Financial Deepening and Economic Development in Nigeria

to Sound and Healthy Long Living dimension proxied by Life Expectancy at Birth . The augmented dickey fuller reported mixed stationarity of I(0) and I(1) among the variables hence suggesting the use of autoregressive distributed lag . The findings revealed long run effect of financial deepening on economic development. Also, the ratio of credit to private sector to GDP (CPS/GDP) had significant negative effect on LEB in the short run and in the long run; the ratio of broad money supply to GDP (M3/GDP), the ratio of stock market capitalization to GDP (SMC/GDP), and the ratio of financial institutions assets to GDP (FIA/GDP) demonstrated significant positive effect on LEB in the short run and in the long run while the ratio of savings and time deposits of deposit money banks to GDP (STD/GDP) showed insignificant positive effect on LEB in the short run and in the long run. Unidirectional causality and bidirectional causality were reported in pairs of some variables. The study concluded that financial deepening has significant positive effect on economic development in Nigeria and recommended among others the encouragement of policies that promote financial deepening. Keywords: Financial Deepening, Economic Development, Effect, Nigeria 1.1 Background of the Study The pursuit of economic development as one of the central goals of the Nigerian government is being addressed through several policy measures including the financial policies that deepen the provision of financial services for better productive environment in the economy. Economic development primarily looks at the effect of economic growth on the well-being of the populace and general economic outlook of the economy Panth (2020). Economic development is a global phenomenon that has attracted series of literature both in theory and in empirical investigation. The United Nation Development Programme series provided that economic development could be measured in terms of Human Development Indices . In the report, the UNDP emphasized that the human person occupies a significant position in issues of economic development. According to Gürler and Özsoy (2019), the Human Development Report which is regularly published annually by the United Nations, have put people at the center of the economic development. Basically, the UNDP 1990 report offered that the human development index is calibrated into 3 sub-indices comprising: the life expectancy sub-index that is defined as a dimension of long and healthy life having the life expectancy at birth as the indicator; the education sub-index which tells knowledge dimension and defined as a combination of mean years of schooling and expected years of schooling indicators; and the third sub-index being the Gross National Income per Capita in purchasing power parity which simply means decent standard of living forming the third sub-index (Panth, 2020). Though the dimension of long and healthy life as measured by life expectancy at birth is scanty in available literature, it remains globally fundamental in issues of economic development. Providing economic development in this regard attracts lots of policy actions including financial intervention (Nzotta & Okereke, 2009). Notably, financial deepening as an approach of financial intervention has been evaluated as an important factor in economic development in Nigeria owing to the fact that it improves economic conditions of the people by creating a healthy environment for many sectors of the economy (Anachedo & Osakwe, 2023). Equally, Samuel-Hope, Ehimare, and Osuma (2020) emphasized that financial deepening improves the economic performance of the players by enhancing people’s overall standard of living. The World Bank Global Financial Development Report 2014 expanded financial depth into financial institution and financial market with series of measures to proxy it. Following the report, the institutional aspect of financial deepening could be measured with such variables as the ratio of credit to private sector to gross domestic product (CPS/GDP), the ratio of broad money supply to gross domestic product (M3/GDP), the ratio of savings and time deposits of deposit money banks to gross domestic product (STD/GDP), and the ratio of financial institutions assets to gross domestic product (FIA/GDP) indicating the intensity of bank and other financial institutions in the economy. while the market aspect of financial deepening could be measured by so many variables including the ratio of stock market capitalization to gross domestic product (SMC/GDP) which indicate the intensity of the stock market in the economy. In any case, financial deepening commonly focuses on the way in which financial institutions in an economy try to effectively mobilize savings for investment purposes (Nzotta & Okereke, 2009). Financial deepening dynamically seeks out and attracts the pool of savings and idle funds and allocates same to entrepreneurs, households and government for investments projects and other purposes with a view of returns which forms the basis for economic development (Nweze, 2015). The Central Bank of Nigeria has been trying hard to ensure that the financial sector in Nigeria maintain a considerable depth and remain liquid with a view to meeting up with the needs of the domestic market and compete effectively within the global financial market (Anachedo & Osakwe, 2023). The need of the domestic market here is summarily targeted at economic development hence, highlighting the nexus between financial deepening and economic development which must be consistently sought out for in the economic life of every nation. 1.2 Statement of the Problem The Nigerian struggle for long and healthy living of its populace as embedded in economic development has over the years witnessed number of policy measures and reforms in several sectors of the economy including financial sector reforms to deepen the extent of liquidity in the economy. In this respect, Anachedo and Osakwe (2023) observed that financial reforms have been a regular feature of the Nigerian financial system in response to the challenges posed by developments in the system such as systemic crisis, technological innovation, and challenges to long and healthy life as such making the Central Bank of Nigeria to try hard in ensuring that the financial sector in Nigeria maintain a considerable depth and remain liquid. In the evaluation of Samuel-Hope, Ehimare, and Osuma (2020), financial reforms have seen to the creation of many new varieties of financial instruments and methods and alteration of current ones as well as the adjustment of the financial markets to deepen the financial system and enable it meet new requirements and conditions necessary for supporting long