The nexus of banking reformation, institutional quality, and economic growth: Evidence from Nigeria

Ooi, Wan Qing and Wong, Yu Qi (2025) The nexus of banking reformation, institutional quality, and economic growth: Evidence from Nigeria. Final Year Project, UTAR.

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Abstract

This study examines the nexus between banking reformation, institutional quality, and economic growth in Nigeria, covering the period from 1998 to 2020. Banking reforms are represented by deposit interest rates, while institutional quality is measured using governance indicators from ICRG. Additional macroeconomic variables, including inflation and population, are incorporated as controls. Gross Domestic Product (GDP) growth serves as the measure of economic performance. The research employs the Autoregressive Distributed Lag (ARDL) model, with model specification guided by unit root testing, cointegration analysis, and diagnostic checks to ensure reliability and robustness. The findings highlight the existence of a long-run equilibrium relationship between banking reforms, institutional quality, and economic growth in Nigeria. The results further suggest that the effectiveness of financial reforms is conditional on the strength of institutions, indicating that reforms implemented in weak governance environments may yield limited or even adverse outcomes. This study contributes to the literature by providing empirical evidence on how financial and institutional dynamics jointly influence development in an emerging economy. The insights generated are valuable for policymakers in designing reform strategies that align financial sector adjustments with governance improvements. Recommendations include prioritizing institutional strengthening, enhancing transparency in policy implementation, and coordinating monetary reforms with broader development initiatives to foster sustainable economic growth. Keywords: Banking reformation, Deposit interest rate, Institutional quality, Economic growth, Nigeria, Governance. Subject area: HG1621-1638 Interest rate. Interest tables, HG8111-8123 Government policy. State supervision

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