Financial Development and Economic Growth in Nigeria: Evidence from Threshold Modelling

Abstract

This paper re-examined the relationship between financial development and economic growth in Nigeria. Unlike existing studies, we attempted to assess the information content of non-linearities in the finance–growth nexus for Nigeria. We also attempted to inventively gauge the impact of financial reforms on the Nigerian economy particularly in terms of economic growth. Using annual data covering the period 1960–2010, we factored in threshold effects through financial development (FD) measures. Following these, we unearth a number of interesting results. First, financial development negatively impacted growth but a sign reversal resulted in accounting for threshold-type effects. This is indicative of some turning points in the finance–growth association. Second, using a composite index of FD led to a similar outcome. Third, on the heels of sample splitting, the coefficients for the pre- and post-reform era are hardly distinguishable casting doubt on the efficacy of financial system reforms. On the basis of the foregoing, broader structural reforms should pervade Nigeria’s policy space if the aim of sustained, inclusive and employment-generating growth is to be ​realized.

Keywords: Financial development, Economic growth, Non-linearities, Nigeria

JEL Classification: O16; E44; F36; G28