Volume 5, Issue 4, April – 2020 International Journal of Innovative Science and Research Technology

ISSN No:-2456-2165

Financial Liberalization and Economic

Growth in Nigeria (1986-2018)
ILUGBUSI, Segun. B. AJALA, Rosemary B.
Department of Management and Entrepreneurship Department of Banking and Finance, The Federal
College of Social and Management Sciences, Afe Babalola Polytechnic Ado Ekiti, Ekiti-State
University, Ado-Ekiti.

AKINDEJOYE, John A. OGUNDELE, Abiodun

Department of Management and Entrepreneurship Department of Banking and Finance
College of Social and Management Sciences, Afe Babalola College of Social and Management Sciences, Afe Babalola
University, Ado-Ekiti University, Ado-Ekiti

Abstract:- Several studies have emerged since the work I. INTRODUCTION

of McKinnon and Shaw (1973) on the relationship
between financial liberalization and economic growth. The argument for financial liberalization was brought
However, there are still dearth of literature in respect to to the brim light by the seminal work of McKinnon (1973)
the proxies employed for financial liberalization. As a and Shaw (1973). These two scholars separately did a work
result, this study investigated the effect of financial on financial liberalization in relation to economic growth.
liberalization on economic growth in Nigeria covering a They expressed that when financial market is liberalized by
period of 33years spanning 1986 to 2018. Adopting eliminating series of impediments or restrictions economic
McKinnon and Shaw hypothesis as the theoretical growth would be enhanced. In their studies, they both
framework, economic growth was represented by gross found that, financial liberalization, through removal of
domestic product (GDP), financial liberalization was government intervention in regulating interest rate and
represented by prime lending rate, saving deposit rate, direction of credit positively and significantly impact
exchange rate, credit to private sector and ratio of economic growth. This implies that, financial liberalization
private investment to GDP. Data were sourced from policies increase savings, leads to a more efficient
CBN Statistical Bulletin and estimation done using auto allocation of resources, higher level of investment and
regressive distributed lag. The study found that, economic growth (Khazri & Djelassi 2011). Ever since
financial liberalization has long and short run then, there have been numerous replicas of studies either on
relationship with economic growth. Further findings country specific or cross countries on financial
also showed that prime lending rate had insignificant liberalization. However, there have been no consensus and
positive and credit to private sector had significant the research are still on going.
positive effects on economic growth. On the other hand,
savings deposit rate, exchange rate and ratio of private Despite the positive results found by the proponents,
investment to GDP have insignificant negative effects on financial liberalization has been criticized on the ground
economic growth. The study concluded that, financial that, it increases the risk of speculative attacks and
liberalization has significant positive effect on economic country’s exposure to international shocks and capital
growth with overriding effect from credit to private flight. For example, Gridlow (2001) as cited by Tswamuno,
sector. Therefore, the study recommended among Parde and Wunnava (2007) says that “Developing countries
others that, government through the Central Bank of in the 1980s and early 1990s had been led to believe that
Nigeria should review the saving deposit rate upward in foreign investment in the form of equities and bonds traded
order to encourage increase of domestic savings by on the local markets were more long term in nature than
surplus sector of the economy. More importantly, foreign bank lending they attracted in the 1970s. However,
policies that will encourage private sector investment huge flight of capital from the emerging markets at times in
should be looked into by government so as to further recent years has exploded that myth.” There was also
stimulate economic growth in Nigeria. argument that financial liberalization may increase the
incidence of financial crises (Baldacci, De Mello &
Keywords:- Financial Liberalization, Economic Growth, Inchauste Comboni, 2002). Further argument was that,
Credit To Private Sector, Prime Lending Rate. information asymmetries which are endemic to financial
markets and transactions in developing countries can be
detrimental to liberalization as and as such, it was
contended that, emerging markets do not have the
capability to assemble information relevant to financial
transactions and thus cannot guarantee that capital will flow

