Acta Universitatis Danubius. Œconomica, Vol 15, No 4 (2019)

Abstract

The study examined the determinants of financial sector development in Nigeria in an error correction modelling framework, and with OLS for robustness checks, using data from 1980 to 2017. The results show that, banking sector reform, gross capital formation, government expenditure, interest rate spread, output size and trade openness were significant determinants of financial sector development in both the short- and long run. Proxy for economic misery was only significant in the ECM equation, while literacy and human development metric was significant in the long-run equation. Natural resource dependence, proxy by ratio of natural resource rent to GDP, was negatively related to financial sector development in Nigeria, though the coefficient was not significant at conventional levels.  Economic misery, interest rate spread and inflation were observed to undermine financial development in Nigeria. The study recommends the continuation of the process of financial liberalization because of its immerse benefits of promoting competition amongst financial institutions with attendant positive effects of reducing interest rate gap. Domestic output, measured by the real GDP, should be enhanced with appropriate stabilising policy, whether fiscal or monetary policy. Additionally, efforts should be enhanced to limit the effects of macroeconomic instability on financial sector development. Lastly, the study recommends efficient management of natural resources to enjoy a non-declining contribution to the development of an inclusive financial system in Nigeria.