Impact of Financial Deepening on Domestic Investment in Nigeria

Abstract

This study investigated the impact of financial deepening on domestic investment in Nigeria. The time scope of the study covered the period 2005-2022. The response variable was domestic investment (DI) while the treatment variables were financial deepening indicators (broad money supply, private sector credits, and stock market capitalization. The specific objectives were to investigate the impact of credits to private sector on domestic investment in Nigeria; determine the impact of broad money supply on domestic investment in Nigeria; examine the impact of stock market capitalization on domestic investment in Nigeria; and ascertain the impact of monetary policy interest rate on domestic investment in Nigeria. The study adopted ex post facto research and employed the ARDL technique to analyze the data. Diagnostics and stability tests were applied (unit root, CUSUM and CUSUM of squares). the findings of the study indicated the series to be stationary but of mixed order 1(0) and 1(1); while the cointegration test showed evidence of long-run relationship. The long-run coefficients (of the ARDL) estimation indicated broad money supply has significant positive impact on domestic investment; private sector credit has significant positive impact on domestic investment; and the stock market capitalization has significant positive impact on domestic investment. However, the interest rate indicated to be negative on domestic investment. The policy implication of these findings impinges on government and authorities in the financial sector to develop a roadmap to further deepen the financial space to drive growth in domestic investment. Based on the findings, the study recommended that the financial authority should strategize to satisfy the demand for business investment funds by expanding the broad money supply and the private sector credits. Also, the monetary policy interest rate should be reviewed down in order to reverse its negative effect on investments.