Financial stability determinants in Nigeria: role of profitability, capital regulation, financial inclusion, inflation, unemployment and economic growth

This study investigates the determinants of financial stability in Nigeria. The two-stage least squares regression and fully modified ordinary least squares (OLS) regression methods were used to estimate the determinants of financial stability in Nigeria from 2002 to 2021. The findings reveal that banking sector return on asset, regulatory capital ratio, the level of financial inclusion, economic growth, inflation and the total unemployment rate are significant determinants of financial stability in Nigeria. Return on asset and the rate of unemployment have a significant positive impact on financial stability. The regulatory capital ratio, the level of financial inclusion, economic growth and inflation have a significant negative impact on financial stability in Nigeria. The implication of the findings is that high bank profitability (or high return on asset), low regulatory capital ratio and low inflation are crucial for financial stability in Nigeria. The results suggest that policymakers in Nigeria should use a mix of macroprudential and macroeconomic policy tools to ensure that banks remain profitable, maintain a minimum regulatory capital ratio and operate in a low inflation and low unemployment environment in order to preserve financial stability in Nigeria.