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Abstract

The current research assesses the role of financial deepening as a catalyst for sustainable growth in Nigeria. This research is prompted by the ongoing controversy as to whether financial development acts as a growth inducer from the supply side or follows the expansion of growth along the demand side. Time series annual data covering the period from 1981 to 2024 is used for the study. Sustainable growth is defined in the context of real GDP. Financial deepening is measured through the broad money supply relative to GDP, private sector credit relative to GDP and gross national savings relative to GDP. The paper will be based on three theoretical perspectives including financial intermediation theory, endogenous growth theory and financial liberalization theory explaining the function of financial systems in mobilizing savings, distributing credit and minimizing transaction costs and promoting investments and productivity growth. Econometric methodology encompasses trend analysis, descriptive statistics, Augmented Dickey-Fuller test, Phillips-Perron unit root test, Johansen cointegration, vector autoregressive approach, impulse response function and variance decomposition. Results show that the variables in question are integrated of order one and there exists a long-run relationship between financial deepness, savings, private sector credit and real output. Vector autoregressive estimates indicate a significant positive influence of broad money relative to GDP on real GDP in Nigeria. Besides, private sector credit and savings have a positive influence on output generation. Impulse responses demonstrate positive responses of growth rates to shocks related to monetary policy and savings. Thus, financial deepening will help stimulate sustainable growth in case of effective application of monetary policy to productive activities, financing of investments by the private sector credit and efficient financial intermediation of savings into long-term investments.