Predicting Bank Failure in Nigeria Using Survival Analysis Approach

Abstract

The collapse and failure of a bank could have devastating consequences to the entire banking system and widespread repercussion effect on other banks and the economy as a whole. The main objective of this paper is to determine how bank failure in Nigeria can be predicted far ahead of its occurrence using a survival analysis approach. The paper identifies the financial distress symptoms that can lead to a bank failure by employing the Cox Proportional Hazards Model using financial covariates from financial statements of banks. Panel data covering a period from 2003 to 2011 were analysed. The study shows that survival of banks in Nigeria is mostly influenced by 12 predictor variables that bank regulators could watch out for, to forestall bank distress. The study shows that banks that are high on non-performing loan to total loan plus lease and with high operating expense to average total assets have very high tendency of failure. Another interesting finding is that average survival time for banks in Nigeria varies significantly according to their specialty. The study therefore recommends that the reform activities of the government should be well thought out and strategies for implementation should be put in place to enhance positive effect on the banking sector in Nigeria.