CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

The financial sector refers to the part of the entire economy which primarily comprises money

markets, banking institutions and brokers. It is a very important sector in most large and highly

developed countries, Igwebuike (2018). It is the framework within which the savings of some

members of society are made available to other members of the society for productive

investment through the process of financial intermediaries. Financial system development relates

to the number and variety of financial institutions, markets, and instruments available in the

financial system. Financial development simply means an increase in the supply of financial

assets in the economy. Therefore, the sum of all the measures of financial assets gives us the

approximate size of financial development. That means that the widest range of such assets as

broad money, liabilities of non-bank financial intermediaries, treasury bills, value of shares in the

stock market, money market funds, etc., will have to be included in the measure of financial

development (Arunmah, 2015).

Similarly, Creane, Mushiq, and Randa (2004) a modern financial system promotes investment by

identifying good business opportunities, mobilize savings, and monitors the performance of

mangers enables the trading, hedging, and diversification of risk and facilitates the exchange of

goods and services.

Nigeria’s economic policy since political independence is a conscious development of the

financial sector through policies and reform initiatives aimed at stabilizing operations in the

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sector. The sector was highly regulated with the government as a key player and regulator. The

indigenous reforms, 1972-1976, in the Nigerian Enterprises Promotion Act, 1972 was designed

to promote active participation of Nigerians and Nigerian government ownership and control of

banks. To consolidate on the gains of the indigenization policy, the Financial System Review

Committee, 1976 known also as Okigbo Committee was mandated to examine the adequacy,

relevance of financial institutions in the country as well as the capacity of the structure of the

system to meet the development needs of the economy.

For Nigeria, studying the relationship between financial development and economic growth is a

vital one considering the continuing progress in its financial sector performance. According to

the central bank of Nigeria statistical bulletin (CBN, 2014), the depth of the financial sector

showed some significant improvement as broad money supply to nominal GDP ratio increased

from 19.3 per cent in 2011 to 19.9 per cent in 2014. Recent macroeconomic and financial

developments Nigeria's economy grew by 3.6% in 2021 from a 1.8% contraction in 2020, (CBN,

2022) In addition; the increased use of the various electronic money products reflected the shift

away from cash transactions and the efficiency of funds intermediation.

Consequently, the ratio of currency outside banks to broad money supply fell further to 7.59

percent in 2014 from 9.39 percent at the end of 2011. Despite these improvements the Nigeria’s

economic growth has been dwindling and has still remained fragile not strong enough to

significantly reduce the prevailing level of poverty even though the various indicators used in

measuring financial development has been increasing steadily over the years.

In the words of Sanusi (2011), Well functioning financial system are able to mobilize household

savings, allocate resources efficiently, diversify risk, enhance the flow of liquidity, reduce

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information asymmetry and transaction costs and provide an alternative to raising funds through

individual savings and retained earnings.

In Nigeria, financial markets have not been developed to expectations and the underdeveloped

financial markets have furthered hindered the level of economic growth in Nigeria. Although the

Nigeria financial system recorded some progress in the last few years, like the national economy,

it has been faced with many challenges. The lack of adequate coordination and harmonization of

fiscal and monetary policies have even deteriorated the performance of the Nigerian financial

sector. The high cost of assessing funds has also discouraged investors from patronizing the

banking system. The development of the financial sector in Nigeria has been hindered by poor

state of infrastructure, utilized in the financial sector. These include power supply, problem of

telecommunication, which include difficulty in internet access etc. The excessive use of cash as

not enhanced the development of the financial sector in Nigeria. In addition, the competiveness

that resulted from the entry of new banks into the financial system and the liberalization of

interest rate brought about a sharp rise in nominal deposit and lending rates. Maximum lending

rate which averaged 12 percent in 1988 rose to 26.5 percent in 2003 (Nnanna, Englama and

Odoko, 2004).

According to Osuji (2015), suggests that financial development has a positive impact on

Nigeria’s economic growth in the long run. Therefore, policy makers should focus more on long

term policies like creation of modern, efficient and strong financial institutions that can drive

Nigeria’s economic growth. Efforts should be devoted to deepening the financial sector

especially the microfinance system in Nigeria. More so, legal reforms to fast track markets and

institutions for efficient credit system and finally regulatory and supervisory bodies of financial

system should be strengthened through capacity building and investing in human resources.

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1.2 Statement of the Problem

The low capital base, dominance of a few banks, over-dependence on public sector deposits and

weak corporate governance among others have necessitated banking reforms in the last few years

in Nigeria with the major objectives of ensuring price stability and facilitate rapid economic

development. The empirical growth literature has come with numerous explanations of cross-

country differences in growth, including factor accumulation, resource endowments, the degree

of macroeconomic stability, educational attainment, institutional development, legal system

effectiveness, international trade and ethnic and religious diversity. The list of possible factors

continues to expand, apparently without limit. One critical factor that has begun to receive

considerable attention more recently is the role of financial development in the growth process

especially in the wake of the recent global economic and financial meltdown. The positive link

between the financial depth and economic growth is in one sense fairly obvious. That is, more

developed countries, without exception, have more developed financial markets. Therefore, it

would seem that policies to develop the financial sector would be to raise economic growth.

Indeed, the role of financial development is considered by many to be the key to economic

development and growth.

Another serious problem is that the literature is less consensual on the impact of financial

development and economic growth. There are studies that establish little or no significantly

positive relationship between financial development and economic growth. Some studies found

that financial development have negative impact on economic growth especially in the long-run

and that causality run from economic growth to financial development and not in reverse

direction. Other studies have also found support for a positive link between financial

development and economic growth. These conflicting results have been traced to orthodox or

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methodological challenges associated with the estimation method such as the Engle- Granger

two step procedures; Johansen reduced rank; and the Vector Auto Regressions (VAR) model; the

use of which dominated the empirical studies in this area. However, recent econometric

techniques have shown the strong limitations to these techniques and revealed that most

economic growth and financial development data have to be subjected to more rigorous analyses

involving both the short run and long run co-movement among a number of time series data to

unbiased, consistent, and efficient estimates.

This study therefore, intends to bridge the existing gap in the literature by empirically

investigating the impact of the financial sector development on economic growth of Nigeria. In

doing this, the current study will employ the recent techniques of econometrics in carrying out

the analysis.

1.3 Objectives of the Study

The general objective of this study is to examine the impact of financial sector development on

the economic growth of Nigeria.

Specific Objectives includes;

1 To determine the impact of financial sector development on economic growth of Nigeria.

2 To assess the causal relationship between financial sector development and economic

growth of Nigeria.

1.4 Research Questions

1 What is the Impact of financial sector development on economic growth of Nigeria?

2 What is the direction of causal relationship between financial sector and economic

growth of Nigeria?

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1.5 Significance of the Study

This study will be of significance to the following: Government, students, researchers, as well as

policy makers dealing with financial sector.

As the authorities are recently more concern about revamping the Nigerian economy from its

mono-cultural state, the study would give an insight to the Nigerian policy makers as regards the

role play by financial sector toward accelerating the growth of the country’s economy for them

to come up with vibrant policies that will move the sector to the next level of development,

which in turn would result to rapid changes in the economy base of the nation.

The study would add to the information already available on financial sector contribution to the

economic growth of Nigeria for Academics, scholars, and researchers, and also a point of

reference for literature, research gaps and also serve as a basis for further research.

In particular, the Central Bank of Nigeria would find this work a useful guide when formulating

policies that will improve the working standard of the commercial banks and other financial

service providers within the country.

1.6 Scope of the Study

The study would use the time frame of 42 years from 1980 to 2021 to analyze the impact of

financial system development and economic growth in Nigeria. The scope of this study will be

define from three dimensions namely, time period, geographical area coverage and data. The

geographical scope of this study is Nigeria. The period sums up to 42years starting from 1980 to

2021, the study is restricted to secondary data. The study will also fill gaps which exist in

previous studies such as (Usman & Adeyemi, 2017), concentrated on investigating financial

system development and economic growth: A causality test and suggested that Nigeria

government needed to introduce more policies that would improve efficiency of financial sector

6
which in turn would accelerate economic growth of the country but he failed to put into

consideration Foreign Direct Investment (FDI) of Nigeria thereby making some of his

assumptions wrong about Nigeria.

1.7 Organization of the Study

The research work is structured into five chapters; chapter one is the introduction which gives a

background to the study, statement of the problem, objectives of the study, research questions,

Significance of the study, Scope of the study and definition of terms; Also Chapter two reviews

relevant literature on the topic in concept of financial system and current literature of the subject

matter with special reference to Nigeria; Similarly, Chapter three deals with methodology of the

study which include introduction, research design, variable description and measurement, sample

size and technique, method of data analysis, analytical tools and estimation procedures.;

Furthermore, Chapter four is concerned with empirical analysis of the collected data; And lastly,

chapter five focuses on summary, conclusion and recommendations.

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 CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

This chapter discusses the conceptual framework, theoretical framework as well as literature

review.

2.1 Conceptual Issues

2.1.1 Concept of Financial System

According to Odife (1985), the financial system is the framework within which capital formation

takes place. It is the framework within which the savings of some members of society are made

available to other members of the society for productive investment through the process of

financial intermediaries. Financial system development relates to the number and variety of

financial institutions, markets, and instruments available in the financial system. Financial

development is measured by relating the macroeconomic indices of financial sector operations to

the gross domestic product (Mohan, 2005).

According to Creane, Mushiq, and Randa (2004) a modern financial system promotes investment

by identifying and good business opportunities, mobilizes savings, and monitors the performance

of mangers enables the trading, hedging, and diversification of risk and facilitates the exchange

of goods and services. Financial development thus involves the establishment and expansion of

financial institutions, instruments and markets which supports the investment and growth process

through improvements in the quantity, quality, and efficiency of financial intermediary services.

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2.1.2 Concept of financial development

Financial development is the process that marks improvement in quantity, quality and efficiency

of financial intermediary services. This process involves the interaction of many activities and

institutions and possibly associated with economic growth. In other words, it implies the level of

development and innovation of traditional and non-traditional financial services, Adams et al.,

(2018). Many other authors have also defined financial development in various ways. The World

Economic Forum (2012) defines it as the factors, policies, and institutions that lead to effective

financial intermediation and markets, as well as deep and broad access to capital and financial

services. Noureen (2013) sees it as a catalyst in economic development and is widely recognized

by both the monetary and development economists. For Garba (2014) he perceived it as the

increased provision of financial services with a wider choice of services geared towards the

development of all sectors of the economy. According to the new growth theorists, a well-

developed financial system facilitates high and sustainable economic growth Hicks, (2017).

Oloyede (2019) remarked thus, “Financial development is the outcome of accepting appropriate

real finance policy such as relating real rate of return to real stock of finance”.

Financial systems play a vital role in economic development and, to be successful in the longer

term, countries must take a holistic view by identifying and improving long-term factors that are

crucial to their development. Such a process would allow countries to encourage economic

prosperity for all participants in the global economy. This approach is supported by empirical

studies that have generally found that cross-country differences in levels of financial

development explain a considerable portion of the cross-country differences in

growth rates of economies, World Financial Development Report, (2018).

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2.1.3 Concept of Economic Growth

According to Olamide (2017) economic growth is defined as long term changes in an economy’s

productive capacity. The productive capacity of the economy is the output that could be

produced if all of the economy’s resources were fully and efficiently employed. This definition

tries to link economic growth to rate of growth of labour force and productivity.

