Nigerian Journal of Banking and Financial Issues (NJBFI)

FINANCIAL SYSTEM STABILITY AND ECONOMIC GROWTH IN NIGERIA

Abstract

The stability of the financial system is theoretically a condition precedent for sustained economic growth. Financial system instability on the other hand impedes economic growth and development. In this study, we examined how the stability of the Nigerian financial system has influenced the nation’s economic growth from 1996 to 2022.

Previous studies have examined the effect of banking sector fragility index (BSFI) and the Z-Score on economic growth (RGDP), but our study includes the effect of average stock price volatility – SPVL (as a measure of stock market stability or otherwise). We used descriptive statistics, Pearson’s correlations, Augmented Dickey Fuller (ADF) stationarity test, Autoregressive Distributed Lag (ARDL) Bound test and ARDL short run (SR) and long run (LR) models to analyze data obtained from secondary sources.

In the SR, we found that LOGRGDP (-1)) has a significant and positive (coefficient = 0.65, p = 0.0020), indicating economic growth momentum from the previous period to the present.  D(BSFI) has a negative and borderline significant effect on LOGRGDP (coefficient = -0.008, p ≈ 0.0535), D(SPVL) has a negative but insignificant effect on LOGRGDP (coefficient = -0.000312, p ≈ 0.6305), D(Z-score) has an insignificant negative effect on LOGRGDP (coefficient = -0.000087, p = 0.9427) and inflation (INFL), a control variable has a weak and insignificant effect on LOGRDGP (coefficient = -0.000974, p = 0.0960). On the LR, the effect of BSFI on LOGRGDP was positive but insignificant (coefficient = 0.466890, p = 0.7010), SPVL was negative but insignificant (coefficient = -0.030943, p = 0.7592), ZSCORE was also negative but insignificant (coefficient = -0.008595, p = 0.9451) and INFL had a:positive but insignificant (coefficient = 0.022285; p = 0.8161) on growth.

We recommend that the Central Bank of Nigeria should implement stricter regulations and oversight to enhance bank resilience against economic shocks, introduce stress tests for banks and adopt a dual approach of monetary and fiscal policies. We also recommend that efforts should focus on improving transparency, attracting more companies to go public, and incentivizing investments in diverse sectors.