Does Financial Deepening Cause Liquidity Problems for Banks? Evidence from Nigeria

Abstract

Attempt to facilitate economic growth makes the Central Banks to formulate monetary policies that seek to deepen the provision of financial resources to target sectors. Since Banks are the main channels through which monetary policies are executed, we attempted to examine whether financial deepening cause liquidity problem among Nigerian banks in this study. We employed time series analytical techniques to analyze selected financial deepening indicators and data for banking system liquidity between 1981 and 2019. The financial deepening variables used include of broad money to the gross domestic product (GDP) ratio; credit to private sector to the GDP ratio; ratio of commercial banks liabilities to the GDP; financial sector contribution to the GDP and ratio of market capitalization to the GDP. On the other hand, the liquidity of the banking system is proxy by its loan/deposit ratio for the period under study. We estimated the statistical properties of the variables examined and conducted some pre-estimation tests (stationarity and co-integration) to ascertain choice estimation techniques. We used a vector error correction mechanism to investigate long and short-run effects of financial deepening on Nigerian banking system liquidity. Both the long run vector autoregressive (VAR) and the short run and vector error correction (VEC) models results showed that there is a positive but statistically insignificant relationship between banking system liquidity and financial deepening variables. In addition, the results of the Granger causality between the dependent and independent variables revealed that there exists no causal relationship between the liquidity of the banking system and financial deepening. These findings imply that financial deepening did not impair banks’ liquidity position in Nigeria during the years under review. The study concluded that financial deepening does not cause liquidity problem for banks in Nigeria; rather, if well managed, can have positive effect on it. In the light of this, the study recommends that banks should re-strategize in the implementation of financial deepening policies that are liquidity friendly and that the Central Bank of Nigeria, should formulate policies that will not only focus on credit and loan beneficiaries, but also on the banks.

The Impact of Financial Deepening on Bank Profitability: An Application on Participation Banks in Turkey

“…Interest-free financial products constitute fundamental financial instruments offered by Islamic banks. Participation banks, as in all financial markets, contribute to the development of financial deepening (Kayode et al, 2021). Financial deepening involves enhancing public accessibility to financial services through the development of various financial instruments and products.…”

“…ARDL sınır testi yöntemine göre bankaların aktif kârlılık (ROA) ve özsermaye kârlılığı (ROE) üzerinde piyasa değeri/GDP ve özel sektör kredileri/GDP olumsuz; mevduat yükümlülükleri/GDP değişkeninin ise olumlu bir etkiye sahip olduğunu tespit etmişlerdir. Kayode et al, (2021), 1981-2019 yıllarına ait verileri kullanarak Nijerya'da bulunan bankaların likiditesi üzerindeki finansal derinleşmenin etkisini analiz etmişlerdir. VAR modeli sonuçlarına göre finansal derinleşme göstergeleri olan M2/GDP ve özel sektör kredileri/GDP'nin bankaların likiditesi üzerinde pozitif ancak istatistiksel olarak anlamlı olmayan bir ilişkinin varlığını tespit etmişlerdir.…”

“…Katılım bankaları, tüm finansal piyasalarda olduğu gibi finansal derinleşmenin gelişmesine katkı sağlayan aktörlerdendir (Kayode et al, 2021). Finansal derinleşme, çeşitli finansal araçların ve ürünlerin geliştirilmesiyle birlikte halkın finansal hizmetlere daha fazla erişilebilir olmasını sağlamaktadır.…”