Financial Deepening and Structural Transformation in Nigeria: An Empirical Analysis of Premature Deindustrialization

This study investigates the impact of financial deepening on structural transformation in Nigeria over the period 1981–2024. Despite significant financial sector expansion—with broad money supply rising from 10.39% to 24.66% of GDP, private sector credit from 7.37% to 20.16% of GDP, and stock market capitalization from 5.0% to 26.8% of GDP—Nigeria has experienced premature deindustrialization rather than genuine structural transformation. Using Principal Component Analysis to construct a composite Financial Deepening Index (FDIX) and employing Autoregressive Distributed Lag (ARDL) bounds testing with error correction mechanisms, this study examines sectoral reallocation, productivity effects, and non-linear threshold dynamics. The findings reveal that financial deepening significantly influences sectoral reallocation, reducing agriculture's GDP share by 0.345% and increasing services by 0.456% per 1% increase in FDIX. However, industrial sector growth is modest (0.234%) and industrial employment has collapsed by 42.9%. Crucially, the study confirms an inverted U-shaped relationship consistent with the 'Too Much Finance' hypothesis, with optimal financial depth thresholds ranging from 29.87 to 33.12 on the FDIX scale—substantially below Nigeria's current FDIX of 83.56. These findings suggest that Nigeria has exceeded the optimal level of financial deepening, and further financial expansion without addressing structural constraints may be counterproductive. The study contributes to development economics literature by simultaneously testing supply-leading, Schumpeterian innovation, and threshold frameworks in a unified Nigerian context, providing empirical evidence for finance-growth bottlenecks in resource-dependent developing economies.