Commercial Banks’ Pricing of Loans, Assets Quality and Financial Intermediation in Nigeria
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ABSTRACT
Despite the interest rate liberalization policy that gave rise to commercial banks’ pricing of loans models which is expected to enhance quality of banks assets and improve financial intermediation, poor assets quality of banks, bank failures and poor intermediation role of banks are still prevalent in Nigeria.
Therefore, the focus of this study is to estimate commercial banks’ pricing of loans model and use the model to evaluate assets quality of banks and level of financial intermediation in Nigeria since the financial liberalization reforms of 1986 – 2002.
Based on a sample of nine Deposits Money Banks (DMBs) with data sourced from their annual balance sheet and income statements of accounts from 2002 – 2016, the study used one-way fixed effect Least Squares Dummy Variable (LSDV) model to estimate the banks’ pricing of loans model.
The estimated LSDV parsimonious model revealed R2 of 0.60 for the ‘low risk’ credit market. Most significant is the revelation that the coefficient of the credit risk variable is significantly negative in the ‘low risk’ and ‘high risk’ credit markets, contrary to the a priori theoretical expectation.
This finding shows that the DMBs underprice credit risk to ‘buy’ market share in the spirit of relationship banking with support from non-interest income (fee–based products) that evolved due to product innovations brought about by financial liberalization.
TABLE OF CONTENT
Title Page ………….i
Declaration………..ii
Certification…………iii
Dedication ………………iv
Acknowledgements ……….v
Abstract ………………vi
Table of Content ……..vii
List of Figures ………………….x
List of Tables ……………………xi
List of Appendices………..xiii
CHAPTER 1: INTRODUCTION
1.1 Background to the Research ……….1
1.2 Research Problem ………..4
1.3 Research Questions ……..6
1.4 Objectives of the Study………..7
1.5 Justification o the Study……….7
1.6 Scope and Limitations of the Research …………9
1.7 Organization of the Study………10
CHAPTER 2: LITERATURE REVIEW
2.1 Introduction …………….12
2.2 Conceptual Literature Review …………13
2.2.1 Conceptualization of Commercial banks‟ Pricing of Loans ……13
(i) Risk based Pricing of Loans Model ………….14
(ii) Price Leadership Loan Pricing Model ……………17
(iii) Simple Cost Plus Loan pricing Model …………18
(iv) Relationship Pricing of Loans Model ………19
(v) Option Pricing of Loans Model ……………20
2.2.2 A Critique of Models of Banks‟ Pricing of Loans ………….23
2.2.3 Conceptual Framework …………31
2.3 Theoretical Literature Review ………..34
2.3.1 Theories of Banking Firm and Pricing of Loans ……….35
2.3.2 The Financial Liberalization Theory ……46
2.3.2.1 A Critique of the Theory of Financial Liberalization ………48
2.3.3 Review of Prudential Regulations …………50
2.3.4 Theoretical Framework ………………54
2.4 Empirical Literature Review ……………56
2.4.1 Review of Empirical Studies on Banks‟ Pricing of Loans Model …..56
2.4.2 Empirical Literature on Bank Distress and Bank Failures in Developed Countries……….65
2.5 Overview of the Banking Sector, Structure and Development in Nigeria:2002-2017…………73
2.6 Evaluation of Conceptual, Theoretical and Empirical Literature: Research Gap …………….78
CHAPTER 3: RESEARCH METHODOLOGY
3.1 Introduction ………….80
3.2 Analytical Framework ……………80
3.2.1 Panel Data Regression Technique ……………80
3.2.2Descriptive Statistical and Trend Analysis ……..80
3.3 Specification of Banks‟ Pricing of Loans Model ………81
3.4 Data Description and Sources ………….90
3.5 Model Theoretical Expectations ………….91
3.6 Data Delimitations and Limitations of the Study ……..92
CHAPTER 4: ESTIMATION, PRESENTATION AND ANALYSIS OF RESULTS
4.1 Introduction ……….94
4.2 Descriptive Statistics: Summary Statistics and Correlation Matrix ………94
4.3 Presentation of Results of Im-Pesaran-Shin (IPS) Test…..……97
4.4 Presentation and Analyses of Results …………98
4.4.1 The Determinants of DMBs Pricing of Loans ………….98
4.4.2 Effects of Pricing of Loans on Assets Quality and Financial Intermediation ……110
4.4.3 Effects of Bank Consolidation on Assets Quality of Banks and Intermediation …………122
CHAPTER 5: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Findings …………126
5.2 Conclusion ……………128
5.3 Recommendations …………….129
5.3.1 Micro-prudential Regulations for Macro-prudential Stability ……130
5.3.2 Need for Increased Macro-prudential Regulations Stability ………130
5.3.3 Regulating Equity Capital Flows ………131
5.3.4 Future Research ……….131
REFERENCES ………134
APPENDICES …159
INTRODUCTION
The relationship between financial liberalization reforms and economic growth has been widely discussed and documented in the literature.
Consequently, there is considerable degree of agreement among economists that financial liberalization facilitates economic growth.
The theoretical foundation linking liberalization reforms to economic growth comes from the neoclassical approach to efficient distribution of financial and economic resources.
This approach dominates the policy thinking and therefore, recommendations of multilateral financial institutions such as the International Monetary Fund (IMF), the World Bank (WB) and the Bank for International Settlement (BIS) in the last 2 decades.
According to the theoretical postulation, the impact of liberalization on investment and economic growth is centered on competition which promotes, among other things:
financial deepening, expansion of financial markets, resource efficiency in mobilization and allocation through market-based banks‟ pricing of financial products, innovation as a result of technology developments.
All these lead to economic growth and consumer welfare (Kaufman, 1972; Mackinnon, 1973; Shaw, 1973).
REFERENCES
Abayomi, T. O., and M. S. Adebayo (2010)“Determinants of Interest Ratesin Nigeria;An Error Correction Model”. Journal of Economics and International Finance, Vol. 2 (12), P.261 – 271.
Adeyemi, B. (2011)“Bank Failure in Nigeria: A consequence of Capital Inadequacy, Lack of Transparency and Non-performing Loans”. Banks and Bank Systems, Vol.6, issue 1.
Afolabi, J.A.,R. W. Ogunleye, and S. M. Bwala (2003)“Determination of Interest Rate Spreads in Nigeria: An Empirical Investigation”. NDIC Quarterly, Vol.13, No.1 March. P. 31 – 54.
Ager, P. andF. Spargoli (2012) Financial Liberalization and Bank Failures:The United States free Banking Experience.
Agu, C. C. (2013) “Understanding the ABC of the Financial System”. 42nd Inaugura Lecture Delivered at University of Nigeria Nsukka.
Aizenman, J. (2010)“The impossible Trinity (aka The Policy Trilemma)”, Department of Economics, University of California, Working Paper Series. Accessed at https://escholarship.org/uc/item9k29n6qn
