Banking consolidation, credit crisis and asset quality in a fragile banking system

Abstract

PurposeThe 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/approachThe 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.FindingsThe 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/implicationsThe 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/valueThis 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.

Non-performing Loan and its Effects on Banking Stability: Evidence from National and International Licensed Banks in Nigeria

“…Thus, financial intermediaries are more likely to lend to high-risk borrowers who are not concerned about the harsh lending conditions and are prone to loan default (Ezeoha, 2011). Pagano and Jappelli (1993) argue that information sharing reduces adverse selection problems by enhancing information on loan applicants.…”

Agency Cost and Credit Risk Management: Empirical Evidence from Listed Commercial Banks in Nigeria

“…However, both cases increase the volatility of non-interest income and make it riskier than interest income. Consistent with this view Altunbas et al [47] and Demirgüc-Kunt and Huizinga (2010) show that banks with a high share of non-interest income are riskier.…”

Where have foreign banks in Nigeria gone? Market structure, competitive intensity and the capabilities of Nigeria banks

“…Banks accumulated vast sums of under-performing loans, often in direct violation of regulatory requirements, without punishment of the regulatory authorities. More recently, the regulatory system was blamed for being a major cause of the ongoing crises in Nigeria banking industry and the multiple periods during which the industry was on a brink of collapse (Agbonkpolor, 2010;Ezeoha, 2011;Kuye, Ogundele, & Otike-Obaro, 2013;Okpara, 2009;Sanusi, 2010).…”

“…Probably the most impactful reform introduced during this period was the increase in 2004 of banks' minimum capital requirement from 2 to 25 billion Nigeria Naira in order to ensure adequate capitalization. This legislation prompted a vast consolidation process, recorded as the largest regulation-induced consolidation in the history of banking in Africa, which reduced the number of banks from 89 on the eve of the reform to 25 in 2006 and 21 by 2017 (Ezeoha, 2011). The changing structure of the industry instilled competitive dynamics that led to explosive growth.…”