The Wikipedia Encyclopaedia (2010) defines economic growth as an increase (or decrease) in

the value of goods and services that a geographic area produces and sells compared to an earlier

time. If the value of an area’s goods and services is higher in one year before, then we say the

economy experiences positive growth, which is called “Economic Growth” while in a year where

goods and services value lower than a year before it is produced and sold, we say it experiences

“Negative Economic Growth” and also called “recession” or “depression”

2.1.4 Financial Sector

Financial sector refers to a section of the economy made up of firms and institutions that provide

financial services to commercial and retail customers. Financial sector is the set of institutions,

instruments, markets, as well as the legal and regulatory framework that permit transactions to be

made by extending credit. Okon (2016). The financial sector refers to businesses, firms, banks,

and institutions providing financial services and supporting the economy. It encompasses several

industries, including banking and investment, consumer finance, mortgage, money markets, real

estate, insurance, retail, etc. Khamis (2019).

2.1.5 Economic Growth

Refers to an increase in the production of economic goods and services, compared from one

period of time to another. Also, it means an increase in the total amount of goods and services

produced per head of the population of a specific country over a year, it can be measured in
10
terms of Gross Domestic Product (GDP). (Economic dictionary) Economic growth is an increase

in the capacity of an economy to produce goods and services, compared from one period of time

to another. It can be measured in nominal or real terms, the latter of which is adjusted for

inflation. Traditionally, aggregate economic growth is measured in terms of gross national

product (GNP) or gross domestic product (GDP), although alternative metrics are sometimes

used. Wikipedia (2018).

2.2 Theoretical Framework

The literature on financial development provides some theoretical explanation on the relationship

between financial development and economic growth. The general view is that financial

development can improve long run growth. This section discusses selected theories that link

financial development to economic growth.

2.2.1 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 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 and Levine (1996) 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.

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2.2.2 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.

2.2.3 Stage of Development Theory: The theoretical basis of this study is anchored on stage of

development hypothesis of financial development by Hugh Patrick (1966) which states that the

direction of causality between financial development and economic growth changes over the

course of development. That is, at the early stage of development, the supply- leading impetus is

evident but as real growth occurs in the economy, it will spark demand for financial services.

This theory suggests a demand – following relationship between financial and economic

developments. High economic growth creates the demand for modern financial institutions; their

services, their assets and liabilities and arrangements, by investors and savers in the real

economy. The financial market in turn responds to such demands. In this case, the evolutionary

development of the financial system is a continuing consequence of the pervasive, sweeping

process of economic development. The level of demand for financial services depends upon

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growth of real output, and commercialization and monetization of agriculture and other

traditional substance sectors.

2.2.4 Financial Liberalization Theory: This hypothesis as postulated by Mckinnon and Shaw

(1973) sees the role government intervention in the financial markets as a major constraint to

savings mobilization, investment, and growth. The main critique of the financial liberalization

theory emanates from the imperfect information paradigm. This school of thought disagrees with

the proposition of these scholars and examines the problem of financial development in the

context of information asymmetry and costly that results in credit rationing. As observed by

Stiglitz and Weiss (1981), asymmetric information leads to two serious problems, first, adverse

selection and second, moral hazard. The implication is that the information asymmetries of

higher interest rates which actually follow financial reforms and financial liberalization policies

in particular exacerbates risk taking throughout the economy and hence threatens the stability of

the financial system, which can easily lead to financial crises while the feedback theory suggests

a two-way causality between economic growth and financial development.

2.2.5 Financial Repression Theory: This hypothesis refers to the notion that a set of

government regulations, laws and other non-market restrictions prevent the financial

intermediaries of an economy from functioning at their full capacity. The policies that cause

financial repression include interest rate ceilings, liquidity ratio requirements, high bank reserve

requirements, capital controls, and restrictions on market entry into the financial sector, credit

ceilings or restrictions on directions of credit allocation and government ownership or

domination of banks. Economists have commonly argued that financial repression prevents the

efficient allocation of capital and thereby impairs economic growth (Okpara, 2010; Darrat and

Siowadi, 2010; Esso, 2010).

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2.2.6 Finance-Growth Hypothesis: Major theoretical hypothesis on financial development and

economic growth process postulate four distinguishable, but not mutually exclusive, effects of

financial activity and development on overall economic performance. The first is the provision of

an inexpensive and reliable means of payment. The second is the volume and allocation effect, in

which financial activity increases resources that could be channeled into investment while

improving the allocation of resources. The third is a risk management effect by which the

financial system helps to diversify liquidity risks, thereby enabling the financing of riskier but

more productive investments and innovations (Greenwood and Jovaovic, 1990; Bencivenga and

Smith, 1991). The fourth is an informational effect; according to which an ex antes information

about possible investment and capital is made available, ameliorating although not necessarily

eliminating the effects of asymmetric information (Levine, 2004).

2.2.7 The Cobb-Douglas Model

The Cob-Douglas production function is a Neo-classical growth theory which accounts for

growth in output as a function of growth inputs, particularly capital and labor. The cob-Douglas

form was developed and tested against statistical evidence of Charles Cobb and Paul Douglas

during 1927-1947. The production function provides a quantitative technology link between

inputs and outputs. As a simplification, it is assumed that labor (N) and capital (K) are the only

important inputs. In its most standard forms of production of a single good with two factors, the

function is

Y = ALα Kβ

Where β α are the output elasticities of capital (K) and (L), respectively. These values are

constant determined by available technologies. Output elasticity measures the responsiveness of

output to a change in levels of either labor or capital used in production.

14
a + β = 1, the production function has constant returns to scale, meaning that doubling the usage

of capital K and labor L will also double output Y. If a + β < 1 returns to scale are decreasing,

and if a + β > 1, returns to scale are increasing. Assuming perfect competition and a + b = 1, and

a and b can be shown to be capital‘s and labor’s shares of output.

More input means more output. In other words, the marginal product of labor, or MPL (the

increase in output generated by increased capital), and the marginal product of capital, or MPK

(the increase in output generated by increased capital), are both positive. Labor and capital each

contribute an amount equal to their individual growth rates multiplied by the share of that input

in income. The rate of improvement of technology, called technical progress, or growth of total

factor productivity, is represented by A.

The growth of rate of total factor productivity is the amount by which output would increase as a

result of improvements in methods of production, with all inputs unchanged. In other words,

there is growth in total factor productivity when we get more output from the same factors of

production. Cobb and Douglas were influenced by statistical evidence that appeared to show that

labor and capital shares of total output were constant over time in developed countries.

But for the sake of this research, the cob-Douglas production function model because it has all

the qualities that would be used for this research and it also try to explain financial system

mathematically. It is very significant also in the sense that it deals with financial development

and economic growth of a nation.

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2.3 Empirical Review

Osuigwe and Oluchukwu (2022) examined the effect of financial innovation on economic

growth in Nigeria from 1980 to 2019. The authors employed Ordinary Least Square, Co-

integration and Philips-perrons test. The variables used were mobile banking, point of sale,

internet banking and automated teller machine. The findings showed that there is a positive

effect on financial innovation and economic growth. The authors recommend public education

and awareness on the benefits of Automated teller machine to enhance the benefit of financial

innovation in Nigeria.

Olajumoke, et al. (2022) investigated the nexus between financial development, trade

performance and economic growth in Nigeria from1985 - 2020. Financial development,

government expenditure, inflation rate and trade openness were used as dimensions of

independent variables while real gross domestic product was used as the dependent variables.

The authors employed Autoregressive distributed lag. The findings revealed that financial

development, government expenditure, trade openness, and real gross domestic product are all

stationary at first difference while inflation rate was stationary at level. It also showed that there

is a positive relationship between economic growth and financial development. The authors

recommends that Nigeria trade performance should be improved through economic

diversification so as to reduce much emphasis on oil export and availability of funds from private

sector at competitive interest rate in order to produce internationally competitive products should

be encouraged.

Similarly, Oji-Okoro and Itodo (2019) examined the impact of the financial sector development

on economic growth in Nigeria from 2000Q1 – 2019Q4. The findings showed that while

financial deepening, banking system liquidity and all share indexes had positive and significant

16
impact on the growth of real output in the long run. The authors recommend that the growth of

the money and capital markets should be prioritized by macroeconomic managers in Nigeria to

improve the level of economic growth.

Iheanacho (2016) investigated the impact of financial intermediary development and economic

growth in Nigeria over the period 1981- 2011 using auto-regressive distributed lag. The findings

showed that there is a negative insignificant relationship between financial development and

economic growth in Nigeria both in the long run and short run.

Also, Usman and Adeyemi (2017) examined the relationship and direction of causality between

financial system development and economic growth in Nigeria from 1970 to 2013. The authors

used Augmented Dickey Fuller test, Philips- perrons test, Johansen Co-integration test and

granger causality test. The variables were Gross Domestic Product, bank deposit to GDP, broad

Money to GDP, Ratio of Bank deposit to GDP, and ratio to domestic credit to private sector to

GDP. The findings revealed that all variables were stationary at first difference and also showed

that there is a long run relationship between financial development variables and economic

growth. The rate of Broad money to GDP Granger caused GDP growth rate and also significant

at 5 percent, ratio of Bank deposit to GDP also granger caused GDP at 1percent. The authors

recommend that Nigeria government need to seek to introduce more regulatory policies that will

improve efficiency of financial sector which will in turn accelerate economic growth in the

country.

Obinna (2015) conducted a study on the relationship between financial development and

economic growth in Nigeria for the period 1960 to 2014. The variables used were output share of

investment, interest rate, GDP, Broad Money Stock, Ratio of total bank liability. The author

employed granger causality test, vector error Correctional Model/ The findings showed that there

17
is a stable positive long run relationship between financial development and economic growth.

The author recommends the need to address the decay in the critical infrastructures which are

power; transport, security etc, as well as this will reduce the cost of funds for banks and also

deepens and sustain the momentum for growth.

Chude and Chude (2016) investigated the impact of financial development on economic growth

in Nigeria from 1980 to 2013. The authors used Vector Error Correction Model. They findings of

the study revealed that there exist a long run equilibrium relationship between financial

development and economic growth in Nigeria, it also showed that the ratio of broad money

supply to GDP have no significant impact on economic growth in Nigeria and lastly that the ratio

of domestic credit to private sector to GDP have no significant impact on economic growth in

Nigeria.

Olanrewaju, et al. (2015) studied the casual linkage between banking sector reforms and output

manufacturing sector as well as the direction of such causality. A sample of financial

development and manufacturing output in Nigeria with annual data between 197 and 2008 were

used and co-integration and Granger causality techniques were also applied to ascertain

evidence. The findings showed that the manufacturing GDP and banking sector reforms

indicators move differently with one not preceding the other within the study period. It further

showed that the bank assets, lending interest rate with co-efficient, exchange rate and real rate

spread negatively and significantly impacted the manufacturing GDP in Nigeria. The authors

recommend that with proper banking policy formulation and guidance in the financial sector, the

manufacturing output growth would be positively affected.

Victor and Samuel (2014) conducted a study on the empirical assessment of financial sector

development and economic growth in Nigeria from 1990 to 2011. The authors used co-

18
integration technique, augmented dickey fuller test, Vector Error Correction and Error

Correction Mechanism. The authors used variables like Real Gross Domestic Product, Interest

rate, liquidity ratio and credit the private sector. The findings showed that all the variables except

financial deepening were non stationary, but became stationary after the first difference was

taken. It also revealed that there exit a long run relationship among financial deepening, credit to

the private sector, liquidity ratio, minimum capital base, interest rate and the level of economic

growth. The authors recommend that further development of the financial sector should be

oriented towards the development of the private sector.

