An ARDL Investigation of the Impact of Financial Liberalization on Credit to Private Sector and Credit Crunch Possibility in Nigeria

An ARDL Investigation of the Impact of Financial Liberalization on Credit to Private Sector and Credit Crunch Possibility in Nigeria

Author by Dr. Andy Okwu

Journal/Publisher: Babcock Journal Of Economics, Banking And Finance

Volume/Edition: 2

Language: English

Pages: 50 - 79

Abstract

The aim of the study was to look at the long and short run impact of financial liberalization on the credit to the private sector of the Nigerian economy, from 1970 to 2009, using the Autoregressive Distributed Lagged (ARDL) technique, built on the McKinnon Complimentary Hypothesis; within which the study further investigates, the possibility of credit crunch in the Nigerian financial system. Upon investigation the results revealed that there exist a cointegrating relationship among the specified variables in the model and discovered that current financial liberalization effect on the credit to private sector indicated a positive but insignificant effect in both the short run and long run. While, past (lag one) financial liberalization variable suggested a negative effect in the short run. The consistency in the significant positive effect of the total financial deposits that proxied total saving in both the long and short run, confirms the conclusion of the World Bank News Report in 2010 that credit crunch did not exist in the Nigerian financial system. The study therefore attributed the failure of financial liberalization to affect credit allocation to inconsistency in reform implementation, and political and institutional          settings of reforms.  Hence, recommends   commitment     in financial liberalization implementation and improved stable macroeconomy; pointing to the fact that, given  the absence of credit crunch, there is great need for  improved screening   of intended credit loan seekers (potential borrowers) and close monitoring of already granted loan investment to avoid if not minimise cases of adverse selection and moral hazard given the high level of asymmetric information induced by the current unstable macro-economic environment, inadequate data management  and poor supervision and regulation from regulator authorities resulting to cases of misappropriation of loans, poor corporate governance, unrecoverable loans, and finally illiquidity in the financial system therein compromising the benefits of credit flow to the private economy


Other Co-Authors