




































American International Journal of Business and Management Studies  

Vol. 1, No. 1; 2019 

Published by American Center of Science and Education, USA 

 

60 

 

Financial Deepening, Financial Intermediation and Nigerian 

Economic Growth: Time Variant Analysis  

 

Uzokwe Grace Onyinyechi 

Department of Banking and finance 

Rivers State University 

Port Harcourt Nigeria 

ABSTRACT 

This study examines financial deepening, financial intermediation and Nigerian economic growth. The main purpose 

is to examine the relationship between financial deepening and Nigerian economic growth while the specific 

objectives are to examine the impact of interest rate, capital market development, rational savings, credit to private 

sector and broad money supply on the growth of Nigerian. Secondary data of the variables were sourced from the 

publications of Central Bank of Nigeria (CBN) from 1981-2017. Nigerian Real Gross Domestic Product (RGDP) 

was used as dependent variable while Broad money supply (M2), Credit to Private Sector (CPS), National Savings 

(NS), Capital Market Capitalization (CAMP) and Interest Rate (INTR) was used as independent variables. Multiple 

regressions with E-view statistical package were used as data analysis techniques. Cointegration test, Augmented 

Dickey Fuller Unit Root Test, Granger causality test was used to determine the relationship between the variable in 

the long-run and short-run. R
2
, F – statistics and β Coefficients were used to determine the extent to which the 

independent variable affects the dependent variable. It was found from the regression result that Broad Money 

Supply, credit to private sector have position effect on the growth of Nigerian Real Gross Domestic Product while 

National Savings, Capitalization and Interest Rate on Nigeria Real Gross Domestic Product. The co-integration test 

revealed presence of long-run relationship among the variables, the stationary test indicated stationarity of the 

variables at level. The Granger Causality Test found bi – variant relationship from the dependent to the independent 

and from the independent to the dependent variables. The regression summary found 99.0% explained variation, 

560.5031, F – statistics and probability of 0.00000. From the above, the study concludes that financial deepening has 

significant relationships with Nigerian economic growth. We recommend that government and the financial sector 

operators should make policies that will further deepen the functions of the financial system to enhance Nigerian 

economic growth. 

Keywords: Financial Deepening, Financial Intermediation, Nigerian Economic Growth, Time Variant Analysis  

INTRODUCTION 

The role of the financial sector in any economy is that of financial intermediation by channeling savings from the 

area of surplus to that of deficit. This function bridges the savings and investment gap and enhances the realization 

of macroeconomic goals; it is also the transmission mechanism for the realization of government monetary and 

macroeconomic policies. There is strong perception of economic growth to be associated with the financial sector 

development through other sectors such as the real sector (Azege, 2014). Financial deepening is to improve 

economic performance through increase competitive efficiency within the financial market thereby indecently 

benefiting non-financial sectors of the economy (Nzoth & Okeseke, 2009) 

Theoretically, the main stream economists such as Schumpeters (1911), Goldsmith (1969), Shaw (1973) and 

McKirion 1973 emphasizes the importance of the financial system in economic growth, for instance, the 

industrialization process in England was promoted by the development of the financial sector which increase access 

to financial services such as profit financing (Odenum & Udeajam 2010). Financial deepening is refers to the 

measures of providing financial services with wider choice of services geared to the development of all level of 

society (Olofin, 2010). 

The size is usually measured by the monetization ratio and intermediation ratio of the financial system. Monetization 

ratio include money based indicators or liquidity liabilities such as broad money supply to Gross Domestic Product 

(M2/GDP), intermediation ratios consists of indicators concerning bank-based measures like bank credit to the 



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private sector (CP/GDP), (GNS/GDP) and capital market based ratio such as the capitalization ratio of stock market 

(Nnanna, 2011).The level of financial deepening reflects the soundness of the financial sector and the ability with 

which credit are created with respect to lending and deposit rates (Ndebbio, 2004). Financial deepening theory 

defined the positive role of financial system on economic growth by size of the size of the sectors activity. Well 

functioning financial institutions enhance overrall economic efficiency, create and expand liquidity, mobilized 

savings, promote capital accumulation, transfer resources from the traditional non-growth sector to the modern 

growth inducing sectors and encourage a competent entrepreneur respond development needs of the economy 

(Shitta, 2012). 

