Institutional Quality, Financial Development and Inclusive Growth in Nigeria
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2022-12
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Lead City University
Abstract
Over the last decade, policymakers and economists have focused on the macroeconomic effects of financial development and institutional quality. Despite financial development being recognized as a growth stimulant, studies on Nigeria’s institutions, financial development, and inclusive growth nexus are scarce and contradictory owing to weak institutions and inappropriateness of GDP as a measure of inclusive growth. This study, therefore, investigates the interrelationship among financial sector development, institutions, and inclusive growth in Nigeria from 1985 to 2020. The data were analyzed using Vector Error Correction Model and Autoregressive Distributed Lag approaches with the inference drawn at a 5% level of significance. The result showed that the composite index of financial development had a significant positive and negative effect on inclusive growth in the short-run and long run, respectively in Nigeria. The negative influence of financial development on inclusive growth resulted from low domestic credit to private sector, insufficient money supply and high lending rate spread. Furthermore, the result showed that the minimum domestic credit to the private sector to GDP would stimulate inclusive growth at 18.22% and 13.49% in the short-run and long run respectively. Concerning money supply to GDP, it would stimulate inclusive growth at 17.84% in the long run. As to financial development index, it exhibits a maximum threshold of 0.697 that maintain inclusive growth in the long run. Institution negatively impact inclusive growth in the short run but positively influenced growth inclusiveness in the long run. The interaction of financial development and institutions had negative and insignificant impact on inclusive growth in short-run and long-run. This study concludes that lack of financial access and weak institutions hampered inclusive growth in Nigeria. As part of the inclusive growth process, the government must ensure credit facilitation, low credit rates, money availability, bureaucracy quality, political stability, and law and order.
Keywords: Domestic credit, money supply, lending rate, institutions, financial development index, inclusive growth, threshold effects.
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Kate Turabian