and healthy life been a critical dimension of economic development. Despite the financial reforms including the 2005 bank recapitalization which was meant to improved financial deepening with respect to the ratio of credit to private sector to gross domestic product (CPS/GDP), the ratio of broad money supply to gross domestic product (M3/GDP), the ratio of savings and time deposits of deposit money banks to gross domestic product (STD/GDP), and the ratio of financial institutions assets to gross domestic product (FIA/GDP), and the ratio of stock market capitalization to gross domestic product (SMC/GDP), the liquidity influence on long and healthy life as measured in life expectancy at birth as an indicator of economic development does not seem to have attain the desired level. This opens a situation of serious concern which prompts the regular question; to what extent could the effect of financial deepening on economic development in Nigeria be established? In this regard, this study aims at examining the effect of financial deepening on economic development in Nigeria through specific objectives meant to: 1. examine the effect of the ratio of credit to the private sector to gross domestic product on life expectancy at birth; 2. ascertain the effect of the ratio of broad money supply to gross domestic product on life expectancy at birth; 3. evaluate the effect of the ratio of stock market capitalization to gross domestic product on life expectancy at birth; 4. assess the effect of the ratio of savings and time deposit to gross domestic product on life expectancy at birth; 5. investigate the effect of the ratio of financial assets to gross domestic product on life expectancy at birth. 2.0 Review of Related Literature 2.1.1 Concept of Financial Deepening The understanding of financial deepening could be described as the effort of the financial sector in increasing the provision of financial services through an elaborate choice of services geared to the development of all levels of the society. The process of financial deepening generally implies more liquidity in the economy. This is based on the premise that the more liquid money is accessible in an economy, the more is the financial deepening and opportunities for continuous growth and expansion (Shaw, 1973 and Deema & Buthiena, 2016). Financial deepening implies the establishment and evolution of financial tools, markets and institutes, as well as enhancing the efficiency of financial activities that promote investment and progression (Ozturk, I et’al, 2007 in Samuel-Hope, Ehimare, & Osuma, 2020). In other words, financial deepening increases people’s access to liquidity in the financial system through differentiated varieties of financial products, by meeting the fund requirements of the different segments of the economic system. Indicators of financial depth are used to estimate the size of the financial sector relative to the economy (Nwosu, Itodo, & Ogbonnaya-Orji, 2021). Financial deepening variables are indicative of the intensity of the financial institutions in the economy. A proxy variable, which has received substantial attention in the literature is the ratio of private credit to GDP, which captures domestic private credit to the real sector by deposit money banks as a percentage of GDP in local currency (Nwosu, Itodo, & Ogbonnaya-Orji, 2021). However, varied of proxy variables of financial deepening are also recommended in the World Bank Global Financial Development Report 2014 which include among others; the ratio of broad money supply to gross domestic product (M3/GDP), the ratio of savings and time deposits of deposit money banks to gross domestic product (STD/GDP), and the ratio of financial institutions assets to gross domestic product (FIA/GDP) indicating the intensity of bank and other financial institutions in the economy. while the market aspect of financial deepening could be measured so many variables including the ratio of stock market capitalization to gross domestic product (SMC/GDP) which indicate the intensity of the stock market in the economy. These proxy variables according to the explanation of (Ndebbio, 2004 in Ohwofasa & Aiyedogbon, 2013) cover the two basic quantitative indicators of the financial sector been the “monetization ratio” and the “intermediation ratio”. 2.1.2 Economic Development Tejvan (2020) described economic development as the process that enables a greater range of social services aimed at improving a nation’s welfare and general economic wellbeing of the populace within the economy., such as the areas of agriculture, social services as health care and education, increase in real incomes, higher life expectancy, lower poverty and a greater provision of basic amenities. The development process according to UNDP (2021) report should not fall short of an environment that is conducive for people and enable them to attain their full potential in accordance with their needs and interests, and support them to have the opportunity to lead a productive, creative, and fulfilling life. UNDP (2021) posits that the implication of development in this instance suggests that the level of economic, social, and technological advancement in the economy, as well as its scientific consciousness, are readily available and on the high side, it could therefore be seen, over the long term, as improved wellbeing, health, and standard of living of people. Sen (1983) in Panth (2020) argued that “education and health should be given greater priority because they directly increase people’s capability to control their own lives. Increased capabilities may be better reflected, he says, by indicators such as literacy rates or higher life expectancy rather than by a higher per capita income”. Most of the empirical studies on financial deepening are channeled to economic growth rather than development, Malizia and Feser (2000) regarded growth and development as complementary because one engenders the other, while growth represents an increase in output, development is feasible in structural change. On this instance, number of proxy variables have been used both for growth and development. The variables unique to economic development in extant literature among others include; Real Gross Domestic Product , and Human Development Index . The Human Development Index as proxy variable for economic development is further sub-divided into three distinct areas of human development which are; Long and healthy life proxied by life expectancy at birth; Education and knowledge proxied by mean years of schooling, with an age range of 25years and above; and Decent standard of living proxied by gross national income .per capita, adjusted by purchasing power parity (UNDP, 2018). While the dimension of decent standard of living proxied by gross national