Background of the study
Long-term sustainable economic growth depends on the ability to raise the rates of accumulation of physical and human capital (Adelakun, 2011), to use the resulting productive assets more efficiently, and to ensure the access of the whole population to these assets (Birdsall and Londono, 1997). Financial intermediation supports this investment process by mobilizing household and foreign savings for investment by firms; ensuring that these funds are allocated to the most productive use; and spreading risk and providing liquidity so that firms can operate the new capacity efficiently. This is only possible if it is based on supply-leading hypothesis, which according to Onwumere, et al. (2012) states that the presence of efficient financial markets increases the supply of financial services in advance of the demand for them in the real sector of the economy.

Financial development thus involves the establishment and expansion of institutions, instruments and markets that support this investment and growth process. Osisanwo (2013) describes financial development as increased financial services in an economy with a wider choice of services geared to all levels of the society. Historically the role of banks and non-bank financial intermediaries ranging from pension funds to stock markets, has been to translate household savings into enterprise investment, monitor investments and allocate funds, and to price and spread risk. Financial development starts with the banking system and depends on the diffusion of scriptural money, which the banking system provides. As countries become highly developed, the share of the banking system in the assets of the financial sector declines, while that of newer and more specialized institutions – such as building societies, life insurance companies, retirement funds and finance assets of the banking system are of lesser value than the financial assets held by all other financial institutions (Svirydzenka, 2016), whereas the reverse is true in economically underdeveloped countries.

The debate on the role of the financial sector in economic growth and development has been going on for over a century now and, according to Sbia and Alrousan (2016) and Era and Srivisal (2013), the global financial crisis has re-ignited the policy debate on the role of finance in propagating and dampening macroeconomic fluctuations. There are two main schools of thought; the first one asserts that financial development plays a limited role in accompanying the development of real activity (Robinson, 1952; Lucas, 1988). This school considers that when the economy develops, the financial system develops. Robinson (1952), asserts that “where enterprises lead, finance follows” and, according to Lucas (1988), economists “badly over-stress” the role of financial factors in economic growth. Rajan and Zingales (1998) and Cameron (1967) opine that, although financial development is essential for growth, it is only “a lubricant but not a substitute for the machine”. The second school of thought accords a crucial role to financial development in boosting the processes of growth, innovation and economic development (Bagehot, 1873, Schumpeter, 1911, MacKinnon 1973, Levine 1996). These authors are of the opinion that causality proceeds from financial to economic development; it is only at a later stage that financial development leads on to growth. Haber, North and Weingast, (2008) assert that “countries do not have large banking systems and securities markets because they are wealthy; they are wealthy because they have large banking systems and securities markets”. Similarly, King and Levine (1993) argue that finance does not merely follow in the wake of economic activity. They affirm that the significant robust relationship between the degree of financial development and the rate of economic growth indicates much more than a positive association between contemporaneous shocks and financial/economic development. For Levine (1996), there is even evidence according to which the level of financial development is a good predictor of future rates of growth, of capital accumulation and of technological change.

In Nigeria, there has been an underdevelopment of the real sector and it has been envisaged that the reason for this is the lack of funds from the financial sector to this sector. Audu and Okumoko (2013) attribute this to the pathetic situation in the country where government deficits that have to be financed by domestic resources provide an opportunity for the banking system to push funds into a relatively safer investment outlet than lending to the private sector. According to them, this has the capacity to push up lending rates, and decrease the amount of resources channelled to private sector credit. Worst still, the banks rely on public fund to finance government borrowing; so, it is a case of lending government fund to same government to generate safe return. Also, Maduka and Onwuka (2013) argue that despite the growth of the banks and non-bank financial institutions in Nigeria, and financial liberalization policy, the country’s economic growth is sluggish as the per capita income is less than $4,000 and most of the industries are winding up giving rise to unemployment thereby putting a question mark on level of development of the financial market in Nigeria and its potency in supporting the investment needed to boost economic growth.
Statement of the problem

The fundamental question in economic growth that has preoccupied researchers is why countries grow at different rates. 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.

While economists have generally reached a consensus on the central role of financial development in economic development theoretically; empirical works supporting this concept are conflicting. One school of thought asserts that financial development plays a limited role in accompanying the development of real activity; the second school of thought accords a crucial role to financial development in boosting the processes of growth, innovation and economic development; while for another group of scholars, the financial market promotes growth, with growth, in turn, comes market formation (Nicet-Chenaf, 2012). This study intends to bridge the existing gap in the literature by empirically investigating the role of financial development in the economic growth of Nigeria.

Objectives of the study
The main purpose of this study is to provide an empirical investigation of the theoretical concept that financial development often leads to economic growth and development. Specifically, the study intends:
1. Investigate the role of financial development in the economic growth of Nigeria;
2. Examine the role of financial development in the economic development of Nigeria;
3. Assess the extent to which the financial sector has developed in Nigeria;

Research Questions
The following research questions shall be examined in the course of this study.
(i) Does financial development actually lead to economic growth?
(ii) Does financial development bring about economic development?
(iii) To what extent has the Nigerian financial market developed?

Research Hypotheses
The research hypotheses to be tested in this study are stated below:
Hypothesis I
Ho : That there is no significant positive relationship between financial development and economic growth in Nigeria.
H1: That there is significant positive relationship between financial development and economic growth in Nigeria.

Hypothesis II
Ho : That there is no significant positive relationship between financial development and economic development in Nigeria.
H1: That there is significant positive relationship between financial development and economic development in Nigeria.
Where H0 represent null hypothesis and H1, the alternative hypothesis.