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Volume 5, Issue 4, April – 2020 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165
where its marginal productivity exceeds opportunity cost II. LITERATURE REVIEW
compared to their developed counterparts
Liberalization is seen as the “removal of controls”,
Although, scholars who advocated for financial that is when government and or authorities remove
liberalization argued that, financial liberalization would whatever restrictions and controls that have been previously
lead to a drop in the cost of debt and equity through placed on the financial sector of the economy, it is called
integration of segmented markets. More importantly, they financial liberalization. Financial liberalization became
argued that, liberalization would result in an increase of popularized in early 1970s due to the seminal work of
stock liquidity. This implies that increased liquidity leads to McKinnon (1973) and Shaw (1973) since then, both
further development of the underlying market as both local developing and developed countries of the world have
and foreign investors are assured of getting in and out of a subscribed to it. They proposed that economic growth can
position without much difficult. Furthermore, the advocates be achieved when investment is encouraged and savings
argued that through financial liberalization, foreign increased through financial liberalization.
investors pressure local institutions to adhere to
international standards, can improves local corporate Other authors also gave different definitions of
governance and reduces the division between internal and financial liberalization. Johnston and Sundararajan (1999)
external finance (Bekaert, Harvey & Lundblad, 2004; defined financial liberalization as a set of policy and
Henry, 2004; Levine & Zervos 1996) reforms designed to deregulate and change the operation of
financial system and its structure with the view to achieving
Nigerian government is said to be pro-liberalization a free and fair market-oriented system within an
and as such there have been series of reforms implemented appropriate regulatory framework. According to Obamuyi
both in the banking sector and financial market to ensure (2010), financial liberalization can be achieved in many
there is adequate growth in investment and savings needed forms such as ''deregulating interest rates'', eliminating or
for economic growth. For example, banking sector in reducing credit controls, allowing free entry into the
Nigeria has undergone different reforms since the banking sector, commercial banks autonomy, allowing
implementation of banking ordinance in 1952 and to private ownership of banks, and reducing control of
strengthen the private sector by the government, there was international capital flows.
implementation of financial liberalization policy in 1986 as
part of the Structural Adjustment Programme and adoption Auerbach and Siddiki (2004) declare that financial
of this programme leads to extinction of financial liberalization is the removal of a set of restrictions in the
repressive policy in the economy (Obamuyi, 2010; financial sector in order to align it with that of the
Akingunola, Adeleke, Badejo & Salami. 2013). developed economies. Three principal types of financial
liberalization have been given. The first type is explained
Hence, this study acknowledged the fact that, there under domestic financial sector reforms such as
have been several studies on the relationship between privatization and increases in credit extension to the private
financial liberalization and economic growth. However, the sector. The second is stock market liberalization which can
study observed that many studies did not used adequate occur when countries open up its stock markets to foreign
proxies to represent financial liberalization. Studies were investors, at the same time allowing domestic firms‟ access
found mixing up proxies for financial development and to international financial markets and the third is
financial deepening to represent financial liberalization, for liberalization of the capital account. This describes a
example; Nwadiubu, Sergius and Onwuka (2014), condition in which specific exchange rate for transactions
Sulaiman, Oke and Azeez (2012) and Qazi and Shahiba of capital account are loosened (Bekaert & Harvey, 2003;
(2013) employed M2/GDP which is a measure of financial Loots, 2003). It can also be explained where domestic firms
deepening and development. In addition, Akingunola, et al. are permitted to borrow funds from abroad (Schmukler &
(2013) also used ratio of liabilities to GDP to represents Vesperoni, 2006), and where reserve requirements are
financial liberalization which as a matter of fact is a lowered (Kaminsky and Schmukler, 2008: 259).
measure for financial development. However, since
financial liberalization focuses on credit, interest rate, Jegede and Mokulolu (2004) noted that before the
investment and easy access to financial services, this study financial sector of Nigeria economy was liberalized, the
therefore employed savings interest rate, lending interest country through government policies and the CBN had a
rate, credit to private sector, private investment as proxies firm control of every of its financial activities. After
for financial liberalization. As a consequence, this study liberalization, following the introduction of SAP in August
examined effects of financial liberalization on economic 1987, Nigeria released the control of interest rates. Credit
growth in Nigeria over a temporal period 1986 to 2018 allocation was promoted and encouraged to be market-
based. This encouraged competition and efficiency. The
motivation behind the adoption of SAP was the need to
strengthen the economy for global competitiveness. Ikhide
and Alawode (2001) noted that, the first reform which was
the interest rate liberalization was implemented in order to
give banks the freedom to charge market-based loan rates.

