Revisiting the impact of credit market development on Nigeria's economic growth

• Published date: 01 May 2022
• Author: Temitayo Esther Ayowole,Demet Beton Kalmaz
• Date: 01 May 2022
• DOI: http://doi.org/10.1002/pa.2396

ACADEMIC PAPER

Revisiting the impact of credit market development on

Nigeria's economic growth

Temitayo Esther Ayowole | Demet Beton Kalmaz

Faculty of Economic and Administrative

Science, Department of Economics, European

University of Lefke, Lefke, Turkey

Correspondence

Demet Beton Kalmaz, European University of

Lefke, Faculty of Economic and Administrative

Science, Department of Economics, Lefke,

Northern Cyprus, TR-10 Mersin, Turkey.

Email: demetkalmaz@eul.edu.tr

This study aims to reinvestigate the long run relationship between credit market

development and economic growth in Nigeria covering the years between 1981 and

2016 by applying recently developed econometric techniques. In addition to mea-

sures of credit market development indicators of domestic credit to the private sec-

tor and broad money, trade openness, foreign direct investment and urbanization are

also included in estimations to overcome the omitted variable problem. The measure

for economic growth used is real gross domestic product. To the best of our knowl-

edge, no study has been conducted before, examining these relationships with all

these listed indicators. Therefore, this study proposes to close this gap in the litera-

ture. To capture the long run effects, we used ARDL, Fully Modified Ordinary Least

Squares, and Dynamic Ordinary Least Squares estimator approaches. Findings

uncover that (a) a long run equilibrium relationship exists between credit market

development and economic growth, (b) economic policy makers are required to seek

after developing the credit market with the main intention of guaranteeing that banks

and other money related establishments are enabled and empowered to give the

essential funds to the beneficial part of the economy which are urban and private

sectors.

1|INTRODUCTION

The primary target of the government of any country is to promote

growth. Credit market development is considered to be one of the

most significant indicators promoting economic growth both in devel-

oped and developing countries, since Schumpeter (1939) put forth the

supply-leading hypothesis which stresses that financial development

thus credit market development accelerates economic growth. The

importance of the credit market in the economic growth process have

since quite a while been discussed by numerous economists in aca-

demic literature focusing on how more gainful ventures received

resources by various intermediaries in the credit market. Hicks (1969)

gave further notes as to why the development of the credit market

assumes such an important position in the financial system. Credit

market development is fundamentally essential for economic growth

to these authors, opening doors for borrowing and loaning that

enables firms to receive new advances in technology and undertake

riskier investments but which yield higher returns.

The system of credit market enhances monetary performance by

evaluating investment openings, reducing risk management, and

bringing down the expenses of asset acquisition (Levine, 1997). A

restored intrigue on credit and its capacity to produce growth has

taken place globally. Reforms in credit markets took place both in

developed and developing countries, especially within the Organiza-

tion for Economic Cooperation and Development (OECD).

The credit market position is highly important in achieving eco-

nomic growth in Nigeria because it will enable economic policy

makers to seek after the pursuit of economic growth making sure that

banks and other financial establishments are positioned and emp-

owered to give the fundamental credits to the gainful part of the

economy. In Nigeria, credit market supplies assets in the form of

funds, for example, giving of loans by loan bosses/moneylenders to

the borrowers/indebted individuals where the borrowers do not repay

the moneylenders promptly. Relatively, about 90% of the financial

system in Nigeria makes up the commercial banks, they give out about

roughly two-third of the aggregate credit to the private sector

Received: 1 February 2020 Revised: 17 May 2020 Accepted: 12 August 2020

DOI: 10.1002/pa.2396

J Public Affairs. 2022;22:e2396. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons Ltd 1of9

https://doi.org/10.1002/pa.2396