Financial deepening and economic growth: A comparative analysis of Nigeria and South Africa

This study examined the effects of financial deepening on economic growth. The objective was to compare the effects of financial deepening on Nigeria’s and South Africa’s economic growth. Time series data were sourced from Central Bank of Nigeria Statistical Bulletin and World Data Base. Nigeria’s and South Africa’s real gross domestic products were modeled as the function of private sector credit, broad money supply, market capitalization and interest rate spread. The study adopted the Vector Error Correction mechanism to compare the effect of financial deepening on economic growth. The study found that that South Africa have higher speed of adjustment than Nigeria, that financial deepening variables as formulated in the model explained more in variation of south African real gross domestic product than Nigeria. Private sector credit added more to South African real gross domestic product than Nigeria. Market Capitalization Ratio added more to South African real gross domestic product than Nigeria broad money supply added more to South African real gross domestic product than Nigeria. From the findings we conclude that financial sector deepening has more effect on South African economic growth than Nigeria. We recommend the need for further reforms in the Nigeria financial market to deepen the operational efficiency of the financial institutions for effective financial intermediation enhancing economic growth in Nigeria like South Africa. The monetary authorities should ensure adequate money supply in the economy such that will reduce cost of borrowing, enhance investment borrowings to achieve higher level output for the growth of Nigeria’s economy. Like the capital market of South Africa, Nigeria’s capital market should further be internationalized; this will enhance inflow of foreign portfolio and real investment to Nigeria economy for better economic growth and the monetary authorities should formulate policies such as reduced interest rate policy for investment borrowing and policy to increase deposit rates to enhance fund mobilization and increase lending to key sectors of the economy. Keywords: Financial deepening, economic growth, Comparative Analysis, Nigeria, South Africa.