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Banking consolidation, credit crisis and asset quality in a fragile banking system: Some evidence from Nigerian data

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  • Abel E. Ezeoha

Abstract

Purpose – The aim of this paper is to identify the major determinants of bank asset quality in an era of regulation-induced industry consolidation, using the Nigerian case to demonstrate how consolidation can heighten incidences of non-performing credits in a fragile banking environment. Design/methodology/approach – The paper makes use of panel data from 19 out of a total of 25 banks operating in Nigeria. A multivariate constant coefficient regression model is adopted as the estimation technique. The dependent variable in the model is quality of bank assets, proxied as the proportion of non-performing loans (NPL) to total loans; while operating efficiency, profitability, asset liquidity, loans to deposits ratio, predictability of depositors' behaviour, size of bank capital, and board skill constitute the exogenous variables. Findings – The study reveals that deterioration in asset quality and increased credit crisis in the Nigerian banking industry between the periods 2004 and 2008 were exacerbated by the inability of banks to optimally use their huge asset capacity to enhance their earnings profiles. It shows that excess liquidity syndrome and relatively huge capital bases fueled reckless lending by banks; and that increase in the level of unsecured credits in banks' portfolios ironically helped to mitigate the level of NPL within the studied period. Research limitations/implications – The findings here should be interpreted with caution. The reason is because of the relatively fewer number of observations and the likely biases associated with the use of pooled regression approach. Originality/value – This paper is one of the first to investigate the specific impact of banking consolidation on the quality of bank assets in an underdeveloped financial system. Among such countries facing such challenge, the Nigerian case is unique considering that the 2004/2005 banking consolidation in the country was recorded as the largest in the history of banking in Africa. The findings here make clearer the policy/practical implications of using regulation-induced consolidation to pursue the goal of increased credit flows in a less developed financial system.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal Journal of Financial Regulation and Compliance.

Volume (Year): 19 (2011)
Issue (Month): 1 (February)
Pages: 33-44

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Handle: RePEc:eme:jfrcpp:v:19:y:2011:i:1:p:33-44

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Related research

Keywords: Assets management; Banks; Consolidation; Developing countries; Loans; Nigeria;

References

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  1. Bernstein, David, 1996. "Asset quality and scale economies in banking," Journal of Economics and Business, Elsevier, vol. 48(2), pages 157-166, May.
  2. Hasan, Iftekhar & Wall , Larry D., 2003. "Determinants of the loan loss allowance: some cross-country comparisons," Research Discussion Papers 33/2003, Bank of Finland.
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  9. Chen, Xiaofen, 2007. "Banking deregulation and credit risk: Evidence from the EU," Journal of Financial Stability, Elsevier, vol. 2(4), pages 356-390, March.
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  13. Gaston Gelos & Jorge Roldos, 2002. "Consolidation and Market Structure in Emerging Market Banking Systems," IMF Working Papers 02/186, International Monetary Fund.
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Cited by:
  1. Lawal Bello Dogarawa, 2012. "Banking under the Banks and Other Financial Institutions Act: A Survey of Compliance," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 2(3), pages 183-191, July.

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