Alex (2012) determine the effect of financial sector reforms on the Nigerian Economy from 1980

to 2008 using variables like investment rate, lending rate, commercial bank loan and advances,

credit allocation to private sector. The author employed Ordinary Least Square. The finding

showed that the financial sector reform is significant to economic development and therefore

there is a positive relationship between banking reforms, and real sector financing measured by

loans and advances. The author recommends there should be appropriate planning before the

developments are carried out and there should be a body that supervises the reforms and ensure a

successful follow up of such developments.

Hassan et al. (2016) empirically examined the impact of financial market development on

economic growth in Nigeria using annual time series data covering the period of 1981-2014.

The study employed a Vector Error Correction Model (VECM) as the econometric methodology.

The empirical results of the study shows that overall there is a positive effect of financial market

development on economic growth in Nigeria. Almost, all the financial markets, namely, stock,

capital and money market have been found to have a significant positive impact with the

exception of only foreign exchange market having a negative impact on economic growth.

19
Ewetan and Okodua (2013) identified the long run and causal relationship between financial

sector development and economic growth in Nigeria for the period 1981 and 2011 using time

series data. A multivariate VAR and vector error correction model was employed to analyze the

data and the result support evidence of long run relationship between financial sector

development and economic growth in Nigeria. Granger causality test results also confirm the co

integration results indicating there exist causality between financial sector development and

economic growth in Nigeria. However, the nature of the causality depends on the variable used

to measure financial development, as this study employed real GDP, real interest rate and real

capital stock as variable in the analysis.

In another study, Agbo and Nwanko (2018) investigated the effect of financial sector

development on the economic growth of Nigeria with secondary data covering the period from

1981 to 2013.The study employed Dickey Fuller unit root test to confirm the stationarity of the

variables involved in the study which are Economic Growth, Banking Sector Credit, money

supply, Marginal Rediscount Rate, Market Capitalization, Exchange Rate, and Foreign Direct

Investment. Ordinary least squares technique was also employed to determine the extent to

which the variables impact on economic growth. The findings of the study showed that money

supply, minimum rediscount rate and exchange rate have positive and insignificant effect on

economic growth. On the other hand, banking sector credit, credit to the private sector, market

capitalization and foreign direct investment discovered to be having negative and insignificant

effect on economic growth.

Okpara et al. (2018) researched on the extent to which financial development engenders

economic growth in Nigeria using a time series data from 1981 to 2014.The study employed a

vector error correction model to finding the long run impact of financial development variables

20
on the growth of the economy. The results of the analyses show that there is a long run

relationship between financial development and economic growth in Nigeria and that besides the

metric for banking system financing of the economy variable which is significantly inadequate,

all other financial development indicators engender economic growth.

Imoagwu et al. (2019) investigated the relationship between financial development and economic

growth in Nigeria during the period of 1986 – 2017. Specifically, the study examined the effect

of financial deepening measured as the ratio of broad money supply to GDP, interest rate, stock

market recapitalization and credit to private sector to GDP on economic growth in Nigeria. The

study adopted recent econometric techniques such as Augmented Dickey-Fuller (ADF) and the

Phillip-Perron (PP), Unit Root Tests, co integration test as well as the Toda-Yamamoto causality

test was used to accomplish its objectives. The results revealed that financial development has

significant positive relationship on economic growth in Nigeria only in the short-run while

negative impact in the long-run and that causality runs from financial development to economic

growth. Furthermore, the study revealed that the stock market capitalization have significant

positive impact on economic growth in Nigeria in the short run while negative significant in long

run. The interest rate has positive insignificant effect on economic growth in Nigeria only in the

short run while negative significant effect in the long run. The ratio of domestic credit to private

sector to GDP have positive significant impact on economic growth in Nigeria only in the long

run while positive insignificant in the short run. Causality also runs from stock market

development, interest rate, banking sector development and recapitalization to financial

development in Nigeria.

Judith and Chijindu (2016) evaluated the relation between financial development and economic

growth in Nigeria, taking exception from existing literatures by integrating broad distinctive

21
indicators of financial development into the model and using different econometric techniques to

assess the financial development - growth link between 1987 and 2014. The findings based on

the analysis indicate that financial development and economic growth move along together in the

long run. It was revealed that credit to the private sector, stock market capitalization and inflation

have negative and impact on the economy, while broad money supply, trade openness and

foreign direct investment exert positive influence on the economy. The error correction term in

the model availed us the correctional influence in the speed of adjustment which indicated that

errors of divergence from equilibrium was corrected at the speed of 86% each year.

Omoruyi and Ahmed (2014) examined empirically the short-run and long run relationships

between financial system development and economic growth in Nigeria. The study adopted a

multivariate OLS analysis for the estimation process, co integration analysis for long-run

equilibrium relationship and the associated error correction model to determine the short-run

impact of the variables. The Granger causality test was used to determine the direction of

causality among the variables. The findings of the study were that financial development

(measured by banking system and stock market development) positively influenced economic

growth in Nigeria; that causality runs from finance to growth in the finance-growth nexus.

Nwani and Orie (2016) empirically examined the independent effects of stock market and

banking sector development on economic growth in Nigeria over the period 1981–2014 using the

autoregressive distributed lag (ARDL) approach to co integration analysis. Controlling for the

possible effects of crude oil price and trade openness on economic activities in Nigeria, the study

found both stock market and banking sector development insignificant in influencing economic

growth in Nigeria. In general, the findings of the study highlight the weakness of the Nigerian

22
financial sector in stimulating economic growth through resource mobilization and allocation

and the dominant role of the oil sector in economic activities in Nigeria.

Ogwumike and Salisu (2017) examined the short run, long run and the causal relationship

between financial development and economic growth in Nigeria from 1975 to 2008. Using the

Bound test approach, this study finds a positive long run relationship between financial

development and economic growth in Nigeria. Financial intermediation- credit to private sector,

stock market and financial reforms exert significant positive impact on economic growth in the

country.

Aneto (2019) examined the relationship between remittances, financial sector development, and

economic growth in Nigeria over the period 1981 to 2017. The study used the autoregressive

distributed lag (ARDL) model to analyze the long run and short-run relationships between the

variables. The results of the study showed that remittances have a negative and significant effect

on economic growth both in the long-run and short-run, also financial sector development has a

negative and significant impact on economic growth both in the long-run and short-run. Further,

the study confirmed the existence of complementarity between remittances and financial sector

development in influencing economic growth, inflation has a negative and significant effect on

economic growth both in the long-run and short run. However, the findings of the study showed

that trade openness, government expenditure, and population growth have no significant impact

on economic growth both in the long-run and short-run.

Furthermore, Elijah and Hamza (2019) investigated the relationships between the financial sector

development and economic growth in Nigeria, using annual time series data for the period

between a time periods of 1981 to 2015. The research finds out that, there exist co integration

23
among the financial development, trade openness and economic growth with structural break

date in 2010 and the results from the vector error correction model finds there is significant and

negative relationship between financial development and the economic growth in Nigeria in the

study period.

Thaddeus and Chigozie (2015) analyzed nature of relationship between financial system

development and economic growth in Nigeria using vector autoregressive model. The findings of

the study revealed among others that long run causality does not run from financial system

development indicators and economic growth, implying that financial system development seem

not to significantly catalyze economic growth trends in Nigeria. However, in specific terms, the

effect of financial system development on economic growth in Nigeria has been positively

significant only in the short run.

Ojofedo and Edez (2014) examined financial sector development and economic growth in

Nigeria For the period 1990 to 2010. The study relied on historical time series for its secondary

data obtained from Central bank of Nigeria statistical bulletin for the period. The study employed

Vector Error Correction (VEC) model to ascertain the direction of causality between financial

sector development and economic growth in Nigeria between1990 to 2010. The findings of the

study showed a strong positive relationship between financial sector and economic growth and

causality runs from market capitalization, banking sector credits and foreign direct investment to

the real gross domestic product which supports the supply leading hypothesis. Therefore, it was

conclude based on the findings that market capitalization, banking credits and foreign direct

investment impact significantly on real gross domestic product.

24
Olusegun et al. (2013) examines the impact of financial sector development and economic

growth in Nigeria. The OLS method of the regression analysis was employed for the analysis

where financial development was proxied by ratio of liquidity liabilities to GDP, real interest

rate, ratio of credit to private sector to GDP, while the economic growth was measured by the

real GDP. The findings of the study reveals that he link between the financial and real sector still

remains weak and could not propel the needed growth towards the vision 202020. There is

therefore the need for consistent, transparent, fair policy, and also a resilient& strong institutional

development of the sector.

2.4 Categories of Financial System

We basically have two categorize of financial system which are;

1 The Informal Sector: This sector comprises of the local money lenders, the thrifts and

savings associations etc. it is poorly developed, limited in reach, and not integrated into the

formal financial system, but plays a major role in the Nigeria financial system. The informal

sector in Nigeria refers to economic activities in all sectors of the economy that are operated

outside the purview of government regulation. This sector may be invisible, irregular, parallel,

non-structured, backyard, under-ground, subterranean, unobserved or residual. Informal

economic activities in Nigeria encompass a wide range of small-scale, largely self-employment

activities. Such financial and economic endeavours of subsistence nature include retail trading,

local transport, restaurant management, repair services, financial intermediation and household

or other personal services. The informal sector covers a wide range of market activities. First, the

informal sector is formed by the coping behavior of individuals and families in an environment

in which earning opportunities are limited. Second, the informal sector is a product of rational

behavior of entrepreneurs that desire to avoid state regulations, which simply means they operate

25
 outside the regulatory purview of the government. The informal sector engages in activities

which are not easily measured and it cuts across a wide range of areas of informality —

environmental, spatial, economic, and social, covering business activities, employment, markets,

settlements, and neighborhoods. These activities include casual jobs, subsistence agriculture and

unpaid jobs. Each of these areas have implications for public policy formulation and

implementation.

2 The Formal Financial System: - This system comprises of the capital and money

market institutions and these comprises of the banks and non-banks financial institutions. Formal

financial institutions is an institution which has a legal basis and subject to regulation by the

government. The formal financial sector such as banking institutions and cooperatives are

institutions that are subject to government regulation, while the informal financial institutions

have the characteristics of high flexibility and is not regulated by government regulation.

2.5 Factors Affecting Economic Growth in Nigeria

Some of the factors that affect economic growth in Nigeria are being discussed below:

1. Natural Resources: The discovery of more natural resources like oil, boost economic growth as

this increases the country’s Production Possibility Curve. But realistically, it is difficult to

increase the number of natural resources in a country. Country must take care to balance the

supply and demand for scarce natural resources to avoid depleting them.

2. Physical Capital: Increase investment in physical capital such as factories, machinery, and roads

will lower the cost of economic activity. Better factories and machinery are more productive

than physical labor.

26
3. Population: A growing population means there is an increase in the availability of workers or

employees, which means a higher workforce. One downside of having a large population is that

it results to high unemployment in developing countries.

4. Human Capital: An increase in investment in human capital can improve the quality of labor

force. This increase in quality would result in an improvement of skills, abilities and training.

5. Technology: Another influential factor is the improvement in technology. The technology could

increase productivity with the same level of labor, thus the accelerating growth and

development. This increment means factories can be more productive at lower rates.

Technology is most likely to lead to sustained long –run growth.

6. Law: An institutional framework which regulates economic rules and laws. There isn’t any

specific institution that promotes growth especially in developing countries like Nigeria.

7. Capital Formation: Involves land, building, machinery, power, transportation, and medium of

communication. Producing and acquiring all these manmade products is termed as capital

formation. Capital formation increases the availability of capital per worker, which further

increases capital/labor ratio. Consequently, the productivity of labor increases, which ultimately

results in the increase in output and growth of the economy.

