Financial Development and Cross- Border Financial Flows to Nigeria

Abstract

This study evaluates different perspectives of financial development and how they impact on variants of international financial flows to Nigeria for  the period ranging from 1986 – 2019. Financial liberalization that started in Nigeria in 1986 and COVID-19 outbreak that shut down the world  economy, led to the choice of the research period. Three indices of financial development such as banking sector development, stock market  development and bond market development are constructed with the aid of principal component analysis (PCA). The controlled variables are  exchange rates, inflation and interest rates spread. The study employs Autoregressive Distributed Lag (ARDL) model in its estimation. The results  shows that, in the long-run, banking sector and stock market development indices have negative and significant impact on FDI. The long-run, bond  market development index has positive and significant impact on FDI. The investigation reveals that BSD, SMD and BMD have significant and  positive impacts on Net FPI flow in the short-run. While in the long-run the index for banking sector development (BSD) has negative and  insignificant impact on FPI. Stock market development (SMD) index has positive and insignificant impact on FPI, while, Bond market development  (BMD) index has positive but significant impact on PFI. The study concludes that financial development significantly influences cross-border financial  flows to Nigeria especially in the long-run. The study recommends that financial intermediation by the banks should be strengthened and  credit facilities made available to investors at reduced lending rate. Furthermore, institutional quality of Nigerian stock market should be improved  to reduce variations in cross-country financial flows which are best explained by fundamentals like quality of institutions, access to foreign export  markets, international price risk mitigation and an ideal macroeconomic policy.