Financial Sector Development, Capital Market Depth, and Economic Growth in Nigeria: A Long-Run Analysis

This study examines the long-run relationships among financial sector development, capital market depth, and economic growth in Nigeria using annual data from 1990 to 2023. The finance-growth nexus has been extensively studied internationally, but evidence from Nigeria remains mixed, partly because of the structural disruptions caused by banking crises, capital market volatility, and macroeconomic instability. This study employs the autoregressive distributed lag bounds testing approach to cointegration, supplemented by vector error correction modeling, to examine long-run and short-run dynamics. Financial sector development is measured using banking sector credit to the private sector as a ratio of GDP, broad money supply, and bank asset quality indicators. Capital market depth is proxied by market capitalization ratio, turnover ratio, and value of transactions. Economic growth is measured using real GDP per capita growth. Results reveal a significant positive long-run relationship between financial sector development and economic growth, but the relationship for capital market depth, while positive, is weaker and statistically less robust. Short-run dynamics show bidirectional Granger causality between banking sector credit and growth, but predominantly supply-leading causality from capital markets. The study concludes that deepening both banking credit allocation and capital market liquidity are essential co-conditions for sustained economic growth in Nigeria. It recommends coordinated CBN and SEC policies to improve credit quality and capital market accessibility for long-term growth investors.

Keywords: financial sector development, capital market, economic growth, Nigeria, ARDL.