8. Social and Political Factors: Play a crucial role in economic growth of a country. Social factors

involve customs, traditions, values and beliefs, which contribute to the growth of an economy to

a considerable extent. For example, a society with conventional beliefs and superstitions resists

the adoption of modern ways of living. In such a case, achieving becomes difficult. Apart from

this, political factors, such as participation of government in formulating and implementing

various policies, have a major part in economic growth.

27
9. Education: It is widely acknowledged that education is the primary means of growth. Greater

progress has been made in countries with widespread education. Education is critical for human

resource development because it increases labor efficiency and reduces mental barriers to new

ideas and knowledge, hence promoting economic progress.

10. Desire for Material Advancement: Desire for material advancement is a necessary but not

sufficient prerequisite for economic development. Societies that place a premium on self-

satisfaction, self-denial, and confidence in fate, for example, restrict risk and enterprise, so

holding the economy behind.

2.6 Measurement of Economic Growth

In Order to measure the economic growth of any country, we use gross domestic product. Gross

domestic Product is the total market value of goods and services produced within a country’s

borders in a specific time period. Gross domestic Product can be measured using three

approaches and should yield same figures. These three approaches are expenditure, output and

the income approach.

 Expenditure Approach

The expenditure approach is also known as spending approach. It calculates the spending by

different groups that participate in economy. This approach can be calculated using the following

formulae;

GDP = C + I + G + NX

Where C is private consumption expenditures, G = Government consumption expenditure and

gross investment, I = Private domestic investment, NX = Net export which is calculated by

subtracting imports from exports.

28
  Output Approach

The output approach is also known as production approach and is the reverse of expenditure

approach. Instead of measuring input costs that feed economic activity, the output approach

estimates the total value of economic output and deducts cost of intermediate goods that are

consumed in the process, like those of materials and services. The output looks backward from

vantage of a state of completed economic activity. This is calculated as;

GDP at market price = value of output in an economy in a particular year – intermediate

consumption at factor – depreciation + net factor income from abroad – net indirect taxes.

 Income Approach

The income approach equates the total output of a nation to the total factor income received by

citizens of the nation. The main types of factor income are employee compensation, interest

received, rental income and royalties paid for the use of intellectual property and extractable

natural resources. The approach can be calculated using the formulae:

GDP = compensation of employee + net interest + rental and royalty income + business

cash flow.

2.7 Nigerian Financial system

The Nigerian financial system includes financial markets (money and capital markets), financial

institutions including the regulatory and supervisory authorities, development finance institutions

(Urban Development Bank, Nigerian Agricultural and Rural Cooperatives bank) and other

finance institutions (insurance companies, pension funds, finance companies, Bureau de change,

and Primary Mortgage Institutions), among others. It also offers financial instruments (e.g.

treasury bills, treasury certificates, central bank certificates), The structure of the Nigerian

Financial System has been through remarkable changes, ranging from their ownership structure,

29
the length and breadth of financial instruments used to the number of institutions established,

regulatory and supervisory frameworks as well as the overall macroeconomic environment

within which they operate. The Nigerian Financial System also consists of interrelationships

among the persons and the bodies that make up the economy. Commercial banks are the most

relevant financial institutions in Nigeria to encourage and mobilize savings and also channel

savings into productive investment units.

2.8 Nigerian Financial System regulatory framework

Finance and banking operations are governed by rules and regulations which are reviewed

regularly to reflect the changing economic environment. Over the years some rules and statutes

which govern the operation of the banks were enacted which includes; the Central Bank of

Nigeria Decree No. 24 of 1999 as amended; Bank and other Financial Institutions (BOFI) Decree

No. 25 of 1991 as amended; the Dishonoured Cheque (Offenses) Decree of 1977; the Failed

Bank (Recovery of Debt) Decree No. 18 of 1994 as amended; and the Money Laundering Decree

No. 3 of 1995. The National Insurance Commission Decree No. 1 of 1997 and the Insurance

Decree No. 2 of 1977 provide the regulatory framework for the operation of the insurance

industry. The major regulatory/ supervisory authorities are the Federal Ministry of Finance

(FMF), Central Bank of Nigeria (CBN), Securities and Exchange Commission (SEC), National

Insurance Commission (NAICOM), Federal Mortgage Bank of Nigeria (FMBN), and the

National Board for Community Banks (NACB). The CBN is at the apex of all banking

institutions operating in the money market and has responsibility for controlling and supervising

all commercial, merchant and community banks, the microfinance banks, finance companies,

discount houses, primary mortgage institutions, bureaux de change, and all development banks.

30
2.9 Types of financial assets

Generally, assets are divided into tangible and intangible assets

• Tangible assets: These are the physical form of an asset. It includes both fixed and current

assets. The fixed assets are land, buildings, machinery whereas an example of current asset is

inventory. These assets are the spine of firms and enable them to carry on with production but

are not accessible to clients. Fixed assets can also be described as assets that have material form

such as cash, equipment, plant, property that could exist in physical form for a long period of

time. Its purchase is for the operation of the business and not essentially for sale to customers.

• Intangible assets: These are those assets that do not take physical form, like goodwill,

copyrights, trademarks, patents as well as brand recognition. They are long-term resources, but,

they cannot be touched or felt as they have no physical existence. Normally, these assets are

categorized into two broad groups namely: a. Definite or Limited-life intangible assets, such as

goodwill, copyrights and patents and b. Indefinite or Unlimited-life intangible assets, like

trademarks. In addition, intangible assets exist on the contrary to tangible assets like land,

vehicles, equipment, inventory, stocks, bonds and cash. An example of a firm's indefinite asset is

its brand name because it stays with it all through its period of operation.

31
 CHAPTER THREE

METHODOLOGY

3.0 Introduction

This chapter presents the methodology adopted in conducting this study. The rest of this chapter

is constructed into research design, sources and method of data collection, sample size and

technique, variables description and measurement, model specification, method of data analysis

and estimation procedure.

3.1 Sources of Data Collection

Secondary source was used for this study. Precisely, the aggregate annual time series data at

current prices for gross domestic product, and total net inflows for financial system covering the

period of 31 years from 1990 – 2021. The unit of measurement for both variables is the naira.

Aggregate annual time series were used because of its stationary characteristics. In addition

aggregate annual time series is normally useful in establishing long term econometric

relationship between variables. This research also employed multiple regression model in order

to examine the degree at which the impact of financial system development affect Economic

growth. The data were extracted from the Central Bank of Nigeria (CBN 2022), National Bureau

of Statistics (NBS 2022), seminar papers, Journals, Internet, Federal Ministry of Finance,

Securities and Exchange Commission (SEC). The reason why these sources are adopted is to

ensure a comprehensive and adequate research and to provide a basis for purposeful research

work.

32
3.2 Model Specification

This study is largely quantitative and build on existing research studies and methodologies. This

study adopted Ordinary Least Square (Gujaratti and Porter 2009) to estimate a system of six

endogenous equation and has been preferred choice in empirical studies with numerous system

of equation (Ghatak and Halicioglu, 2006). In this study ordinary least square (OLS) method was

adopted to test the hypothesis on the various relationships between financial system development

and economic growth also to avoid number of challenges and issues that crop up when

quantitative method are used in econometric studies. These include the issue of subjective and

bias responses and the inability to incorporate such biases in econometric model. In respect to

this study, the model specification used Gross Domestic Product (GDP) as the dependent

variable while Foreign Direct Investment (FDI), Market Capitalization (MCAP), Trade Openness

(TOP), Interest Rate (INT) and External Debt (EXB) as the independent variables. The modified

model is been specified as follows;

RGDPg = f (FDI, MCAP,TOP, INT, EXB)

Thus the model is

Yt = a0 + a1 X 1t + a2X 2t + a3X3 a4X4t + a5X 5t+ Ut………………………………(1)

Y= RGDP= Real Gross Domestic Product

X1 = FDI = Foreign Direct Investment

X2 = MCAP = Market Capitalization

X3 = TOP = Trade Openness

X4 = INT = Interest Rate

33
X5 = EDB = External Debt

Ut= Error term

3.3 Variables Description and Measurements

This study consists of both dependent variable Gross Domestic Product (GDP) and independent

variables such as Foreign Direct Investment, Market capitalization, Trade Openness, Interest rate

and External Debt.

Gross Domestic Product: This is a monetary measure of the market value of all final goods and

services produced in a specific period of time. It is an aggregate measure of production equal to

the sum of the gross value added to all resident and institutional units engaged in production and

services. Real GDP will be used to measure gross domestic product. It will also be measured

using natural logarithm which is IN_GDP.

Foreign Direct Investment refers to the flow of capital and personnel from abroad for investment

in another country. It is a form of controlling ownership in a business in one country by an entity

based in another country. A foreign direct investment stock is used in the measurement of FDI at

any point in time, usually at the end of the year. It will also be measured using natural logarithm

which is IN_FDI.

Market Capitalization refers to the equal to the market price per common share multiplied by the

number of common shares outstanding. It is the total value of a publicly traded company’s

outstanding shares owned by shareholders. It will be measured using natural logarithm which is

IN_MCAP.

34
Interest Rate: this refers to the amount of interest due per period as a proportion of the amount

lent, deposited, or borrowed. It will be measured using natural logarithm which is IN_INT.

Openness to Trade: This refers to the outward and inward orientation of a given country

economy. Outward orientation refers to economies that take significant advantages of the

opportunities to trade with other countries. While inward orientation refers to countries or

economies that are independent by developing countries. The openness index is used to measure

trade openness and is calculated as the ratio of a country’s total trade merchandise trade (import

+ export) to GDP as a proxy for index of trade openness, using natural logarithm to measure the

variable in IN_TOP.

External debt refers to the portion of a country debt that is borrowed from foreign lenders,

including commercial banks, government or international financial institutions. These loans

including interest, must usually be paid in the currency in which the loan was made to earn the

needed currency, the borrowing country may sell and export goods to the lender country. It will

be measured using natural logarithm which is IN_EDB.

3.4 Method of Data Analysis

The study adopted the regression and correlation analysis. In this study emphasis were made on

ordinary least square regression analysis in order to ascertain whether or not there is relationship

between independent variable (FDI, MCAP, INT, TOP,EDB) and the dependent variable (GDP)

and the correlation analysis throw more light on the degree of the relationship existing between

econometric variables. The data used for the study will be processed using the E –views 10.0

econometric software.

35
3.5 Estimation Technique

3.5.1 Ordinary Least Square

The ordinary least square method (OLS) of classical linear regression model will be used to

carry out this study; this is because the equation is specified in a linear form. The OLS was

chosen for estimation because of the following reasons;

1. The OLS is fairly easy to compute as compared to other econometric methods.

2. The mechanism of the OLS is simple to comprehend and interpret.

3. Finally, the Parameters estimation the OLS methods have some desirable optical

properties. They are best, linear unbiased estimators (BLUE)

3.5.2 Granger Causality Test

The Granger test is applied to know the direction of causality of variables included in the model.

Generally, causality between two variables has been tested using Granger and Sims causality test

(Granger 1969). A variable X is then said to cause a variable Y. if at time t the variable help to

predict the variable YT-1. While predictability in its self is merely a statement about stochastic

dependence, it is precisely the axiomatic imposition of a temporal ordering that allow one to

interpret such dependence as causal connection.

36
 CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND INTEPRETATION

4.0 Introduction

This chapter presents analysis and interpretation of the empirical results of the study. This

comprises of different preliminary test conducted which includes unit root test, Ordinary Least

Square (OLS) estimation and also Granger Causality Test.

