Commercial Banks’ Pricing of Loans, Assets Quality and Financial Intermediation in Nigeria

Description

– Commercial Banks’ Pricing of Loans, Assets Quality and Financial Intermediation in Nigeria –

Download Commercial Banks’ Pricing of Loans, Assets Quality and Financial Intermediation in Nigeria. Students who are writing their projects can get this material to aid their research work.

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.

Introduction

1.1 Background of the Study

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).

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