An investigation into the impact of financial institutions on economic growth in Nigeria

Financial institutions’ benefit to an economy comes in diverse ways. In addition to the generic role of mediating between the ultimate providers and users of funds, financial institutions promote economic growth by encouraging the accumulation of capital, providing funds for investment opportunities, mobilizing domestic savings into productive investments, mobilization of savings, risk transfer and indemnification while influencing savings and investment decisions. However, the level of financial institutions’ activities relative to Nigeria’s huge potentials have not been actualized. Also, the previous studies in Nigerian context (Asongu and Odhiambo, 2019) failed to investigate the aggregation effect of financial institutions on economic growth and the evidence that supply leading hypothesis holds in Nigeria is inconclusive. It is against this background that this study investigates the impact of financial institutions on economic growth in Nigeria. The study adopted a diagnostic and ex-Post Facto research design and annualized time series data for a 30-year period (1987-2017) and the research used the Autoregressive Distributed Lag (ARDL) model with data sourced from the Central Bank of Nigeria Statistical Bulletin to analyze the shortrun and longrun impact of financial institutions on economic growth in Nigeria. The results emanating from this study revealed that commercial bank loans had insignificant impact on the Nigerian economy in the short-run as well as the long-run. Microfinance bank loans have a significant impact both in the short-run and the long-run. However, the results further revealed that the expenditures of insurance companies have a significant positive impact both in the short-run and long-run. Interestingly, the aggregated impact of the three selected financial institutions has a significant positive impact on economic growth in Nigeria in the long-run and the short-run. Lastly, the Grouger Casuality Test shows that the demand following hypothesis explained the finance-growth nexus for Nigeria rather than the supply-leading hypothesis and this study is the first to investigate the aggregated dynamic impact of the aforementioned financial institutions on economic growth in Nigeria. The sensitivity analysis conforms to all the results obtained. However, the sensitivity analysis revealed a slight deviation from the initial results obtained about the impact of commercial bank loans on economic growth in Nigeria in the short run. That is, commercial bank loans have a significant (negative) impact on economic growth in Nigeria in the short run when inflation is not included in the control variables. The study therefore recommends among others, that the Nigerian Government should offer strategic policy direction that will strengthen the various financial institutions while creating enabling environment for businesses to thrive in order to drive economic growth which in turn will lead to more demand for financial services