Examining the Causes of Bank Failure in Nigeria since Deregulation: Some Empirical Results and Implications of the Policy

Abstract

This paper examines the causes of bank failure in Nigeria since the inception of the current financial deregulation and the implications of the policy. The analysis, at the theoretical level, suggests that the root of the present financial instability and bank failure can be traced to structural changes in the economy, social and political upheaval, inconsistencies in regulatory and macro economic policies and bank internal problems.

However, the empirical evidence seems to suggest that the primary causes of bank failure in Nigeria are banks' internal factors, especially liquidity, profitability and asset quality measured by the level of credit risk in a bank's portfolio. This is not surprising, given that the data used are essentially cross sectional and that the internal factors are to a large extent a reflection of external influences identified in the theoretical analysis. However, it is surprising that credit policy, management quality and capital adequacy are found to be less significant determinants of bank failure in Nigeria.