FINANCE-GROWTH NEXUS AND ECONOMIC PERFORMANCE IN NIGERIA

Abstract

A strong financial sector is essential for economic growth in both developed and developing nations. This study examines the relationship between financial sector development and economic growth in Nigeria, with a focus on banks from 1981 to 2023. Stationarity tests using Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) methods were conducted, and the presence of a long-run relationship justified the use of the Autoregressive Distributed Lag (ARDL) model. The Toda-Yamamoto causality test was applied to determine the direction of causality. The ARDL results indicate a positive impact of financial sector development on economic growth and banking performance in both the short and long run. Market capitalization and credit to the private sector significantly boost Gross Domestic Product (GDP), while high interest rates negatively affect growth. Although commercial bank expansion shows a positive correlation with GDP, its long-run effect is statistically insignificant. Toda-Yamamoto tests reveal a 
unidirectional causality from economic growth to most financial sector indicators, except for credit to the private sector, which exhibits bidirectional causality. The study recommends infrastructure development, firm productivity enhancement, tax incentives to mitigate high interest rates, and credit risk management institutions to strengthen the 
financial sector’s role in economic growth. 
Keywords: Bank performance, Credit to private sector, Economic growth,