Financial reforms and credit growth in Nigeria: Empirical insights from ARDL and ECM techniques

Adeleye, Ngozi and Osabuohien, Evans and Bowale, Ebenezer and Matthew, Oluwatoyin and Oduntan, Emmanuel (2017): Financial reforms and credit growth in Nigeria: Empirical insights from ARDL and ECM techniques. Published in: International Review of Applied Economics No. DOI: 10.1080/02692171.2017.1375466 (October 2017): pp. 1-14.

Abstract

In the last 37 years Nigeria has undergone several stages of financial reforms with different impacts on the economy. Hence, this paper empirically analyses the impact of financial reforms on credit growth in Nigeria using annual data from 1980 to 2016. The research work hinges on the theoretical underpinning of the McKinnon-Shaw hypothesis on the relevance of financial reforms in a lagging economy. Analysing the data with autoregressive distributed lag (ARDL) error correction representation and bounds testing techniques, we notably find evidence to this hypothesis and state that at higher real interest rate there is increased financial intermediation evidenced by credit growth. Other findings are that in the long-run, financial system deposits, inflation rate and per capita GDP are strong asymmetrical predictors of credit growth and real interest rate (the financial reform indicator) while the short-run relationships are indicator-specific. We further show that a long-run cointegration relationship exists between domestic credit and other covariates and likewise between the real interest rate and its regressors.

• Item Type: MPRA Paper
• Language: English
• Keywords: autoregressive distributed lag; bounds testing, cointegration, credit growth, financial reform, interest rate
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation; G - Financial Economics > G1 - General Financial Markets > G19 - Other

References

Adam, M. A. 2011. "Financial Openness Induced Growth and Poverty Reduction." The International Journal of Applied Economics and Finance 5 (1): 75-86.

Adelakun, O. J. 2010. "Financial Sector Development and Economic Growth in Nigeria." International Journal of Economic Development Research and Investment 1 (1): 1-17.

Akingunola, R. O., A. A. Olusegun, B. Oluwaseyi, and S. G. Olusoji. 2013. "The Effect of the Financial Liberalisation on Economic Growth." International Journal of Academic Research in Economics and Management Sciences 2 (1): 2226-3624.

Alege, Philip O, and ESC Osabuohien. 2013. "G-localization as a development model: Economic implications for Africa." International Journal of Applied Economics & Econometrics, Bangalore. India 21 (1): 41-72.

Alege, Philip O., and Henry Okodua. 2014. "International Competitiveness and Growth of the Nigerian Economy: A Structural VAR-Based Perspective." Research in Applied Economics 6 (4): 53-74.

Balassa, Bela. 1990. "Financial Liberalization in Developing Countries." Studies in Comparative International Development 25 (4): 56-70.

Bassey, B., P. Bessong, and C. Effiong. 2012. "The Effect of Monetary Policy on Demand for Money in Nigeria." Interdisciplinary Journal of Contemporary Research in Business 4 (7): 430-39.

Belloumi, Mounir. 2014. "The Relationship Between Trade, FDI and Economic Growth in Tunisia: An Application of the Autoregressive Distributed Lag Model." Economic Systems 38 (2): 269-287.

Chandar, N., D. K. Patro, and A. Yezegel. 2009. "Crises, Contagion and Cross-listing." Journal of Banking and Finance 33 (1709-1729).

Chipote, Precious, Bahle Mgxekwa, and Praise Godza. 2014. "Impact of Financial Liberalization on Economic Growth: A Case Study of South Africa." Mediterranean Journal of Social Sciences 5 (23): 1-8.

Chuah, Hong Leng, and Van-can Thai. 2004. "Financial Development and Economic Growth: Evidence from Causality Tests for the GCC countries." IMF Woking Paper WP/04/XX: 1-47.

Chung, K. H., W. T. Smith, and T. L. Wu. 2009. "Time Diversification: Definitions and Some Closed-form Solutions." Journal of Banking and Finance 33: 1101-1111.

Cubillasa, Elena, and Francisco González. 2014. "Financial Liberalization and Bank Risk-Taking: International Evidence." Journal of Financial Stability 11: 32-48.

De Gregorio, J., and P.E. Guidotti. 1995. "Financial Development and Economic Growth." World Development 23 (3): 433-448.

