ABSTRACT
This study examined the determinants of non-performing loans in emerging economies with evidence from the Nigerian banking industry. The study adopted the ex-post facto design. Time series data for the period 1993-2014 were collated from the Central Bank of Nigeria Statistical Bulletin and Financial Statement of banks for the period. The Ordinary least square regression was used to test the five hypotheses stated. Non-performing loans measured by the natural logarithm of aggregate non-performing loans of banks represented the dependent variable while gross domestic product, inflation rate, total loans and advances, total assets and bank’s lending rate were adopted as the independent variables for the five hypotheses of the study. Macroeconomic variables such as exchange rate, and interest rate were also included as control variables. Descriptive statistics on the dependent, independent and control variables were also computed and graphed to complement the regression results. The result emanating from this study revealed that gross domestic product had negative effect on non-performing loans; Inflation rate had positive effect on non-performing loans but was insignificant; total loans and advances had positive effect on non-performing loans and was statistically significant at the 0.05 level; total Assets exerted negative effect on non-performing loans and was statistically significant at the 0.05 level and Bank lending rate had positive and insignificant effect on non-performing loans. The study therefore concludes that bank-specific factors drive changes in or determine Non-performing loans more than macroeconomic factors in Nigeria. This should affect the direction of economic policies in the country. It is recommended, among others, that macroeconomic policy should be directed at sustaining economic growth as it curbs non-performing loans in the banking industry.
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Emerging economies as defined by Center for Knowledge Societies (2008), are those regions of the World that are experiencing rapid informationalization under conditions of limited or partial industrialization. The emerging economies often referred to as “Emerging Markets” (Bloomberg, 2006) are Countries that have the characteristics of developed markets but are not yet developed markets. These include countries that may become developed markets in the future or were in the past. It may be a nation with social or business activity in the process of rapid growth and industrialization. Kveint (2009:3) explains that “emerging market country is a society transitioning from a dictatorship to a free-market-oriented-economy, with increasing economic freedom, gradual integration with the Global Marketplace and with other members of the Global Emerging Market (GEM), an expanding middle class, improving standards of living, social stability and tolerance, as well as increase in cooperation with multilateral institutions”.
According to Robert (2000:1), the emerging economies are low-income, rapid-growth countries using economic liberalization as their primary engine of growth. He explained that the major government policy tool is the capital account liberalization, which is a parameter used in measuring the degree of openness of an economy, signaling the rate of inflow and outflow of capital from one country to another without undermining its territorial integrity and independence. The extremes of the continuum are strict controls, which come in some variety, and liberalized markets, where economic agents freely interact under commonly applicable rules to clear the markets.
In the early 1980s, the term, newly industrialized countries, was applied to a few fast-growing and liberalizing Asian and Latin American countries. Because of the wide spread liberalization and adoption of market-based policies by most developing countries, the term “newly industrializing countries” has now been replaced by the broader term emerging market economies (Adedipe, 2006). Thus, an emerging economy has further been explained as a country that satisfies two criteria: a rapid pace of economic development, and government policies favouring economic liberalization and the adoption of a free-market system (Anold & Quelch, 1998).
The International Finance Corporation (IFC, 1999) identified 51 rapid-growth economies in Asia, Latin America, Africa and the Middle East in addition to the 13 transitional economies following the collapse of Communism in Eastern and Central Europe in 1989. Over time, the Emerging Economies countries became classified as regional economic blocks which are identified as follows:
Ø The BRICS Countries (Brazil, Russia, India, China, and South Africa).
Ø The CIVETS Countries (Columbia, Indonesia, Vietnam, Egypt, Turkey and South Africa).
Ø MINT (Mexico, Indonesia, Nigeria and Turkey).
Ø Others include (Bangladesh, Iran, Pakistan, Philippines, Poland, and South Korea, etc).
Miller (1998) summarizes the most common characteristics of emerging markets using the following parameters, and comparing emerging markets with developed economies in the table below as follows:
1) Physical characteristics- in terms of an inadequate commercial infrastructure as well as inadequacy of all other aspects of physical infrastructure (communication, transport, power generation);
2) Sociopolitical characteristics- which include, political instability, inadequate legal framework, weak social discipline, and reduced technological levels, besides (unique) cultural characteristics; and
3) Economic characteristics- in terms of limited personal income centrally controlled currencies with an influential role of government in economic life, in managing the process of transition to market economy.
Comparing emerging markets (and emerging economies) with developing countries, it is necessary to understand why emerging economies are so important for world economic growth. Differences between emerging economies and developed economies are presented in Table 1 below.....
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