Causal Relationships between Savings Mobilisation, Capital Market Development, and Economic Growth in Nigeria

Abstract

This study investigates the causal relationships between savings mobilisation, capital market development, and economic growth in Nigeria using the Autoregressive Distributed Lag (ARDL) bounds testing approach on annual data from 1990 to 2023. The dependent variable is GDP growth rate, while explanatory variables include gross domestic savings ratio (GDSR), total savings (LTS), All Share Index (LASI), market capitalisation (LMCAPE), number of listed entities (LNLE), real interest rate (RINT), and exchange rate (LEXR). The bounds test confirms cointegration among the variables, validating a long-run equilibrium relationship. The error-correction term is negative and highly significant (−1.220; p < 0.001), indicating rapid adjustment and long-run causality from the regressors to GDP growth. Long-run estimates reveal that gross domestic savings as a ratio of GDP (GDSR) and market capitalisation (LMCAPE) exert positive and significant effects on growth, while total savings (LTS) show a significant negative effect. LASI and LNLE are not significant. Real interest rate and exchange rate also display positive long-run impacts. Short-run dynamics provide weak evidence of causality, with most differenced terms insignificant except for a marginal lagged exchange-rate effect. These findings suggest that financial deepening influences growth primarily through structural channels rather than immediate demand effects. Policy implications are twofold: first, deepen capital market infrastructure and instruments to translate mobilised savings into productive investment. Second, address structural bottlenecks that impede efficient allocation of aggregate savings. Collectively, the results support state contingent financial sector strategies that strengthen both savings mobilisation and market depth to foster sustained growth in Nigeria. Policy implications emphasise raising domestic savings and strengthening capital market depth to channel resources into productive investments, while addressing inefficiencies that hinder effective intermediation.