The effect of financial development on real sector in Nigeria : an empirical analysis

This study examines the influence of financial development on the real sector in Nigeria, focusing on agriculture, manufacturing, and services. Nigeria faces many economic challenges, including limited access to credit, high borrowing costs, and financial inefficiencies. The aim of this research is to determine whether financial development helps the real sector grow or creates more barriers. The study uses Principal Component Analysis (PCA) to create a Financial Development Index (FDI) and applies the Autoregressive Distributed Lag (ARDL) model to examine both short-run and long-run effects. The Granger-causality test is also used to check whether financial development influences real sector growth or if the relationship works both ways. The results show that financial development negatively affects agriculture, manufacturing, and services in both the short and long run. This is different from traditional economic theories, such as the supply-leading hypothesis, which suggests that financial development should support economic growth. Instead, the findings suggest that problems like high interest rates, limited access to credit, and financial market inefficiencies prevent financial development from benefiting the real sector. The findings reveal that while financial development may have short-term negative effects on the real sector, these effects are not persistent over the long term. Further analysis was done by separating financial development into its main components, including broad money supply, private sector credit, stock market capitalisation, total debt securities, and bank assets. The findings confirm that private sector credit and total debt securities have the most negative impact on the real sector, showing that Nigeria’s financial system is not fully supporting business growth. This study suggests that financial policies should be improved to make credit more accessible and affordable, ensuring that financial development leads to real economic growth. Policies should focus on reducing borrowing costs, strengthening financial regulations, and supporting businesses in key sectors.