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Soundness and unsoundness of banking sector in Nigeria: a discriminant analytical approach

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  • Okpara, Godwin Chigozie

Abstract

This paper set out to determine the factors that discriminate most in the classification of banks into sound and unsound position using method of discriminant analysis. Data used were sourced from the annual report of the Nigerian deposit and insurance corporation. The findings revealed the order of severity of institutional factors that could lead to bank distress. The none performing loans to total loans contributed about 53.4% of the total discriminant scores while capital to risk weighted asset contributed 19 percent to the group separation of the discriminant function. Others, gross loan to deposit ratio (with 14.34%), average liquidity ratio (with 9.25%) and insured deposit to total deposit (with 3.76%) made little discriminating contributions while the rest of the variables made insignificant contributions. Thus, by this reason of contribution, the 25% non scientifically determined (and subjective based judgment) component weight attached to asset quality in the CAMEL rating should be increased to at least 1/3 (30%) of the total weight components since its components are found to dominate the discriminant score.

Suggested Citation

  • Okpara, Godwin Chigozie, 2012. "Soundness and unsoundness of banking sector in Nigeria: a discriminant analytical approach," MPRA Paper 36474, University Library of Munich, Germany, revised 06 Feb 2012.
  • Handle: RePEc:pra:mprapa:36474
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    File URL: https://mpra.ub.uni-muenchen.de/36474/1/MPRA_paper_36474.pdf
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    References listed on IDEAS

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    1. Eugenie D. Short & Gerald P. O'Driscoll & Franklin D. Berger, 1985. "Recent bank failures: determinants and consequences," Proceedings 66, Federal Reserve Bank of Chicago.
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    Cited by:

    1. Godwin Chigozie OKPARA & Eugine IHEANACHO, 2014. "Banking Sector Performance and Corporate Governance in Nigeria: A Discriminant Analytical Approach," Expert Journal of Finance, Sprint Investify, vol. 2(1), pages 10-17, December.
    2. Anthonia T. Odeleye, 2014. "Pre-Consolidation and Post-Consolidation of Nigerian Banking Sector: A Dynamic Comparison," International Journal of Economics and Financial Issues, Econjournals, vol. 4(1), pages 27-34.

    More about this item

    Keywords

    Soundness; Unsoundness; Bank Distress; Non Performing Loan; Capital to Risk Weighted Assets; CAMEL; Discriminant Analysis;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G01 - Financial Economics - - General - - - Financial Crises

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