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Abstract

This study examined the effect of financial intermediation on financial stability in Nigerian financial market. The aim of the study was to investigate and analyze the puzzle on finance and growth, as well as growth and finance. Financial development and real Gross Domestic Product can be modeled as the function of narrow money supply, broad money supply, market capitalization, monetary aggregate, net domestic credit and total savings. Ordinary least square (OLS) method of cointegration, Augmented Dickey Fuller (ADF) unit root test, Granger causality test and Vector Error Correction Model (VECM) was used. The findings proved that narrow money supply and market capitalization have negative impact on financial sector development while broad money supply; monetary aggregate, net domestic credit and total savings have positive impact on financial sector development. Market capitalization and narrow money supply have negative impact on real gross domestic products while total savings; net domestic products, monetary aggregates and broad money supply have positive impact on real gross domestic products. The cointegration test shows the presence of long run relationship, the unit root test found stationarity at first difference. From the findings, the study concludes that there is presence of intermediation puzzle between finance and growth, as well as between growth and finance. Hence, adequate policy is recommended in harmonizing the divergences.