4.1 Data Presentation

Table 4.1.1 Descriptive Statistics

RGDP FDI MCAP TOP INT EXB

Mean 29.40258 0.085872 25.68941 3.453738 2.803119 3.087027
Median 29.6626 0.112401 24.7555 3.529348 2.828586 3.050076
Maximum 32.80193 1.756279 30.66259 4.19565 3.454738 4.794429
Minimum 24.64067 -1.69379 21.48524 2.804218 2.131994 1.599552
Source: Author’s computation using E-views 10.0 software

The summary of the statistics used in the empirical study is presented in Table 4.1.1, as observed

from the Table, FDI has the lowest mean value of 0.085872 and RGDP has the highest mean

value of 29.40258 whereas the mean value of MCAP, TOP INT and EXB are 25.68941,

3.453738, 2.803119 and 3.087027 respectively. The result also shows the maximum and

minimum of RGDP as 32.80193 and 24.64067. It also indicates the maximum and minimum of

FDI as 1.756279 and -1.69379. Furthermore, it reveals the maximums and minimums of MCAP,

TOP and INT as 30.66259 and 21.48524, 4.19565 and 2.804218, and 3.454738 and 2.131994

respectively. The result of EXB maximum and minimum is 4.794429 and 1.599552 from the

descriptive statistics.

37
4.2 Ordinary Least Square

Regression analysis was employed in the analysis of data to assess the impact of financial system

development and economic growth in Nigeria. The estimation of the parameter in the formulated

model as obtained after running multiple regression analysis with the use of ordinary least square

(OLS) method is shown below:

GDP = A0 +A1FDI +A2MCAP+ A3TOP +A4INT +A5EXB+ et

Table 4.2.1: Results of Regression Analysis

Variables Coefficient Std. Error t-Statistic P- value

FDI -0.00581 0.047983 -0.12101 0.9044
MCAP -0.01306 0.011551 -1.1302 0.2663
TOP 0.072211 0.1173 0.615607 0.5423
INT 0.165347 0.171567 0.963745 0.342
EXB -0.05544 0.041796 -1.32636 0.1936
C 1.40536 0.805505 1.744695 0.0901

R-squared 0.996231 Mean dependent var 29.51873

Adjusted R-squared 0.995566 S.D. dependent var 2.435217
S.E. of regression 0.162164 Akaike info criterion -0.64617
Sum squared resid 0.894102 Schwarz criterion -0.35361
Log likelihood 20.24643 Hannan-Quinn criter. -0.53963
F-statistic 1497.739 Durbin-Watson stat 1.367355
Prob(F-statistic) 0.0000
Source: Author’s computation using E-views 10.0 Software

Table 4.2.1 shows the ordinary least square estimation of the equation as:

GDP = 1.40536 -0.00581FDI -0.01306MCAP +0.072211TOP +0.165347 INT

38
-0.05544EXB

S.E = (0.047983) (0.011551) (0.1173) (0.171567) (0.041796)

Tstat= (1.744695) (-0.12101) (-1.1302) (0.615607) (0.963745)

(-1.32636)

R2 = 0.996231

Adj. R2 = 0.995566

F-stat = 1497.739

DW = 1.367355

4.3 Interpretation of Regression Results

From the above regression line, it can be deducted that the Gross Domestic Product (GDP) is

1.40536 holding all repressors to be zero. A unit increase in Foreign Direct Investment (FDI) on

average will lead to a decrease in GDP by coefficient of -0.00581. Similarly, a unit increase in

Market Capitalization (MCAP) on average will lead to a decrease in GDP by coefficient of -

0.01306. However, a unit increase in Trade Openness (TOP) on average will lead to an increase

in GDP by coefficient of 0.072211. In addition, a unit increase in interest rate (INT) will lead to

an increase in GDP by the coefficient of 0.165347. Furthermore, a unit increase in External Debt

(EXB) on average will lead to a decrease in GDP by coefficient of -0.05544.

39
From statistical point of view, the result from the estimated regression shows the slopes of the

coefficients are found to be significant at 5% and all the independent variable are in line with a

prior expectation.

However, the above table 2 indicates that all variables were found to be jointly significant base

on the value of F-statistics which stood at1497.739. Nevertheless, the value of R-squared and

Adjusted R-squared co-efficient of multiple determinations stood at 0.996231 and 0.995566

respectively. This implies that 99 percent of variation in Gross Domestic Product (GDP) is

explained by the variation in all independent variables, while the remaining 1 percent is

accounted for by the error term (e t). The high value of R-squared shows that the model is a good

fit. This implies that the dependent variable considered in the model does account to a large

extend for the changes in the dependent variables.

4.4 Hypothesis Testing

The hypothesis for this study are stated in chapter one, but the need for it arises to test the

statistical significance of the Ordinary Least Square (OLS) estimate, standard error test is

employed.

HO1 Financial Sector Development has no impact on the economic growth of Nigeria

Ho2 Financial Sector Development has impact on the economic growth of Nigeria

At 5% level of significance (0.05) with explanatory variables and degree of freedom.

V1 = k-1

V2 = N-k

Where

40
N= Number of observation

K= Number of variables

Hence,

V1 = (5-1) = 4

V2 = (42-5) = 37

4.5 Statistical Test of Significant

Standard Error test enable us to determine the degree of confidence. However, in order to

achieve this significantly, it begins by stating the null hypothesis against the alternative

hypothesis.

H0: Ais= 0

H1: Ais≠ 0

Decision Rule

In order to accept or reject the null hypothesis or alternative hypothesis, the following conditions

must be made;

i. If S.E (A1) < A1/2 reject the Null hypothesis thereby accepting the alternative hypothesis

and conclude that A1 is statistically significant.

ii. On the contrary, if S.E A1 >A1/2 accept the null hypothesis and therefore accepting that

the population parameter is equal to zero (i.e A 1 = 0). Hence, we conclude that the estimate is not

significantly significant. Therefore the test A1, A2 and A3 can be expressed below:

41
For S.E (A1) = 0.047983 while A1/2 = (-0.00581/2) = -0.002905, since S.E (A1) is greater than

A1/2, hence, accept the null hypothesis (H0) therefore we conclude that (A1) is not statistically

significant by rejecting alternative hypothesis ( H1) at 5% level of significance.

For S.E (A2) = 0.011551 while A2/2 = (-0.01306/2) = -0.00653, since A2 is greater than A2/2, we

accept the null hypothesis (H0) therefore we conclude that A2 is not statistically significant by

rejecting alternative hypothesis (H1) at 5% level of significance.

For S.E (A3) = 0.1173 while A3/2 = (0.072211/2) = 0.0361055, since A3 is greater than A3/2, we

accept the null hypothesis (H0) therefore we conclude that A 3 is statistically not significant at 5%

level of significance by rejecting the alternative hypothesis (H1).

For S.E (A4) = 0.171567 while A4/2 = (0.165347/2) = 0.0826735, this shows that A4 is greater

than A4/2, hence, we accept the null hypothesis (H 0). Therefore we that A4 is not statistically

significant at 5% level of significance by rejecting the alternative hypothesis (H 1).

For S.E (A5) = 0.041796 while A5/2 = (-0.05544/2) = -0.02772, since A5 is greater than A5/2, we

accept the null hypothesis (H0) therefore we conclude that A5 is not statistically not significant at

5% level of significance by rejecting the alternative hypothesis (H1).

4.6 F-statistics: Decision Rule

a) If F calculated (F*) is less than the F- tabulated, we accept null hypothesis and conclude

the slope coefficient are simultaneously zero.

b) If F calculated (F*) is greater than F-tabulated, we reject null hypothesis and conclude the

slope coefficient are simultaneously zero.

42
Given our empirical F-calculated (F*) as obtained in the result of estimated regression is

1497.739, while that of F-tabulated at 5% level of significance V 1 = (k-1 = 5-1 = 4) and V 2 (N-k

= 42-5 = 37), is found to be (2.61) which is less than 1497.739 for F*. Therefore, since F-

calculated (F*) > F-tabulated (i.e 1497.739 > 2.61) alternative hypothesis (H1) is accepted and

concludes that all the slope coefficient is simultaneously zero.

It should be noted that the application of F-statistics is to determine the general statistical

significance and reliability of the regression model used for this study. The outcome of the study

depicts that the model used is statistically significant and equally reliable with the coefficient of

determination of (R2) of 99 % percent.

4.7 Durbin Watson Statistics

Durbin Watson test explains whether the auto-correlation exists by comparing the empirical

value of Durbin Watson with the calculated value from the regression result at a given level of

significance in the light of DW test the decision rule stated below:

Decision Rule:

i. If d* (calculated value) is less than d L (dlower tabulated), reject the null hypothesis (H 0) if

no auto-correlation and accept the alternative hypothesis (H1) with presence of auto-correlation.

ii. If d* (calculated value) is greater than d L (d tabulated), we accept the null hypothesis H0

if no auto-correlation and reject alternative hypothesis (H1) of presence of auto correlation.

From the tabulated result d* calculated is 1.367355, and from DW table at 5% of significant, k=5

N=42. Thus, the DW table dL = (1.111) and du = (1.583) this depicts that d* > dL (i.e 1.367355 >

1.111) therefore we accept the null hypothesis (H 0) and conclude that there is no auto-correlation

in the model thereby rejecting the alternative hypothesis (H1).

43
4.8 Pair-wise Granger Causality Test

The idea of this test is to determine if the indices of financial sector development provide

significant statistical information about the economics of Nigeria. Causality occurs when there is

a lift in an index of Financial Sector Development that leads to a latter increase in GDP and vice

versa. In establishing Granger Causality at threshold value of 5% the p-value must not exceed

0.05 (p-value, ≤ 0.05). Table 4.9.1 shows the outcome of the causality test conducted on a two

lag length.

Table 4.8.1: The Estimates of Pair-wise Granger Causality Test Results

Null Hypothesis: Obs F-Statistic P-value

FDI does not Granger Cause RGDP 40 12.1031 0.0001*

RGDP does not Granger Cause FDI 0.47601 0.6252

MCAP does not Granger Cause RGDP 40 0.0712 0.9314

RGDP does not Granger Cause MCAP 2.03392 0.146

TOP does not Granger Cause RGDP 40 4.14443 0.0242*

RGDP does not Granger Cause TOP 0.54732 0.5834

INT does not Granger Cause RGDP 40 18.8533 3.0006

RGDP does not Granger Cause INT 1.13912 0.3317

EXB does not Granger Cause RGDP 40 10.3676 0.0003*

RGDP does not Granger Cause EXB 4.16328 0.0239*

MCAP does not Granger Cause FDI 40 2.55675 0.092

FDI does not Granger Cause MCAP 1.16001 0.3252

TOP does not Granger Cause FDI 40 0.7159 0.4958

FDI does not Granger Cause TOP 3.39465 0.0449*

44
 INT does not Granger Cause FDI 40 3.06328 0.0594
FDI does not Granger Cause INT 0.57073 0.5703

EXB does not Granger Cause FDI 40 0.78473 0.4641

FDI does not Granger Cause EXB 3.19217 0.0533*

TOP does not Granger Cause MCAP 40 1.34214 0.2744

MCAP does not Granger Cause TOP 0.00976 0.9903

INT does not Granger Cause MCAP 40 1.94786 0.1577

MCAP does not Granger Cause INT 3.58685 0.0383*

EXB does not Granger Cause MCAP 40 0.00139 0.9986

MCAP does not Granger Cause EXB 2.01202 0.1489

INT does not Granger Cause TOP 40 2.86534 0.0704

TOP does not Granger Cause INT 0.02427 0.976

EXB does not Granger Cause TOP 40 1.99375 0.1514

TOP does not Granger Cause EXB 2.66131 0.084

EXB does not Granger Cause INT 40 1.12433 0.3363

INT does not Granger Cause EXB 3.05701 0.0598
Source: Author’s computation using E-views 10.0 Note ‘*’ shows the presence of causality

The test for causality as revealed in the table shows the existence of a causal link between FDI

and RGDP i.e FDI doest granger cause GDP as indicated by the p -value (0.0001). This means

that Foreign Direct Investment does influence economic growth (GDP), but RGDP does not

granger cause FDI as revealed by the p-value (0.6252), this means that there is a uni-directional

relationship between FDI and RGDP. MCAP does not granger cause RGDP as indicated by the

p-value (0.9314), also RGDP does not granger cause MCAP as indicated by the p-value (0.146).

