Banking Sector Intermediation and Economic Growth: New Evidence from Nigeria

Abstract:  This study investigates the nexus between banking sector intermediation and economic growth in Nigeria through the lens of traditional time series prediction methods, specifically employing multivariate regressions. Spanning a comprehensive dataset from 1960 to 2022, sourced from the Central Bank of Nigeria, the analysis focuses on three crucial banking intermediation indicators: the Ratio of Private Sector Credit to GDP (RPSC), the Ratio of Currency outside Banks to Broad Money Supply (RCOB), and the Ratio of Total Loan to Total Deposit (RTLD). The research methodology encompasses both descriptive and econometric analytical techniques. Descriptive statistics offer preliminary insights, while econometric techniques, including unit root tests, Vector Autoregressive (VAR) models, and cointegration tests, establish relationships between variables and explore long-term dynamics. The findings reveal significant cointegration among the variables, particularly between banking intermediation indicators and economic growth. Lagged values of banking sector intermediation metrics demonstrate a notable influence on their current values, suggesting potential implications for economic growth. The study recommends further exploration using Vector Error Correction Models (VECM) for a nuanced understanding of the long-term dynamics and causal relationships. The study provides four key recommendations. First, a deeper exploration with VECM is suggested to uncover subtleties in the relationships. Second, policymakers should consider the historical trends of banking intermediation metrics when shaping policies. Third, continuous monitoring of these metrics is essential for anticipating shifts in economic growth trends. Lastly, policy measures are recommended to enhance the efficiency of banking intermediation, focusing on credit allocation, currency management, and loan-to-deposit ratios.