EFFECT OF FINANCIAL DEEPENING ON ECONOMIC GROWTH IN NIGERIA

This study examines the effect of financial deepening on economic growth in Nigeria for the period 1960-2017. The study proxy financial deepening with broad money supply and credit to private sector while economic growth is proxied with real gross domestic product. This study adopts expo facto research design. The study collected secondary data from Central Bank of Nigeria statistical bulletin. The study employs the Ordinary Least Square method to estimate the model; this is done using the partial adjustment approach to estimating given parameters of a model. In so doing, Vector Error Correction model is used. The study employs the conventional augmented Dickey Fuller test to test for stationarity among real Gross Domestic Product, money supply and Credit to the Private Sector, Johansen cointegration technique to determine the long run relationship among the variables. The result indicates that all the variables are non stationary at levels, but became stationary after first difference. The three variables are cointegrated of the same order. The result of the ordinary least square reveals that broad money supply has a significant positive effect on economic growth in Nigeria while credit to private sector has a negative significant effect on economic growth in Nigeria. The result of the Granger causality test reveals that real Gross Domestic Product Granger causes Credit to the Private Sector at 5% significance level. The result also reveals that the other variables do not Granger cause each other at 5% significance level. The Vector Error Correction model result suggests that there is long and short run effect of money supply and Credit to the Private Sector on real Gross Domestic Product in Nigeria. Test for adequacy performed on the residuals of the Vector Error Correction model indicates that they are homoskedastic, have no serial correlation and are normally distributed suggesting that the model is good. The study concludes that broad money supply drives economic growth in Nigeria while credit to private sector retards economic growth in Nigeria. Based on the findings of this study, the study recommends that Federal government of Nigeria through the Central Bank of Nigeria should continue to increase the volume of broad money supply to the economy as it is found to increase economic growth in Nigeria, it also recommends that Central Bank of Nigeria should reduce interest rate in the economy so that investors may raise their investment and output.