The essence of emphasize on the development of the Nigerian financial sector is in the theory of financial repression 

which posited that efficient utilization of resource via highly organized development and liberal financial system 

will enhance economic growth. This is the so-called supply led theory of finance-growth Nexus. One of the oldest 

debate in economic has remain the relationship between financial development and economic growth. Its root can be 

traced to Schumpeter (1912) when he posited that finance is prominent to economic  growth while Robbinson 

(1952) argued that economic growth promote finance. 

Over the years, Nigerian government has embarked on structural and institutional policy reforms in the financial 

sector to deepen the operational efficiency of the institution for the realization sets monetary and macroeconomic 

goals, for instance the deregulation of interest rate in 1986 was aimed at reducing the cost of fund and allocate 

financial resources to preferred investors and sectors (Anyanwu, 2010). The banking sector consolidation aimed at 

repositioning the banking sector to be an active player in the global financial market rather than a spectator (Toby, 

2006), while the internationalization of the Nigerian capital market was aimed at attracting foreign real and portfolio 

investors (Onoh, 2007). The extents to which these policies have affected financial deepening for the realization of 

macroeconomic goals remain a knowledge gap and attract empirical research.  However, despite the growing 

literature on financial sector reforms and economic growth, the effect of various measures of financial deepening on 

economic has not been captured in previous studies, therefore this study intend to examine the relationship between 

financial deepening and Nigerian macroeconomic growth. 

LITERATURE REVIEW 

Financial Development and Growth Theory 

One of the oldest debates in economics has remained the relationship between financial development and economic 

growth. Its root can be traced to Schumpter (1912), when he posits that finance is paramount for economic growth. 

However, Robinson (1952) argues that economic growth promotes financial development. Financial markets 

provide an economy with vital services comprising, for example, the management of risk and information, and the 

pooling and mobilization of savings (Gries et al., 2011). Theoretically, the linkage between finance and economic 

growth may take different forms. On the one hand, the financial sector may affect growth through the accumulation 

channel and the allocation channel. The accumulation channel emphasizes the finance-induced growth effects of 

physical and human capital accumulation (Pagano, 1993). The allocation channel focuses on the financed-induced 

efficiency gains in resource allocation that enhances growth (King and Levine, 1993). Following these 

considerations, causality runs from finance to growth (supply-leading hypothesis). On the other hand, financial 

development may also be stimulated by economic growth. For instance, in a growing economy, the private sector 

may demand new financial instruments and an improved access to external finance. Financial activities then simply 

expand in step with general economic development (Robinson, 1952), positing the so-called demand-following 

hypothesis. Additionally, finance and growth may be mutually dependent. The real sector may provide the financial 

system with the funds necessary to enable financial deepening, eventually allowing for a capitalization on financial 

economies of scale which in turn facilitates economic development (Berthelemy and Varoudakis, 1996). The latter 

hypothesis postulates bidirectional causality. Countries with better-developed financial systems are therefore 

expected to grow faster over long periods of time. Following more skeptical views (Lucas, 1988), the financial and 

real sector may also be independent of each other, thereby naturally putting emphasis on other factors that may 

determine economic development (insignificant causation).  

Supply - Leading Hypothesis 

The supply-leading hypothesis suggests that financial deepening spurs growth. The existence and development of 

the financial markets brings about a higher level of saving and investment and enhance the efficiency of capital 



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accumulation. This hypothesis contends that well-functioning financial institutions can promote overall economic 

efficiency, create and expand liquidity, mobilize savings, enhance capital accumulation, transfer resources from 

traditional (non-growth) sectors to the more modem growth inducing sectors, and also promote a competent 

entrepreneur response in these modern sectors of the economy. The recent work of Dernirguc-Kunt& Levine (2008) 

in a theoretical review of the various analytical methods used in finance literature, found strong evidence that 

financial development is important for growth. To them, it is crucial to motivate policymakers to prioritize financial 

sector policies and devote attention to policy determinants of financial development as a mechanism for promoting 

growth. 