45
TOP does granger cause RGDP as indicated by the p-value (0.0242) but RGDP does not have

any causal link with TOP as indicated by the p-value (0.5834). This means that there is a uni-

directional link between TOP and RGDP and also implying that trade openness influence

economic growth. INT does not granger cause RGDP as indicated by the p-value (3.0006), also

RGDP does not granger cause INT as indicated by the p-value (0.3317). EXB does granger cause

RGDP as indicated by the p-value (0.0003) also RGDP does granger cause EXB as indicated by

the p-value (0.0239). This suggests that there is a bi-directional link between EXB and RGDP.

In summary, Indices like FDI and TOP from the Pair-wise Granger Causality Test indicates a

causation on RGDP, but RGDP have causation on both of them, indicating a uni-direction link

between them. But variable like INT has no causation on RGDP and RGDP does not produce

any causation on it as well. However, EXB found to have a bi-directional relation with RGDP.

4.9 Discussion of Findings

The study assesses the impact of financial sector development on the economic growth in

Nigeria, using annual time series data from 1989 to 2021. The finding of this study reveals that

Trade openness (TOP) has a positive and significant relationship with GDP, meaning a 100%

increase in TOP will lead to a 0.072 percent increase in GDP for the period under review. Its

contribution to both the financial sector is statistically significant under this period. This

corresponds to Arthukorala (2003) and Anyanwale (2007).

The Regression result also show that Market capitalization (MCAP) has a negative and

insignificant relationship with GDP, meaning a 100% increase in MCAP, will lead to a 0.013

percent decrease in GDP for the period under review. Its contribution to financial sector

development is not statistically significant. Furthermore, External Debt (EXB) has a negative and

insignificant relationship with GDP meaning a 100% increase in EXB will lead to a decrease in

46
GDP, while a reduction in external debt will stimulate economic growth. This study also reveals

that Foreign Direct Investment (FDI) has a negative and insignificant relationship with GDP,

meaning a 100% increase in FDI will lead to a 0.005 % increase in GDP indicating that for more

financial sector development the government needs to discourage investment from international

bodies. Moreover, the result indicates that there exists a positive and significant relationship

between interest (INT) and GDP, meaning a 100% increase in interest will leads to

0.165% in GDP, indicating that for more financial sector development, government needs to

increase the rate of the interest in the economy.

CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

47
5.0 Introduction

This chapter is design to give a brief overview of the study. It contains summary of the major

findings. Moreover, the chapter contains the conclusion based on the literature reviewed and the

findings of the study as well as policy recommendations that will help in enhancing financial

sector development in Nigeria.

5.1Summary of Findings

The study assess the impact of financial sector development on the economic growth in Nigeria,

various econometric techniques such as Ordinary Least Square (OLS), Granger Causality test

and Unit Root Test were employed on time series data from 1989 – 2021. In order to ensure the

fulfilment of this goal, data on financial sector development variables such as Trade openness

(TOP), External Debt (EXB), Foreign Direct Investment (FDI), Market Capitalization (MCAP),

and Interest rate (INT), were collected from Central Bank of Nigeria (CBN) bulletin, National

Bureau of Statistics (NBS), Debt Management Office and World Development Indicators (WDI).

In line with the research, Conceptual framework was discussed, these includes concept of

financial system, categories of financial system, Factors that affect financial system in Nigeria,

Problems associated with financial system in Nigeria, concept of economic growth, factors

affecting economic growth in Nigeria and Measurement of economic growth. The empirical

review of related literature was discussed. The methodology adopted in the research was

discussed and the variables used were Gross Domestic Product (GDP) as the dependent variable

and TOP, FDI, MCAP, EXB and INT were employed as Independent variables.

The study came up with the following findings;

48
1 Stationary test using augmented dickey fuller shows that some variables are stationary at

level I(0) ( i.e FDI, MCAP, and TOP) while some were found to be stationary at first

difference. I(1) (i.e RGDP, and INT).

2 From the regression analysis the result obtained shows that MCAP has a negative and

insignificant relationship with GDP, meaning a 100% increase in MCAP, will lead to a 0.013

percent decrease in GDP, the negative means that Market capitalization do not stimulates

economic growth and also do not encourage productivity in financial system development.

This study is in line with Christopher (2012).

3 The regression result shows that TOP has a positive and a significant relationship with GDP,

meaning that a 100% increase in TOP will lead to a 0.072 percent increase in GDP, and the

positive relationship means that Trade openness stimulates economic growth and encourages

productivity in financial sectors under review. This study is in line with Onayemi and

Akintoye (2009).

4 Furthermore, the result obtained shows External Debt EXB has a negative and insignificant

relationship with GDP, meaning that the higher the External Debt, the lower the GDP.

5 In addition, the regression result shows that Foreign Direct Investment (FDI) has a negative

and insignificant relationship with GDP, meaning a 100% increase in FDI will lead to a

0.005 % increase in GDP. This findings is in accordance with Mojekwu and Ogege (2012).

6 The Granger causality test reveals the presence of causal link between TOP and GDP and

also FDI and GDP as a uni-directional link. The findings is in line with Benedict and

Chinizea (2017).

7 The Granger causality test reveals that there is no causality between INT and GDP.

8 The granger causality test reveals a bi-directional relationship between EXB and RGDP.

49
5.2 CONCLUSION

In line with the findings of this study which is a significant addition to existing literature, the

empirical evidence from the study reveals that the proxy of financial sector development used in

this study was Gross Domestic Product. It focuses on the period of 1989 to 2021 and used time

series data obtained from African Development Bank (AFDB), Central Bank of Nigeria (CBN),

World Bank and Federal Office of Statistics. Some statistical method: Ordinary Least square,

Unit Root Test and Granger Causality test were used for correlation and direction of causality.

The study reveals that financial system development is very essential in every country for it to

attain economic growth and its of paramount important especially to the Nigerian system as it

helps to go hand in hand in enhancing economic growth and also has a direct relationship which

encourages investment and productivity in goods and services. This implies that the growth

which has been experienced in the country for the past years has been partly due to the immense

concentration in the agricultural and industrial sector in the country.

Undoubtfully, the findings of this study goes a long way in bridging the gap and enabling policy

makers to plan and formulate both short and long term policies from an informed perspective.

Nigeria as an example of a third world economy needs to know that engaging in trade between

nations and reduce importation but increasing exports and borrowing of loans from international

bodies to foster the economy is of paramount importance if they economy needs to grow given

its positive benefits.

The Nigerian Economy was reformed through the help of the APEX bank the Central Bank of

Nigeria using the structural adjustment program launched in 1986, which had some main

objectives. These objectives include minimizing state intervention, establishing a free market

50
economy and integration of the economy and integration of the economy with the global

economic system.

It can be concluded that market capitalization, foreign direct investment and trade openness are

variables that Nigeria needs to consider and put more effort in ensuring that financial system

development doesn’t collapse even in the nearest future.

5.3 Recommendations

Based on the findings of the study and by considering the result of the regression models, the

following recommendations were made:

1. Need for Privatization: The privatization of inefficient stated-owned enterprise will boast

more productivity. Since Nigeria has now recognized that the privatization of corporations is

necessary to reduce government fiscal deficit. Also to spread and sustain growth in Nigeria,

the evidence has point to three key objectives: avoiding collapses in growth, accelerating

productivity growth and increasing private businesses. This can be accomplished by

increasing the number of variety of firms and farms that can compete and produce more

goods and services in the global economy. This implies pushing more export, increasing

connectivity to regional and global markets through deeper and regional integration.

2. Diversification of the economy: Countries like Nigeria rely on exportation of crude oil for

foreign exchange earnings; this exposes them to significant terms of trade shocks.

Diversification of the economy and exploring other sectors like the educational sector or

manufacturing sector will enable them to cushion the effects of shocks, reduce country risk

and also have an increased human capital development. This reduction in country risk will

increase the attractiveness of foreign investors to invest in the tertiary and secondary sectors.

51
3. Trade Liberalization: Openness to trade will signal commitment to outward-looking market-

oriented policies and enhance, trading opportunities thereby attracting foreign investors’

interest on taking advantages of the new trading opportunities.

4. Birth Rate Control: Population is essential in labour productivity in both the agricultural and

industrial sector but too much population will lead to a negative outcome or social vices into

the society like unemployment, poverty, crime etc. So it necessary to control population and

make it to a positive advantage rather than a negative one. The government should adopt the

use of contraceptive by its citizens to control the rate of birth from not escalating. The

countries health system should also be looked into.

5. Borrowings: Government should be encouraged to borrow more funds from the international

bodies like International Monetary Fund. This would help in developing the sectors which

needs funding, as it will in the future brings about high GDP, high per capita income and

boast economic growth.

6. Agricultural and Industrial Sector has very essential in our country as it also have a positive

and significant impact and thus government should try and implement policies that will

encourage farmers and companies to key into the sector. Things like tax holiday, subsidy,

price ceiling and price floor should all be implemented.

7. Improving Infrastructures: This is essentials to reduce transaction cost in producing goods

and services. Government should build more companies, ensure adequate infrastructure are

in place and provide more jobs that are production based and employ experts that will help

in teaching the workers.

8. Spurring Innovation: This will require investment in information technology and skill

formation to enhance productivity and competiveness. The potential comparative advantage

52
 of low wages in Nigeria is too often nullified by low productivity. Survey shows that labor is

not cheap when productivity is low.

REFERENCES
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Akintola, A. A, Oji-okoro, I. and Itodo, A. (2019). Financial Sector Development and Economic
Growth in Nigeria: An Empirical Re-examination.

Benecivenga V. and Smith B. D (1991). Financil Intermediation and Endegenous Growth, the
Review of economic studies, 58(2).

Greenwood J &Jovanovic B. (1990). Financial Development, Growth and the Distribution of

Income. Journal of political economy, 98(5).

Jung, W. (1986). Financial Development and Economic Growth: International evidence.

Economic Development and cultural change, 34(2), 333-346.

Kuznets, S. (1955). Economic growt and Income Inequality. American Economic Review, 48, 1-
28.

Lucas R. E. (1988), “On the mechanics of Economic Development. Journal of Monetary

Economics, 22(1), 3-42.

Mckinon, R. I. (1973). Money and Capital in Economic Development Washington DC: The
Brooking Institution.

Mohan, R. (2005). Financial Sector Reforms: Policies and Performance Analysis. Economic
Political Weakly, Special Issue on Money, Banking and Finance. Vol. 40, Pp. 1106-1112.

Nnanna, O. J. Englama, A. and Odoko, F.O. (2004). Financial Market in Nigeria. A central Bank
of Nigeria Publications, Printed by Kas. Arts Science.

Obinna, O. (2015). Financial Development and Economic Growth in Nigeria. Journal of

Economics and Sustainable Development. Vol. 6, No. 20.

Odife, D. O. (1985). Understanding the Nigerian Stock Market, New York: Vantage Press

Oriavwote, N. and Eshenake, S. (2014). An Empirical Assessment of Financial Sector

Development and Economic Growth in Nigeria. Department of Social Sciences,
Economic and Development Studies Programme, Federal University Otuoke, Bayelsa
State.

