Credit Creation and Financial Stability of Banks: Evidence in Nigeria

Abstract

The study examined how bank credit creation affects financial stability in Nigeria from 1981 to 2020. We obtained the data for the study from the Central Bank of Nigeria and World Bank statistical bulletins. Our research looked specifically at how credit creation to the agricultural (LnCCAS), manufacturing (LnCCMS), transport and communication (LnCCTC), and mining and quarrying (LnCCMQ) sectors affects financial stability (FS) of banks in Nigeria. We used descriptive statistics, unit root, Johansen co-integration, VECM, and Granger Causality techniques at the 5% level to investigate this. The unit root demonstrates that all variables were stationary at first differences, requiring the Johansen co-integration, which reveals the presence of long-run form. The VEC model reveals that LnCCAS and LnCCMS are positive and significant; LnCCMQ is negative and insignificant; while LnCCTC is positive but insignificant to FS in Nigeria. For the Granger causality, there is no directional relationship between each of LnCCMS, LnCCMQ, LnCCTC, and LnCCAS to FS. We conclude that credit creation by banks affects their financial stability in Nigeria. On recommendation, we advocated for the continuous provision of credit to the manufacturing and agricultural sectors of the economy, as these sectors significantly promote financial stability. Furthermore, banks should prioritise the economy's transportation and communication sectors because they have the potential to stimulate financial stability among Nigerian banks. As a result, banks should limit the amount of credit available to the mining and quarrying sectors of the economy.