THE ROLE OF COMMERCIAL BANKS IN ECONOMIC GROWTH IN NIGERIA
The precise link and direction of causation between financial development and economic growth has remained at the centre of empirical debates for decades. The debate arguably gathered momentum with the empirical works of King and Levine (1993) who, in a cross country study comprising data from 77 countries over the period 1960-1989, found that the level of financial development stimulates economic growth. Deidda and Fattouh (2002) with the same data but a threshold regression confirm the positive relationship between the level of financial depth and economic growth for countries with high income per capita but no significant relationship for lower-income countries, which is consistent with the non-monotonic relationship implied in the model.
Again, Rousseau and Sylla (2001) in their cross-country study covering 17 countries over the period 1850-1997 also find evidence of a leading role for finance. Their result was further supported by Rousseau and Wachtel (1998) who, examining the links between the financial and real sectors for five countries that underwent rapid industrialization over the 1870-1929 period, are able to confirm that financial intermediation Granger-cause real output, especially before the Great Depression, with little evidence of feedback from output to intermediation.
Allesandra (2010) has argued that the strongest critique to all these studies comes from Arestis and Demetriades (1997). The authors, using King and Levine’s (1993:3) data underline that the question of causality cannot be satisfactorily addressed in a cross-section framework. More specifically, they conclude that:
…we have warned against the over-simplified nature of results obtained from cross-country regressions in that they may not accurately reflect individual country circumstances such as the institutional structure of the financial system, the policy regime and the degree of effective governance. The econometric evidence we have reviewed using time-series estimations on individual countries suggests that the results exhibit substantial variation across countries, even when the same variables and estimation methods are used. Thus, the ‘average’ country for which cross-country regressions must,
presumably, relate to may well not exist.(Allesandra,2010:2)
Some scholars have also approached the subject from the perspective of time series in a bid to find a common ground of consensus but here also, the results have been contentious. For instance, Harrison, Sussman and Zeira (1999) using a panel of data for 48 US states from 19821994, find a feedback effect between the real and the financial sector that helps to explain intranational differences in output per capita. Luintel and Khan (1999) using the VAR technique on 10 developing countries with yearly data from the 1950s to the mid-1990s find two cointegrating vectors identified as long-run financial depth and output relationship linking financial development to economic development. They also find causality between the level of financial development (depth) and growth in per capita income in all sample countries. This confirms the findings of Demetriades and Hussein (1996) who, with data on 16 developing countries, with 30 to 40 yearly observations from the 1960s, find that in most countries evidence favours bidirectional causality and in quite a few countries economic growth systematically causes financial development.
Also Shan, Morris and Sun (2001), using quarterly data from the mid-70s to 90s for 9 OECD countries, find evidence of reverse causality, namely from growth to financial development, in some countries and bi-directional causality in others, but no evidence of one-way causality from financial development to growth.