Dissecting the Threshold Effects of Financial Deepening on Industrial Sector Performance in Nigeria

Abstract

This study seeks to examine the relationship between financial deepening and industrial sector performance in Nigeria. It relied on the autoregressive distributed lagged (ARDL) technique, utilizing data obtained from the World Bank Development Indicators (WDI) between 1980 and 2018. The specific objectives of the study are to examine the impact of financial deepening on industrial growth, and compute the threshold of financial deepening index required to spur industrial growth to its optimum level. To achieve the above, the study built its theoretical framework on the supply-leading hypothesis. The results reveal that financial deepening index exerts a positive impact on industrial sector growth. Also, financial deepening threshold of 36.8% is required to spur industrial sector output to its equilibrium steady-state, beyond which industrial growth declines. Furthermore, the Granger causality test supports the bi-directional hypothesis, hence, the study concludes that government policies and programs should be focused at persuading financial institutions to grant more credit facilities to private investors in the industrial sector.

JEL Classification: C5 G2 I6

Keywords: financial deepening, industrial sector, threshold effects, ARDL, Nigeria