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The study aims to investigate the relationship between banking sector development (BSD), foreign direct investment, and international trade (TRD) in Nigeria using the recently developed Bayer-Hanck combined co-integration test to confirm the robustness of the Autoregressive Distributed lag (ARDL) bounds test. The ARDL test is employed to investigate the coefficients between the tested variables. Furthermore, the Granger Causality tests were also used to examine the causality direction between the variables. The study found that if international trade is increased by one percent, BSD is increased by 3.01%, implied the validity of TRD led BSD hypothesis in both the short and the long run. The elasticity of FDI is only positive and significant in the short run but negative and insignificant in the long run. This indicates that the FDI has no influence on banking sector development in the long run in Nigeria. Another finding from the Granger Causality revealed that there is a uni-directional causal relation from TRD to BSD, suggest the validity of TRD led BSD hypothesis. However, uni-directional causal relation has been shown from FDI and TRD. Overall, the study concludes that FDI and TRD have positive effects on BSD in Nigeria. The study recommends that Nigeria should create active trade policies to attract FDIs such as free trade and active exchange rate policies that can induce external trade competitiveness among other benefits.
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