Demand - Following Hypothesis 

The demand-following view of the development of the financial markets is merely a lagged response to economic 

growth (growth generates demand for financial products). This implies that any early efforts to develop financial 

markets might lead to a waste of resources which could be allocated to more useful purposes in the early stages of 

growth. As the economy advances, this triggers an increased demand for more financial services and thus leads to 

greater financial development. Some research work postulate that economic growth is a causal factor for financial 

development. According to them, as the real sector grows, the increasing demand for financial services stimulates 

the financial sector. It is argued that financial deepening is merely a by-product or an outcome of growth in the real 

side of the economy, a contention recently revived by Ireland (1994) and Demetriades and Hussein (1996). 

According to this alternative view, any evolution in financial markets is simply a passive response to a growing 

economy. 

Empirical Review  

Agu & Chukwu (2008) in his effort to ascertain the direction of causality between “bank based” financial deepening 

variables and economic growth in Nigeria found that financial deepening variables and economic growth were 

positively co-integrated and that there was only one co-integrating vector indicating a stable and sustainable long 

run equilibrium relationship in the full Information Maximum Like-hood (FML) multivariate Johnson. 

Arestis and Demetriades (1996), in particular, using twelve countries as case study, show that the direction of 

causality depends on the variable used and that each country exhibit different results. These results do not exhibit a 

pattern for developed or developing countries which confirms the hypothesis that institutional considerations and 

policies of countries do play a role in the relationship between finance and growth. 

Arestis and Demetriades (1996) show that King and Levines causal interpretation is statistically fragile and that 

cross-sectional datasets cannot address the question of causality in a satisfactory way. Arestis and Demetriades 

1997), using time series analysis, later conclude that the evidence favors a bidirectional causality relationship 

between financial development and economic growth. Moreover, Murinende and Eng (1994) find evidence of such 

bi-directionality in the case of Singapore, as do Demetriades and Hussein (1996) for 16 developing countries. 

Likewise, Luintel and Khan (1999), who investigate the finance-growth nexus in a multivariate VAR model, find 

bidirectional causality between financial development and economic growth in all their sample countries.  

Ndebbio (2004), using an ordinary least square regression framework, finds that financial sector development 

weakly affect per capita growth of output. He attributed the result to shallow finance and the absence of well-

functioning capital markets. The finding of Nnanna (2004) was more disturbing. He, also using ordinary least square 

regression technique, concluded that financial sector development did not significantly affect per capita growth of 

output.  

Nzotta and Okereke (2009) based on two stages least analytical framework for a period starting from 1986 t0 2007, 

concluded that financial deepening did not support economic growth in Nigeria. However, Afangideh (2009), using 

three stage least square estimation technique on a data spanning 1970 to 2005, found that a developed financial 

system alleviates growth financing constraints by increasing bank credit and investment activities with resultant rise 

in output. The finding of Agu and Chukwu (2008) is quite different from other authors on Nigeria. They employed 

the augmented Granger causality test to ascertain the direction of causality between financial deepening and 

economic growth in Nigeria between 1970 and 2005. Their findings revealed evidence to support both demand- and 

supply-leading hypotheses, depending on the financial deepening variable that is used, in addition to the existing 

literature on finance and economic growth, this study sets to investigate the path of finance-growth nexus in Nigeria. 



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Darrat and Al-Sowaidi (2010) assess the role of information technology and financial deepening in Qatar, a fast 

growing economy. The study employs vector-error-correction modeling technique with its attendant short-run causal 

dynamics and found that real economic growth in Qatar is robustly linked over the long-run to both financial 

deepening and information technology and concluded that financial development, rather than IT, is more critical for 

enhancing economic growth over the short-run horizon. 

