Developing an Empirically Validated Theory of Bank-Based versus Market-Based Financial Systems for Economic Stability in Oil-Dependent Economies: Nigerian Evidence

The comparative merits of bank-based versus market-based financial systems for economic stability in oil-dependent economies constitute an unresolved theoretical question, and Nigeria's experience of financial system evolution alongside oil revenue dependence provides a unique empirical setting for advancing this debate. This study develops and empirically validates an original theory of financial system architecture and economic stability for oil-dependent economies, challenging the standard bank-versus-market dichotomy by proposing a resource revenue financial cycle model that captures the distinct macro-financial dynamics of petroleum economies. The theoretical framework integrates the financial system architecture literature, the Dutch disease model, and the financial accelerator theory into an original model showing how oil revenue windfalls interact with bank-based versus market-based financial systems to produce differential stability outcomes during boom-bust cycles. Testable predictions are derived for Nigeria, including the hypothesis that market-based systems provide superior shock-absorbing capacity during oil price busts due to risk-sharing properties, while bank-based systems may amplify oil revenue credit cycles. The Bayesian structural vector autoregression methodology with time-varying parameters was employed, using quarterly data from 1990 to 2022. Financial architecture was characterised by a continuous bank-market index. Results confirm the theoretical prediction: market-based finance components produce stability-enhancing outcomes during oil price bust episodes (impulse response coefficient = -0.28, p < 0.05), while bank credit growth amplifies boom-bust volatility. These findings advance both oil economy macrofinance theory and the comparative financial systems literature with original Nigerian evidence. Keywords: bank-based financial system, market-based financial system, economic stability, oil-dependent economy, Nigeria