The Effect of Credit Boom on Financial System Soundness in Nigeria (1985 to 2018)
CHAPTER ONE
OBJECTIVE OF THE STUDY
The objectives of the study are;
- To examine the effect of credit boom on financial system soundness in Nigeria
- To ascertain whether credit boom have effect on bank crisis
- To ascertain the effect of credit boom on Nigeria economy
CHAPTER TWO
REVIEW OF RELATED LITERATURE
Concept of Bank Soundness
The concept of banking system soundness is derived from the financial system soundness indicators with various studies on the micro and macro prudential determinants. A sound banking system is a system in which individual banks accounting for most of the system’s transactions are solvent and meet capital adequacy requirements (Toby, 2006). Banking system is considered sound, if it is capitally adequate and can withstand monetary and macroeconomic shocks in its operating environment.
Central Bank of Nigeria and banking system indicators
The Central Bank of Nigeria computes a group of macro prudential indicators for the purpose of analyzing the effects of macroeconomic variables on the financial system in order to pursue its goals of monetary and financial stability. The objective of developing the indicators is to find some early warning signals that may imply the necessity to take certain economic policy action to avoid possible crisis in the financial system. However, the use of these indicators for financial system stability assessments and monetary policy decisions is quite recent (Sunday and Sani, 2015). Over the years, the CBN’s monetary policies consists of a combination of actions aimed at ensuring monetary and price stability as well as promoting financial system stability. It therefore becomes pertinent to have coordination between actions taken towards each goal, as the achievement of each depends on the other. Appropriate monetary policy is desirous of financial stability and vice versa, and the maintenance of price stability requires a stable financial environment. Thus, policy actions taken for both goals must be consistent and mutually reinforcing. The monetary policy in recent years was conducted against the background of the lingering effects of the liquidity crunch in the domestic economy, arising from the global financial and economic crises of 2007/2008 and internal problems in some deposit money banks in Nigeria Liquidity management was, therefore, geared towards improving the liquidity and efficiency of the financial market, without compromising the objective of monetary and price stability. Consequently, the monetary policy measures substantially improved liquidity conditions in the banking system and, to a large extent, ameliorated the capital erosion witnessed in the banking system in the late 2009. The indicators compiled comprise both core and encouraged Financial Soundness Indicators for deposit takers (DTs) in Nigeria. The compilation is limited to the indicators whose underlying series are available in the statutory returns of deposit money banks (DMBs) in Nigeria. Eleven out of the twelve core FSIs are currently being compiled for the banking sector in Nigeria. These FSIs cut across four components of the indicators: capital adequacy, asset quality, earnings and profitability, and liquidity. The definition and methodology applied are explained hereunder.
CHAPTER THREE
RESEARCH METHODOLOGY
Research design
The researcher used descriptive research survey design in building up this project work the choice of this research design was considered appropriate because of its advantages of identifying attributes of a large population from a group of individuals. The design was suitable for the study as the study sought to the effect of credit boom on financial system soundness in Nigeria (1985 to 2018)
Sources of data collection
Data were collected from two main sources namely:
Primary source and Secondary source
Primary source:
These are materials of statistical investigation which were collected by the research for a particular purpose. They can be obtained through a survey, observation questionnaire or as experiment; the researcher has adopted the questionnaire method for this study.
Secondary source:
These are data from textbook Journal handset etc. they arise as byproducts of the same other purposes. Example administration, various other unpublished works and write ups were also used.
CHAPTER FOUR
PRESENTATION ANALYSIS INTERPRETATION OF DATA
Introduction
Efforts will be made at this stage to present, analyze and interpret the data collected during the field survey. This presentation will be based on the responses from the completed questionnaires. The result of this exercise will be summarized in tabular forms for easy references and analysis. It will also show answers to questions relating to the research questions for this research study. The researcher employed simple percentage in the analysis.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
Introduction
It is important to ascertain that the objective of this study was to ascertain the effect of credit boom on financial system soundness in Nigeria (1985 to 2018)
In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of credit boom on financial system soundness in Nigeria (1985 to 2018)
Summary
This study was on the effect of credit boom on financial system soundness in Nigeria (1985 to 2018). Three objectives were raised which included: To examine the effect of credit boom on financial system soundness in Nigeria, to ascertain whether credit boom have effect on bank crisis, to ascertain the effect of credit boom on Nigeria economy. In line with these objectives, two research hypotheses were formulated and two null hypotheses were posited. The total population for the study is 200 staff of CBN, Uyo, Akwa Ibom state. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made up accountants, human resource managers, senior staff and junior staff was used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies
Conclusion
Since the banking system plays a vital role in the country’s economic growth, mainly through the credit channels, it is important to ensure the safety and soundness in the operations of commercial banks. This study, therefore, shed the lights on the effects of Vietnamese commercial banks recent lending activities to their efficiency, profitability, asset quality and capital structure. The rapid credit growth, on the one hand, helps increasing bank profit as bank lending is still the main source of incomes in all Vietnamese banking system. On the other hand, however, higher credit growth on average worsen the asset quality, decrease the bank distance to default and leads to smaller capital shield. A remarkable reason is the over-activity of smaller and less efficient banks in bank lending to seek profits and market share throughout the sample periods. During the credit boom period with peaking credit demands in the economy, these risky lending behaviours lead to more negative effects to the bank soundness, provoking NPLs, rising liquidity problem, and systemic risks
Recommendation
The real economic growth can be used as a second reliable indicator since, during periods of high real GDP growth, the credit demand of the economy has increased sharply for consumption and investment. Furthermore, substantial changes in asset prices, especially the two major assets, real estate and stocks, might be other indicators for early warning of credit booms and the risks to the banking system. They represent potential risks when bank lending grows too fast but is primarily directed toward high-risk economic sectors such as real estate and stock trading. Similar to the Credit-to-GDP gap, the gap between the house price-to-per capita income ratio and its long-term trend at more than 2% indicates a sign of a credit boom period.
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