Effect of Public Debt on Banking Sector Performance in Nigeria, 1995-2016

Abstract

This study sought to achievethe following objectives: (i) investigate the impact of federal government’s external borrowings on the lending rates of deposit money banks in Nigeria, (ii) determine the effect of federal government’s domestic borrowings on commercial banks total deposit liabilities in Nigeria, (iii) examine the effect of federal government’s domestic borrowings on commercial banks total credit, and; (iv) evaluate the effect of federal government’s domestic borrowings on the total assets of commercial banks in Nigeria. The study adopted ex-post facto research design. It was conducted using 16 year annualized time series data spanning the period, 1995-2016. Data were generated from the Central Bank of Nigeria Statistical Bulletin. Four research hypotheses were formulated in the process of the research as follows: (i) Federal Government’s external borrowings had no positive and significant effect on the lending rates of deposit money banks in Nigeria, (ii) There was no significant positive effect of Federal Government’s domestic borrowings on the commercial banks total deposit liabilities in Nigeria, (iii) Federal government’s domestic borrowing did not have a significant positive effect on commercial banks’ total credit in Nigeria, and (iv) federal government’s domestic borrowing did not have a significant positive effect on the total assets of commercial banks in Nigeria. The dependent variable for the four hypotheses was the banking sector performance measured by commercial Banks lending rates, their deposit liabilities, their total credits, and their total assets. The explanatory variables weregovernment external debt components for hypothesis one and government domestic debt components for hypotheses two to four. The four hypotheses were tested at 5% level of significance via IBM computer-based bi-variate linear regression model using the current statistical package for social science (SPSS) version 20. Findings show that there wasno significant positive effect of federal government’s external borrowings on the lending rates of deposit money banks in Nigeria; there was significant positive effect of federal government’s domestic borrowingson commercial banks total deposit liabilities in Nigeria; Government’s domestic borrowing had a significant positive effect on commercial banks’ total credit in Nigeria; and Federal government’s domestic borrowing had a significant positive effect on the total assets of commercial banks in Nigeria. Considering the findings, the following recommendations are made: Government should reduce her financing expenditure using external debt and should rather adopt more of domestic debt financing strategy as servicing external debt have been found to be more expensive. Secondly, the presence of a well-functioning autonomous domestic debt market could help reduce the rate at which government borrows from outside, therefore, such robust domestic debt market should be established in Nigeria.