Dynamics of financial inclusion and capital formation in Nigeria

Abstract

This study tested econometrically derived hypotheses concerning the link between financial inclusion and capital production in Nigeria using annual data from 1992 to 2021. Cointegration analysis and the vector error correction model (VECM) were used to capture both long- and short-term relationships between variables. Johansen co-integration tests were used to perform cointegration, and VECM was required for the result. Ex-ante and ex-post forecasting utilizing variance decomposition and impulse response were utilized to assess the research duration. The VECM Granger causality approach was utilized in the study to examine short-run causality correlations between series using an F-/Wald test simulation. According to the VECM estimation, both loans from commercial banks to rural areas and credit from commercial banks to SMEs had a somewhat favorable impact on capital creation. On the other hand, capital formation in Nigeria was significantly and diminishingly impacted by both rural commercial bank deposits and the quantity of commercial bank branches. Further evidence that the system was dynamic came from the variance decomposition and impulse response, which revealed that the impact of financial inclusion on capital formation changed over time. According to the study's findings, the government should change the lending environment to accommodate the financing needs of smaller economic entities, such as rural communities, in order to ensure their financial inclusion.