WILBERFORCE JOURNAL OF THE SOCIAL SCIENCES (WJSS)
ISSN: 2504 – 9232
Volume 10, No. 1, March, 2025
Pages 121-145
DOI: 10.36108/wjss/5202.01.0180
EXAMINING FINANCIAL DEEPENING AND ECONOMIC GROWTH: AN ANALYSIS OF COMPETING FINANCE-GROWTH NEXUS THEORIES IN NIGERIA
MICHAEL A. AMAEGBERI AND EBIERINYO AYEBAEMI AKARARA
Abstract
The finance-growth nexus remains a subject of intense debate, with competing hypotheses questioning whether financial deepening drives “economic growth” (supply-leading), follows it (demand-following), or exhibits a bidirectional relationship (feedback). This study examines the relationship between “financial deepening” and “economic growth” in Nigeria, addressing the question: Does “financial deepening” stimulate “economic growth”, or is it a consequence of economic expansion? Drawing on annual time-series data from the World Bank, IMF, and CBN Statistical Bulletin (2023), the study employs unit root tests, cointegration analysis, and error correction models to analyse the short- and long-run effects of financial deepening—proxied by Credit to the Private Sector (CPS), Total Insurance Premium (TIP), Total Banking Assets (TBA), Foreign Direct Investment (FDI), and Market Capitalization-to-GDP Ratio (MCR)—on “economic growth”, measured by GDP growth rate (GDPR). The findings reveal a positive relationship between financial deepening and “economic growth”, supporting the supply-leading hypothesis; however, the insignificance of CPS, TBA, TIP, and MCR suggests inefficiencies in credit allocation, weak insurance participation, and structural constraints within the financial system. The error correction model confirms a rapid adjustment toward long-term equilibrium, underscoring the importance of “financial deepening” in sustaining economic expansion. To enhance the effectiveness of financial institutions, the study recommends strengthening credit risk assessments, improving financial literacy, deepening capital market reforms, and fostering regulatory synergy. By addressing these systemic challenges, Nigeria can optimize the role of financial deepening in driving sustainable economic growth while contributing to the broader finance-growth debate.