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Soundness and unsoundness of banking sector in Nigeria: a discriminant analytical approach.

Okpara, Godwin Chigozie (2012): Soundness and unsoundness of banking sector in Nigeria: a discriminant analytical approach.

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Abstract

This paper set out to determine the factors that discriminate most in the classification of banks into sound and unsound position using method of discriminant analysis. Data used were sourced from the annual report of the Nigerian deposit and insurance corporation. The findings revealed the order of severity of institutional factors that could lead to bank distress. The none performing loans to total loans contributed about 53.4% of the total discriminant scores while capital to risk weighted asset contributed 19 percent to the group separation of the discriminant function. Others, gross loan to deposit ratio (with 14.34%), average liquidity ratio (with 9.25%) and insured deposit to total deposit (with 3.76%) made little discriminating contributions while the rest of the variables made insignificant contributions. Thus, by this reason of contribution, the 25% non scientifically determined (and subjective based judgment) component weight attached to asset quality in the CAMEL rating should be increased to at least 1/3 (30%) of the total weight components since its components are found to dominate the discriminant score.

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