Ardic and Damar (2006) analyze the effects of financial sector deepening on economic growth using a province-

level data set for 1996-2001 on Turkey. The period covered was associated with a weakly regulated and relatively 

unsupervised expansion of the banking sector which led to the 2001 financial crisis. The results indicate that a strong 

negative relationship between financial deepening, both public and private, and economic growth exists. The study 

argues that it is possible that financial development may not always contribute to economic growth, and the 

conditions under which such a contribution takes place should be investigated further.  

Guryay, et al., (2007) examine the relationship between financial development and economic growth. The study 

employed ordinary least squares technique to show that there is insignificant positive effect of financial development 

on economic growth for Northern Cyprus. They posit that causality runs from growth to financial development 

without a feedback. 

Wadud (2005) examines the long-run causal relationship between financial development and economic growth for 

three South Asian countries namely India, Pakistan and Bangladesh. He disaggregated financial system into “bank-

based” and “capital market based” categories. The study employed a cointegration vector autoregressive model to 

assess the long-run relationship between financial development and economic growth. The empirical findings 

suggest that the results of error correction model indicate causality running from financial development to economic 

growth. Waqabaca (2004) examines the causal relationship between financial development and growth in Fiji using 

low frequency data from 1970 to 2000. The study employed unit root test and co-integration technique within a 

vicariate VAR framework. Empirical results suggest a positive relationship between financial development and 

economic growth for Fiji with causality running from economic growth to financial development. He posits that this 

outcome is common with countries that have less sophisticated financial systems. 

Nzotta and Okereke (2009) examine financial deepening and economic development in Nigeria between 1986 and 

2007. The study made use of time series data and two stages least squares analytical framework and found that four 

of the nine variables; lending rates, financial savings ratio, cheques/GDP ratio and the deposit money banks/GDP 

ratio had a significant relationship with financial deepening and concluded that the financial system has not 

sustained an effective financial intermediation, especially credit allocation and a high level of monetization of the 

economy.  

Agu and Chukwu (2008) employ the augmented granger causality test approach developed by Toda and Yamamoto 

(1995) to ascertain the direction of causality between “bank-based” financial deepening variables and economic 

growth in Nigeria between 1970 and 2005. Their co-integration results suggest that financial deepening and 

economic growth are positively co-integrated. In the Toda-Yamamoto sense, the study finds that the Nigerian 

evidence supports the demand-following hypothesis for “bank based” financial deepening variables like private 

sector credit and broad money; while it supports the supply-leading hypothesis for “bank-based” financial deepening 

variables like loan deposit ratio and bank deposit liabilities. Thus, the study concludes that the choice of bank-based 

financial deepening variable influences the causality outcome. 

Shittu (2012) examines the impact of financial intermediation on economic growth in Nigeria with time series data 

from 1970 to 2010. Employing cointegration test and error correction model, he finds that financial intermediation 

has a significant impact on economic growth in Nigeria.  

Azege (2004) examines the empirical nexus between the level of development by financial intermediaries and 

growth. The study employed data on aggregate deposit money bank credit over time and gross domestic product to 

establish that a moderate positive relationship exist between financial deepening and economic growth. He 

concludes that the development of financial intermediary institutions in Nigeria is fundamental for overall economic 

growth. 

Olofin and Afangideh (2010) examine the financial structure and economic growth in Nigeria by using annual data 

from 1970 to 2005. Small macro econometric model to capture the interrelationships among aggregate bank credit 



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activities, investment behaviour and economic growth given the financial structure of the economy was developed. 

They adopted three stage least square estimation techniques, while counter factual policy stimulations were 

conducted. The results of these tests indicate that a developed financial system alleviates growth financing 

constraints by increasing bank credit and investment activities with resultant rise in output. One major outcome of 

this study is that financial structure has no independent effect on output growth through bank credit and investment 

activities, but financial sector development merely allows these activities to positively respond to growth in output. 

