Institutional Quality, Financial Inclusion and Inclusive Growth: Causality Evidence from Nigeria

The study examines the causal interactions among the institutional, financial and inclusive growth variables by employing Toda-Yamamoto (TY) Granger non-causality test within the augmented VAR framework. Annual time series, data from 1998 to 2017, were used. The TY analysis showed that all the variables, with the exception of financial inclusion index, Granger-caused inclusive growth, but without any evidence of feedback. However, a bidirectional causal relationship was found between inclusive finance and the interaction of institutional quality and financial inclusion. Thus, the null hypothesis of block exogeneity can be refuted when real GDP per person employed (RGDPE) is taken as the dependent variable. This implies that while the effects of institutional quality could vary widely in an economy, institutional quality appears to be the dominant driving force behind inclusive growth. It is, therefore, recommended that institutional improvement, beyond the present liberal democratic threshold, is much needed to effectively harness the human capital resource-base. The Nigerian government should adopt a labourintensive development strategy, such that poor active households are comprehensively integrated into productive activities for optimal value-chain finance-growth inclusiveness. This should be able to address the protracted tripartite socio-economic problems of poverty, inequality and unemployment in line with Lin’s comparative advantage conforming hypothesis.