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Volume 5, Issue 4, April – 2020 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165
 Overview of Financial Sector Reforms in Nigeria Credit Controls Rationalization: In 1985, specific
The Nigeria financial sector reform and policy credit distribution priority was set at 18 sectors of the
formulation was first initiated in 1952 when banking economy. At the beginning of the SAP regime in 1987,
ordinances was enacted. Since then, so many regimes of priority was reduced to 2 (agriculture and manufacturing)
financial reform has graced the sector. Most of these and every other were non-priority. Some other measures
reforms are motivated by developmental challenges of the were also introduced and enacted. Expectations were totally
system. The reform was used to achieve a goal of eliminated on bank credit expansion within the ceiling on
strengthened economy with global competitiveness. bank, commercial and merchant banks were treated equally
as regards liquidity ratios and credit ceiling.
Long before the popular Nigeria Financial Sector
reform of 1987, government and the CBN had so much  Deposit Money Banks
control of the banking sector. There were restrictions Soludo, in 2006 said it is the duty of Deposit money
placed on entry into the banking industry, regulation of banks to promote economic growth though capital
exchange rate, control of interest rates and other monetary formation. To achieve this feat, a consolidation exercise of
policy instruments were directly used (Emenuga, 2005). the Nigerian banking sector was initiated in mid-2004, the
This control was liberalized by the 1987 reform to allow an banks were asked to set on a minimum capital based of
autonomous market-based exchange rate regime. This N25bn by the end of 2005 from an initial minimum of
reform regime was characterized by so many inconsistent N2bn. After series of mergers and acquisitions, the number
implementation channels that lead to discontinuation and of banks from 89 in the country were reduced to 25 big
reintroduction of some policy implementation channels. banks.
Government restricted bank licensing in 1991 and
controlled interest rate, only to allow market forces III. THEORETICAL FRAMEWORK
determination of same in 1992 and 1993. (Omotar, 2007).
The key elements of the 2004 banking reform policy This study adopted as its theoretical underpinning,
include the following; Consolidation of banking institutions financial liberalization theory as postulated by Mickinnon-
through mergers and acquisitions, Phased withdrawal of Shaw hypothesis (1973) and new growth theory as
public sector funds from banks, Adoption of a risk focused, postulated by Romer (1987). Mickinnon-Shaw hypothesis
and a rule based regulatory framework, Adoption of zero (1973) focused on how economy can achieve economic
tolerance in the regulatory framework, The automation growth through financial liberalization, that is, a situation
process for reporting of returns, Strict enforcement for the whereby financial repression is discarded and financial
contingency planning framework of systemic banking liberalization or freedom is accepted. The argument of
distress etc. (Okagbue & Aliko, 2005). these two scholars was that financial liberalization is
essential for generating high savings and investment rate
 Issues on Nigeria Financial Sector Reform and that the subsequent real growth in the financial
Soludo, 2007 categorically stated that the banking institutions provides domestic investors with the incentive
sector reform is needed to strengthening the financial sector to borrow and save, thus enabling them to accumulate more
of the economy in other for it to be able to strongly support equity thereby lowering the cost of borrowing. Gibson and
government developmental plans for the future. As earlier Tsakalos (1994) also argued that for financial markets to
stated, banks and the financial sector of the economy has function efficiently and offer new opportunities for
been seriously affected by the inconsistence of the 1987 financing in the economy, financial liberalization is
financial sector reforms. Hence, in order to stabilize the sacrosanct. This is possible when restriction to financial
economy, some reforms were designed in the monetary market are removed and allow the demand and supply of
policy for short goals and to introduce a financial sector market forces to determine the interest rate or cost of funds
that is market oriented. Below are brief explanations of the in the market. More so, removal of restrictions to the entry
reforms: and exit of companies within and outside of the country
have a way of improving the capitalization of the financial
 Deregulation of Interest Rate market through which economic growth can be influenced.
In a bid to prepare the country and the financial sector This theory complements the new growth theory as
for the SAP regime, deregulation of interest rate was postulated by Romer (1987) which postulated that
partially introduced in January 1987, and it was fully economic growth is primarily a result of endogenous
implemented in August of same year, then, market factors and not external forces. It further holds that,
determined interest rate was allowed. Deregulation of economic growth can be achieved through investment in
interest rate was intended to enable banks charge loan rates human capital, technological progress, innovation and
based on market. Banks were subsequently encouraged to knowledge. In addition, greater investment into research
pay interests on current account deposits in 1989. The CBN and development together with incentives for businesses
introduced a new system to indicate the desired direction of and budding entrepreneurs. Hence, as one of endogenous
interest rates changes. factors, deliberate actions of the government to remove any
restrictions that may hamper the growth of investment
should be discouraged through financial liberalization.