income. per capita is found prominent in available empirical studies, the other dimensions of education and knowledge proxied by mean years of schooling, and Long and healthy life proxied by life expectancy at birth remain scanty. Hence, this study concentrates on the dimension of Long and healthy life proxied by life expectancy at birth. The long and healthy life dimension of the DHI has as its indicator, life expectancy at birth which according to UNDP (2018), is referred to as “the number of years a new-born infant could expect to live if ‘tiling patters of age-specific mortality rates at the time of birth were to stay the same throughout the child’s life”. The 2014 HDR established minimum and maximum of 20 and 85 years respectively as goal posts to be adopted in the calculation of the life expectancy index. Life expectancy at birth used here is the average number of years a newborn is expected to live if mortality patterns at the time of its birth remain constant in the future. It reflects the overall mortality level of a population, and summarizes the mortality pattern that prevails across all age groups in a given year (World Bank, 2025) 2.2 Theoretical Review 2.2.1 The Schumpeterian Theory of Economic Development The Schumpeter theory of economic development of (1934) presumed a perfectly competitive economy which is in static equilibrium. In such a static state, there is perfect competitive equilibrium: no profits, no interest rates, no savings, no investments and no involuntary unemployment within the economy. Schumpeter stated that the equilibrium has a common feature which was labeled the “circular flow” that is repetitive year after year (Jhingan, 2012). In the circular flow structures the economy as such that the same products are created every year in the same method. The economic is encircled as such that a corresponding demand already awaits every supply created in the economic system. For each demand, there is a corresponding supply (Jhingan, 2012). To Schumpeter, The circular flow is a brook that is nourished from the continually flowing springs of labour-power and land, and flows in every economic period into income, in order to be transformed into the satisfaction of wants. Schumpeter observed that an attempt for development requires a forced expansion to the an end to end production and consumption status of the circular flow thereby causing disturbance of equilibrium in the form of “a spontaneous and discontinuous change in the channels of the circular flow that will redefine the equilibrium state previously existing. These ‘spontaneous and discontinuous’ changes in economic life are not forced upon it from without but arise by its own initiative from within the economy and appear in the sphere of industrial and commercial life. Development consists in the carrying out of new combinations for which possibilities exist in the stationary state. The spontaneous and discontinuous changes come in the form of innovations that consist of: (1) the introduction of a new product; (2) the introduction of a new method of production; (3) the opening up of a new market; (4) the conquest of a new source of supply of raw materials or semi-manufactured goods; and (5) the carrying out of the new organisation of any industry like the creation of a monopoly. Schumpeter encapsulated that, it is the introduction of a new product and the continual improvements in the existing ones that lead to development (Jhingan, 2012). The theory states that the innovative effort of the entrepreneurs in the form of a new product for the purpose of earning profits causes breaking up of the circular flow, and the innovating entrepreneurs are financed by bank-credit expansion and since investment in innovations is risky, the entrepreneurs must pay interest on the borrowed funds. The demand for the bank credit here creates the link between economic development and financial deepening within which the financial services identify and direct funds to more innovative projects, which otherwise would have been stagnated for lack of access to requisite amount of capital. 2.2.2 Keynesian Theory on Financial Deepening Keynesian hypothesis of financial deepening (1936) is founded on the basis government intervention in the financial markets through fund injection (Orji, Ogbuabor, & Anthony-Orji., 2015). The theory proposes that rising government spending is essential for the financial deepening spectacle. As such, the theory asserts that the government needs to increase its spending in other to stimulate the level fund flow and achieve full employment in the economy. According to Keynes, government spending is a factor that may be used as a tool for policy to encourage economic growth. Accord to Keynes, financial deepening has a role-over effect on economic development. This is considered valid on the bases that government spending increases aggregate demand and income, which in turn raise the demand for money (Mckinnon, 1973), with the demand for money and its stability necessary for both macroeconomic dynamics and economic development. 2.2.3 Theoretical Framework The great work of number of scholars as Solow-Swan model, McKinnon (1973) and Shaw (1973) frameworks, Levine (1991), Bencivenga and Smith (1991), and Keynesian hypothesis of financial deepening (1936) have over time established a mutual link between finance and economic activities. More so is the Patrick’s hypothesis of reciprocal causality between finance and growth which posited that, both economic growth and financial sector are reinforcing each other. This study however is underpinned by the Schumpeter’s theory of economic development of 1934. The theory asserts that it takes financial deepening to inject funds into the economy to force a brake on the end to end bounded production to consumption circular flow to bring about entrepreneurial innovation dynamics that ushers the economy into higher level of economic development. 