Odeniran and Udeaja (2010) examine the relationship between financial sector development and economic growth 

in Nigeria. The study employs granger causality tests in a VAR framework over the period 1960-2009. Four 

variables, namely; ratios of broad money stock to GDP, growth in net domestic credit to GDP, growth in private 

sector credit to GDP and growth in banks deposit liability to GDP were used to proxy financial sector development. 

The empirical results suggest bidirectional causality between some of the proxies of financial development and 

economic growth variable. Specifically, the study finds that the various measures of financial development granger 

cause output even at one per cent level of significance with the exception of ratio of broad money to GDP. 

Additionally, net domestic credit was equally found to be driven by growth in output, thus indicating bidirectional 

causality. The variance decomposition shows that the share of deposit liability in the total variations of net domestic 

credit is negligible, indicating that shock to deposit does not significantly affect net domestic credit. 

Okoli (2010) examines the relationship between financial deepening and stock market returns and volatility in the 

Nigerian stock market for the period 1980-2009. The study employs the popular GARCH (1, 1) model. Four 

modeled equations were estimated and analyzed. Financial deepening was represented by two variables, the ratio of 

the value of stock traded to GDP (FD1t) and the ratio of market capitalization to GDP (FD2t). Empirical results 

revealed that financial deepening (FD1t) measured as the ratio of value of stock traded to GDP do not affect the 

stock market and there is no news about volatility. But financial deepening (FD2t) measured as the ratio of market 

capitalization to GDP affect the stock market. It indicated that financial deepening reduces the level of risk 

(volatility) in the stock market. Result also recorded that the conditional volatility of returns is slightly persistent. 

Sulaiman, et al., (2012) critically explore the effect of financial liberalization on the economic growth in developing 

nations with its assessment focusing on Nigeria with annual time series data from 1987-2009. The study employs 

co-integration and error correction model (ECM) by making Gross Domestic Product as a function of lending rate, 

exchange rate, inflation rate, financial deepening (M2/GDP) and degree of openness as its financial liberalization 

indices. Co-integration result confirms the existence of long run equilibrium relationship while the ECM results 

show a very high R2 in both the over-parameterized model (95%) and parsimonious model (91%). The study 

therefore concludes that inancial liberalization has a growth-stimulating effect on Nigeria. 

Johannes et al. (2011) using Johansen cointegration established positive relationships between financial 

development and economic growth in the long run and short run for Cameroon for the period 1970-2005 for 

Cameroon at 5% level of significance. The result agreed that financial sector development cause economic growth in 

the long run and the short run. Economic growth is as a result of financial sector development.  

 

Azege (2004) examines the empirical relationship between the level of development by financial intermediaries and 

growth. The study employed data on aggregate deposit money bank credit over time and gross domestic product to 

establish that a moderate positive relationship exist between financial deepening and economic growth. He 

concludes that the development of financial intermediary institutions in Nigeria is fundamental for overall economic 

growth.  

Wadud (2005) examines the long-run causal relationship between financial development and economic growth for 3 

South Asian countries namely India, Pakistan and Bangladesh. The study employed a cointegrated vector 

autoregressive model to assess the long-run relationship between financial development and economic growth. The 

results indicate causality between financial development and economic growth but running from financial 

development to economic growth.  

 

Odhiambho (2004) investigates the role of financial development on economic growth in South Africa. The study 

uses three proxies of financial development namely; the ratio of M2 to GDP, the ratio of currency to narrow money 

and the ratio of bank claims on the private sector to GDP against economic growth proxied by real GDP per capita. 

He employed the Johansen-Juselius cointegration approach and vector error correction model to empirically reveal 



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overwhelming demand-following response between financial development and economic growth. The study totally 

rejects the supply leading hypothesis.  

 

Waqabaca (2004) examines the causal relationship between financial development and growth in Fiji using low 

frequency data from 1970 to 2000. The study employed unit root test and cointegration technique within a bivariate 

VAR framework. Empirical results suggest a positive relationship between financial development and economic 

growth for Fiji with causality running from economic growth to financial development. He posits that this outcome 

is common with countries that have less sophisticated financial systems.  

