Substitution of Risk Asset Allocation Role of Micro Financial Institutions in Positively Changing Market Structures

Abstract

Bank consolidations have globally affected banking firms’ market structures. Whenever market structures change, both the consolidating and non-involved performances in the local banking market could be co-impacted in the same or different direction at different degrees. Taking evidence from Nigeria changing market structures, we examined how banks and other micro financial institutions concurrently respond in terms of lending to changes in market structures. To have achieved this, we purposively sampled 845 financial institutions, which comprised 24 commercial banks and 821 Micro-Finance Banks (MFBs). We made use of secondary data, which were collected between 2001 and 2010 from the Central Bank of Nigeria Data Base. We analyzed the data by multivariate regression analysis method. The result shows that fall in bank loans to small businesses (β= - 0.817) due to changes in bank size of merged commercial banks positively affected microfinance bank lending (β = 0.955, p-value= 0.086). MFBs increase their loans to small businesses by 0.955% for every 0.817% fall in banks’ loans. Dynamic changes in bank equity affected commercial banks’ and MFBs propensities to supply loans to small businesses negatively (β=- 0.699) and positively (β=0.727) respectively. This means that as increment in merged bank equity reduced banks’ credits to small business borrowers by 0.699% significantly (p-value=0.023< 0.05), MFBs responded to the shortfall by increasing their loans by 0.727% although insignificantly (p-value=0.147>0.05). Moreover, increases in bank deposits negatively but significantly affected credits commercial banks supply to small business borrowers (β= - 0.725, p-value= 0.012), but positively although insignificantly affected MFBs loan to borrowers (β= 0.776, p-value=0.107) implying that MFBs increase their loans by 0.776% for every 0.725% fall in commercial bank loans. Finally, changes in bank market share negatively and positively affected commercial banks’ and MFBs propensities to supply small credits (β = -0.018) and (β= 0.03) respectively implying that MFBs banks’ increase their loans by 0.03% for every 0.018% fall in merged banks’ loan to small credit consumers. On average therefore, credit availability to small businesses has not decreased due to the offsetting lending role of MFBs in the Nigerian banking sector contrary to general opinion. We strongly recommended that the maximum lending volume of MFBs should be reviewed upward to further strengthen them for this emerging role.

Keywords: Bank Consolidation, Small Businesses, Bank Lending, Micro-Finance Banks and Market Structures