Financial stability determinants in Nigeria: role of profitability, capital regulation, financial inclusion, inflation, unemployment and economic growth

Ozili, Peterson K (2025): Financial stability determinants in Nigeria: role of profitability, capital regulation, financial inclusion, inflation, unemployment and economic growth. Forthcoming in:

Abstract

This study investigates the determinants of financial stability in Nigeria. The two-stage least squares regression and fully modified ordinary least squares (OLS) regression methods were used to estimate the determinants of financial stability in Nigeria from 2002 to 2021. The findings reveal that banking sector return on asset, regulatory capital ratio, the level of financial inclusion, economic growth, inflation and the total unemployment rate are significant determinants of financial stability in Nigeria. Return on asset and the rate of unemployment have a significant positive impact on financial stability. The regulatory capital ratio, the level of financial inclusion, economic growth and inflation have a significant negative impact on financial stability in Nigeria. The implication of the findings is that high bank profitability (or high return on asset), low regulatory capital ratio and low inflation are crucial for financial stability in Nigeria. The results suggest that policymakers in Nigeria should use a mix of macroprudential and macroeconomic policy tools to ensure that banks remain profitable, maintain a minimum regulatory capital ratio and operate in a low inflation and low unemployment environment in order to preserve financial stability in Nigeria.

• Item Type: MPRA Paper
• Language: English
• Keywords: financial stability, return on assets, regulatory capital ratio, financial inclusion, economic growth, inflation, unemployment, efficiency, Nigeria, determinant, capital regulation.
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G20 - General; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; G - Financial Economics > G2 - Financial Institutions and Services > G23 - Non-bank Financial Institutions ; Financial Instruments ; Institutional Investors; G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O43 - Institutions and Growth; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O47 - Empirical Studies of Economic Growth ; Aggregate Productivity ; Cross-Country Output Convergence

References

Acosta-Smith, J., Grill, M., & Lang, J. H. (2024). The leverage ratio, risk-taking and bank stability. Journal of Financial Stability, 74, 100833.

Adam, B. M., Sarpong-Kumankoma, E., & Fiador, V. (2024). Economic freedom, corruption and bank stability: evidence from sub-Saharan Africa. Journal of Financial Crime, 31(4), 781-794.

Agenor, R. P., Alper, K., & da Silva, L. P. (2018). Capital regulation, monetary policy, and financial stability. 32nd issue (September 2013) of the International Journal of Central Banking.

Ajisafe, R. A., Odejide, A. D., & Ajide, F. M. (2021). Monetary policy and financial stability in Nigeria. Ilorin Journal of Economic Policy, 8(2), 17-35.

Al-Sharkas, A. A., & Al-Sharkas, T. A. (2022). The impact on bank profitability: testing for capital adequacy ratio, cost-income ratio and non-performing loans in emerging markets. Journal of Governance and Regulation, 11(1).

Arun, T., & Kamath, R. (2015). Financial inclusion: Policies and practices. IIMB Management Review, 27(4), 267-287.

Carlson, M., Correia, S., & Luck, S. (2022). The effects of banking competition on growth and financial stability: Evidence from the national banking era. Journal of Political Economy, 130(2), 462-520.

Chand, S. A., Kumar, R. R., & Stauvermann, P. J. (2021). Determinants of bank stability in a small island economy: a study of Fiji. Accounting Research Journal, 34(1), 22-42.

Chizoba E, D., Nsikak J, J., Joel I, O., Annette O, E., Jurbe Y, G., Charles N, O., ... & Victoria E, E. (2022). Monetary policy and banking sector stability in Nigeria. CBN Journal of Applied Statistics (JAS), 13(1), 1-26.

Chukwudi, O. F., & Henry, J. T. (2020). Monetary policy and financial stability in the Nigerian banking industry. International Journal of Financial Research, 11(1), 11.

Daud, S. N. M., Khalid, A., & Azman-Saini, W. N. W. (2022). FinTech and financial stability: Threat or opportunity?. Finance Research Letters, 47, 102667.

Diamond, D. W., & Dybvig, P. H. (1983). Bank runs, deposit insurance, and liquidity. Journal of political economy, 91(3), 401-419.

Feghali, K., Mora, N., & Nassif, P. (2021). Financial inclusion, bank market structure, and financial stability: International evidence. The Quarterly Review of Economics and Finance, 80, 236-257.

Ferreira, C. (2022). Determinants of non-performing loans: A panel data approach. International Advances in Economic Research, 28(3), 133-153.

Golitsis, P., Khudoykulov, K., & Palanov, S. (2022). Determinants of non-performing loans in North Macedonia. Cogent Business & Management, 9(1), 2140488.

Isayas, Y. N. (2021). Financial distress and its determinants: Evidence from insurance companies in Ethiopia. Cogent Business & Management, 8(1), 1951110.

Levine, R. (2005). Finance and Growth: Theory and Evidence. Handbook of Economic Growth, 1.

Kharabsheh, B., & Gharaibeh, O. K. (2022). Determinants of banks’ stability in Jordan. Economies, 10(12), 311.

Korbi, F., & Bougatef, K. (2017). Regulatory capital and stability of Islamic and conventional banks. International Journal of Islamic and Middle Eastern Finance and Management, 10(3), 312-330.

Kryzanowski, L., Liu, J., & Zhang, J. (2023). Effect of COVID-19 on non-performing loans in China. Finance Research Letters, 52, 103372.

Makri, V., Tsagkanos, A., Bellas, A. (2014). Determinants of Non-Performing Loans: The Case of Eurozone. Panoeconomicus, 61(2), 193–206.

Minsky, H. P. (1977). The financial instability hypothesis: An interpretation of Keynes and an alternative to" standard" theory. Challenge, 20(1), 20-27.

Nkusu, M. (2011). Nonperforming Loans and Macrofinancial Ulnerabilities in Advanced Economies. IMF Working Paper 161.

Ofoeda, I., Mawutor, J. K. M., & Ohenebeng, D. N. F. H. (2024). Financial inclusion, institutional quality and bank stability: Evidence from sub-Saharan Africa. International Economics and Economic Policy, 21(1), 27-64.

Ofori-Sasu, D., Mekpor, B., Adu-Darko, E., & Sarpong-Kumankoma, E. (2023). Bank risk exposures and bank stability in Africa: the role of regulations in a non-linear model. Journal of Financial Regulation and Compliance, 31(5), 546-567.

Olusegun, T., Evbuomwan, O., & Belonwu, M. (2021). Does financial inclusion promote financial stability in Nigeria. Economic and Financial Review, 59(1).

Ozili, P. K. (2018). Banking stability determinants in Africa. International Journal of Managerial Finance, 14(4), 462-483.

Ozili, P. K. (2020). Non-performing loans in European systemic and non-systemic banks. Journal of Financial Economic Policy, 12(3), 409-424.

Ozili, P. K. (2025). Bank non-performing loans research around the world. Asian Journal of Economics and Banking.

Pedroni, P. (2001). Fully modified OLS for heterogeneous cointegrated panels. In Nonstationary panels, panel cointegration, and dynamic panels (pp. 93-130). Emerald Group Publishing Limited.

Radivojevic, N., & Jovovic, J. (2017). Examining of determinants of non-performing loans. Prague Economic Papers, 26(3), 300-316.

Salas, M., Lamothe, P., Delgado, E., Fernández-Miguélez, A. L., & Valcarce, L. (2024). Determinants of Nonperforming Loans: A Global Data Analysis. Computational Economics, 1-22.