Financial Liberalization and Bank Performance in Nigeria: A Perspective from the McKinnon-Shaw Hypothesis

Abstract

The paper empirically analyzed financial liberalization and Bank performance in Nigeria. Several issues have continued to engage the attention of writers on financial liberalization over time. More importantly, of particular concern here is that the implementation of financial reforms have been accompanied by variable rates of inflation and an increase in the worries about the performance of banks in most economies and especially in the Nigerian economy. There are concerns that undesirable phenomena may have arisen because of the improper timing and wrong sequencing of the Nigerian reform policies overtime with their attendant inimical consequences. The objective of this study is to examine the Liberalization of the Nigerian financial sector and the implications for the Nigeria bank performance from the perspective of the McKinnon-Shaw Hypothesis. The co integration analytical technique and panel data models were employed for data spanning a period of thirty four years (i.e. 1971-2005). Earnings per share (EPS), Returns on capital employed (ROCE) and Returns on equity (ROE) were used as proxies for Bank performance (i.e. the dependent variables) while interest rate, real financial savings and exchange rates were used as the proxies for financial liberalization (i.e. the independent variables). Moreover, a number of diagnostic tests were also conducted on the residuals to evaluate the models. The LM test of serial correlation showed that there was an absence of first order serial correlation in the residuals and cumulative sum tests also showed that observations were more stable during Pre-SAP period than the post-SAP era. The results of the study revealed that the impact of financial liberalization on bank performance in Nigeria for the period of study though was significant, especially as measured by the proxies of Earnings per Share and Return on Equity but has not been significant enough to take Nigeria’s economy out of the woods. The study therefore recommends amongst other things that strong emphasis should be placed on the role of monetary policy in stabilizing macroeconomic variables so that it is not hampered by government fiscal policy of deficit financing.