An Investigation into the Effects of Capitalization of Banks on Credit Creation in Nigeria

Abstract

This study investigates the impact of capitalisation on the ability of Deposit Money Banks (DMBs) to create credit in Nigeria. Since aggregate capitalisation of banks is not the only influencing factor of credit creation, other determining factors such as the number of banks, lending rate, volume of deposits and gross domestic products are taking into consideration as explanatory variables. Secondary time series data from the yearly CBN statistical bulletin covering a period of 26 years (1985:01-2010:04) were used for the OLS method of econometrics. The reason for the choice of this time frame is that apart from the recapitalisation of 2004, there has not been any other major one. The reorganisation of banks into international, national and regional by the CBN in 2010 marks the beginning of a new banking era which is out of the scope of the study.  Three of the expressed explanatory variables-interest rate, bank capitalisation and volume of deposits- were found to be significant at explaining the credit creation ability of DMBs in Nigeria while GDP shows an inverse relationship. It was therefore suggested that periodic recapitalisation of banks by CBN would be a right policy not only by setting the banks on a solid capital base but also enhance their ability to advance credit to the economy.

Keywords: Capitalization, credit creation, deposit money banks, ols method