Financial Soundness and Banking Sector Performance: Insights from Nigeria

Abstract

The banking sector is one of the significant sectors in any country; therefore its health and efficiency are crucial to the country. This study examined financial soundness and performance of banking sector in Nigeria. Time series data for the period 1990 to 2015 for five variables representing about twenty-five (25) annual observations was generated. The study used Augmented Dickey Fuller test to determine the stationary state of the variables. It also employs the ordinary least squares multiple regression method, co-integration and error correction mechanism to analyze the data generated. The empirical findings revealed that financial soundness largely determined the performance of banks in the Nigerian banking sector as indicated by the coefficient of determ ination both in the short-run and long-run. Similarly, a long-run relationship exists between financial soundness and banking sector performance in Nigeria. The current periods of capital adequacy ratio, ratio of non-performing loan to gross loan and liquidity were found to increase banks performance and were not statistically significant. In the long-run, only liquidity has a positive impact on banking sector performance was not statistically significant. The study therefore recommends that Central Bank Nigeria should put up constant review of minimum amount of capital requirement as this will reduce moral hazards by putting bank owners' money at risk.