Osuji C. (2015). “An empirical Assessment of Financial Development and Economic Growth in
Nigeria: A causality Test.” Department of Banking and Finance, Delta State University,
Asaba Campus.

Oyindamola, O. A and Chinonso, T. (2022). The Nexus between Financial Development, Trade
Performance and Growth in Nigeria. Global Journal of Arts, Humanities and Social
Sciences. Vol.10, No. 3, Pp.1-17.

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Ray, D. (1998). Development Economics. Princeton: Princeton University Press.

Robinson J. (1952). “The generalization of the general theory. In the Rate of Interest and Other
Essay, London: Macmillan 69-142.

Schumpeter, J. A. (1912). The theory of Economic Development, Cambridge, M. A. Harvard

University Press.

Usman, O. A. & Adeyemi, A. Z. (2017). Financial System Development and Economic Growth
in Nigeria: A causality Test. International Journal of Research, in Business Studies and
Management. Vol. 4 Issue 12, Pp. 36-43.

APPENDICES

APPENDIX 1

RGDP FDI MCAP TOP INT EXB

1980 24.64067 0.140506 27.63917 4.195650 2.131994 2.683339

1981 25.65997 -1.109475 27.67183 3.158818 2.187922 1.949572

55
 1982 25.72756 -1.198610 27.84009 2.984892 2.255231 2.135751
1983 25.79060 -0.979927 28.12907 3.147918 2.300249 2.903065
1984 25.83437 -1.357039 27.86495 3.363042 2.326464 3.197087
1985 25.95881 -0.417863 28.14022 3.369104 2.244250 3.244653
1986 26.01215 -1.042579 28.35696 2.819380 2.298493 3.728504
1987 26.22322 0.147618 28.24555 3.063775 2.636315 4.055693
1988 26.47779 -0.270895 28.58412 3.150518 2.810406 4.099125
1989 26.75121 1.454441 28.68702 3.473237 3.017575 4.274733
1990 26.92710 0.084296 28.70854 3.571631 3.230804 4.180747
1991 27.10349 0.371783 28.80250 3.767293 2.997813 4.274584
1992 27.53234 0.629151 28.99855 3.742001 3.209162 4.169887
1993 27.85989 1.578523 21.48524 4.139244 3.454738 4.794429
1994 28.20132 1.756279 21.81428 3.858069 3.019612 4.655124
1995 28.76250 -0.271552 22.77446 3.843104 3.007331 4.400407
1996 29.03860 -0.022736 23.26601 3.789411 2.987532 4.163797
1997 29.11687 -0.148179 23.25371 3.814871 2.878918 3.998437
1998 29.20071 -0.600356 23.05751 3.552969 2.900551 4.069813
1999 29.33256 0.526241 21.80153 3.632360 3.010128 3.917091
2000 29.58586 0.495756 30.44978 3.755593 3.057494 3.969245
2001 29.73935 0.491965 30.59919 3.706313 3.154373 3.876553
2002 30.07349 0.678837 21.58782 3.290265 3.209667 3.696400
2003 30.23792 0.649519 30.66259 3.505727 3.030818 3.744232
2004 30.52826 0.322355 23.48744 3.660663 2.953912 3.561540
2005 30.77180 1.042498 23.82534 3.702348 2.887497 2.883559
2006 31.04465 0.710866 24.21462 3.576566 2.826919 1.722770
2007 31.17707 0.774356 25.16468 3.596039 2.829628 1.770177
2008 31.31876 0.881177 24.59576 3.692074 2.717065 1.625477
2009 31.40290 1.064797 24.19596 3.425149 2.943956 1.928707
2010 31.63128 0.495960 24.64616 3.553699 2.867046 1.705234
2011 31.77629 0.757585 24.38756 3.725672 2.773838 1.703111
2012 31.91256 0.421196 24.75228 3.575527 2.820883 1.599552
2013 32.02559 0.067228 25.11289 3.338517 2.816755 1.622108
2014 32.13235 -0.201531 24.86268 3.336106 2.806285 1.689665
2015 32.18677 -0.475617 24.63477 2.957599 2.824301 1.922543
2016 32.26162 -0.158532 24.11752 2.833848 2.825419 2.199528
2017 32.37508 -0.442882 24.34005 3.003577 2.865244 2.531167
2018 32.49151 -1.693790 24.17391 3.200876 2.827544 2.660714
2019 32.61215 -0.664767 24.50567 3.268995 2.732846 2.628423
2020 32.66961 -0.594400 24.75873 2.804218 2.613155 2.829190
2021 32.80193 -0.285580 24.75873 3.110339 2.440879 2.889396

APPENDIX 2

DESCRIPTIVE STATISTICS

Date: 01/14/23
Time: 14:11
Sample: 1980 2021

RGDP FDI MCAP TOP INT EXB

Mean 29.40258 0.085872 25.68941 3.453738 2.803119 3.087027

Median 29.66260 0.112401 24.75550 3.529348 2.828586 3.050076
Maximum 32.80193 1.756279 30.66259 4.195650 3.454738 4.794429
Minimum 24.64067 -1.693790 21.48524 2.804218 2.131994 1.599552

56
Std. Dev. 2.520357 0.801137 2.626743 0.344180 0.307929 1.028509
Skewness -0.279533 -0.104236 0.297518 -0.111632 -0.572950 -0.100927
Kurtosis 1.677670 2.580897 1.943717 2.411822 2.877585 1.559337

Jarque-Bera 3.606945 0.383439 2.572153 0.692650 2.324124 3.703446

Probability 0.164726 0.825538 0.276353 0.707283 0.312840 0.156967

Sum 1234.909 3.606621 1078.955 145.0570 117.7310 129.6551

Sum Sq. Dev. 260.4402 26.31466 282.8909 4.856849 3.887636 43.37110

Observations 42 42 42 42 42 42

APPENDIX 3

REGRESSION RESULT

Dependent Variable: RGDP

Method: Least Squares
Date: 12/26/22 Time: 01:32
Sample (adjusted): 1981 2021
Included observations: 41 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

FDI -0.005806 0.047983 -0.121009 0.9044

MCAP -0.013055 0.011551 -1.130195 0.2663
TOP 0.072211 0.117300 0.615607 0.5423
INT 0.165347 0.171567 0.963745 0.3420
EXB -0.055437 0.041796 -1.326363 0.1936
C 1.405360 0.805505 1.744695 0.0901
RGDP(-1) 0.951785 0.018018 52.82309 0.0000

R-squared 0.996231 Mean dependent var 29.51873

Adjusted R-squared 0.995566 S.D. dependent var 2.435217
S.E. of regression 0.162164 Akaike info criterion -0.646167
Sum squared resid 0.894102 Schwarz criterion -0.353606
Log likelihood 20.24643 Hannan-Quinn criter. -0.539633
F-statistic 1497.739 Durbin-Watson stat 1.367355
Prob(F-statistic) 0.000000

APPENDIX 4

UNIT ROOT TEST

Null Hypothesis: D(RGDP) has a unit root

Exogenous: Constant, Linear Trend
Lag Length: 0 (Automatic - based on SIC, maxlag=9)

57
 t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -8.156874 0.0000

Test critical values: 1% level -4.205004
5% level -3.526609
10% level -3.194611

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(RGDP,2)
Method: Least Squares
Date: 01/14/23 Time: 13:41
Sample (adjusted): 1982 2021
Included observations: 40 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

D(RGDP(-1)) -0.893844 0.109582 -8.156874 0.0000

C 0.193168 0.050675 3.811892 0.0005
@TREND("1980") -0.001671 0.001637 -1.020662 0.3140

R-squared 0.654476 Mean dependent var -0.022174

Adjusted R-squared 0.635799 S.D. dependent var 0.186104
S.E. of regression 0.112312 Akaike info criterion -1.463035
Sum squared resid 0.466717 Schwarz criterion -1.336369
Log likelihood 32.26071 Hannan-Quinn criter. -1.417237
F-statistic 35.04180 Durbin-Watson stat 1.099491
Prob(F-statistic) 0.000000

Null Hypothesis: FDI has a unit root

Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=9)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -3.076737 0.0363

Test critical values: 1% level -3.600987
5% level -2.935001
10% level -2.605836

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(FDI)
Method: Least Squares
Date: 01/14/23 Time: 13:51
Sample (adjusted): 1981 2021
Included observations: 41 after adjustments

58
 Variable Coefficient Std. Error t-Statistic Prob.

FDI(-1) -0.393259 0.127817 -3.076737 0.0038

C 0.026940 0.102842 0.261960 0.7947

R-squared 0.195317 Mean dependent var -0.010392

Adjusted R-squared 0.174684 S.D. dependent var 0.719793
S.E. of regression 0.653909 Akaike info criterion 2.035854
Sum squared resid 16.67629 Schwarz criterion 2.119443
Log likelihood -39.73501 Hannan-Quinn criter. 2.066293
F-statistic 9.466312 Durbin-Watson stat 2.192930
Prob(F-statistic) 0.003817

Null Hypothesis: MCAP has a unit root

Exogenous: Constant, Linear Trend
Lag Length: 0 (Automatic - based on SIC, maxlag=9)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -4.966717 0.0013

Test critical values: 1% level -4.198503
5% level -3.523623
10% level -3.192902

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(MCAP)
Method: Least Squares
Date: 01/14/23 Time: 13:53
Sample (adjusted): 1981 2021
Included observations: 41 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

MCAP(-1) -0.790152 0.159089 -4.966717 0.0000

C 21.86355 4.495644 4.863274 0.0000
@TREND("1980") -0.077015 0.035262 -2.184052 0.0352

R-squared 0.393770 Mean dependent var -0.070255

Adjusted R-squared 0.361863 S.D. dependent var 2.967733
S.E. of regression 2.370728 Akaike info criterion 4.634627
Sum squared resid 213.5734 Schwarz criterion 4.760010
Log likelihood -92.00985 Hannan-Quinn criter. 4.680285
F-statistic 12.34124 Durbin-Watson stat 2.043498
Prob(F-statistic) 0.000074

59
Null Hypothesis: TOP has a unit root
Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=9)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -3.212221 0.0264

Test critical values: 1% level -3.600987
5% level -2.935001
10% level -2.605836

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(TOP)
Method: Least Squares
Date: 01/14/23 Time: 13:56
Sample (adjusted): 1981 2021
Included observations: 41 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

TOP(-1) -0.364784 0.113561 -3.212221 0.0026

C 1.236452 0.395052 3.129848 0.0033

R-squared 0.209220 Mean dependent var -0.026471

Adjusted R-squared 0.188943 S.D. dependent var 0.274418
S.E. of regression 0.247137 Akaike info criterion 0.089804
Sum squared resid 2.381995 Schwarz criterion 0.173393
Log likelihood 0.159013 Hannan-Quinn criter. 0.120243
F-statistic 10.31837 Durbin-Watson stat 1.409274
Prob(F-statistic) 0.002641

Null Hypothesis: D(INT) has a unit root

Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=9)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -5.816027 0.0000

Test critical values: 1% level -3.605593
5% level -2.936942
10% level -2.606857

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(INT,2)

60
Method: Least Squares
Date: 01/14/23 Time: 13:58
Sample (adjusted): 1982 2021
Included observations: 40 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

D(INT(-1)) -0.960985 0.165230 -5.816027 0.0000

C 0.005855 0.023290 0.251384 0.8029

R-squared 0.470945 Mean dependent var -0.005705

Adjusted R-squared 0.457022 S.D. dependent var 0.199165
S.E. of regression 0.146759 Akaike info criterion -0.951348
Sum squared resid 0.818448 Schwarz criterion -0.866904
Log likelihood 21.02695 Hannan-Quinn criter. -0.920815
F-statistic 33.82616 Durbin-Watson stat 1.961131
Prob(F-statistic) 0.000001

