IMPACT OF FINANCIAL SECTOR DEVELOPMENT ON ECONOMIC GROWTH IN NIGERIA

Abstract

This study investigated the influence of financial sector development on economic growth in Nigeria, with particular focus on domestic credit to the private sector, inflation, interest rate spread, and broad money supply. The analysis was anchored on the McKinnon–Shaw financial deepening hypothesis and the supply-leading theory of finance. Annual time series data spanning 1990 to 2024 were sourced from the World Bank Development Indicators. The methodology combined descriptive statistics, unit root tests, Johansen cointegration, and the Vector Error Correction Model (VECM) to examine both the short-run and long-run interactions among the variables. The long-run estimates indicate that domestic credit to the private sector and interest rate spread significantly enhance economic growth, highlighting the importance of access to private credit and efficient intermediation margins. By contrast, broad money supply has a negative and significant impact, suggesting that excess liquidity may undermine productive activity and fuel macroeconomic distortions. Inflation remains statistically insignificant, reflecting inefficiencies in price stability mechanisms and weak monetary policy transmission. The short-run results show limited and insignificant effects across variables, with the error correction term revealing a slow adjustment speed of 3.9 percent towards equilibrium. This study concluded that financial development enhances economic growth. The study recommends improved credit channels to private sector, improving monetary transmission mechanisms, and managing liquidity so as to enhance financial sector deepening which will influence sustainable economic growth.