Financial Intermediation Efficiency and Economic Growth in Nigeria: An Empirical Investigation Using Panel Data

Financial intermediation efficiency is a fundamental determinant of economic growth, yet the direction and strength of the relationship in Nigeria's banking-dominated financial system remains empirically contested. This study empirically investigates the relationship between financial intermediation efficiency and economic growth in Nigeria for the period 2000 to 2022, using state-level panel data to exploit regional variation in banking sector penetration. Financial intermediation efficiency was measured by the bank credit-to-GDP ratio, bank deposit-to-GDP ratio, intermediation spread, and the ratio of private sector credit to domestic credit. Economic growth was measured by state-level real gross product proxy derived from sectoral output data. The system generalised method of moments estimator was employed to control for endogeneity, with state fixed effects and time dummies included. Results showed a significant positive long-run effect of the credit-to-GDP ratio on economic growth (coefficient = 0.29, p < 0.01), while the intermediation spread exerted a significant negative effect (coefficient = -0.34, p < 0.01), indicating that wide lending-deposit spreads suppress growth. The positive growth effect of intermediation efficiency was strongest in South West and North Central states with higher banking sector penetration. The study fills a gap in state-level evidence on the finance-growth nexus in Nigeria and concludes that reducing intermediation spreads through enhanced competition and improved credit information infrastructure is critical for maximising the growth contribution of financial intermediation. Policy implications for the Central Bank of Nigeria's financial system strategy 2025 to 2029 are discussed. Keywords: financial intermediation, economic growth, credit-to-GDP ratio, intermediation spread, panel data