Financial Development and Economic Growth: Impact of Banks’ Size and Efficiency in Financing Real Sector Growth in Nigerian Economy

Abstract

In spite of the implementation of several banking sector reforms, the real sector of the Nigerian economy is still bedevilled with inadequate access to finance, especially from the deposit money banks that hold 90% of the total financial sector assets. The nominal interest rate is high causing many firms to avoid bank-borrowing. These myriad financing challenges facing the real sector call for the assessment of the finance-growth nexus in Nigeria. In this regard, this study examined the long-term relationship between some selected financial development indicators and real sector growth in Nigeria over the period 1970 – 2014. Based on the nature of the study, the correlational research design was adopted while secondary data was mainly employed. Johansen and Juselius's (1990) approach to cointegration and Vector Error Correction Modelling (VECM) were used to determine the extent of the relationship between variables. The findings of the study revealed that in the long-run and liquid liabilities of deposit money banks exert statistically significant and negative influence on real sector growth, conversely, credit to private sector, level of investment and interest rate spread exert statistically significant and positive influence. The policy implications are these financial reforms and policies should focus on formulating policies that liberalize the interest rate and enhance financial intermediation will result in high economic growth, moreover, the government should direct their borrowing towards encouraging and financing entrepreneurs which proves to increase investment in turn real sector growth.