2.3 Empirical Review Anachedo and Osakwe (2023) analysed the effects of financial deepening on the economic growth in Nigeria for the period 1985 to 2021, the model used gross domestic product growth to proxy economic growth as the dependent variable, and Credit to Private Sector as a percentage of GDP, Money supply as a percentage of GDP, Market Capitalization as a percentage of GDP and Insurance Premium to proxy financial deepening as the independent variable. Time series data were sourced from Central Bank of Nigeria statistical bulletin. The data were analyzed using the Ordinary Least Square regression method and the Granger Causality test. Findings revealed that increasing the credit to private sector has actually coincided with rising economic growth rate, it further revealed that Market capitalization as a percentage of GDP was also found to have a positive connection with the rate of economic growth in Nigeria and that both percentage money supply to GDP and insurance industry premiums have negative and significant relationships with economic growth rate in Nigeria. Conclusively, the researchers stated that financial deepening significantly predicts the rate of economic growth in Nigeria though without the desired effect on economic growth. The recommendation held that the monetary authorities should strive to increase the participation of more companies in the Nigerian stock market as this will lead to standardized practices that will ultimately improve economic growth and the monetary authorities should also control the monetary stock and tailor it to the prevailing level of economic activities. Ajudua and Odishika (2022) assessed the impact of financial deepening on economic growth in nigeria for the period 1986 to 2020. The model of the study adopted economic growth as the dependent variable proxied by Gross Domestic Product and financial deepening as the explanatory variable measured by Broad Money Supply (MS), Credit to Private Sector , Market capitalization (MC), Bank Lending Rate , and Liquid Liabilities (LL). Secondary time series were gotten from the Central Bank of Nigeria Statistical Bulletin. The Augmented Dickey-Fuller test revealed mixed order zero I(0) and order one I(1) integration among the variables. The Auto-regressive Distributed Lag Model estimates from ECM and the long run show that money supply, market capitalization and liquid liabilities positively impact economic growth in Nigeria while credit to private sector and lending rate has no significant impact on economic growth in Nigeria during the period under study. The researchers concluded that financial deepening has significant influence on economic growth in nigeria. they recommended reduction in lending rate and an attractive deposit rate to encourage borrowers and savers respectively. Okafor, Bowale, Onabote, Afolabi, and Ejemeyovwi (2021) studied the relationship between financial deepening and economic growth in Nigeria The study employed the Johannsen Cointegration, error correction and granger causality as estimation techniques to determine the nexus between financial deepening and economic growth. The variables contained in the model include the ratio of credit to the private sector to gross domestic product which proxy bank-based financial deepening, the proportion of market capitalization to gross domestic product which proxy for stock market development. The result of the analysis revealed that the Nigerian economic growth is influenced by financial deepening positively and significantly, especially the bank-based financial depth. Samuel-Hope, Ehimare, and Osuma (2020) explored the effect of financial deepening on economic growth in Nigeria for 38 years covering the period 1981- 2018. The model captured financial deepening proxies for deposit money banks been money supply and credit to the private sector and gross domestic product as proxy for economic growth. Data was obtained from CBN Bulletin different issues and analyzed using Autoregressive Distributed Lag. From the result of analysis, the study found that long run relationship existed but no regressor was found to be significant. Credit to the private sector to GDP was inversely related to GDP growth whereas money supply to GDP had positive relations with economic growth rate, time and savings deposits in commercial banks negatively affected national growth. the researchers recommended that policies favoring credit lending to the private sector should be encouraged by stakeholders in the economy, for instance, higher savings interest rates would encourage more savings. More importantly, policies should be enacted to make sure that savings are transmitted into productive investments that can yield financial deepness. Nwakobi, Oleka, and Ananwude (2019) examined the effect of financial deepening on economic growth in Nigeria over a period of thirty-three (33) years spanning 1986 to 2018. Data were collected from statistical bulletins of the Central Bank of Nigeria and factbooks of the Nigerian Stock Exchange . The model estimation followed the Auto-regressive Distributive Lag approach with the effect estimated in line with the Granger Causality analysis. Findings revealed evidence of a positive relationship between economic growth, banking sector and stock market development, while a negative relationship was observed for insurance sector development and economic growth in Nigeria and a unidirectional causality running from economic growth to financial deepening. The study recommended that impediments to the competition in the banking, insurance and capital market activities should be removed by strict legislation in line with international best practices and participants in the markets be protected as well. Gürler and Özsoy (2019) evaluated the relationship between life expectancy at birth and economic growth in 56 developing countries in North Africa, Middle-East and South-East Asia covering the period 1990 to 2015. The model employed variables as income per capita and life expectancy at birth . Cross Section and Panel data were gathered from the World Bank, Series. The method of analysis covered Cross-section data analysis and panel data analysis consisting random and fixed effects estimations as well as Granger causality test. The findings revealed LEB as one of the determinants of IPC and IPC as a main determinant of LEB in the 56 developing countries. Granger causality test confirmed that IPC Granger causes LEB increase and vice versa for panel data. For cross-section data analysis there was no proved correlation between two variables. In conclusion, the researchers opined that LEB and IPC promote each other not at once but in a time period. In the study our results show that economic growth Granger causes LEB increase and vice versa only for panel data not for cross-section data. The study recommended improvement in health care services which promotes life expectancy at birth for better economic performance. Ohwofasa and Aiyedogbon (2013) analysed the impact of financial deepening in the banking sector on economic growth over the last two decades in Nigeria from 1986 to 2011. Vector autoregressive methodology was employed. The findings revealed that the series are co- integrated and that long run relationship existed between the variables. The results of the VAR estimates revealed among other things that a one year lag of economic growth, gross national saving as a ratio of GDP (lag 1) and exchange rate (lag 1) have significant positive impact on current economic growth while the impact of GCF (lag 1) on the current level of economic growth was negative and statistically significant. It was discovered that PSC/GDP (lag 2) and GNS/GDP (lag 2) happened to be key determinants of M2/GDP. Similarly, the key determinants of PSC/GDP include its year 1 and 2 lagged values and GNS/GDP (lag 2) with GNS/GDP (lag 2) and PSC/GDP (lag 2) exhibiting negative impact. Finally, on the current level of GNS/GDP, it is observed that M2/GDP (lag 1) and PSC/GDP (lag 2) exhibit significantly negative determining influence while PSC/GDP (lag 1) and the past value of GNS/GDP (lag 2) were also seen as its key determinant. Among the recommendations of the study are that savings should be stimulated in order to place more funds with banks to intermediate investors seeking funds. 