Commercial Banks‟ Pricing of Loans, Assets Quality and Financial Intermediation in Nigeria
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Abstract
Despite the interest rate liberalization policy that gave rise to commercial banks’ pricing of loans models which is expected to enhance quality of banks assets and improve financial intermediation, poor assets quality of banks, bank failures and poor intermediation role of banks are still prevalent in Nigeria. Therefore, the focus of this study is to estimate commercial banks’ pricing of loans model and use the model to evaluate assets quality of banks and level of financial intermediation in Nigeria since the financial liberalization reforms of 1986 - 2002. Based on a sample of nine Deposits Money Banks (DMBs) with data sourced from their annual balance sheet and income statements of accounts from 2002 – 2016, the study used one-way fixed effect Least Squares Dummy Variable (LSDV) model to estimate the banks’ pricing of loans model. The estimated LSDV parsimonious model revealed R2 of 0.60 for the ‘low risk’ credit market. Most significant is the revelation that the coefficient of the credit risk variable is significantly negative in the ‘low risk’ and ‘high risk’ credit markets, contrary to the a priori theoretical expectation. This finding shows that the DMBs underprice credit risk to ‘buy’ market share in the spirit of relationship banking with support from non-interest income (fee–based products) that evolved due to product innovations brought about by financial liberalization. These attitudes of the DMBs are in response to stiff competition provoked by financial liberalization which has adverse consequences for assets quality of banks that deteriorated and successively led to bank failures, high cost banks bailouts and low level of financial intermediation, with financial disintermediation and ‘inverted intermediation’ militating against economic growth. This study, therefore, recommends that Central Bank of Nigeria (CBN) should up-step its focus on prudential regulations with greater emphasis to macro-prudential regulations to enhance assets quality of banks, reduce bank failures and improve financial intermediation for economic growth.
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