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IV. EMPIRICAL REVIEW share of GDP, while the independent variables were Labour
force as a share of population, secondary enrolment ration,
Igbinosa (2012) examined financial liberalization and trade openness indicator, real rate of interest and net capital
economic growth in Nigeria covering a time period 1981 to inflows. Secondary data were sourced and estimated using
2009. Gross domestic product GDP was used as a proxy for cointegration and error correction method. The empirical
economic growth while financial variables that were results showed that financial liberalization policy variable
indicative of financial policy measures used in this study (real interest rate) was negative and significant, implying
are interest rates (deposit and lending rates), money supply, that financial liberalization has significant negative effect
credit allocation by banking sector to the domestic on economic growth.
economy, foreign direct investment and market
capitalization. Secondary data used in the study were Owusu and Odhiambo (2013) carried out an empirical
obtained from World Bank data bases and were analyzed study on the relationship between financial liberalization
using ordinary least square (OLS). The study found and economic growth in Nigeria between 1969 to 2008.
significant positive relationship between financial Economic growth which is the dependent variable was
development and economic growth especially the money proxied by real GDP per capita and financial liberalization
supply but that of interest rate were negative and not was proxied by an index calculated by using principal
significant component analysis (PCA). Annual data were sourced and
estimated using autoregressive distributed lag (ARDL)-
Sulaiman, Oke and Azeez (2012) empirically bounds testing. The empirical findings showed that
investigated the effect of financial liberalization on the financial liberalization have a positive and significant effect
economic growth in Nigeria spanning a period 10987 to on economic growth in Nigeria – both in the short run and
2009. The study proxied Gross Domestic Product as the in the long run.
dependent variable and the following macroeconomic
variables; lending rate, exchange rate, inflation rate, Qazi and Shahida (2013) empirically investigated the
financial deepening (M2/GDP) and degree of openness as impact of financial liberalization on economic growth in
its financial liberalization indices. Annual time series data Pakistan between 1971 and 2007. Economic growth was
were obtained from the Central Bank of Nigeria Statistical proxied by real GDP per capita while financial
Bulletin from and estimated using Johansen Co-integration development was proxied by financial development index.
test and the Error Correction Mechanism. The study Using auto regressive distributed la estimation technique,
revealed an existence of a long-run equilibrium relationship the study revealed a clear evidence between the long-run
among the variables. Further finding revealed that, financial growth and a number of financial liberalization indicators
liberalization has a growth-stimulating effect on Nigeria. which confirmed the anticipations of the new growth
theory. Their findings took cognizance of financial
Akingunola, et al. (2013) investigated the relationship liberalization as a policy tool because of its possibility to
between financial liberalization and economic growth in promote economic growth
Nigeria from 1976 to 2012. The financial liberalization
was proxied by ratio of liquidity, that is liabilities to GDP, Nwadiubu, Sergius and Onwuka (2014) empirically
real interest rate, and total deposit while the economic examined the effect of financial liberalization on economic
growth was measured by the real GDP. Secondary data Growth in Nigeria for the period 1987 to 2012. Economic
were sourced from CBN’s Annual Statistical Bulletin. And growth was proxied by GDP while inflation rate, degree of
it was analyzed using vector Error Correction. The study openness, exchange rate, lending rate and financial
showed an insignificant negative effects of interest rate and deepening measure were used as proxies for financial
total deposit on economic growth while ratio of deposit of liberalization. Annual time series data were obtained from
liquidity liability was positive in relationship with the Central Bank of Nigeria Statistical Bulletin and
economic growth. It was also found that, there exists a long analyzed using Johansen Co-integration test and the Error
run relationship between the two variables. Correction Mechanism (ECM). The study found existence
of a long-run equilibrium relationship among the variables
Oyovwi and Eshenake (2013) studied the effect of and co-integration equation at 5% significance level.
financial openness on economic growth in Nigeria over a Furthermore, except for financial deepening (FD), all the
time scope 1970 to 2010. Economic growth was proxied by explanatory variables and their lagged values demonstrated
GDP while financial openness was proxied by the ratio of positive relationship with GDP.
M2 to GDP, the ratio of total trade to GDP and investment
to GDP as control variable. Adopting vector error Orji et al. (2015) studied the effect of financial
correction technique as estimation method, the studied liberalization on economic growth in Nigeria from 1981 to
showed that financial depth exerted a significant positive 2012. Real exchange rate, real lending interest rate, private
impact on economic growth. investment as ratio of GDP and financial liberalization
index were proxies for financial while economic growth
Bashar and Khan (2013) evaluated the impact of was proxied by gross domestic product. Time series data
liberalization on the country’s economic growth in were sourced and estimate using ordinary least square and
Bangladesh spanning in 1987 to 2013. The dependent cointegration analysis. The study revealed that financial
variable was per capital GDP and gross investment as a liberalization and private investment have significant

