The Nigerian Banking Crisis: What Role Did the Macroeconomy Play?
2001
The Nigerian Banking Industry responded favourably at first to the economy-wide institutional and policy reforms enunciated in the Structural Adjustment Programme, recording unprecedented numerical growth and exponential profit performance. By 1989, however, the industry was experiencing one of the worst crisis ever, reflected in an increasing number of distress cases. To be sure, the number of distressed banks which stood at 9 in 1990 rose steadily to 16 in 1992. By 1993, 38 banks were distressed. The number leapt to 55 in 1994 and 60 in 1995. This paper examines the distress phenomenon in the Nigerian Banking Industry, specifically focusing on the role played by the macroeconomy in triggering and perpetuating the crisis. The empirical analysis is in two parts. The first part analyses trends in relevant macroeconomic variables to determine the extent to which anomalous macroeconomic developments provided early warning signals of an impending danger. The second part uses a logistic regression model to isolate the specific macroeconomic variables that played significant roles in occasioning the crisis. The results are quite revealing: persistent deficit financing increases the probability of a banking crisis in Nigeria, strong per capita real GDP growth reduces the chances of a banking crisis occurring, accelerating inflation and negative real interest rates exacerbate Nigerian banking sector fragility and precipitous and unmanaged depreciation of the exchange rate impinges negatively on banking sector soundness. The paper recommends, among others, the institution of policies to stem the astronomical jump in price that often attend the implementation of adjustment policies. This could be in form of provoking robust output growth which calls for a comprehensive appraisal and remedy of constraints posed by infrastructure, inconsistent policies and weak effective demand.
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