The paper models banking sector liberalisation variables between financial liberalisation and economic growth in Nigeria for the period of 1981 to 2012, based on time series econometrics using granger causality through Vector AutoRegression method. It examines the extent of banking sector liberalisation on growth of the economy using growth in credit to private sector to GDP, growth in demand deposit to narrow money, growth in net domestic credit to GDP, growth in net broad money stock to GDP, and growth in currency in circulation to broad money stock. The finding from the paper indicates that there is no stable long run relationship between the banking sector liberalisation and economic growth in Nigeria. The causality runs between currency in circulation and economic growth, and domestic credit and economic growth. The results suggest the financial sector development can enhance economic growth and development of the country if the growth in currency in circulation, positively influenced by demand deposit and credit to the private sector, is fully monitored to improve investment in real sectors of the domestic economy. The findings suggest that Central Bank of Nigeria with the collaboration of Bankers’ Committee need to adopt more stringent penalties related to unsafe insider and related party lending that does not enhance investment in the real sectors of the economy which is source drivers of growth.
Keywords: Financial liberalisation, time series econometrics, granger causality, Vector Autoregression