Determinants of Bank Failure in Nigeria: An Empirical Investigation

ABSTRACT: This study investigates the determinants of bank failure in Nigeria from 1970-2013. It uses
Autoregressive Distributed Lag (ARDL) approach in the analysis and further examines the extent to which these
determinants lead to bank failure in Nigeria. The study found that there is significant long run relationship between
bank failure and exchange rate, interest rate, capital adequacy ratio, non-performing loans and liquidity ratio, but an
insignificant relationship with inflation in Nigeria. On the direction of causality, the study found a bidirectional
causal relationship between bank failure and, capital adequacy ratio and non-performing loans (NPL), while a
unidirectional causal relationship was found between bank failure and exchange rate but shows no causal
relationship between bank failure and, inflation and interest rate. The study therefore conclude that bank failure is
chiefly determined by capital adequacy ratio (CAR), exchange rate, interest rate and liquidity ratio in Nigeria, and
that Non-Performing Loans (NPL) leads to the degradation of the financial sector thereby making the financial
institutions vulnerable to failure. It is recommended that monetary authorities in Nigeria must ensure that all banks
operating in the country comply with the CAR guideline to guard against sudden bank failure, and that financial
institutions should make sure that all necessary checks prior to the advancement of credit such as adequate
collateral and viable financial projection be dully carried out and satisfied in order to forestall the incidence of bank
failure in Nigeria.
KEY WORDS: bank failure, Non-performing loans, CAR, ARDL, Nigeria JEL: