IIARD International Institute of Academic Research and Development

IIARD INTERNATIONAL JOURNAL OF BANKING AND FINANCE RESEARCH (IJBFR )

E-ISSN 2695-1886
P-ISSN 2672-4979
VOL. 11 NO. 1 2025
DOI: 10.56201/ijbfr.vol.11.no1.2025.pg106.116

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Financial Deepening of Market Capitalization and Economic Development in Nigeria

Ukoh, Josephine E

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Abstract

The research work examined the effect of financial deepening on the Nigerian economic growth. Specifically, the study assessed the relationship between market capitalization and economic development proxied by per capita income period from 1999-2022. Ex-post facto research design was the adopted research design for this study. Data were extracted from the CBN annual reports and statistical bulletin. Hypotheses were tested using ordinary least square (OLS) regression techniques. The study found among other things that revealed that there is a significant and positive relationship between market capitalization and economic development in Nigeria. Based on the findings, the study recommend that it is pertinent that government should design policies aimed at developing the financial sector so as to make private credit accessible to investors as this will boost private sector development and facilitates domestic investors which is one of the engine of growth and Nigerian capital market should be well regulated to ensure that public trust is sustained to ensure that the fund obtained from the capital market is sustained.

keywords:

Financial deepening, Market capitalization and Economic development

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References:

and liquidity needs. Better savings mobilization may
increase the saving rate. The stock market also provides an avenue for growing companies to
raise capital at lower cost. In addition, companies in countries with developed stock market are
less dependent on bank financing, which can reduce the risk of a credit crunch.
Economic development is generally agreed to indicate development in an economy, because it
transforms a country from a five percent saver to a fifteen percent saver. Thus it is argued that for
stock market and bank financing to contribute or impact on the economic development in
Nigeria, it must operate efficiently. Most often, where the market operate efficiently, confidence will
be generated in the minds of the public and investors will be willing to part with hard earned
funds and invest them with the hope that in future they will recoup their investment.(Okoli, 2020).
Levine (2017), argued that bank and stock markets provide financial services which are essential
for the development of a country and is of the opinion that the services provided by bank and
stock market may be complementary.
Economic growth is a complex, long-run phenomenon, subjected to constraints like: excessive
rise of population, limited resources, inadequate infrastructure, inefficient utilization of
resources, excessive governmental intervention, institutional and cultural models that make the
increase difficult, etc (Hardy, 2021).
Economic growth is obtained by an efficient use of the available resources and by increasing the
capacity of production of a country. It facilitates the redistribution of incomes between
population and society. The cumulative effects, the small differences of the increase rates,
become big for periods of one decade or more. It is easier to redistribute the income in a
dynamic, growing society, than in astatic one. There are situations when economic growth is
confounded with economic fluctuations. The application of expansionist monetary and tax
policies could lead to the elimination of recessionary gaps and to increasing the GDP beyond its
potential level. Economic growth supposes the modification of the potential output, due to the
modification of the offer of factors (labour and capital) or of the increase of the productivity of
factors (output per input unit). When the rate of economic growth is big, the production of goods
and services rises and, consequently, unemployment rate decreases, the number of job
opportunities rises, as well as the population’s standard of life (Quinoz, 2020).
Empirical Review
Shittu (2022) examined the impact of financial intermediation on economic growth in Nigeria
with time series data from 1970 to 2020. Employing co integration test and error correction
model, he finds that financial intermediation has a significant impact on economic growth
in Nigeria. Sulaiman and Azzez (2022) critically explored the effect of financial liberalization
on the economic growth in developing nations with its assessment focusing on Nigeria with
annual time series data from 1987-2019. The study employs cointegration and error correction
model (ECM) by making Gross Domestic Product as a function of lending rate, exchange rate,
inflation rate, financial deepening (M2/GDP) and degree of openness as its financial
liberalization indices. Co-integration result confirms the existence of long run equilibrium
relationship while the ECM results show a very high R2 in both the over-parameterized model
(95%) and parsimonious model (91%). The study therefore concludes that financial liberalization
has a growth-stimulating effect on Nigeria. Jalil, Wahid and Shahbaz (2020) investigated the
relationship between development of the financial sector and economic growth. They used time
series data for the 1985 -2017 period and set the estimation strategy under the ARDL model. The
variables used for financial deepening were liquid liabilities to nominal GDP (M2/GDP), credit
to private sector to nominal GDP, Commercial/Central Bank asset ratio. The researchers found a
positive monotonic relationship between financial development and economic growth for South
Africa, Trade Openness and per capita real capital were found as the other important
determinants of economic growth.
Nzotta and Okereke (2019) carried out an empirical study which observed financial deepening
and economic development in Nigeria from the year 1986 to year 2017. Their work made use of
secondary data obtained for a period of 32 years. They specified nine explanatory variables for
their study based on hypothetical substructures. In their work, they sought to establish a
relationship between the variables they specified and financial deepening index. They used two
stages least square analytical framework in their analysis and also trend analysis was applied in
the study. At the end of their study, they observed that financial deepening index is low in
Nigeria over the years. They discovered also that the nine explanatory variables, as a whole were
useful and had a statistical relationship with financial deepening. They also found out that four of
the variables specified in their study; lending rates, financial savings ratio, cheques/GDP ratio
and the deposit money banks/GDP ratio had a significant relationship with financial deepening.
They concluded that the financial system has not sustained an effective financial intermediation,
especially credit allocation and a high level of monetization of the economy which led them to
recommend that the regulatory structure should be reorganised to guarantee good risk
management, corporate governance and lessening systemic crisis in the system. Adu, Marbuah
and Mensah (2019) investigated the long run effect, financial deepening has on the Ghana
economy, using a time series data for 14 years period 1998 to 2018. Their study used private
sector credit ratio to GDP, money supply ratio to GDP, total domestic credit ratio, total bank
liabilities ratio and a set of control variables such as trade openness, inflation rate and real
gross government expenditure. The study, although useful in the use of more than one measure
of financial deepening and the use of control variables, the number of observation of their
data points is insufficient to obtain a statistically significant result for the individual
variables. The researcher failed to apprehend the fact that the time span of the study
draws into question the validity of the finding, as they could be spurious. Econometric
theories suggest a minimum 15 years’ time series data as a measure of avoiding spurious result in
a study. Ndebbio (2019) studied financial deepening and economic growth: evidence from
selected sub-Saharan African countries using the ratio of money supply to GDP and
growth rate per capital real money balances as indicators of financial deepening. The study
found positive and statistically significant impact on growth rate in per capital real money
balances on real per capital GDP growth. Agu and Chukwu (2018) studied financial
deepening and economic growth in Nigeria from the period of 1970 to 2015. The study
used only bank based financial deepening proxies. Financial deepening means an increase in
asset and providing level of financial services to the economy. The total amount of
financial assets will constitute an optimal measure of financial deepening. Bashiru (2018) studied
the financial deepening and economic growth in Ghana using quarterly data from 1983 -2018.
The Johansen co integration approach, vector error correction, vector autoregressive and Granger
causality approaches were employed. Financial deepening was

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