Financial inclusion, financial development, and economic diversification in Nigeria

The current oil-induced fiscal crisis in Nigeria has, once again, brought the country into the headlines as suffering great economic hardship. As a result, economic diversification is currently at the center of the debate on how Nigeria can improve its economic performance and achieve higher incomes. This discussion, however, has most of the times lacked an explanation of how financial development and financial inclusion can help to drive economic diversification in Nigeria. The literature is scanty in this regard. The objective of this study, therefore, is to contribute to this empirical evidence to the understanding of the impact of financial development and financial inclusion on economic diversification in Nigeria. The data for the study is from CBN Statistical Bulletin and World Development Indicators, for the period 1981 to 2014. It is well-known in the literature that employing the standard OLS techniques on non-stationary data may lead to spurious results. This study, therefore, uses the fully modified least square (FMOLS) which is designed to provide optimal estimates of cointegrating regressions. The results show that financial development has a positive effect on economic diversification, though the effect is not statistically significant. Additionally, financial inclusion, in terms of financial access and financial usage, has positive and significant effects on economic diversification. In other words, financial inclusion has contributed significantly to the diversification of the Nigerian economy. As well, GDP per capita, capital formation, and human capital development have positive and significant effects on economic diversification. FDI has positive effects on economic diversification, though the effects are not significant. On the contrary, exchange rate and trade openness have negative and significant effects on economic diversification. Financial inclusion can, therefore, be seen as a potent accelerator of economic diversification, and can help realize the national objectives of building shared prosperity and abolishing extreme poverty in Nigeria.