An Econometric Analysis Of The Impact Of Financial Deepening On Aggregate Welfare In Nigeria

ABSTRACT

A general way of evaluating the economic welfare of country is through its household

per capita expenditure. Thus, the major purpose for this study is to investigate how the

recent financial deepening processes in Nigeria have impacted on aggregate welfare.

Private per capita consumption expenditure is used to measure aggregate welfare in

this study which serves as a macroeconomic measure of indicators of aggregate

welfare. Financial deepening can affect aggregate welfare in various ways and in

many outcomes. From the existing literature, the channels of influence through which

financial sector deepening affects aggregate welfare are indirectly through growth and

directly through increased access to financial services. Financial deepening is

represented by two variables, the degree of financial intermediation/development

(MS2/GDP) and the ratio of private sector credit to gross domestic product

(PSC/GDP). Three modelled equations, with justifications for each, were estimated

and analysed. With a time series data spanning from 1975 to 2010, a country specific

regression was used.

A dummy variable approach for structural differences was used for the analysis in the

first Model after the necessary conditions of non-stationarity and cointegration had

been satisfied, while the Autoregressive Distributed Lag-Error Correction Model

(ARDL-ECM) was used for the analysis of the second and third Models. The

empirical findings show that there are structural differences in the level of financial

deepening in the country between the pre and post recent financial reform periods in

Nigeria, the bank size represented by (DMBA/GDP) and bank branch distribution

represented by (NBBT) are the outstanding and significant determinants of financial

deepening in Nigeria. Lastly, financial deepening has no direct significant impact on

aggregate welfare, but can go through the financial accessibility indicator-bank branch

distribution.

The policy implications derive from the findings is that, the country should come up

with more policies to improve financial deepening/intermediation and there is need to

formulate financial reform policies that will have a proportionate beneficial welfare

impact on the poor.