2.4: Literature Gap The series of empirical literature reviewed in this study revealed most studies on financial deepening over the years as focusing more on economic growth while living the aspect of economic development in dearth. This attempt led to repeated use of gross domestic product to measure economic growth as well as repeated use of institutional based proxies being the ratio of private sector credit to gross domestic product (CPS/GDP) and the ratio of broad money supply to gross domestic product (M3/GDP) to measure financial deepening thereby making the prior studies appear monotonous and lope-sided. To address this gap, this study navigates to area of economic development proxied by life expectancy at birth along with institutional base and market-based proxies of financial deepening in a more expanded model. 3.0 Methodology 3.1: Research Design/ Data Sources The study adopted the quasi-experimental research design in analyzing the effect of financial deepening on economic development in Nigeria. This research design is considerably the most appropriate for the study since offers better means of explaining the effect of the explanatory variable on the dependent variable. Annualized secondary time series data were sourced specifically from the United Nations Development Programme 2024, and Central Bank of Nigeria Statistical Bulletin 2023 on the variables of the study for the period of 1990 to 2023. 3.2: Model Specification The model adopts the study of Nwakobi , Oleka, and Ananwude (2019); Samuel-Hope, Ehimare, and Osuma (2020); Okafor, Bowale, Onabote, Afolabi, and Ejemeyovwi (2021), Ajudua and Odishika (2022), and Anachedo and Osakwe (2023) with unique modifications and specified in a linearized function as: Economic Development = ƒ (Financial Deepening) ..................................... 1 LEB = ƒ (CPS/GDP, M3/GDP, SMC/GDP, STD/GDP, FIA/GDP) .......... .......... 2 Presented in log linearized form as: LEBt = b0 + b1CPS/GDPt + b2M3/GDPt + b3SMC/GDPt + b4STD/GDPt + b5FIA/GDPt + Ut ........ 3 Where: LEB = Life Expectancy at Birth CPS/GDP = ratio of credit to private sector to gross domestic product M3/GDP = ratio of broad money supply to gross domestic product SMC/GDP = ratio of stock market capitalization to gross domestic product STD/GDP = ratio of savings and time deposits of deposit money banks to gross domestic product FIA/GDP = ratio of financial institutions assets to gross domestic product Ut = the error term Equation 3 is further presented in log linearized format as: LogLEBt = b0 + b1LogCPS/GDPt + b2LogM3/GDPt + b3LogSMC/GDPt + b4LogSTD/GDPt + b5LogFIA/GDPt + Ut The a priori expectation of the study is b1 – b6 > 0. 3.3 Method of Data Analysis 3.3.1: Trend Analysis This involves assessment of the flow in the rate of financial deepening on each of the components within the period 1985 to 2022. 3.3.2: Unit Root Test In line with the global standard, the unit root test is carried out on the dataset of the variables to evaluate their order of integration. The Augmented Dickey-Fuller t-statistic is compared with the 0.05 critical value and the decision rule is that if the t-statistic value is greater than the 0.05 critical value, the null hypothesis of non-stationarity is rejected, otherwise it is accepted. The unit root test enabled the researcher to identify the order of integration of the dataset before estimating any long-term association between variables (Pesaran, Shin and Smith 2001). The order of integration of the variables is expected to appear either all 1(0), all 1(1), or mixed order of 1(0) and 1(1). Series with order of 1(2) are rejected because of the shortfall in the information they supply making their outcome spurious 3.3.3: ARDL Estimate The Autoregressive Distributed Lag presents the autoregressive effects of economic growth on itself, being the extent to which the past period(s) of the dependent variable impacted its current period performance. The Autoregressive Distributed Lag model is specified as: LogLEBt = b0 + LogLEBt-1 + b1LogCPS/GDPt + + b1LogCPS/GDPt-1 + b2LogM3/GDPt + b2LogM3/GDPt -1 + b3LogSMC/GDPt + b3LogSMC/GDPt-1 + b4LogSTD/GDPt + b4LogSTD/GDPt-1 + b5LogFIA/GDPt + b5LogFIA/GDPt-1 + ECM (-1) Where ECM (-1) is the one period lag of the model residual. It is the long run speed of adjustment of the model. The sign of the coefficient of ECM (-1) is expected to be negative and significant as well to hold the long run equilibrium, where the negative sign implies ability of convergence (Pesaran, Shin and Smith 2001). 4.0 Data Analyses and Interpretations 4.1: Trend Analysis of the model for the period, 1995 to 2023 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 96 98 00 02 04 06 08 10 12 14 16 18 20 22 LEB_YRS CPS_GDP M3_GDP SMC_GDP STD/GDP FIA/GDP Source: developed from (1) CBN statistical bulletin 2023 (2) UNDP Report 2023. Figure 4.1: Financial deepening and economic development in Nigeria 1995-2023. Figure 4.1 presents conventional facts on the trend of financial deepening and economic development in Nigeria 1995-2023. The extent of financial deepening is captured under four basic measures namely ratio of credit to private sector to gross domestic product (CPS/GDP), ratio of broad money supply to gross domestic product (M3/GDP), ratio of stock market capitalization to gross domestic product (SMC/GDP), ratio of savings and time deposits of deposit money banks to gross domestic product (STD/GDP), and ratio of financial institutions assets to gross domestic product (FIA/GDP). These measures are valued in billions of naira. The trend of economic development is measured by life expectancy at birth as one of the human development indices as a proxy for economic development as given in the United Nation Development Programme . The LEB is valued in years been the expected age or number of years each life runs before death. The trend of financial deepening over these years has maintained a common trajectory of upward slope in all the measures. This may be attributed to return to democratic rule in the country within the period, which instilled confidence and boost in the economy. The trend of financial deepening conspicuously made quicker swing from 2005 to 2008 with a little drop in 2009 to 2010 when it continued to rise again consistently up to 2023. The rise in the period of 2005 to 2008 is symbolic of the banking reform on recapitalization and consolidation that lead to emergence of stronger financial institutions and market, the improvement in the degree of financial depth. While the drop in the trend from 2009 to 2010 gives a reflection of the global financial meltdown that affected almost all economies of the world. The trend of life expectancy at birth which is a pointer to economic development over this period of 28 years showed a slight upward shift which may not be adjudged significant. 