Development financial institutions and capital formation: Experience from Nigeria

Abstract

This study examines the effect of development financial institutions on capital formation in Nigeria. Using time series data from 1990 and 2023, the study employs autoregressive distributed lag (ARDL) bounds testing approach proposed by Pesaran et al., (2001) to estimate the long run and short run effect of development financial institutions on capital formation in Nigeria. The result from cointegration test showed presence of long run relationship between dependent and all explanatory variables. The R-squared found that about 96.9 percent of variations in capital formation are explained by all the included independent variables. The F-statistic value of the long-run model is also significant and implies that all the independents variables include in the model are jointly significant. The Durbin Watson test statistic shows an absence of autocorrelation in the model. The long-run result shows that the variables in the past have negative and no significant effect on the dependent variable (capital formation). The implication of this finding is that the Nigerian capital formation has been hindered by poor performance of the development financial institutions. The study suggest the need for the management and participants in the financial market to increase the size of the markets in Nigeria by increasing the number of development financial institutions available to increase operational efficiency and market discipline that can add positively to capital formation.