FINANCIAL DEVELOPMENT AND FOREIGN PORTFOLIO INVESTMENT IN NIGERIA

Abstract

This study investigates the impact of financial development on foreign portfolio investment (FPI) in Nigeria using annual data from 1990 to 2024 sourced from the World Development Indicators. The analysis applies the Cross-sectional Autoregressive Distributed Lag (CS-ARDL) approach to capture both short-run and long-run dynamics. Financial development is represented by a composite index constructed through principal component analysis of stock market capitalization, market liquidity, and private sector credit, while control variables include GDP growth, exchange-rate volatility, inflation, and interest-rate differentials. Empirical results reveal that stock market capitalization, liquidity, and private sector credit exhibit positive but statistically insignificant long-run relationships with FPI. Conversely, short-run factors, particularly recent credit expansion and favourable interest-rate differentials, exert significant influence, suggesting that temporary improvements in domestic credit and interest-rate policies attract foreign portfolio inflows. The findings indicate that financial development has only a modest effect on FPI, highlighting the importance of macroeconomic stability and institutional quality. Policy recommendations include strengthening exchange-rate management to reduce currency risk, adopting credible inflation-targeting frameworks to curb volatility, and enhancing credit market efficiency. These measures create a stable investment environment that indirectly supports financial development and fosters sustained FPI inflows.