Economic Downturn and Credit Risk: Empirical Evidence from the Nigerian Banking Sector
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Date
2018
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Abstract
This paper investigates the impact of the economic downturn on the credit risk of the Nigerian banking sector using quarterly data for the period 2007 -2016. The study employs ARDL (Autoregressive Distributed Lag) approach to cointegration. The study also conducted causality test using the Modified Wald (MWALD) test proposed by Toda and Yamamoto (1995) to determine the direction of causality among the variables. The results provide empirical support for the existence of a long-run relationship between the credit risk of Nigerian Banks and macroeconomic variables, namely GDP growth, interest rate, inflation and foreign exchange rate. Most importantly the study finds greater causality power of interest rate, inflation and foreign exchange rate over the credit risk of Nigerian Banks during the study period. The findings of the study have important implications for the impact of the macroeconomic factors on the quality of risk assets of the bank. One practical implication for Nigerian Banks, is the integration and assessment of the potential impact of the macroeconomic environment into the evaluation and assessment mechanism of the quality of their risk asset portfolio. Similarly, in order to mitigate another round of banking crisis and therefore a financial system instability in the country, the government and monetary authority should therefore, work to harmonise the government fiscal policies and the monetary policies with a view to reducing the interest rate, inflation and exchange rate in order to reduce the negative impact of volatile macroeconomic environment on the risk assets of the banking sector.
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Keywords
Economic downturn, credit risk, ARDL Bounds testing