Financial Sector Development and Economic Growth in Nigeria

Abstract

This study investigates the relationship between financial sector development and economic growth in Nigeria from 1981 to 2024. Its primary objective is to evaluate the contributions of banks, insurance, and stock market development to the country's economic growth over this period. Specifically, the research assesses the impact of banking sector development, examines the influence of the insurance sector, and analyzes the effect of stock market evolution on economic performance. Despite extensive empirical investigations, the existing literature reveals significant gaps: insufficient integration of Stage of Development Theory and McKinnon–Shaw Financial Theory with comprehensive empirical analyses; limited studies addressing the combined effects of all financial subsectors; inadequate exploration of the dynamic interplay among financial access, depth, efficiency, and stability; and a scarcity of research on the bidirectional causality between financial development and economic growth under varying macroeconomic conditions. Adopting an ex post facto design and leveraging secondary time series data from the World Bank’s World Development Indicators, this study applies the Autoregressive Distributed Lag (ARDL) model to evaluate long-run and short-run relationships. Results indicate that banking sector development and stock market growth significantly and positively influence Nigeria’s economic expansion, while the insurance sector's impact is positive but statistically insignificant. These findings underscore the need for targeted policies to enhance financial inclusion, strengthen credit allocation to productive sectors, and improve stock market infrastructure. The study contributes to closing literature gaps by offering an integrative, longitudinal perspective grounded in relevant theories, providing nuanced insights for policy formulation aimed at fostering Nigeria’s sustained economic growth through financial sector advancement.