Financial Integration in a Sub-Saharan Country: An Empirical Investigation of Nigeria's Financial Sector Reform through Rational Institutional Evolution

The recent shift in policy towards market-oriented systems has led to increasing attention towards the development of efficient financial systems in developing countries. The key role of the financial sector in the savings-investment growth bond is to provide a channel for promoting investment by raising and distributing capital. This paper analyses the 1986 financial liberalisation of Nigeria as part of its Structural Adjustment Programme. Liberalization in Nigeria began with the relaxation of entry barriers into the financial services sector followed by Central Bank relaxation of restrictions against capital inflow / outflow, interest rates, foreign exchange and bank ownership. Since then Nigeria has been characterized by trends of increased liberalization, greater openness to world trade and higher levels of financial deepening and integration. This increased openness has motivated increases in private capital inflows and outflows as apparent in the fast growing size of the country's stock market capitalisation. We analyse whether financial integration has contributed to economic growth through the Granger-Causality methodology. This causal relationship between financial integration and economic growth is examined with time series data for the period from 1961– 2008. The Augmented Dickey Fuller (1981) and Phillip Perron (1988) tests are utilised to test for the stationary properties of all the variables. The results showed that all variables are stationary at levels. Then the VAR residual Serial Correlation LM tests are carried out on a lag structure to test for the presence of serial correlation. The tests showed no serial correlation so the Johansen and Juselius (1992) co integration tests were implemented to establish the co integration relationship among the variables. Finally the Granger-Causality tests showed that growth does not cause financial openness but financial openness causes growth. However we found that financial deepening does not have a significant impact on growth whilst growth does have causal impact on financial deepening. There was also a two-way causality relationship between Human Resource Development and growth and between gross fixed capital and growth.