4.2: Test of Stationarity Table 4.1. Unit Root Test Result Source: Author’s construct from E-views 10 Output. The result of stationarity test on table 4.1 shows the order of integration of the variables. Variable is considered stationary when the ADF t-stat is above its critical values at 5% significance. It is non stationary when ADF t-stat is below critical values at 5% significance.at point of stationarity also; the probability value becomes less than 0.05. the need for this test is to establish non-existence of second differenced data which makes bound tests result spurious and unreliable since they are based on the criteria of stationarity at level and/or at first difference. The result reveals LEB stationary at 1(0) and other variables including CPS/GDP, M3/GDP, SMC/GDP, STD/GDP, and FIA/GDP stationary at 1(1) indicating that the model’s variables are in mixed order of I(0) and I(1), thus, prompting the use of Autoregressive Distributed Lag in the estimation. This therefore establishes that the time series employed in this study have no stationarity defect that might act as a threat to the output of the regression 4.3: Autoregressive Distributive Lag Model 4.3.1: Bounds Test for Long Run Relationship Table 4.2: ARDL Bounds Test Bounds Result F-statistic 1(0) 1(1) Value 9.939912 2.39 3.38 Global Explanatory Statistics F-statistic Prob. (F-statistic) Adjusted R2 Durbin Watson 553.9355 0.00000 0.995320 2.728077 Source: Extracted from Econometric Views 10 Output The ARDL result on table 4.2 presents the bounds test which gives the values of the bounds F- statistic as 9.939912, lying above the lower bound of 2.39, and the upper bound of 3.38 at 5%. Consequently, the ARDL H0 which states no long run effect between the dependent and the independent variables is rejected with the affirmation of existing long run effect between the influences of financial deepening and economic development in Nigeria for the period under Variables ADF stat at Level ADF stat at 1st Difference Critical Values at 5% P value at Level P Value at 1st Difference Order of integration LEB -2.982342 -5.114405 -2.981038 0.0499 0.0003 1(0) CPS/GDP -1.278577 -4.096894 -2.971853 0.6251 0.0040 1(1) M3/GDP -1.167399 -4.783216 -2.971853 0.6739 0.0007 1(1) SMC/GDP -1.281170 -5.279132 -2.971853 0.6239 0.0002 1(1) STD/GDP -1.453928 -4.292916 -2.971853 0.5416 0.0024 1(1) FIA/GDP -2.356928 -4.792578 -2.971853 0.1624 0.0009 1(1) study. The global explanatory statistics show adjusted R2 value of 0.995320, indicating that 99.53% percent of the total changes in economic development in Nigeria can be attributed to its reliance on financial deepening as captured in the variables employed in the model. The F- statistic value of 553.9355 shows high coverage and the probability value of 0.0000 indicate that the global effect of the financial deepening variables in the model is statistically significant. The Durbin Watson value of 2.728077 falls closer to “2” than “0” revealing that the model is auto correlation free. 4.3.2: Autoregressive Distributive Lag Short Run and Long Run Tests Table 4.3: Short Run and Long Run Result Short Run Result Variable Coefficient Std. Error t-Statistic Prob. LEB_YRS(-1)* -0.230631 0.064837 -3.557084 0.0026 CPS/GDP -0.033550 0.009297 -3.608711 0.0024 M3/GDP 0.040168 0.013622 2.948730 0.0094 SMC/GDP(-1) 0.016232 0.004748 3.418810 0.0035 STD/GDP(-1) 0.001604 0.008542 0.187780 0.8534 FIA/GDP 0.008909 0.003262 2.731047 0.0148 ECM -0.230631 0.023579 -9.781189 0.0000 Long Run Result CPS/GDP -0.145471 0.048106 -3.023951 0.0081 M3/GDP 0.174165 0.062725 2.776627 0.0135 SMC/GDP 0.070381 0.018740 3.755621 0.0017 STD/GDP 0.006955 0.036461 0.190744 0.8511 FIA/GDP 0.038627 0.013599 2.840486 0.0118 Source: Extracted from Econometric Views 10 Output, 2025. The result on table 4.3 shows one lag period coefficient value of LEB as -0.230631, revealing that life expectancy at birth as proxy of economic development has one lag period negative effect on its current status, and its probability value of 0.0026 being less than the 0.05 significance level indicates that the effect is significant. This is inverse relationship which implies that one percent increase in the one lag period of economic development will significantly decrease its current value by 23.06%, and verse versa. The consideration of the performance of the explanatory variables shows that the credit to the private sector as a ratio of gross domestic product (CPS/GDP) has coefficient and probability values of -0.033550 (0.0024) in the short run and -0.145471 (0.0081) in the long run. The coefficient values here show negative effect of CPS/GDP on LEB while the probability values in the short run and in the long run being less than 0.05 significance level, indicate that the reported effect is significant. This result indicate that a unit increase in credit to the private sector as a ratio of gross domestic product decreases life expectancy at birth significantly by 3.35% in the short run and 14.54% in the long run, and verse versa. The ratio of broad money supply to gross domestic product (M3/GDP) has in the short run coefficient of 0.040168 and probability of 0.0094 and in the long run coefficient of 0.174165 and probability of 0.0135. This index shows positive value indicating its direct effect on life expectancy at birth , and the probability values are less than 0.05 significant level, indicating that the short and the long run effects are both significant. The implication is that a unit increase in M3/GDP increases LEB by 0.040168 units in the short run and 0.174165 units in the long run significantly, and vice versa. The stock market depth in form of the ratio of the stock market capitalization to gross domestic product (SMC/GDP) displays in the short run (at one period lag) and in the long run coefficient values and associated probability values of 0.016232 (0.0035) and 0.070381 (0.0017) respectively. The coefficient values here are positive implying direct effect of the ratio of the stock market capitalization to gross domestic product (SMC/GDP) on