Assessment of Nigeria’s Financial Services Sector Stability and Diversity
Date
2021-07-19
Authors
Sunday, Enebeli-Uzor Emeka
Innocent, Ifelunini Abanum
Journal Title
Journal ISSN
Volume Title
Publisher
African Economic Research Consortium
Abstract
A key lesson from the global financial crisis of 2007-2009 and the ensuing widespread
economic dislocations is the reminder of the nexus between financial system stability
and resilience, and macroeconomic stability. Also, emerging research efforts at
exploring financial system stability, resilience and economic welfare have underscored
the importance of diversity in the financial system. This study assessed Nigeria’s
financial system stability and diversity. Specifically, the study sought to develop an
Aggregate Financial Stability Index that is reflective of the intrinsic structure of the
Nigerian financial services sector; develop an Aggregate Financial Diversity Index
for the Nigerian financial services sector; investigate the determinants of aggregate
financial stability index; and also investigate the relationship between the aggregate
financial stability index and aggregate financial diversity index. Using annual and
quarterly banking sector data for the period 2006-2015 and employing Principal
Component Analysis, Hirschman-Herfindahl (HH) Index, Simpson Index, Simple
Regression and Granger Causality, the study establishes that the Nigerian financial
system shows a cyclical movement, and yet to achieve diversity. The study also
found that, financial diversity positively influences financial stability and that there
exists a bidirectional causal relationship between financial diversity and financial
stability running from diversity to stability and vice versa. The study recommends
that regulatory and supervisory authorities in Nigeria should include the diversity of
financial services in their policy design as this will enhance, not only the stability of
financial system, but also the economy as a whole. The Central Bank of Nigeria can
also regularly monitor banks’ funding models to ensure that banks set up diverse
funding plans to preempt a systemic crisis.