FINANCIAL DEEPENING AND ECONOMIC GROWTH IN NIGERIA: A CAUSALITY AND IMPACT ANALYSIS

The controversial issues surrounding the direction of causality links between financial deepening and economic growth have been the issues of much concern in the finance literature. This paper investigates the long and short-run and causality relationship between financial deepening and economic growth in Nigeria for the period 1986-2019. Times series data are obtained from secondary source, that is, from the Central Bank of Nigeria Statistical Bulletin. The paper adopted ex-post facto research design and employed Johansen co-integration techniques, Error Correction Model as well as the Toda-Yamamoto Granger causality test was also employed to investigate the long and short run and causalityrelationship between financial deepening variables (broad money supply, credit to private sector and value of stock traded and insurance assets) andeconomic growth (gross domestic product growth rate). Findings from the study reveal that there are short and long run relationship between economic growth and financial deepening variables. The vector regression estimates showed sufficient evidence that the financial deepening significantly impacts on economic growth in Nigeria in the short and long-run while Toda – Yamamoto VAR Granger Causality tests reveal that there was a strong and significant unidirectional causality, running from the money supply, credit to private sector and stock market turnover proxies for financial deepening to economic growth but no causality relationship between stock market liquidity and economic growth. This lends support to the supply-leading hypothesis. Therefore, the paper concludes that the financial sector is a catalyst for
economic growth in Nigeria. It recommends amongst other that the policy makers should design policies that will promote an efficient banking and non-banking, and capital markets deepening, remove obstacles that impede their growth and strengthen healthy and competitiveness of the financial intermediaries in order to boost economic growth in Nigeria.