Empirical Analysis of the Long-Run Relationship Between Financial Development and Economic Growth in Nigeria

The finance-growth nexus is a foundational question in development economics, and empirically establishing the long-run relationship between financial sector development and economic growth for Nigeria fills an important empirical gap in the African development finance literature. This study empirically examined the long-run relationship between financial sector development and economic growth in Nigeria using annual data from 1986 to 2022. Financial development was proxied by domestic credit to the private sector as a percentage of GDP, money supply growth, and banking sector depth measures. GDP growth served as the dependent variable. An ARDL bounds testing approach was applied, followed by error correction modelling. Granger causality tests identified the direction of the finance-growth relationship. Results confirmed a long-run cointegrating relationship between financial development and economic growth (F-statistic = 6.83, above the upper critical bound). The error correction coefficient of -0.42 confirmed significant speed of adjustment to long-run equilibrium. Domestic credit to the private sector showed a significant positive long-run coefficient of 0.34 (p < 0.01). Granger causality tests confirmed bidirectional causality in the long run but supply-leading causality from finance to growth in the short run. Structural break analysis identified significant regime shifts in 2008 and 2016. The study provides empirical evidence filling the long-run finance-growth relationship gap for Nigeria and recommends CBN prioritising private sector credit expansion, deepening capital market access, and reducing financial intermediation costs as growth-enhancing interventions. Keywords: finance-growth nexus, ARDL, financial development, Nigeria, long-run relationship