Banks and Economic Growth in Nigeria: A Re-Examination of the Financial Repression Hypothesis

Abstract

This study examines the relationship between banks and economic growth in Nigeria with emphasis on the financial repression hypothesis. The study seeks to establish among others, the relationship between banking sector development in Nigeria and economic growth; the impact of regulation of banks on economic growth; the applicability of the financial repression hypothesis to Nigeria; and the direction of causality between banks and economic growth over a period of forty-one years divided into three regulatory regimes (intensive regulation regime (1970-1985), deregulation regime (1986-1995) and guided deregulation regime (1996-2010)). Regression analysis of the ordinary least square method was used to estimate the models and the significance of the estimated parameters. The Pairwise Granger Causality test was adopted to determine the direction of causality. The results show that banks have significant positive impacts on growth in Nigeria under all the regulatory regimes. However, the impact is felt most under the regime of deregulation. The conclusion is that although banks have positive impacts on growth in Nigeria, banks cannot be said to be the propelling force for economic growth. This study recommends the continuation of the current policy of guided deregulation; adoption of entrepreneur friendly policies in lending by banks; and periodic review of various regulations affecting banks in Nigeria.