Economy & Business Journal of International Scientific Publications www.scientific-publications.net RECENT TREND OF FINANCIAL DEEPENING AND ECONOMIC GROWTH: EMPIRICAL EVIDENCE FROM NIGERIA’S DATA Matthew J. Kromtit, Joseph B. Tsenkwo Department of Economics, University of Jos, Nigeria Abstract Financial systems all over the world play fundamental roles in the growth and development of the economy. Given the profound changes in the Nigerian financial system over the recent years, this study aims at assessing the performance of Nigeria’s financial sector deepening and unveiling its implications on the economic growth and development of the country in recent times. By basing the study on the Harrod-Domar Growth Model and using qualitative and quantitative methods of analyses, it was found that while the recent trend in Nigeria’s financial deepening in terms of credit allocation to the private sector increased steadily, annual market capitalization dwindled and the outcomes in terms of economic growth and development were grossly insignificant, implying that the deepening of the financial system in the country in itself was insignificant as its impact on the economy was found to be majorly negative. The Granger Causality Test result shows that independence exists between economic growth and broad money supply in Nigeria; and that independence is suggested between credit to the private sector and economic growth as well as between annual market capitalisation and economic growth-implying that financial deepening does not cause economic growth. The OLS result corroborates the evidence revealed by the analysis of the trend of financial deepening and economic growth in Nigeria as its impact on the economy is disappointing. The study therefore, recommends that in credit allocation to the private sector, key sectors such as manufacturing and agriculture should be highly favoured through improved lending to investors, the monetary authority should encourage lenders of funds to bias the maturity period of loans towards the long end and devise reliable means of punishing chronic debtors in banks through legislation to ensure that public funds are not subjected to waste by unscrupulous borrowers, the public should be enlightened more on financial markets operation and the anti graft agencies as well as the regulatory authority should closely monitor the markets to avoid manipulations and encourage private sector participation; and poverty and unemployment in the country must be sincerely tackled by making funds available to young entrepreneurs who are willing to venture into small and medium scale businesses if the financial sector must deepen enough to cause economic growth. Key words: Financial Deepening, Economic Growth and Nigeria 1. INTRODUCTION One of the salient features of the drivers of growth and development of any economy including Nigeria is a conscious development in its financial sector. In recent times there has been a marked shift in economic policy strategy toward greater pivotal role of the private sector as the prime –mover of the economy and correspondingly, a diminished role of government. This paradigm shift in development strategy, which is from inward-looking to outward looking approach, in turn has elevated the importance of the financial system in resource mobilization and allocation. The effectiveness and efficiency in performing these roles, particularly the intermediation between the surplus and deficit units of the economy, depend largely on the level of development of the financial system (Ofanson, Aigbokhaevbolo and Enabulu, 2010). Development economists posit that economic growth depends on capital accumulation and underscore this as a central problem in economic development (Adams, 1998). However, capital accumulation requires financing through financial intermediation. This influences economic growth and development by affecting the extent to which savings become available and are allocated to investment opportunities that bring the highest returns (Akanni, 1997). It Page 1204 ISSN 1314-7242, Volume 8, 2014