 

Unalmis (2002) investigates the direction of causality between financial development and economic growth in 

Turkey using Granger non-causality in the context of VEC model. The study finds that in the long run, there exists 

bidirectional causality between financial deepening and economic growth. Adam (2011) examines how efficient the 

financial intermediation process has been in Nigeria’s growth performance. The study employed the 2SLS approach. 

The empirical results show that financial intermediation process is sub-optimal and caused by high lending rate, high 

inflation rate, low per capita income, and poor branch networking. 

Samson & Udeaja (2010) examined financial sector development and economic in Nigeria. The study unlike most 

early studies; the major empirical results show that financial deepening does not have influence on economic 

growth. The VAR results indicate that changes in net domestic credit impact on economic growth while per capital 

output also influences net domestic credit and economic growth. Changes in deposit liabilities appear to have no 

major impact on economic growth. More recently, Samson & Elias (2012) examine the relationship between 

financial sector development and economic growth in Nigeria. It tests the competing financial growth nexus 

hypothesis using granger causality tests in VAR framework over the period 1969 to 2009.  

RESEARCH METHODS 

Documentary evidence constitutes the instrument of data collection as the study is based on secondary data. The 

data is time series collected from the Central Bank of Nigeria statistical bulletin. The data for the study is the 

aggregate of banking sector credits, market capitalization and foreign direct investment to financial sector and real 

GDP from 1981-2017. This period is regarded as period of financial liberalization and control. The variables for 

aggregate banking sector credits, market capitalization, foreign direct investment to financial sector and real GDP 

met the requirement for the quantitative data available for the study periods of 1980 to 2014. Based on this, the 

hypothesis was tested using vector error correction model. This study is interested in the long run predictive effect of 

financial sector development on economic growth. The advances in econometric techniques however, enable recent 

researchers to use techniques such as stationarity tests (i.e. unit root test), co- integration test and causality test in 

their analysis to reanalyze the traditional regression applied in earlier studies. The steps used in this analysis are 

discussed below. 

Model Specification 

RGDP = f(CPS, NS, CAPM, INTR) ………………………(1) 

Transforming eqn(1) to empirical model 

RGDP = 0 M21 CPS2 NS3 CAPM4   INTR +         ………. 2 

Where: 

RGDP = Nigerian Real Gross Domestic Product 

M2  = Broad Money Supply 

CPS  = Credit to Private Sector 

 NS  = National Savings 

CAPM  = Capital Market Performance 



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INTR  = Interest Rate 

0   = Regression Intercept 

1   - 5  = Coefficient of the independent variables to the Dependent variable 

Stationarity (Unit Root) Tests 

We investigate the stationarity properties of the time series data using the Augmented Dickey Fuller (ADF) test. 

According to Nelson and Plosser (1982), Chowdhury (1994) there exist a unit root in most macroeconomic time 

series. While dealing with time series, it is necessary to analyze whether the series are stationary or not. Since 

regression of nonstationary series on other non-stationary series leads to what is known as spurious (bogus) 

regression causing inconsistency of parameter estimate. The Null hypothesis of a unit root is rejected against the one 

sided alternative if the t-statistics is less than the critical value. Otherwise, the test fails to reject the null hypothesis 

as a unit root at 5% significance level. 

Co-integration Test 

Next, we employ Johansen Multivariate Co-integration Test. Co-integration is the existence of a long run 

equilibrium relationship among time series variables. Johansen (1988, 1991) pointed out that a linear combination of 

two or more nonstationary time series may be stationary. If such a stationary linear combination of two or more non-

stationary time series exists, the non-stationary time series are said to be cointegrated and may be interpreted as 

long-run relationship among the variables. The lag length is one and is based on the Akaike (1969) information 

criterion (AIC). The lag is taken into account at Mckinnon critical values at 5% level. If the residuals from the 

regression are 1(1) or 2(2), i.e stationary, then variables are said to be co-integrated and hence interrelated with each 

other in the long run. 

