Banking consolidation, credit crisis and asset quality in a fragile banking system. Some evidence from Nigerian data

Pages33-44
Published date22 February 2011
Date22 February 2011
DOIhttps://doi.org/10.1108/13581981111106158
AuthorAbel E. Ezeoha
Subject MatterAccounting & finance
Banking consolidation, credit
crisis and asset quality in a fragile
banking system
Some evidence from Nigerian data
Abel E. Ezeoha
Department of Economics and Economic History, Rhodes University,
Grahamstown, South Africa
Abstract
Purpose – The 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/approach – The 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.
Findings – The 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/implications – The 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/value – This 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.
Keywords Consolidation,Assets management, Loans, Developingcountries, Banks, Nigeria
Paper type Research paper
1. Introduction
In most developing economies, the theoretical premises for banking consolidation
include the expansionist argument – to give banks enough financial muscles that
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1358-1988.htm
This paper is part of the postdoctoral research activities at Rhodes University. The author
acknowledges the supports provided by the Economics and Economic History Department at
RhodesUniversity, andthe excellent commentsand suggestions offeredby Professor ChibuikeUche
and Mr Raymond Ezekwu.
A fragile
banking system:
Nigerian data
33
Journal of Financial Regulation and
Compliance
Vol. 19 No. 1, 2011
pp. 33-44
qEmerald Group Publishing Limited
1358-1988
DOI 10.1108/13581981111106158

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