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Volume 5, Issue 4, April – 2020 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165
positive impact on economic growth in Nigeria. However, employed real GDP per capita as proxy for economic
real lending rate proved to be negatively related to growth. The model is specified as follows
economic growth in Nigeria within the period under
review. GDP= f (SDR, LDR, EXR, FPI, CPS, RPIG)

Rayyanu (2015) empirically examined the effect of In a linearized form, the model is re-stated as
financial liberalization on economic growth in Nigeria 𝐺𝐷𝑃𝑡 = 𝛽0 + 𝛽1 𝑆𝐷𝑅𝑡 + 𝛽2 𝐿𝐷𝑅𝑡 + 𝛽3 𝐸𝑋𝑅𝑡 + 𝛽4 𝐶𝑃𝑆𝑡
between 1981 and 2012. The model was specified using + 𝛽5 𝑅𝑃𝐼𝐺𝑡 + 𝑈𝑡
real GDP in Naira as dependent variable to measure
economic growth while financial liberalization was proxied Specifying using vector auto correction mechanism,
with a measure of financial liberalization, exports and the model is re-stated as
imports of goods and services (% of GDP) while external
debt stock to GDP, government expenditure to GDP and 𝐼𝑛𝐺𝐷𝑃𝑡 = 𝛽0 + ∑𝑛𝑖=1 𝛽1𝑖 ∆𝐼𝑛𝑆𝐷𝑅𝑡 + ∑𝑛𝑖=1 𝛽2𝑖 ∆𝐼𝑛𝐿𝐷𝑅𝑡 +
investment measured by gross fixed capital formation to ∑𝑛𝑖=1 𝛽3𝑖 ∆𝐼𝑛𝐸𝑋𝑅𝑡 + ∑𝑛𝑖=1 𝛽4𝑖 ∆𝐼𝑛𝐶𝑃𝑆𝑡 +
GDP were control variables used. Secondary data were ∑𝑛𝑖=1 𝛽5𝑖 ∆𝐼𝑛𝑅𝑃𝐼𝐺𝑡 + 𝛿6 𝐼𝑛𝐺𝐷𝑃𝑡−𝑖 + 𝛿7 𝐼𝑛𝑆𝐷𝑅𝑡−𝑖 +
sourced and analyzed using ARDL. The study shows that 𝛿8 𝐼𝑛𝐿𝐷𝑅𝑡−𝑖 + 𝛿9 𝐼𝑛𝐸𝑋𝑅𝑡−𝑖 + 𝛿10 𝐼𝑛𝐶𝑃𝑆𝑡−𝑖 +
there is a long-term and short-term relationship between 𝛿11 𝐼𝑛𝑅𝑃𝐼𝐺𝑡−𝑖 + 𝑈𝑡 -
financial liberalization and real output.
Where βo= Constant term, GDP= Gross domestic
V. METHODOLOGY product, SDR= Savings deposit rate, LDR=Lending rate,
EXR=Exchange rate, CPS= credit to private sector,
Based on the theory proposed in this study by RPIG=Ratio of private investment to GDP, U= error term,
McKinnon-Shaw hypothesis (1973) and endogenous β1……….β6 = are short run Coefficients while δ8…….δ14
growth theory, this study adopted Cobb Douglas production are the long run coefficients to be estimated
function for model the specification. However,
measurement for economic growth for this study is real  Estimation Technique
GDP, financial liberalization was proxied by savings The study employed ADF unit root to test for the
deposit rate, lending rate, exchange rate, credit tip private stationarity of the variables after which ARDL bound test
sector while ratio of private investment to GDP was used as and dynamic test were estimated. Breusch pagan and serial
control variable. Annual time series data spanning 1986 to correlation test were used to test for the serial correlation
2018 were sourced from CBN Statistical Bulletins and and heteroscedasticity problems while normality test was
CBN Annual Reports of various editions. Therefore, to done using Jargua Bera test.
specify the model for the study, Cobb Douglas production
function is used and it states that, economic growth is a VI. ANALYSIS AND INTERPRETATION OF DATA
function of capital, labour and technology. This is stated as
 Philip Perron Unit Root Test
Y= f ( ALβ Kα) Whenever a time-series analysis is done, testing if the
variables suffer from problems of unit root is usually the
Where Y is the total output in a year, L is Labour, K is starting point. The reason for this is to show the direction
capital input, A = total factor productivity while for the analysis to follow. For this study, Philip Perron unit
α and β are the output elasticities of capital and labor, root test was used. The result is presented in Table 1, it
respectively. These values are constants determined by revealed that, variables are integrated of difference order.
available technology. However, this model is therefore As it is shown, LGDP, LDR, LEXR have no unit root at
expanded to incorporate other factors that can increase the level, this means these variables are stationary and it can be
total output such as financial liberalization. Hence, the used without differencing. However, LSDR, LCPS and
functional model is stated as RPIG have unit root at level, meaning they are non-
stationary series. The study further test for unit root using
Y= f ( L, K, FL) their first difference level and it was found that, the series
became stationary at first difference. Given that there are
In an expanded functional form, the study therefore mixed of integration levels, the result therefore points to the
incorporates financial liberalization proxies such as saving use of Autoregressive Distributed Lag (ARDL) as the
deposit rates, lending rates, exchange rates, foreign appropriate method of analysis.
portfolio investment, domestic credit and ratio of private
investment to GDP as control variable while and

