Nexus between financial development and the growth of small enterprises in Nigeria

Abstract

The small enterprises subsector of the Nigerian economy is perceived to be a key factor in the attainment of the twin economic objectives of diversification and growth. It is widely assumed that it has not reached its full potential due to the myriads of challenges bedeviling it, one of which is finance. Therefore, the study investigates the nexus between financial development and small enterprises’ growth in Nigeria using secondary data obtained from the Central Bank of Nigeria annual bulletins from 1986-2018.Financial development is proxy by bank loan, financial deepening and lending rate while small enterprises growth is proxy by its contribution to GDP over the reviewed period. The objectives of the study were achieved by testing two hypotheses on long-run relationship and causality effect between the variables using Vector Error Correction Model and Granger Non-causality tests respectively. Findings from the study reveal that there is a long- run equilibrium relationship between the variables. It also shows the existence bi-directional causal effect between each measure of financial development and small enterprises growth except for lending rate where a unidirectional causality is observed. The study recommends that measures to increase bank loans to small enterprises at moderate cost, deepen financial activities and to reduce the negative effect of high lending rate on small enterprises’ loans should be encouraged.