Edo, Samson E. 2012. "Performance of Liabilities Accruing from Liberalization of the Banking Sector in Nigeria." The Review of Finance and Banking 4 (2): 1-12.

Efobi, U. R, E. S. Osabuohien, and S. Oluwatobi. 2014. "One Dollar, One Bank Account: Remittance and Bank Breadth in Nigeria." Journal of International Migration and Integration 16 (3): 761-781.

Efobi, U. R., I. Beecroft, and E. S. Osabuohien. 2014. "Access to and Use of Bank Services in Nigeria: Micro-econometric Evidence." Review of Development Finance 4: 104-114.

Egwakhe, A. J., and E. S. C. Osabuohien. 2009. "Positioning Nigerian Service Sector Towards Vision 2020: Stylized Facts From Banking Sub-Sector." Pakistan Economic and Social Review 47 (2): 139-156.

Elliot, G., T. J. Rothenberg, and J. H. Stock. 1996. "Efficient Tests for an Autoregressive Unit Root." Econometrica 64: 813–836.

Fry, M. J. 1980. "Savings, Investment, Growth and the Cost of Financial Repression." World Development 8 (4): 317-27.

Harris, R., and R. Sollis. 2003. Applied Time Series Modeling and Forecasting. West Sussex: Wiley.

Hye, Qazi Muhammad Adnan, and Shahida Wizarat. 2013. "Impact of Financial Liberalization on Economic Growth: A Case Study of Pakistan." Asian Economic and Financial Review 3 (2): 270-282.

International Monetary Fund, Research Dept. 1983. Interest Rate Policies in Developing Countries. Vol. 22: International Monetary Fund.

Khalaf, A. H. 2011. "Impact of Financial Liberalization on Financial Depth in Iraq." The Review of Finance and Banking 3 (2): 67-78.

King, R. G., and R. Levine. 1993. "Finance and Growth: Schumpeter Might Be Wright." Quarterly Journal of Economics 108 (3): 713-37.

Kripfganz, Sebastian, and Daniel C. Schneider. 2016. "ARDL: Stata Module to Estimate Autoregressive Distributed Lag Models." Stata Conference, Chicago, July 29, 2016.

Loayza, Norman V., and Romain Ranciere. 2006. "Financial Development, Financial Fragility, and Growth." Journal of Money, Credit and Banking 38 (6): 1051-1076.

McKinnon, R. I. 1973. Money and Capital in Economic Development. Washington DC: Brookings Institution.

Molho, Lazarus. 1986. "Interest Rate, Savings and Investment in Developing Countries: A Re-Examination of the McKinnon-Shaw Hypothesis." IMF Staff Papers 33 (1): 90-111.

Narayan, Paresh Kumar. 2004. "Reformulating Critical Values for the Bounds F -statictics Approach to Cointegration: An Application to the Tourism Demand Model for Fiji." Department of Economics Discussion Papers No. 02/04, Monash University, Melbourne, Australia.

Narayan, Paresh Kumar. 2005. "The Saving and Investment Nexus for China: Evidence from Cointegration Tests." Applied Economics 37 (17): 1979-1990. doi: 10.1080/00036840500278103.

Narayan, Paresh Kumar, and Russell Smyth. 2005. "What Determines Migration Flows from Low-Income to High-Income Countries? An Empirical Investigation of Fiji-U.S. Migration 1972 - 2001." Contemporary Economic Policy 24 (2): 332-342.

Obamuyi, Tomola M., and Sola Olorunfemi. 2011. "Financial Reforms, Interest Rate Behaviour and Economic Growth in Nigeria." Journal of Applied Finance & Banking 1 (4): 39-55.

Odedokun, M. O. 1996. "Alternative Econometric Approaches for Analyzing the Role of the Financial Sector in Economic Growth: Time-series evidence from LDCs." Journal of Development Economics 50 (1): 119-146.

Odhiambo, Nicholas M. 2010a. "Interest Rate Deregulation, Bank Development And Economic Growth In South Africa: An Empirical Investigation." International Business & Economics Research Journal 9 (11): 1-12.

