Abstract
Political risk is prevalent in Nigeria and tends to influence business outcomes and the stability of the banking system. As a result of this study, it was determined whether political risk matters to the performance of the banking sector in Nigeria. The effect of political risk on different banks’ performance measures, such as return on assets, return on invested capital, credit risk and stock price, were examined in a panel of 12 selected commercial banks for the period 2006–2018. Data was analyzed using a two-stage system of generalized method of moments. The results provided evidence that the effect of political risk on bank performance depends on the performance proxies. Specifically, political risk was found to be negatively related to banks’ returns on invested capital and positively related to deteriorating credit risk. Hence, it can be concluded that political risk induces poor banking system performance in Nigeria. The study provides a critical insight into the management of a country’s political systems in terms of their potential to create unfavorable conditions for banking systems to thrive.
Highlights
The banking sector is the focal point of money markets that are used for short-term funds and investments
Cost of business operations for banks and their customers. This informs the positive effect of inflation this study found that stock prices are on credit risk and suggests that inflation increas- determined by the macroeconomic condition in es nonperforming loans for the Nigerian banking Nigeria
This study has examined whether political risk matters to bank performance in the Nigerian banking sector
Summary
The banking sector is the focal point of money markets that are used for short-term funds and investments. The sector is a key component of the financial system and plays a fundamental role in the development and growth of nations (Fapetu & Obalade, 2015) The relevance of this sector qualifies it as the most regulated sector in Nigeria’s economy, as in many other economies (Adaramola et al, 2018). Banking turmoil, which led to the revocation of licenses of five banks and takeover of 18 banks by the CBN between 1994 and 1996, occurred following an unstable political environment engendered by the cancellation of the 1993 Presidential Election In this context, Brownbridge (1998) attributed banking distress in African countries such as Nigeria, Kenya, Uganda and Zambia to moral hazard arising from political interference. Given the prevalence of political risk in Nigeria, this paper contributed to the risk-performance literature on the banking industry by examining the impact of political risk component of country risk on different deposit money banks’ performance measures in Nigeria
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