Testing the Supply-Leading and Demand-Following Hypothesis for Financial Development and Economic Growth – a Case of the Nigerian Banking System

The study examined financial development and economic growth in the context of the Nigerian banking system using the Toda-Yamamoto approach to Granger causality to test whether the relationship between financial development and economic growth follows the pattern of supply-leading and demand-following hypothesis propounded by Patrick (1966). The financial development indicators of the banking system, which depicts financial deepening and stability for the period 1960 to 2019 were utilised. The findings of the study showed that the relationship between financial development and economic growth was neither supply-leading nor demand-following for the sub-periods of 1960-1985 and 1986-2019. However, for the entire period of 1960-2019, the demand-following hypothesis was established, suggesting that in Nigeria economic growth granger cause financial development. This implied that financial development stemming from the banking system does not drive economic growth in Nigeria. In view of this, it was recommended that efforts be made by government to diversify and fast-track development in the economy to ensure that financial development impacts on economy