life expectancy at birth in the short and long run. The probability values being less than the 0.05 significance level suggests that these effects are significant. This result is a reflection of movement in the same direction which signifies that a unit increase in SMC/GDP prompts corresponding increase in LEB by 1.62% in the short run and 7.03% in the long run, and verse versa. The ratio of time and savings deposits to gross domestic product (STD/GDP) in the short run reveals one period lag effect. At coefficient value of 0.001604 and probability value of 0.8534 which is greater than the 0.05 level of significance, the one period lag effect though positive, but remains insignificant. On the long run also, STD/GDP manifested coefficient value of 0.006955 and probability of 0.8511 which is greater than the 0.05 level of significance implying insignificant positive effect. The effect of the ratio of financial institutions assets to gross domestic product (FIA/GDP) appear as 0.008909 (0.0148) in the short run and 0.038627 (0.0118) in the long run. The positive coefficients indicate that the index has a progressive effect on life expectancy at birth , and the probability values that are less than 0.05 significant level imply that the effect is actually significant. The Error Correction Model result with coefficient value of -0.230631 which is negative implies that it has the correct signed as possessing the power of convergence. And the probability value 0.0000 being less than 0.05 indicate the ECM is significant. The ECM result therefore reveals that the model has 23.06% of adjustment to equilibrium annually 4.4.: Pairwise Granger Causality Test Table 4.4: Presentation of Granger Causality Test Results Null Hypothesis: Obs F-Statistic Prob. CPS_GDP does not Granger Cause LEB_YRS 27 0.09308 0.9115 LEB_YRS does not Granger Cause CPS_GDP 4.43829 0.0240 M3_GDP does not Granger Cause LEB_YRS 27 0.03723 0.9635 LEB_YRS does not Granger Cause M3_GDP 3.75233 0.0396 SMC_GDP does not Granger Cause LEB_YRS 27 0.84148 0.4445 LEB_YRS does not Granger Cause SMC_GDP 5.39573 0.0124 STD_GDP does not Granger Cause LEB_YRS 27 0.27658 0.7610 LEB_YRS does not Granger Cause STD_GDP 4.26387 0.0272 SMC_GDP does not Granger Cause CPS_GDP 27 10.5947 0.0006 CPS_GDP does not Granger Cause SMC_GDP 5.86750 0.0091 STD_GDP does not Granger Cause M3_GDP 27 3.91476 0.0351 M3_GDP does not Granger Cause STD_GDP 1.95976 0.1647 FIA_GDP does not Granger Cause M3_GDP 27 3.43567 0.0503 M3_GDP does not Granger Cause FIA_GDP 1.06387 0.3622 STD_GDP does not Granger Cause SMC_GDP 27 0.53414 0.5936 SMC_GDP does not Granger Cause STD_GDP 5.42508 0.0122 FIA_GDP does not Granger Cause STD_GDP 27 2.59724 0.0971 STD_GDP does not Granger Cause FIA_GDP 3.38561 0.0523 Source: Extracted from E-Views Output, 2025. The result of the pairwise granger causality presented on table 4.4 shows the null hypothesis for each of the pairs of the variables of the study. Analyzing from the benchmark of 0.05 significant figure, unidirectional causality is found in such pairs as: LEB Granger Causes CPS/GDP at P- value of 0.0240, LEB Granger Causes M3/GDP at P-value of 0.0396, LEB Granger Causes SMC/GDP at P-value of 0.0124, LEB Granger Causes STD/GDP at P-value of 0.0272, STD/GDP Granger Causes M3/GDP at P-value of 0.0351, FIA/GDP Granger Causes M3/GDP at P-value of 0.0503, SMC/GDP Granger Causes STD/GDP at P-value of 0.0122, and STD/GDP Granger Causes FIA/GDP at P-value of 0.0523. Bidirectional causality was found running between SMC/GDP and CPS/GDP since SMC/GDP Granger Causes CPS/GDP at P- value of 0.0006, and CPS/GDP Granger Causes SMC/GDP at P-value of 0.0091. 4.5 Diagnostic Test The diagnostic test is using the results as presented on table 4.6 to ascertain the model validity and reliability. Table 4.5: Diagnostic Result Statistics Coefficient Probability Remark Jarque Bera Normality Test 0.9406 0.6247 > 0.05 Normally Distributed Serial Correlation LM Test: 9.7978 0.0075 < 0.05 Not Serially correlated Heteroskedasticity Test: 14.8236 0.1386 > 0.05 Homoskedastic Ramsey Reset Test 0.2731 0.6089 > 0.05 Correctly Specified Source: Extracted from E-views 10 Output 2025. The result on table 4.5 houses the outcome of the post estimation tests. The Normality result shows Jacque-Bera joint chi-square with P-value of 0.6247. Since the probability value is greater than 0.05 level of significant, the null hypothesis is accepted with the conclusion that the residuals are multivariate normal as reflected in the normality curve in figure 4.3 that showed the “bell shape” curve. On the serial correlation, the probability value of 0.0075 being less than 0.05 level of significant indicates that the model suffers serial correlation. The hecteroscedasticity chi- square with probability value of 0.1386 which is greater than 0.05 significant level leads to acceptance of the null hypothesis and the conclusion that the residuals of our model have constant variance. This implies absence of heteroscedasticity and presence of homoscedasticity in the model. The Ramsey Regression Equation Specification Error Test probability value of 0.6089 being greater than 0.05 level of significance indicates that the model is correctly specified in its functional form. 0 1 2 3 4 5 6 7 8 -0.006 -0.004 -0.002 0.000 0.002 0.004 0.006 Series: Residuals Sample 1997 2023 Observations 27 Mean -3.58e-16 Median 5.94e-05 Maximum 0.005128 Minimum -0.006896 Std. Dev. 0.002547 Skewness -0.295100 Kurtosis 3.698455 Jarque-Bera 0.940697 Probability 0.624784 Figure 3: Normality Curve Result. Source: Econometric Views 10 Output -12 -8 -4 0 4 8 12 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 CUSUM 5% Significance Figure 4: CUSUM Result. Source: Econometric Views 10 Output Figure 4 reveals that CUSUM lies within the critical boundaries thereby suggesting stability of the parameter. The results indicate a stable long run relationship between government expenditure and economic growth in Nigeria. The general diagnostic results signify that the model is valid and reliable. 