Financial Development in Nigeria: A Causal Imperative for Economic Growth

This research investigated the causal relationship between financial development and economic growth in Nigeria from 1994 to 2023. Secondary data were obtained from the Central Bank of Nigeria's Statistical Bulletin and the World Bank's Financial Development Indicators Database. The unit root test was used to establish data stationarity, revealing conflicting results that necessitated the application of Auto Regressive Distributed Lag and the Granger Causality Test. The findings indicated that the private sector credit ratio to gross domestic product, the number of bank accounts per 100,000 persons, and the lending-deposit spread were significant predictors of Nigeria's gross domestic product. Furthermore, the applied indicators of financial development neither facilitate nor enhance economic growth, nor does economic growth assist or promote the utilized measures of financial development throughout the research period, as shown by the lack of causation in our findings. Consequently, the research indicated that of the variables used, just one – the asset quality ratio – did not substantially affect economic growth, and moreover, none of the four measures of financial development used fostered economic expansion. The study advocated for Nigerian banks to strengthen their credit policies and rigorously comply with them, as this would mitigate non- performing loans and subsequently improve asset quality ratios. Additionally, it emphasized the necessity for banks to enhance their financial inclusion initiatives, which would attract more deposits, thereby augmenting their credit capacity. An increase in credit provision would elevate operational efficiency and, consequently, bolster their contribution to the growth of the Nigerian economy.