Determinants of bank stability in an emerging market: A dynamic panel evidence from Nigeria

Abstract

Banks are a key driver of economic activities, especially in emerging markets, where capital markets are not well developed. Thus, this study examines the factors that determine the stability of banking in an emerging market. We have employed the fixedeffects and dynamic System-GMM techniques to analyze panel data collected from the annual reports of the banks, the bulletin of the Central Bank of Nigeria (CBN), and the World Bank database from 2014-2023. These estimators address heterogeneity, measurement error, endogeneity, and unobserved biases. The results indicate that capital adequacy ratios, liquidity ratios, efficiency, bank size, quality of governance, and profitability are important in enhancing bank stability in Nigeria. Although past stability has a positive influence on present stability, GDP growth has a positive but statistically insignificant effect on resilience. Bank stability is adversely impacted by non-performing loans, inflation, the quality of institutions, and interest rates. These findings suggest that banks should be regulated on bank-specific variables, including non-performing loans. The Central Bank should further strengthen its control over the Nigerian banking industry to foster resilience and sustainability. Policymakers should improve the level of governance and policies that promote stability.