Macroeconomic Determinants of Financial Sector Development in Nigeria: 1986-2024

Abstract

Financial sector development is crucial for economic growth, enabling capital movement, enhancing consumption and investment, and promoting job creation. However, the optimization of the relationship between the real economy and the financial sphere require a stable macroeconomic environment. Thus, this paper investigated the macroeconomic factors that influence the growth of the financial sector development in Nigeria from 1986 to 2024., focusing on macroeconomic variables such as GDP per capita, interest rate spread , inflation and exchange rate. This study employed the Dynamic Ordinary Least Squares (DOLS) technique. The estimation of the DOLS regression revealed that gross domestic product per capita is positively and significantly related to the growth of financial sector develop ment in the long run. Consequently, one percentage increase in gross domestic product per capita will lead to an increase in financial sector development in Nigeria by 5.93 percent in the long run. Furthermore, the estimated impact of interest rate spread on financial development is negative in the long run. By implication, one percentage change or increase in interest rate spread will lead to -0.41% increase in financial development. On the other hand, the findings indicated that inflation rate appears to affect financial sector development significantly and negatively in the long-run. Controlling for other factors, for instance, a 1 percent increase in inflation rate will decrease financial sector development by -0.17% in the long run. Also, the estimated impact of exchange rate on financial sector development is negative and significant in the long run. By implication, one percentage change or increase in exchange rate will lead to -0.03% decrease in financial sector development in the long -run respectively. Therefore, this paper recommended that t o promote sustained growth in GDP per c apita, the Federal Ministry of Education and Health should invest in human capital (education and skills development) to sustain long- term income growth and financial deepening. Also, the Central Bank of Nigeria (CBN) should strengthen competition in the banking sector by reducing entry barriers and encouraging fintech participation to drive down lending rates. Further, to maintain low and stable inflation rates in Nigeria, the Central Bank of Nigeria should adopt a credible inflation -targeting framework anchored by disciplined monetary policy. Additionally, the Central Bank of Nigeria should adopt a more transparent and market-reflective exchange rate regime to reduce volatility and uncertainty.