Vector Error Correction (VEC) Technique 

We investigate the direction of causality for the hypotheses using Vector Error Correction 

(VEC) model based causality technique. The presence of co-integrating relationship forms the basis of the use of 

Vector Error Correction Model. Eviews econometric software used for data analysis, implement vector Auto-

regression (VAR)- based co-integration tests using the methodology developed by Johansen (1991,1995). The non-

standard critical values are taken from Osterward Lenun (1992). 

ANALYSES, AND DISCUSSIONS 

This section deals with the presentation, analyses and interpretation of data obtained from publications of Central 

Bank of Nigeria. The purpose of the study is to investigate the effect of financial deepening on Nigerian economic 

growth. In this study, financial deepening is measured as interest rate, credit to private sector, national savings, 

capital market proxy by market capitalization and Broad money supply while Nigerian economic growth is 

measured as Real Gross Domestic Product. 

 PRESENTATION OF REGRESSION RESULTS 

     Variable Coefficient Std. Error t-Statistic Prob.   

     C 12700.76 1692.484 7.504211 0.0000 

M2 4.333063 0.830968 5.214474 0.0000 

CPS 1.081742 0.797931 1.355683 0.1869 

NS -1394.199 140.6354 -9.913570 0.0000 

CAPM -0.000619 0.001449 -0.427139 0.6728 

INTR -149.6007 88.60707 -1.688360 0.1033 

R-squared 0.990808     Mean dependent var 13623.61 

Adjusted R-squared 0.989040     S.D. dependent var 22098.76 



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S.E. of regression 2313.500     Akaike info criterion 18.49827 

Sum squared resid 1.39E+08     Schwarz criterion 18.77310 

Log likelihood -289.9723     Hannan-Quinn criter. 18.58937 

F-statistic 560.5031     Durbin-Watson stat 1.038689 

Prob(F-statistic) 0.000000    

 

Interpretation of Regression Result 

The summary of the relationship between financial deepening using multiple regressions using the Ordinary Least 

Square analysis is as shown in the table above. 

The coefficient of R
2
 and adjusted R

2
 measures the explanatory power of the multiple regression models. From the 

results there is a high coefficient of determination of 0.990808 R
2
 and 0.98040 adjusted R

2
 (99.0% and 98%). This 

implies that the variables in the equation are useful for explaining the level of economic growth to the power of 

99.0% and 98.0% between 1980- 2013. The standard error of the estimate also known as the residual standard 

deviation has values stable for the analysis of the results. 

The F-statistics is found to 560.5031 with probability of 0.00000 implies that the model is significant at the 5% 

level, the Durbin Watson (DW) statistics of 1.038689 shows that there is no problem of serial correlation in the 

regression models. This is a case of positive serial correlation. This also indicates that the multi-colenarity which 

other presents in cross-sectional data seems to be non-existence in the models. 

The estimation results from the regression model indicate that Broad money supply; credit to private sector has 

positive relationship with Nigerian Real Gross Domestic Product while national savings, capital market and interest 

rate have negative effect on Nigerian Real Gross Domestic Product. 

STATIONARITY TEST (ADF LEVEL) 

VARIABLES ADF STATISTICS MACKINON CRITICAL 

VALUE 1% 

5% 10% ORDER OF INTEGRATION 

RGDP -4.641147 -3.679322 -2.967767 -2.622989 1(1) 

M2 -3.392431 -3.679322 -2.967767 -2.622989 1(1) 

CPS 4.737006 -3.679322 -2.967767 -2.622989 1(1) 

NS 7.353168 -3.679322 -2.967767 -2.622989 1(1) 

CAPM -5.937106 -3.679322 -2.967767 -2.622989 1(1) 

INTR -3.093153 -3.679322 -2.967767 -2.622989 1(1) 

Source: Computed by Researcher from E-view 7.0 

The stationarity test shows that the variables are stationary; this implies that the null hypothesis of non stationarity is 

rejected and alternate accepted. 