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Lag length: PP Unit Root Test (Intercept)
10
Variables PP @ Level PP @ First Difference Integration
level
T-Statistic Probability T-Statistic Probability
LGDP -3.3058 0.0230 I(0)
LSDR I(1)
-1.0467 0.7241 -5.4820 0.0001
LDR -5.0425 0.0003 I(0)
LEXR -2.9984 0.0457 I(0)
LCPS -1.5957 0.4731 -3.8829 0.0058 I(1)
RPIG -1.1592 0.6795 -4.3457 0.0058 I(1)
Table 1:- PP Unit Root Test
Author’s Computation using E-views 9, 2020

Table 2 presents summary of co-integration result between financial liberalization and economic growth. the study employed
auto regressive distributed lag bound test to examine the long run relationship between the variable of interest. ARDL co-
integration test was found to be perfect for this purpose because of the level of integration of the variables. it was revealed that,
the F-statistics of the Narayan test 17.56 is greater than the upper bound of 3.79 at 5% level of significant. This indicates an
evidence of a long run relationship between financial liberalization and economic growth. therefore, this study confirms that,
financial liberalization and economic growth moves in a long run

Test Statistic Value K

F-statistic 17.56066 5

Critical Value Bounds

Significance I0 Bound I1 Bound
10% 2.26 3.35
5% 2.62 3.79
2.50% 2.96 4.18
1% 3.41 4.68
Table 2:- Summary of ARDL Bound Test for Cointegration
Author’s Computation using E-views 9, 2020

 Effect of financial liberalization of economic growth

In examining the effect of financial liberalization on economic growth in Nigeria, the study employed vector error correction
mechanism (VECM). The first step of this approach is the lag order section that would be appropriate for the estimation. The
result of the lag order selection from VAR environment is presented in Table 3. The result revealed that, estimation would be best
effected using Akaike Information criteria at lag order 2 as it gives the least value. Hence, the VECM is estimated using lag 2.

