Innovative Journal of Business, Management and Economics Vol. 1, No. 1, pp: 20-28, 2017 URL: http://centerise.com/?ic=journal&journal=11&info=aims 20 Impact of Economic Growth on Financial Development in Nigeria (1987 – 2014) Okeke, Chizoba Benneth Department of Accountancy, Business Administration and Entrepreneurial Studies, Federal University Ndufu-Alike Ikwo, Ebonyi State, Nigeria Acha, Ikechukwu A. Department of Banking and Finance University of Uyo, Uyo, Akwa Ibom State, Nigeria Abstract: This study examined the impact of economic growth on financial development in Nigeria within the period of 1987 – 2014 using stock market capitalization ratio, growth rate of credit to private sector, money demand over GDP and All Share Index growth rate as financial development indicators. These financial indicators were used as dependent variables while Gross Domestic Product was used as independent variable. The study employed ex-post facto research design. Four hypotheses were tested using data collected from Central Bank of Nigeria statistical bulletin and annual report. Ordinary Least Square method of analysis was used to test the four hypotheses. The result of the analysis conducted revealed that economic growth has significant impact on the stock market capitalization, the growth of private credit, money supply and All Share Index in Nigeria. The study therefore concluded that economic growth has significant impact on financial development in Nigeria and recommended that favourable policy should be made to enhance the growth of the economy which will in turn further develop the financial sector. Keywords: Economic Development, Savings, Private Credit, Market Capitalization, All Share Index. This work is licensed under a Creative Commons Attribution 4.0 International License. 1. Introduction Financial sector provides the bridge through which the savings of surplus units may be transformed into medium and long term investments in the deficit units. It affects economic activity through the creation of liquidity. A well- developed financial system performs several critical functions to enhance the efficiency of intermediation by reducing information, transaction and monitoring costs. If a financial system is well developed, it will enhance investment by identifying and funding good business opportunities, mobilizing savings, enabling the trading, hedging and diversifying of risk and facilitating the exchange of goods and services. All these result in a more efficient allocation of resources, rapid accumulation of physical and human capital, and faster technological progress, which in turn results in economic growth (Olusegun et al., 2013). At the same time, these functions would not be fruitful if the economic growth is not strong to absorb these facilities. Economic growth however refers to the increase in the amount of the goods and services produced by an economy over time (Onwumere et al., 2012). Economic growth could be attributed to increases in population, accumulation of capital, and increased productivity. Increase in productivity is a major factor responsible for per capital economic growth. An increase in per capita income of citizens (investors) could make investors invest in long term financial assets in many ways through the financial system mechanism which leads to financial development. This relationship between financial development and economic growth has been extensively studied in the recent decades. The thrust of this debate has been whether financial sector development causes economic growth (supply-leading phenomenon), or whether it is the growth of the real sector which causes financial sector development (demand-following phenomenon). These arguments can be traced as far back as 1873 to Bagehot, W. and 1912 to Schumpter, J. as cited in (Sinha and Macri, 2001). Bagehot (1873) argued that financial system was an important catalyst in the industrialization of England by facilitating the movement of large amounts of funds “immense” works. Schumpeter (1912) viewed it that a well-functioning financial system would induce technological innovation by identifying, selecting and funding