Financial stability determinants in Nigeria: role of profitability, capital regulation, financial inclusion, inflation, unemployment and economic growth

Peterson K. Ozili

African Journal of Economic and Management Studies, 2025, vol. 17, issue 5, 596-607

Abstract: PurposeThis study aims to investigate the determinants of financial stability in Nigeria.Design/methodology/approachThe two-stage least squares regression and fully modified ordinary least squares regression methods were used to estimate the determinants of financial stability in Nigeria from 2002 to 2021.FindingsBanking sector return on assets (ROA), regulatory capital ratio, the level of financial inclusion, economic growth, inflation and the total unemployment rate are significant determinants of financial stability in Nigeria. ROA and the rate of unemployment have a significant positive impact on financial stability. The regulatory capital ratio, the level of financial inclusion, economic growth and inflation have a significant negative impact on financial stability in Nigeria.Practical implicationsHigh bank profitability (or high ROA), low regulatory capital ratio and low inflation are crucial for financial stability in Nigeria. The results suggest that policymakers in Nigeria should use a mix of macroprudential and macroeconomic policy tools to ensure that banks remain profitable, maintain a minimum regulatory capital ratio and operate in a low inflation and low unemployment environment in order to preserve financial stability in Nigeria.Originality/valueEmpirical research on the macroeconomic determinants of financial stability in Nigeria is scarce in the literature. This study adds to the literature by examining the bank-specific and macroeconomic determinants of financial stability in Nigeria.

Keywords: Financial stability; Return on assets; Regulatory capital ratio; Financial inclusion; Economic growth; Inflation; Unemployment; Efficiency; Nigeria; Determinant; Capital regulation (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ajemsp:ajems-01-2025-0060

DOI: 10.1108/AJEMS-01-2025-0060

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