Null Hypothesis: D(EXB) has a unit root

Exogenous: Constant, Linear Trend
Lag Length: 0 (Automatic - based on SIC, maxlag=9)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -5.017510 0.0011

Test critical values: 1% level -4.205004
5% level -3.526609
10% level -3.194611

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(EXB,2)
Method: Least Squares
Date: 01/14/23 Time: 14:00
Sample (adjusted): 1982 2021
Included observations: 40 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

D(EXB(-1)) -0.728913 0.145274 -5.017510 0.0000

C 0.119491 0.104156 1.147236 0.2586
@TREND("1980") -0.004511 0.004270 -1.056383 0.2976

R-squared 0.408544 Mean dependent var 0.019849

Adjusted R-squared 0.376573 S.D. dependent var 0.393307
S.E. of regression 0.310545 Akaike info criterion 0.571060
Sum squared resid 3.568204 Schwarz criterion 0.697726
Log likelihood -8.421198 Hannan-Quinn criter. 0.616858

61
F-statistic 12.77874 Durbin-Watson stat 1.834289
Prob(F-statistic) 0.000060

APPENDIX 5

MULTICOLONIALITY TEST

Variance Inflation Factors

Date: 01/14/23 Time: 14:05
Sample: 1980 2021
Included observations: 41

Coefficient Uncentered Centered

Variable Variance VIF VIF

FDI 0.002302 2.329317 2.303662

MCAP 0.000133 138.1967 1.415605
TOP 0.013759 255.4609 2.246203
INT 0.029435 368.6597 3.835108
EXB 0.001747 28.99119 2.870035
C 0.648838 1011.608 NA
RGDP(-1) 0.000325 438.2040 3.069217

APPENDIX 6

SERIAL-AUTO CORRELATION TEST

Breusch-Godfrey Serial Correlation LM Test:

F-statistic 0.121929 Prob. F(2,32) 0.8856

Obs*R-squared 0.310079 Prob. Chi-Square(2) 0.8564

Test Equation:
Dependent Variable: RESID
Method: Least Squares
Date: 01/14/23 Time: 14:07
Sample: 1981 2021
Included observations: 41
Presample missing value lagged residuals set to zero.

Variable Coefficient Std. Error t-Statistic Prob.

FDI 0.001592 0.049507 0.032155 0.9745

MCAP -0.000625 0.012121 -0.051525 0.9592
TOP 0.003903 0.120762 0.032322 0.9744
INT -0.014560 0.178778 -0.081444 0.9356
EXB 0.001673 0.043217 0.038712 0.9694
C 0.025967 0.832972 0.031173 0.9753
RGDP(-1) 0.000415 0.018599 0.022314 0.9823

62
 RESID(-1) 0.052942 0.181121 0.292302 0.7719
RESID(-2) -0.075127 0.184666 -0.406824 0.6868

R-squared 0.007563 Mean dependent var -4.94E-15

Adjusted R-squared -0.240546 S.D. dependent var 0.149508
S.E. of regression 0.166521 Akaike info criterion -0.556198
Sum squared resid 0.887340 Schwarz criterion -0.180048
Log likelihood 20.40206 Hannan-Quinn criter. -0.419225
F-statistic 0.030482 Durbin-Watson stat 1.481254
Prob(F-statistic) 0.999988

Date: 01/14/23 Time: 14:06

Sample: 1980 2021
Included observations: 41
Q-statistic probabilities adjusted for 1 dynamic regressor

Autocorrelation Partial Correlation AC PAC Q-Stat Prob*

.|. | .|. | 1 0.048 0.048 0.1013 0.750

.*| . | .*| . | 2 -0.067 -0.069 0.3035 0.859
.*| . | .*| . | 3 -0.137 -0.131 1.1773 0.758
.*| . | .*| . | 4 -0.111 -0.106 1.7688 0.778
.*| . | .*| . | 5 -0.157 -0.173 2.9729 0.704
.|. | .|. | 6 -0.022 -0.051 2.9973 0.809
.|. | .|. | 7 0.031 -0.026 3.0462 0.881
.|. | .|. | 8 0.065 0.001 3.2731 0.916
.*| . | .*| . | 9 -0.133 -0.192 4.2492 0.894
.*| . | .*| . | 10 -0.116 -0.160 5.0140 0.890
.|. | .|. | 11 0.066 0.032 5.2692 0.917
.*| . | **| . | 12 -0.137 -0.232 6.4024 0.894
.|. | .*| . | 13 -0.016 -0.099 6.4175 0.930
. |** | . |*. | 14 0.240 0.151 10.180 0.749
. |*. | .|. | 15 0.118 0.001 11.132 0.743
.*| . | .*| . | 16 -0.067 -0.115 11.447 0.781
.*| . | .*| . | 17 -0.085 -0.086 11.979 0.801
.*| . | .*| . | 18 -0.119 -0.144 13.066 0.788
.|. | .|. | 19 0.035 0.010 13.166 0.830
.*| . | .*| . | 20 -0.101 -0.150 14.021 0.829

*Probabilities may not be valid for this equation specification.

APPENDIX 7

HETEROSCEDASTICITY TEST

Heteroskedasticity Test: Breusch-Pagan-Godfrey

F-statistic 3.125769 Prob. F(6,34) 0.0151

Obs*R-squared 14.57577 Prob. Chi-Square(6) 0.0238
Scaled explained SS 52.15931 Prob. Chi-Square(6) 0.0000

63
Test Equation:
Dependent Variable: RESID^2
Method: Least Squares
Date: 01/14/23 Time: 14:09
Sample: 1981 2021
Included observations: 41

Variable Coefficient Std. Error t-Statistic Prob.

C 0.677889 0.308070 2.200438 0.0347

FDI -0.024076 0.018351 -1.311920 0.1983
MCAP -0.004021 0.004418 -0.910088 0.3692
TOP 0.028703 0.044862 0.639807 0.5266
INT 0.010793 0.065617 0.164478 0.8703
EXB -0.034118 0.015985 -2.134348 0.0401
RGDP(-1) -0.019589 0.006891 -2.842564 0.0075

R-squared 0.355507 Mean dependent var 0.021807

Adjusted R-squared 0.241772 S.D. dependent var 0.071225
S.E. of regression 0.062020 Akaike info criterion -2.568453
Sum squared resid 0.130782 Schwarz criterion -2.275892
Log likelihood 59.65329 Hannan-Quinn criter. -2.461918
F-statistic 3.125769 Durbin-Watson stat 1.271669
Prob(F-statistic) 0.015066

Heteroskedasticity Test: ARCH

F-statistic 6.283476 Prob. F(1,38) 0.0166

Obs*R-squared 5.675684 Prob. Chi-Square(1) 0.0172

Test Equation:
Dependent Variable: RESID^2
Method: Least Squares
Date: 01/14/23 Time: 14:15
Sample (adjusted): 1982 2021
Included observations: 40 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

C 0.009143 0.002483 3.682288 0.0007

RESID^2(-1) 0.083582 0.033343 2.506686 0.0166

R-squared 0.141892 Mean dependent var 0.010961

Adjusted R-squared 0.119310 S.D. dependent var 0.016005
S.E. of regression 0.015020 Akaike info criterion -5.510163
Sum squared resid 0.008573 Schwarz criterion -5.425719
Log likelihood 112.2033 Hannan-Quinn criter. -5.479631
F-statistic 6.283476 Durbin-Watson stat 2.072276
Prob(F-statistic) 0.016583

64
APPENDIX 8

STABILTY TEST

Ramsey RESET Test

Equation: UNTITLED
Specification: RGDP FDI MCAP TOP INT EXB C RGDP(-1)
Omitted Variables: Squares of fitted values

Value df Probability
t-statistic 2.161078 33 0.0380
F-statistic 4.670256 (1, 33) 0.0380
Likelihood ratio 5.426894 1 0.0198

F-test summary:
Mean
Sum of Sq. df Squares
Test SSR 0.110848 1 0.110848
Restricted SSR 0.894102 34 0.026297
Unrestricted SSR 0.783254 33 0.023735

LR test summary:
Value
Restricted LogL 20.24643
Unrestricted LogL 22.95987

Unrestricted Test Equation:

Dependent Variable: RGDP
Method: Least Squares
Date: 01/14/23 Time: 14:16
Sample: 1981 2021
Included observations: 41

Variable Coefficient Std. Error t-Statistic Prob.

FDI 0.015032 0.046594 0.322609 0.7490

MCAP 0.003721 0.013442 0.276847 0.7836
TOP 0.114739 0.113164 1.013917 0.3180
INT 0.016821 0.176892 0.095090 0.9248
EXB 0.057314 0.065565 0.874154 0.3884
C 18.78305 8.077545 2.325341 0.0263
RGDP(-1) -0.376690 0.614966 -0.612538 0.5444
FITTED^2 0.024015 0.011113 2.161078 0.0380

R-squared 0.996698 Mean dependent var 29.51873

Adjusted R-squared 0.995998 S.D. dependent var 2.435217
S.E. of regression 0.154062 Akaike info criterion -0.729750
Sum squared resid 0.783254 Schwarz criterion -0.395394
Log likelihood 22.95987 Hannan-Quinn criter. -0.607996
F-statistic 1423.025 Durbin-Watson stat 1.325213
Prob(F-statistic) 0.000000

APPENDIX 9
65
NORMALITY TEST

APPENDIX 10

PAIR-WISE GRANGER CAUSALITY TEST

Pairwise Granger Causality Tests

Date: 12/26/22 Time: 01:27
Sample: 1980 2021
Lags: 2

Null Hypothesis: Obs F-Statistic Prob.

FDI does not Granger Cause RGDP 40 12.1031 0.0001

RGDP does not Granger Cause FDI 0.47601 0.6252

MCAP does not Granger Cause RGDP 40 0.07120 0.9314

RGDP does not Granger Cause MCAP 2.03392 0.1460

TOP does not Granger Cause RGDP 40 4.14443 0.0242

RGDP does not Granger Cause TOP 0.54732 0.5834

INT does not Granger Cause RGDP 40 18.8533 3.E-06

RGDP does not Granger Cause INT 1.13912 0.3317

EXB does not Granger Cause RGDP 40 10.3676 0.0003

RGDP does not Granger Cause EXB 4.16328 0.0239

MCAP does not Granger Cause FDI 40 2.55675 0.0920

FDI does not Granger Cause MCAP 1.16001 0.3252

TOP does not Granger Cause FDI 40 0.71590 0.4958

FDI does not Granger Cause TOP 3.39465 0.0449

INT does not Granger Cause FDI 40 3.06328 0.0594

66
FDI does not Granger Cause INT 0.57073 0.5703

EXB does not Granger Cause FDI 40 0.78473 0.4641

FDI does not Granger Cause EXB 3.19217 0.0533

TOP does not Granger Cause MCAP 40 1.34214 0.2744

MCAP does not Granger Cause TOP 0.00976 0.9903

INT does not Granger Cause MCAP 40 1.94786 0.1577

MCAP does not Granger Cause INT 3.58685 0.0383

EXB does not Granger Cause MCAP 40 0.00139 0.9986

MCAP does not Granger Cause EXB 2.01202 0.1489

INT does not Granger Cause TOP 40 2.86534 0.0704

TOP does not Granger Cause INT 0.02427 0.9760

EXB does not Granger Cause TOP 40 1.99375 0.1514

TOP does not Granger Cause EXB 2.66131 0.0840

EXB does not Granger Cause INT 40 1.12433 0.3363

INT does not Granger Cause EXB 3.05701 0.0598

67