Banks, markets, and economic growth in Nigeria

This paper examines proxies of money market, capital market, and banks in Nigeria using annual data from 1961 to 2018. We employ autoregressive distributed lag (ARDL) bounds testing approach, Wald test, and vector error correction model (VECM) Granger causality technique to analyse the data. Our findings show that total subscriptions of treasury bills has a positive and negative statistically significant relationship with real gross domestic product (GDP) on the long-run and short-run, respectively. Hence, we argue that markets and banks exhibit competitive interaction in favour of markets in Nigeria. Additionally, our findings show a unidirectional short-run causality from real GDP to value of transactions on the Nigerian Stock Exchange (NSE). Furthermore, our results support the existence of growth-led finance view or demand-following hypothesis in Nigeria, as we observe a unidirectional long-run causality from real GDP to both value of money market instruments outstanding as at end-period and total subscriptions of treasury bills.This study investigates finance-growth nexus in Nigeria with a particular focus on banks and markets. The findings of this research reveal that the role of markets on economic growth is superior to banks in Nigeria. Hence, banks and markets are competitive. Additionally, our empirical findings provide evidence to support the existence of growth-led finance view in Nigeria. This research explains the relevance of the financial system on economic growth in Nigeria and provides corresponding insights to policy makers.