Odhiambo, Nicholas M. 2010b. "Interest Rate Reforms and Credit Allocation in Tanzania: An Application of the ARDL Bounds Testing Approach." International Business & Economics Research Journal 9 (5): 23-32.

Odhiambo, Nicholas M. 2011. "The Impact of Financial Liberalisation in Developing Countries: Experiences from Four SADC Countries." Organisation for Social Science Research in Eastern and Southern Africa (OSSREA), Addis Ababa.

Okoye, Victor, and Onyekachi Richard Eze. 2013. "Effects of Bank Lending Rate on the Performance of Nigeria Deposit Money Banks." International Journal of Business and Management Review 1 (1): 34-43.

Olofin, Sam O., and Udoma J. Afangideh. 2008. "Financial Structure and Economic Growth in Nigeria: A Macro Econometric Approach." Nigeria Journal of Securities and Finance 13 (1): 1-27.

Omankhanlen, Alex Ehimare 2012. "The Financial Sector Reforms and their Effect on the Nigerian Economy." Economy Transdisciplinarity Cognition 15 (2): 45-57.

Orji, Anthony, Ekene Aguegboh, and Onyinye I. Anthony-Orji. 2015. "Real Sector Output and Financial Liberalisation in Nigeria." Journal of Infrastructure Development 7 (2): 136-150.

Osabuohien, E. S. 2008. "ICT and Nigerian Banks' Reforms: Analysis of Anticipated Impacts in Selected Banks." Global Journal of Business Research 2 (2): 67-76.

Osuagwu, E. S., and N. Nwokoma. 2017. "Empirical Assessment of the Competitive Conduct of Nigerian Banks in a Post-consolidation Era." Research in International Business and Finance 41: 412-422.

Patrick, H. T. 1966. "Financial Development and Economic Growth in Underdeveloped Countries." Economic Development and Cultural Change 14 (1): 174-189.

Pesaran, M. Hashem, Yongcheol Shin, and Ron P. Smith. 1999. "Pooled Mean Group Estimation of Dynamic Heterogenous Panels." American Statistical Association 94 (446): 621-634.

Pesaran, M. Hashem, Yongcheol Shin, and Ron P. Smith. 2001. "Bounds Testing Approaches to the Analysis of Level Relationship." Journal of Applied Econometrics 16: 289–326.

Robinson, Joan. 1952. "The Generalization of the General Theory." In The Rate of Interest and Other Essays. London: MacMillan.

Roubini, N. , and X. Sala-I-Martin. 1992. "Financial Repression and Economic Growth." Journal of Development Economics (Amsterdam) 39 (1): 5-30.

Shan, Jordan. 2003. "Financial Development and Economic Growth: The Empirical Evidence from China." Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies Australia (ACESA), Melbourne.

Shan, Jordan, and Qi Jianhong. 2006. "Does Financial Development Lead Economic Growth? The Case of China." Annals of Economics and Finance 7 (1): 197.

Shaw, E. S. 1973. Financial Deepening in Economic Development. New York: Oxford University Press.

Shittu, Ayodele Ibrahim. 2012. "Financial Intermediation and Economic Growth In Nigeria." British Journal of Arts and Social Sciences 4 (2): 1-16.

Soultanaeva, Albina. 2010. "Financial Intermediation and Economic Growth: Evidence from the Baltic Countries." Umeå Economic Studies 817: 1-11.

Spears, A. 1992. "The Role of Financial Intermediation on Economic Growth in SSA." Canadian Journal of Development Studies 13: 361-80.

Taylor, L. 1988. Varieties of Stabilization Experience: Towards Sensible Macroeconomics in the Third World. Oxford: Clarendon Press.

Wijnbergen, S. 1982. "Stagflation Effect on Monetary Stabilization Policies: A Quantitative Analysis of South Korea." Journal of Development Economics June: 133-169.

World Bank. 2016. "World Bank Global Financial Development Database." World Bank, Last Modified June 22, 2016. http://www.worldbank.org/en/publication/gfdr/data/global-financial-development-database.

World Bank. 2017. "World Development Indicators." World Bank, Accessed July 20, 2017. https://data.worldbank.org/data-catalog/world-development-indicators.

Xu, Zhenhui. 2000. "Financial Development, Investment, and Economic Growth." Economic Inquiry 38 (2): 331-344.