Determinants of Financial Deepening in Nigeria

Abstract

The purpose of this paper is to examine the determinants of financial deepening in Nigeria with a specific focus on how financial sector policies, real interest rate and the level of economic activity affect financial deepening. The study is carried out using the Bounds Test approach to determine the long- run and short-run relations hip between financial deepening, real output and financial sector policies employing time series data. A financial liberalization index is constructed to show the effect of financial liberalization on financial deepening. The study finds out that in the long run, both the level of economic activity and the real interest rate have a positive effect on financial deepening with only the real interest rate being significant. The financial liberalization index is seen to hove a negative and significant effect on financial deepening. The paper recommends the removal of interest rate controls and advocates for the effective implementation of financial sector policies in order to deepen the Nigerian Financial System.