Does financial sector development cause economic growth? empirical evidence from Nigeria

The debate in economics whether financial development causes economic growth or whether it is a consequence of increase in economic activity seems unending. This paper examined the effect as well as the causal relationship between financial sector development and economic growth in Nigeria. This study focused on two focal variables, depth of the financial sector (M2/GDP) ratio of broad money stock to GDP and level of financial intermediation ratio of private sector credit to the GDP PC/GDP. Ensuring data stationarity using Phillips-Perron test permitted OLS and Granger causality to ascertain relationships, effects and causal relationship. Findings suggest positive long run relationship between government consumption and trade openness while the measures of financial development show negative relationships with economic growth. The outstanding results are true for the two major indicators we used M2/GDP and PC/GDP to capture the development of the financial sector, showing that they actually deepen the financial sector but failed to cause economic growth in Nigeria.