Financial Intermediation and the Nigerian Economy: A Time Series Analysis

Abstract

This paper examines the level of development of financial intermediation and how it impacts on economic growth of Nigeria. Using a time series data covering a period of 40 years (1970 –2009) and employing the econometric tool of Ordinary Least Squares (OLS) and cointegration analysis based on Engle Granger cointegration theory and error correction methodology, we tested both short and long run relationships between financial intermediation and economic growth in Nigeria. The result revealed that a long–run relationship exists between financial intermediation and growth during the period of study, the result further showed that credit to the private sector, and money supply deviated from a priori use case while the other regressors (financial deepening, interest rate, credit to public sector ) conforms to a priori since they appeared with correct signs. On the whole only 48 percent variation in growth of the Nigerian economy is determined by financial intermediation during the period of study implying that financial intermediation is weak in stimulating investment and growth of the Nigerian economy during the period of study. However, the weak correlation between the dependent and the independent variables could be attributed to the high level of instability witnessed in the financial sector with its attendant consequences on the domestic economy within the period of
this study. Based on the findings, the study recommends a reduction in lending rate, increased volume of credit to private sector, reduction of credit to public sector (to crowd in credit for the private sector), sustenance of on-going reforms, eradication of corruption, evolving measures to boost deposit mobilization and improvement in infrastructures which would spur investment and engender growth in the Nigerian economy.
Key Words: Financial intermediation, Financial Deepening, Economic Growth, Growth Model.