington, DC: The
Brookings Institution.
Murinde, V. & Eng, F.S.H. (1994). Financial Development and Economic Growth in Singapore:
Demand- Following and Supply-Leading? Applied Financial Economics, Vol. 4, no. 6, pp. 391-404.
Ndikumana, L. (2000). Financial Determinants of Domestic Investment in Sub-Saharan Africa:
Evidence from Panel Data. World Development, Elsevier, Vol. 28, no. 2, pp. 381-400.
Obstfeld, M. (2009). International finance and growth in developing countries: What have we learned?
IMF Staff Papers, Vol. 56, no. 1, pp. 63-111.
Odhiambo, N.M. (2004). Is Financial Development Still a Spur to Economic Growth? A Causal
Evidence from South Africa. Savings and Development, Vol. 28, pp. 47-62.
Odhiambo, N.M. (2008). Financial Depth, Savings and Economic Growth in Kenya: A Dynamic Causal
Linkage. Economic Modelling, Vol. 25, No. 4, pp. 704-713.
Oke, B.O.; Uadiale, O.M. & Okpala, O.P. (2011). Impact of Workers’ Remittances on Financial
Development in Nigeria. International Business Research, Vol. 4, no. 4, pp. 218-225.
Oyaromade, R. (2005). Financial Sector Reforms and Financial Savings in Nigeria. Selected papers
from the Nigerian Economic Society Conference, The Nigerian Journal of Economic and Social
Studies.
Perkins, D.H.; Radelet, S. & Lindauer, D.L. (2006). Economics of Development. W.W. London: Norton
and Company Ltd..
Rehman, M.I.; Ali, N. & Nasir, N.M. (2015). Linkage between Financial Development, Trade Openness
and Economic Growth: Evidence from Saudi Arabia. Journal of Applied Finance and Banking, Vol. 5,
no. 6, pp. 127-141.
Rioja, F. & Valev, N. (2004). Finance and the Sources of Growth at Various Stages of Economic
Development. Economic Inquiry, Vol. 42, no. 1, pp. 127-140.
Robinson, J. (1952). The Rate of Interest and other Essays. London: Macmillan
Roubini, N. & Sala-i-Martin, X. (1992). Financial Repression and Economic Growth. Journal of
Development Economics, Vol. 39, pp. 5 – 30.
Saaed, A.J. & Hussain, M.A. (2015). The Causal Relationship among Trade Openness, Financial
Development and Economic Growth: Evidence from Kuwait. Journal of Emerging issues in
Economics, Finance and Banking, Vol. 4, no. 1, pp. 1385-1409.
Sami, J. (2013). Remittances, Banking Sector Development and Economic Growth in Fiji. International
Journal of Economics and Financial Issues, Vol. 3, no. 2, pp. 503-511.
Senbet, L.W. & Otchere, I. (2005). Financial Sector Reforms in Africa: Perspectives on Issues and
Policies. Paper prepared for the annual World Bank conference on development economics
(AWBCDE), Dakar.
Serhan C. & Mohammad, R. (2013). Searching for the Finance-Growth Nexus in Libya, IMF Working
Paper WP 13/92. Washington: International Monetary Fund
Shahbaz, M.; Rehman, I.U. & Muzaffar, A.T. (2014). Re-Visiting financial development and economic
growth nexus: the role of capitalization in Bangladesh. South African Journal of Economics, Vol. 83,
no. 3, pp. 452-471.
Shaw, E. (1973). Financial Deepening in Economic Development. Oxford University Press.
Soyibo, A. (1994). Financial liberalisation and bank restructuring in SSA: Some lessons for sequencing
and policy design. Presented at the plenary session of the workshop of the AERC, Nairobi, December
4-9.
Todaro, M.P. & Smith, S.C. (2011). Economic development. 11th Edition. Pearson Education, New
York.
Tressel, T. & Detragiache, E. (2008). Do financial sector reforms lead to financial development?
Evidence from a new dataset, IMF Working Paper WP/08/265.Washington: International Monetary
Fund.
Zhang, R. & Naceur, S.B. (2019). Financial development, inequality, and poverty: Some international
evidence. International Review of Economics & Finance, Vol. 61, pp. 1-16.
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2021-07-01
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Collective Authors. (2021). Business Administration and Business Economics: Array. Acta Universitatis Danubius. Œconomica, 15(4). Retrieved from https://dj.univ-danubius.ro/index.php/AUDOE/article/view/1217
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