Financial Stability, Bank Efficiency, And Economic Growth Transmission: Evidence from Nigerian Deposit Money Banks

The paper focuses on the transmission patterns of financial stability and bank efficiency on economic growth in Nigeria through bank level panel data of Deposit Money Banks (DMBs). Based on the endogenous growth and financial intermediation theories, the study employs the econometric panel analysis based on the fixed and random effects models and diagnostic tests to capture the unobserved heterogeneity and endogeneity. The dependent variable is the GDP growth, which is chosen, as well as the stability proxies (non-performing loans ratio, capital adequacy ratio, liquidity ratio) and efficiency proxies (return on assets, return on equity, cost-to-income ratio) are the key variables, and the bank size, deposits, leverage, inflation, policy rate, Treasury bill rate, Basel dummy, and Central Bank directive dummy are the controls. Findings show that there is no significant direct impact of bank efficiency on growth, financial stability has mixed effects with capital adequacy having positive effects in fixed effects models and joint effects are not important. Bank size, inflation, policy rate, Treasury bill rate, regulatory dummies, and control variables have a major role in the transmission of growth. The results indicate that intermediation of finances by improving the efficiency of banks and their stability with specific regulations may help to sustain economic growth. The policy suggestions include the use of macroprudential reforms, managing the costs and setting them in accordance with the sustainable development objectives of the economy to reduce the inefficiencies within Nigeria banking sector.