JOHANSEN’S CO-INTEGRATION TEST 

              
Hypothesized  Trace 0.05    

No. of CE(s) Eigenvalue Statistic Critical Value Prob.**   

       None *  0.927383  182.5713  95.75366  0.0000   

At most 1 *  0.782402  111.7624  69.81889  0.0000   

At most 2 *  0.750892  70.58449  47.85613  0.0001   

At most 3 *  0.509753  33.05808  29.79707  0.0203   

At most 4  0.304525  13.81126  15.49471  0.0883   

At most 5 *  0.137886  4.005928  3.841466  0.0453   

 

 



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Discussion of Findings 

The achievement of economic growth has been one of the major policy thrust of Nigerian government since 1960, 

this is because economic growth signify the well being of the economy and the people. Government recognizes that 

financial sector can facilitate and enhance the realization of the policy through efficient and effective functioning of 

the financial market. From the findings of this study, financial deepening in Nigeria has significant effect on the 

growth of Nigerian economy, represented by Nigerian Real Gross Domestic Product. Findings reveal that the 

positive value of 4.433063 as parameter for money supply and 1.081742 as parameter for credit to private sector 

reveal that an increase of 1% in the variables will lead to increase in Real Gross Domestic Product by 4.3% and 

1.08%, this finding is expected in the result as theories such as financial intermediation theories has noted that an 

effective and efficient financial sector is required to achieve economic growth. The finding is also expected because 

of the various reforms Nigerian government has put in place over the years to increase the operational functioning of 

the financial market such as the financial sector reforms. The findings consolidate the opinions that finance granger 

cause economic as oppose to the opinion that economic growth granger cause finance. It also validates the demand 

leading hypotheses as opposed to the supply leading hypotheses. However, findings reveal that with negative 

coefficient of -1394.199 as parameter for national savings, the negative value of 0.000619 as parameter for capital 

market development and negative coefficient of 149.6007 as parameter for capital market development indicates that 

an increase of 1% will lead to decrease in Nigeria Real Gross Domestic Product by 1394%, 149% and 001%, this 

finding is contrary to the expectation of the result as the variables are expected to add positively to the growth of 

Nigerian economy. The negative effect of the variables can be traced to the marginal performance of the financial 

sector such as the financial dualism that contracts deposit mobilization of the formal financial market. It can also be 

blamed on the financial sector crises within the period of this study, for instance the banking sector crises within the 

period have the capacity of affecting negatively the economic growth of the country. It can also be traced to 

monetary and macroeconomic instability within the period of this study. 

CONCLUSION AND RECOMMENDATIONS 

Conclusions 

From the findings in the study, the following conclusions were drawn; 

 There is positive and significant relationship between Broad Money Supply and the growth of Nigerian 

economy. This finding confirms the A-piroi expectation. 

 There is positive but insignificant effect between credit to private sector and the growth of Nigerian 

economy. 

 National savings have negative and significant relationship with the growth of Nigerian economy, this 

findings is the expectation of the results. 

 Capital market development proxy by All Share Price Index has negative but insignificant relationship 

with Nigeian economic growth. This finding is contrary to the study expectation. 

 Interest rate have negative but insignificant relationship with the growth of Nigerian economy, the 

findings is contrary to the expectation of the results. 

 That 99.0% and 98% variation in Nigerian Real Gross Domestic Product can be explained by variation 

in the independent variables in the model. 

Recommendations 

From the conclusions above, the study makes the following recommendations: 

 There should be structured monetary and macroeconomic policies that will enhance the performance of the 

financial system to achieve economic growth. 

 Policies that antagonize the operational efficiency of the financial system should be abolished to enhance 

the performance of the financial market. 

 The monetary authorities and operators in the financial market should come up with policies that will 

enhance the operational performance of the financial system for economic growth.  

 The financial institutions such as the banking should effectively perform its financial intermediation 

function to enhance economic growth. 

 There should be expansionary monetary policy with guided deregulation to enhance availability of 

investment fund for economic growth. 



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 There should be policies to manage the interest rate structure to avert the negative effect of investment 

borrowings in Nigeria. 

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