EFFECT OF FINANCIAL SECTOR ON ECONOMIC GROWTH: EVIDENCE FROM DEPOSIT MONEY BANKS IN NIGERIA

1 Ahmed Mohammed 2 Alhassan Kawu Abubakar 3 Usman Mustapha Badeggi

Abstract

Aftermath of global financial meltdown of late 2000s, there were numerous strategies that were
introduced in Nigeria to strengthen the financial sector. As a guide against the effect of similar crisis
in the future, various strategies and reforms were put in place to ensure that the financial sector is
well positioned and strong enough to contribute to the economic growth of Nigeria. This study
therefore, investigated the effect of financial sector and economic growth in Nigeria during the
period of 2004 – 2018. Specifically, it seeks to examine the effect of financial deepening measured as
the ratio of profitability, investment, deposit, advances, inflation and interest rate to gross domestic
product. The study adopted econometric techniques such as Augmented Dickey-Fuller (ADF) and the
Phillip-Perron (PP), Unit Root Tests, regression and causality test were used to accomplish its
objectives. The data were sourced from the financial statement of thirteen listed deposit money
banks as at December, 2018 (2004-2018) and CBN statistical bulletin of 2018. The results revealed
that financial sector has significant positive relationship on economic growth in Nigeria. Also,
revealed was that there was insignificant impact of advances, inflation and interest rate on banking
sector development to economic growth in Nigeria. The policy implication of these findings is that
financial sector is one of the desired panaceas to achieving economic growth in Nigeria and any
policy targeted on financial development is expected to positively affect the level of economic growth
in Nigeria. Based on these findings, the study therefore recommends among others that government
should redirect its policy on financial sector i.e. deposit money banks as well as the stock market are
the most vibrant institutions in the Nigerian financial system. Thus, the government through the
Central Bank should pursue favourable policies that will energies the financial sector while ensuring
effective and efficient functioning of the stock exchange devoid of scams and malpractices in order to
allow investors the access to long-run resources that are indispensable for the financing of medium
and long-term projects.These will boost private sector development and investments which is the
engine of growth and development. Finally, the Central Bank of Nigeria should constantly monitor
the implementation of monetary policy mechanisms for compliance by deposit money banks among
financial sector in Nigeria.