4.6: Discussion of Findings This study is an expanded multivariate evaluation of the effect of financial deepening on economic development in Nigeria. The basic unique aspect of the study is the application of variables that measure the basic two concepts of the study. Following the united nation development programe report on economic development, life expectancy at birth as a sub-measure of human development index is employed to proxy economic development. Equally, in line with the financial development 4x2 framework of the World Bank Global Financial Database 2014 measures as ratio of credit to private sector to gross domestic product (CPS/GDP), ratio of broad money supply to gross domestic product (M3/GDP), ratio of stock market capitalization to gross domestic product (SMC/GDP), ratio of savings and time deposits of deposit money banks to gross domestic product (STD/GDP), and ratio of financial institutions assets to gross domestic product (FIA/GDP) to proxy financial deepening. Employing these variables in the model, the study established that financial deepening has long run effect on economic development in Nigeria. This finding is similar to Gürler and Özsoy (2019) which established significant long run effect of income per capita to life expectancy at birth . Similar to this are studies as: Samuel-Hope, Ehimare, and Osuma (2020); Okafor, Bowale, Onabote, Afolabi, and Ejemeyovwi (2021), Ajudua and Odishika (2022) which found long run effect between financial deepening and economic growth in Nigeria. in line with the early work of King, & Levine (1993) finance remains significant in every aspect of economic growth and development. Specifically, ratio of credit to private sector to gross domestic product (CPS/GDP) exerted significant negative effect on life expectancy at birth in the short run and in the long run, this result falls short of our theoretical expectation though contrary to Ajudua and Odishika (2022) which found positive effect of money supply on economic growth in Nigeria, it conforms to the findings of Samuel-Hope, Ehimare, and Osuma (2020) which attributed the retrogressive effect to possible insufficiency of the depth of national financial deepness in Nigeria. this result may also leverage on the position of World bank (2022) which highlighted that a “very high ratio of private sector credit to GDP does not necessarily reflect a good experience just like all the 8 countries with the highest ratios of private sector credit to GDP as of 2010 (Cyprus, Ireland, Spain, Netherlands, Portugal, United Kingdom, Luxembourg, and Switzerland, going from the highest to the lowest) had a major crisis episode since 2008”. Another justification for this result may be linked to what Sahay, Čihák, N’Diaye, Barajas, Bi, Ayala, Gao, Kyobe, Nguyen, Saborowski, Svirydzenka, Yousefi (2015) found as “too much money effect” being case of misappropriation of funds. The granger causality result however revealed a unidirectional causality where only LEB granger causes CPS/GDP, indicating that economic development is leading financial deepening unlike Anachedo and Osakwe (2023) which found no causality between the ratio of credit to private sector to gross domestic product (CPS/GDP) and gross domestic product growth . The significant positive effect found in the ratio of broad money supply to gross domestic product (M3/GDP) on life expectancy at birth this finding meets the theoretical expectation. The result contradict the finding of Anachedo and Osakwe (2023) which found significant negative effect between ratio of broad money supply to gross domestic product (M2/GDP) and gross domestic product growth but aligns with the position of Ohwofasa and Aiyedogbon (2013), Samuel-Hope, Ehimare, and Osuma (2020), Ajudua and Odishika (2022) that revealed positive effect of the ratio of broad money supply to gross domestic product (M3/GDP) on GDP growth rate. This suggests that the effort of the financial sector in addressing the level of money supply broadly actually improve economic development through enhanced life expectancy at birth. The ratio of the stock market capitalization to gross domestic product (SMC/GDP) injected a significant positive effect on economic development being life expectancy at birth thereby realizing the a priori of the study. In similar vein, this finding corroborates Nwakobi , Oleka, and Ananwude (2019), and Anachedo and Osakwe (2023) which found positive effect though not significant and other studies as Okafor, Bowale, Onabote, Afolabi, and Ejemeyovwi (2021), Ajudua and Odishika (2022) which found significant positive effect of ratio of the stock market capitalization to gross domestic product (SMC/GDP) on gross domestic growth . This positive effect could be attributed to improved general participation and market viability of the companies listed on the Nigerian Stock Exchange as well as improved ease of doing business. The ratio of time and savings deposits to gross domestic product (STD/GDP) made positive effect on economic development being life expectancy at birth hence meeting the theoretical expectation of the study. This result opposes Samuel-Hope, Ehimare, and Osuma (2020), Ajudua and Odishika (2022) which posited that time and savings deposits in commercial banks negatively affected national growth. the position of the finding here suggests that the degree of financial deepening in mobilizing deposits if taken to a significant level has the chance of promoting economic development in Nigeria. The ratio of financial institutions assets to gross domestic product (FIA/GDP) demonstrated a significant positive effect on life expectancy at birth . This indicates that the theoretical expectation of the ratio of financial institutions assets to gross domestic product (FIA/GDP) to contribute to economic development of Nigeria is actually met. 5.1: Conclusion and Recommendations This study having examined the effect of financial deepening in Nigeria for the period 1995 to 2023 under the adopted variables in the autoregressive distributed lag model concludes that the extent of financial deepening in Nigeria has significant positive long run effect on economic development in the country. The study therefore recommends as follows: 1. The extension of credit to the private sector should be on considerable credit terms and the credits be duly monitored to ensure credible appropriation and utilization to redirect the negative effect to a positive outcome. 2. Policies that promote increase in broad money supply in Nigeria should be encouraged for greater level of economic development in the country. 3. Policies and regulations of the Nigeria’s stock market should encourage more participation in the market and navigate its operations to areas of national developmental needs. 4. The bank policies on deposit mobilization should be sustained and further deepened. 5. The monetary authorities should articulate policies supporting activities on the assets of the financial institutions. 5.4: Contribution to Knowledge This research has formulated a unique model to study the effect of financial deepening on economic development in Nigeria for the period 1995 to 2023 and provide the latest position on this. Given the model LEB = ƒ (CPS/GDP, M3/GDP, SMC/GDP, STD/GDP, FIA/GDP) analysed using autoregressive Distributive Lag Model; the study has established that financial deepening has significant positive effect on economic development in Nigeria. References Ajudua, E. I., & Odishika, V. A (2022). 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