Financial Sector Dynamics and Economic Development of Nigeria

Abstract

This study examined the impact of financial sector development on economic development in Nigeria from 1990 to 2024, employing the Autoregressive Distributed Lag (ARDL) bounds testing approach to analyze both short-run and long-run relationships. Four comprehensive models were developed to assess the effects of market capitalization, total value of equity traded, bank deposit liabilities, and money supply on poverty index, human development index, Gini coefficient, and GDP per capita. The bounds test results confirmed significant long-run cointegrating relationships in all models, with F-statistics exceeding critical values. However, the empirical findings revealed troubling patterns: market capitalization significantly reduced human development (-0.057, p=0.0318) and increased inequality (+0.334, p=0.0000); bank deposit liabilities paradoxically reduced GDP per capita (-0.083, p=0.0000) and increased inequality (+0.015, p=0.0019); while most variables showed statistically insignificant effects on poverty reduction. Only money supply demonstrated consistently beneficial effects, significantly reducing inequality (-0.345, p=0.0000). The error correction mechanisms revealed differential adjustment speeds: poverty (46%), GDP per capita (70%), human development (104%), and inequality (328% with massive overshooting). The study concludes that Nigeria's financial sector expansion has been fundamentally disconnected from inclusive development objectives, primarily benefiting elites while failing to reduce poverty, improve human development, or promote equitable growth. The research recommends comprehensive reforms including: redirecting bank credit toward productive sectors; enhancing financial inclusion for marginalized populations; incentivizing capital market investment in real economy sectors; and strengthening regulatory frameworks to ensure financial sector growth translates into broad based development outcomes.