Impact of Banking Sector Development on Economic Growth: Another Look at the Evidence from Nigeria

Despite the implementation of several banking sector reforms, the real sector in Nigeria is still finding it difficult to access financial resources especially from the commercial banks that hold about 90% of the total financial sector assets. Nominal interest rate is high causing many firms to avoid bank-borrowing. Other formidable financing challenges are concentration of bank credit to the oil and gas, communication and general commerce sectors to the disadvantage of the core real sectors, banks are also more disposed to financing government financial need as almost 50% of their assets are tied up in government debt. These myriad financing challenges facing the real sector call for the reassessment of finance-growth nexus in Nigeria. In this regard, this study re-examined the long run relationship between financial development indicators and economic growth in Nigeria over the period 1970-2010. Using the Johansen and Juselius (1990) approach to cointegration and Vector Error Correction Modelling (VECM). The findings of the study revealed that in the long-run, liquid liabilities of commercial banks and trade openness exert significant positive influence on economic growth, conversely, credit to the private sector, interest rate spread and government expenditure exert significant negative influence. The findings implied that, credit to the private sector is marred by the identified problems and government borrowing and high interest rate are crowding out investment and growth. The policy implications are these; financial reforms in Nigeria should focus more on deepening the sector in terms of financial instruments so that firms can have alternatives to banks’ credit which proved to be inefficient and detrimental to growth, moreover, government should inculcate fiscal discipline so as to reduce excessive borrowing from the financial sector and thereby crowding out private investment.