Lag LogL LR FPE AIC SC HQ

0 -18.77891 NA 0.291041 1.598639 1.876185 1.689113
1 39.12832 89.66281* 0.007426 -2.072795 -1.748991 -1.967243
2 41.62784 3.708970 0.006768* -2.169538* -1.799477* -2.048908*
Table 3:- Lag Order Selection
Author’s Computation using E-views 9, 2020

Estimating vector error correction mechanism 11.12% is rightly signed and highly significant as the p-
required that series must be co-integrated. This is evidence value of 0.0397 is below 5% level of significant. This
from the ARDL bound test which confirmed an existence implies that the speed of adjustment would be 11%
of long run relationship between financial liberalization and annually. The coefficients of variable in the VAR revealed
economic growth. the lag selection has been done through that at lag 2, gross domestic product of 0.0611 has a
Akaike information thereby selecting lag 2 for the positive but insignificant effect on its own innovation. In
estimation. Hence, the result of the VECM as presented in addition, the financial liberalization variables such as LDR
Table 4 revealed that, the error correction mechanism of - of 0.0039, CPS of 0.2938 have positive effects on gross

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Volume 5, Issue 4, April – 2020 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165
domestic products while SDR of -0.0930, EXR of -0.1575 domestic product is explained by the joint effects of
and RPIG of -0.0089 have negative effects on gross explanatory variables while 24% can be explained by other
domestic product. Checking the significant of each of the variables not included in the model. the adjusted R2 also
variables on gross domestic product, it was found that, only confirmed the level of the relationship by recording 55.20%
credit to private sector was significant at 5% while variation in dependent variable which implies that there is
exchange rate was significant at 10% while other variables true relationship between the variables. the significant of
were insignificant at both 5% and 10% significant level. the whole model also showed that, the model is significant
The implication of this is that, a unit increase in LDR and with its corresponding probability value of 0.009 which
CPS would bring about an increase in gross domestic indicates that the whole model is highly significant. Durbin
product while a unit increase in SDR, EXR and RPIG Watson of 2.02 showed that the series are free from
would bring about a reduction in gross domestic product. problem of auto correction. The whole results pointed to
the fact that, there is a significant effect of financial
Further findings in respect to the coefficient of liberalization on economic growth in Nigeria.
determination R2 showed that, 76% variation in gross

Variable Coefficient Std. Error t-Statistic Prob.

ECM(-1) -0.111278 0.04941 -2.252153 0.0397
D(LGDP(-1) 0.968355 0.262674 3.686536 0.0022
D(LGDP(-2) 0.06119 0.217258 0.281649 0.7821
D(DLSDR(-1) -0.025716 0.071194 -0.361204 0.723
D(DLSDR) -0.09301 0.059831 -1.554544 0.1409
D(LDR(-1) -0.003907 0.008485 -0.46047 0.6518
D(LDR(-2) 0.003903 0.006935 0.562789 0.5819
D(LEXR(-1) 0.155975 0.072403 2.154268 0.0479
D(LEXR(-2) -0.157528 0.082417 -1.91135 0.0753
D(DLCPS(-1) -0.047754 0.102792 -0.464576 0.6489
D(DLCPS(-2) 0.293852 0.116151 2.529909 0.0231
D(DRPIG(-1) -0.032484 0.012548 -2.588776 0.0206

D(DRPIG(-2) -0.00892 0.00947 -0.941859 0.3612

C -0.008543 0.038937 -0.219415 0.8293
R2=0.7600 Adj-R2=0.5520 F-Stat=3.6549 P-value=0.009 D.W=2.0252
Table 4:- Summary of Vector error correction mechanism
Author’s Computation using E-views 9, 2020

Table 5 presents result of diagnostic check on residuals, the study used Breusch serial correlation and pagan test and
normality test and it was found that series have no problems of auto correlation, or heteroscedasticity and the series is normally
distributed.

Breusch-Godfrey Serial Correlation LM Test:

F-statistic 0.1148 Prob. F(2,18) 0.8922

Heteroskedasticity Test: Breusch-Pagan-Godfrey
F-statistic 0.5549 Prob. F(9,20) 0.8171
Jarque-bera 7.16814 Prob 0.2720
Table 5:- Summary Diagnostic Check on the Residuals
Author’s Computation using E-views 9, 2020

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ISSN No:-2456-2165
VII. SUMMARY AND DISCUSSION OF FINDINGS REFERENCES

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