The Impact of Macroeconomic Instability on the Banking Sector

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Journal of Money, Investment and Banking ISSN 1450-288X Issue 7 (2009) © EuroJournals Publishing, Inc. 2009

The Impact of Macroeconomic Instability on the Banking Sector Lending Behaviour in Nigeria Somoye, Russell Olukayode Christopher Associate Professor, Department of Banking and Finance Olabisi Onabanjo University, Ago-Iwoye P.O Box 1140 Ijebu Ode , Nigeria E-mail: Tel: + 234-8033335688 Ilo, Bamidele M Department of Banking and Finance, Olabisi Onabanjo University PMB 2002, Ago- Iwoye E-mail: Tel: + 234-80560085567 Abstract This study aims primarily at investigating the impact of macroeconomic instability on banking sector lending behaviour in Nigeria using data on commercial banks and macroeconomic instability from 1986 to 2005. Our results under the Co-integration and Vector Error Correction Modeling framework show that bank lending has a long-run relationship with macroeconomic instability. The study therefore, recommends that while banks should pay adequate attention to the consequences of their firm specific characteristics in their lending activities both in the short-run and long-run, their worries about macroeconomic instability should be limited to the long-run consequences on their lending behaviour. It is also pertinent that appropriate measures be taken to curtail inflation and sporadic money supply growth making banks become unfavourably disposed to lending given the attendant negative consequences of loan curtailment on economic growth in the long run.

JEL classification Codes: C52 E44, G21

The are fundamental economic roles banks are expected to perform, especially that of acting as financial intermediaries and facilitating the payment system for the purpose of ensuring an efficient allocation of the deposits in their custody. Banks typically make out loans in order to generate income and make the bulk of their income from the spread between lending and deposit rates relative to the volume of loans granted. The volume of loans granted by a bank in a year may be a function of its internal characteristics such as size, deposit base, liquidity, credit policy and other internal factors, all of which may be said to fall though relatively, within the control of the bank. Though such policies are internal, they, however, to a large extent mimic the general macroeconomic environment, such that the general loan behaviours of most banks will be a reflection of the signals from the aggregate economy.

Journal of Money, Investment and Banking - Issue 7 (2009)


Expectedly, if they perceive a stable macro environment they form an expectation that the borrowers will be able pay back because of their ability to predict the economy more accurately and possibly earn a good return on their investment projects. Therefore, since banks do not operate in a vacuum, their overall lending behaviour may generally be influenced by the environmental factors particularly the regulatory and macroeconomic factors. The regulatory environment is more stringent and must be observed but the economic environment is perhaps the more challenging since it affords them the opportunity to exercise their discretion at least relatively, in a manner that will impact positively on their business in the long run. The economic environment is a systematic risk component that affects every participant within the economy. The general performance of the economy is reflected by the macroeconomic aggregates including the gross domestic product (GDP), employment level, industrial capacity utilization, inflation, money supply and exchange rate. Banks therefore adjust there lending behaviour in response to the signals from these factors, such that positive signals make banks become more fovourably disposed to lending and vice versa . Bank loan portfolio including volume, tenor and structure may be generally influenced by their expectations...
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