Financial Dualism, the Informal Sector and Economic Growth: An Econometric Investigation of the Nigerian Evidence

Abstract

This study empirically examined the impact of the informal financial sector on economic growth in Nigeria from 1981-2013. The stationarity of the variables in the model were first tested via the Augmented Dickey-Fuller (ADF) and Phillip Perron (PP) unit root tests and results indicate that all variables were integrated in the order of I (1). Having confirmed the stationarity of the variables (GDPPC, DFIND, INSEC, RINTR, and TSAV),the analyses was pushed further to determine the long-run equilibrium relationship between the variables in the model by using the trace statistics test and the maximum eigenvalue test of the Johansen multivariate cointegration test after the order of linear deterministic trend. The informal financial sector impacts negatively on gross domestic product per-capita in Nigeria. Other variables that impact negatively on GDP are real interest rate, degree of financial depth while total savings has a positive but insignificant relationship. A major policy recommendation which drawn from the above findings is that the linkage between the formal and informal sectors in Nigeria should be strengthened towards full elimination of dualistic market. Deposit money banks and the monetary authority should evolve policies aimed at reaching the unbanked informal sector agents, especially the rural households and the urban informal production units. This will deepen the financial sector and assist in mobilizing the much needed savings that will engender investment and growth in the economy.