Financial Sector Development and Economic Growth Nexus in Nigeria: Evidence from Autoregressive Distributed Lag and Toda-Yamamoto Causality Techniques

The paper investigated financial sector development and economic growth nexus in Nigeria using annual time series data spanning 1981 to 2023. The Augmented Dickey-Fuller, Phillips-Perron and Zivot-Andrews unit root tests reveal that the variables have a mixed order of integration, I(0) and I(1). This necessitated the adoption of the autoregressive distributed lag (ARDL) model and the Toda-Yamamoto causality test. The ARDL bounds test confirmed existence of a long-run relationship between financial sector development related variables and economic growth proxy by real gross domestic product (RGDP). Both short-run and long-run impacts were estimated. Findings indicate that financial access and financial depth made negative and insignificant impact on RGDP whereas credit to the private sector and interest rates made positive and significant impact on RGDP in both periods. Financial efficiency had a positive but insignificant impact on RGDP. A bidirectional causality between credit to the private sector and RGDP; and unidirectional causality from interest rates to RGDP were established. Financial access, financial depth and financial efficiency have no causality with RGDP. Based on these findings, the study concludes that financial sector development contributed significantly to economic growth in Nigeria within the period under review, and recommends that financial institutions and their regulatory bodies should increase credit to private sector, access, depth and ensure strict implementation of regulatory policies and use instruments such as interest rate to regulate the economy, to boost the growth of the Nigerian economy.