A Macro Analysis of Bank Performance in Debt-Burdened Countries: The Case of Nigeria

Abstract

In this study the focus is on the long-run relationship and impact of public debt on banking industry performance i.e. a macro-analysis in Nigeria using different performance indices such as total bank lending, total bank deposit and total bank branches between the period1975-2005. A general macro model underpinned by a simultaneous equation using a vector auto-regression estimation approach was done with the objective of sensitising countries on the need for caution on public debt. The findings are that public debt impacts negatively on bank performance but the extent of impact is different on the variables chosen in this study. The analysis carried out show that domestic debt impacts most negatively on total bank lending while external debt impacts most negatively on total bank deposit. It is believed that though domestic debt can be used as an instrument of economic stabilization, nonetheless, in the choice of whether to use domestic debt or external debt it may be more expedient to use external debt based on the outcome of this study though it should be stated that in doing that still, adequate care must be taken to maintain an acceptable Debt/GDP ratio needed for debt sustainability.