Financial Inclusion and Stock Market Capitalization in Nigeria

Abstract

This study examined the relationship between financial inclusion and stock market capitalization in Nigeria over the period 1986–2023 using the Autoregressive Distributed Lag (ARDL) modelling technique with inference at 5% significant level. Financial inclusion was proxied by deposit levels of rural branches (DRB), number of bank branches (NBB), proportion of adults with bank accounts (LPAB), rural loans (LRB), and prime lending rate (PLR), while stock market capitalization as a percentage of GDP was used as the dependent variable. The findings reveal that in the long run, deposit levels of rural branches (DRB) (β = 0.00386, p = 0.0072), number of bank branches (NBB) (β = 0.5316, p = 0.0080), and rural loans (LRB) (β = 0.0011, p = 0.0155) have positive and statistically significant effects on stock market capitalization, indicating that improved rural financial intermediation and expansion of banking infrastructure enhance capital market development. Conversely, account ownership (LPAB) (β = –1.0499, p = 0.0279) exerts a negative and significant effect, suggesting that increased access to bank accounts may initially redirect savings toward deposit-based instruments rather than equity investments. In the short run, DRB (β = 0.001154, p = 0.0001), NBB (β = 0.1777, p = 0.0246), and LRB (β = 0.000271, p = 0.0001) maintain positive and significant impacts, while LPAB (β = –0.2342, p = 0.0157) continues to negatively influence stock market capitalization. The error correction term (ECT) (β = –0.6555, p < 0.0001) is negative and statistically significant, indicating a rapid adjustment to long-run equilibrium. Consequently, the null hypothesis that financial inclusion does not significantly affect stock market capitalization in Nigeria is rejected. The study concludes that financial inclusion is a key driver of financial sector development in Nigeria, supporting the supply-leading hypothesis that expansion of financial services stimulates financial deepening and capital market growth. Based on the findings, the study recommends the expansion of rural financial infrastructure through bank branches, agent banking, and digital financial services, alongside the development of accessible investment platforms to channel savings into the stock market. Additionally, targeted financial literacy and investor education programs are necessary to encourage active participation in equity markets and ensure that increased financial access translates into productive investment behavior.