Research Methodology
The analysis that will be made in this study shall be based on time series data for the Nigerian financial sector and macroeconomic data. Due to the linearity nature of the model formulation, Least Square (LS) estimation method would be employed in obtaining the numerical estimates of the coefficients in the model using Statistical Software for Social Sciences (SPSS).

Two multiple regression models shall be used in the estimation. The models shall seek to investigate the effect of financial development/deepening on economic growth and development in Nigeria. This is a follow up on the objectives of study stated earlier. The estimation period shall be restricted to the period between 2010Q3 and 2016Q1.

The data for this study would be obtained mainly from secondary sources; particularly from Central Bank of Nigeria (CBN) publications such as the CBN Statistical Bulletin, CBN Quarterly Statistical Bulletin, CBN Annual Reports and Statements of Accounts, CBN Economic and Financial Review Bullion and Bureau of Statistics publications.
Model Specification
Model I
gdp = a0 + a1 Cr_2 + a2 Mv_2 + Ui
Where gdp - Gross Domestic Product
Cr_2 - Currency ratio (ratio of currency in circulation [cc] to money Supply [m1]) for previous two quarters
Mv_2 - Monetisation variation (ratio of broad money supply [m2] to GDP) for previous two quarters
a0, a1 and a2 - Parameters
Ui - Error term

Model II
iind = b0 + b1 Cr_2 + b2 Mv_2 + Ui
Where iind – Index of Industrial Production at 2010 base year
Cr_2 - Currency ratio (ratio of currency in circulation [cc] to money supply [m1]) for previous two quarters
Mv_2 - Monetisation variation (ratio of broad money supply [m2] to GDP) for previous two quarters
b0, b1 and b2 - Parameters
Ui - Error term

Significance of the study
Financial system is seen as vehicle for promoting economic growth. Financial institution identifies the most efficient investment ventures and channel resources from savers into investors. It also screens borrowers, manages risks and operates the payment and settlement system. Thus, development of an efficient and vibrant financial system is fundamental to macroeconomic stability. Existing literature has only discussed this relationship in theory. This study is significant and unique because it empirically investigates the relationship between financial development/deepening and economic growth and development thereby filling the existing gap in the literature as it relates to the subject matter especially as it relates to Nigeria.

Scope of the study
This study shall focus the empirical relationship that exists between the financial development/deepening and economic growth and development. The study shall also examine the extent of financial development in Nigeria. The empirical investigation shall be restricted to the period between third quarter of 2010 and first quarter of 2016 due to the rebasing of economic data from 1990 to 2010.

Plan of the Study
This study shall be divided into five chapters. The first chapter provides the background of the subject matter justifying the need for the study. Chapter two presents related literature concerning financial development and economic growth and development. The research methodology, which includes the research design, sources of data, model formulation, estimation techniques etc are stated in chapter three while data presentation and analysis were made in chapter four. Concluding comments in chapter five reflects on the summary, conclusion, recommendations and suggestion for further studies based on the findings of the study.

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Bagehot, W. (1873) Lombard Street. Homewood; Illinois: Irwin R. D. (1962 Edition).
Birdsall, N. and Londono, J. L. (1997) Asset Inequality Does Matter: Lessons from Latin America. Inter American Development Bank OCE Working Paper. Pp. 1-27.
Cameron, R. (1967) Banking in the Early Stages of Industrialization. New York; Oxford University Press.
Era, D. N. and Srivisal, N. (2013) “Revisiting the Link Between Finance and Macroeconomic Volatility”. International Monetary Fund (IMF) Working Paper. No. WP/13/29, pp. 1-35.
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Haber, S. H., North, D. C. and Weingast, R. B (2008) Political Institutions and Financial Development. Stanford University Press.
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McKinnon, R. (1973) Money and Capital in Economic Development. Washington, DC: The Brooking Institutions.
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Onwumere, J.U.J.; Ibe, I. G.; Ozoh, F. O. and Mounanu, O. (2012) “The Impact of Financial Deepening on Economic Growth: Evidence from Nigeria”. Research Journal of Finance and Accounting. Vol 3, no. 10, pp. 64-71.
Osisanwo, B. G. (2013) “The Macroeconomic effect of Financial Development on Economic Growth in Nigeria: A Long-Run Analysis, 1970-2011”. Journal of African Macroeconomic Review. Vol. 4, no. 1, pp. 227-245.
Rajan, R. and Zingales, C. L. (1998) Financial Dependence and Growth. The American Economic Review. No. 88, pp. 559-586.
Robinson, J. (1952) The Generalization of the General Theory. In The Rate of Interest and other Essays. London: Macmillan.
Sbia, R. and Alrousan, S. (2016) “Does Financial Development Induce Economic Growth in UAE? The Role of Capitalization and Foreign Direct Investment”. International Journal of Economics and Financial Issues. Vol. 6, no. 2, pp. 703-710.
Schumpeter, J. A. (1911) The Theory of Economic Development. Cambridge, MA: Harward University Press.
Svirydzenka, K. (2016) “Introducing a New Broad-based Index of Financial Development”. IMF Working Paper. No. WP/16/5, pp. 1-42.

Project Status
Number of Chapters
Number of Pages
Number of Words
Number of References
Project Level
N10,000 - Ten Thousand Naira (Non-Negotiable)
Regression Data and Results are included
How to Pay for this Project . . . .CLICK HERE

Keywords: finanacial development, financial deepening, role of financial institution in economic development, financial application development, financial product development





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