Bank Competition and Economic Growth: Evidence from Nigeria

The relationship between financial development and economic growth has been subjected to several debates by various authors. It has been argued that a competitive and efficient financial sector is a prerequisite for economic growth and development. The objective of this study therefore is to examine the relationship between bank competition and economic growth in Nigeria for the period 1986 – 2012 using vector error correction mechanism. This study is anchored on the fact that there are conflicting empirical arguments (positive or negative relationship) on the effects of bank competition on economic growth. Also, the new reform introduced, as well as the increase in the cost of borrowing in the Nigerian banking industry motivates this study to further strengthen the examination of bank competition and its effect on economic growth in a transition economy like Nigeria. Bank competition was measured in the study using bank concentration ratio. The Johansen cointegration test was performed to test for the existence of long run relationship in the model. The result of the study showed that there that bank competition has a first -order positive effect on economic growth both in the short run (as shown by the result of Vector error correction model) and in the long run (as suggested by the cointegration test and the likelihood ratio test). This finding is consistent with the theoretical prediction that higher bank competition results, on average, in a lower cost of borrowing to firms. The study suggested that strengthening the competitiveness and efficiency of the financial sector would lead to improved economic growth. However, efficiency gains are therefore likely to be realized in the long run, only if there is evenly distribution of market share in the banking industry as opposed to the present situation where majorly three banks dominate and take the larger market share in the industry. __________________________________________________________________________________________