The Effect of Bank Credit to the Private Sector and Financial Deepening on Nigerian Economic Growth

Purpose: This study examines the influence of bank credit to the private sector and financial deepening on economic growth in Nigeria using annual time series data from 1990 to 2021. Theoretical Framework: The study anchored on the supply-leading hypothesis which postulated that financial system fosters economic growth. It also argued that financial deepening drives economic growth in a nation. Design/Method/Approach: The study adopted MacKinnon (1996) residual cointegration test to investigate if the variables are cointegrated. Also, autoregressive distributed lag model suggested by Pesaran et al. (2001) was adopted to analyze the existing relationship between the variables, while the ARDL bound test approach was utilized to examine the existing long run relationship. Findings: The ARDL findings show that bank credit to the private sector (as a percentage of GDP) and financial deepening proxy with the ration of money supply had a significant impact on economic growth, while the bound test confirmed a long-term association between the variables in the model. According to the short-run coefficient of the error correction model (ECM), there will be a 68% correction to the rate of adjustment from the short-run to the long-run. Research, Practical & Social implications: The information provided by the current study is crucial to enhancing the conditions for Central Bank of Nigeria to grant loans and credits to businesses and people with solid business plans. Additionally, it makes recommendations for coordinated and synergistic policies that might strengthen the banking system and promote the expansion of the financial system. Originality/value: The current study is important because it investigates the long-term relationship between the repercussions of the financial system's bubble and economic growth. Furthermore, the study used a parametric method and processes to investigate the long-term correlations between bank loans, financial bubble measures, and economic development.