Private Sector Credit Provision in Periods of Fluctuating Capital Inflows in Nigeria: Does each Regime Change Influence Credit Provision Differently?

International Journal of Research and Innovation in Social Science (IJRISS) | Volume VI, Issue I, January 2022 | ISSN 2454–6186

Private Sector Credit Provision in Periods of Fluctuating Capital Inflows in Nigeria: Does each Regime Change Influence Credit Provision Differently?

Nzeh, Innocent Chile¹, Benedict I. Uzoechina², Millicent Adanne Eze³, Chika P. Imoagwu⁴ and Ozoh Joan Nwamaka^5
1Department of Economics, Renaissance University, Ugbawka, Enugu State, Nigeria,
^{2, 4,5}Department of Economics, Nnamdi Azikiwe University, Awka, Anambra State, Nigeria
³School of Business and Social Sciences, Abertay University, Dundee, United Kingdom

Abstract
Our study aims to find the link between capital inflows and credit to private sector over a period of 2010M01-2021M08 and to identify if the behavior of banks’ credit in each regime differ. Under the framework of ARDL, in the first sub-sample, findings show that capital inflows negatively impacts on credit to private sector in the short-run, while in the long-run, the impact is positive though not significant. The study also finds that the interaction of capital inflows with the dummy variable leads to a positive significant impact of capital inflows on credit to private sector in the short-run. In the second sub-sample, findings show that the impact of capital inflows on credit to private sector is positive but not significant both in the short-run and in the long-run. However, when capital inflows interact with the dummy variable, the impact on credit to private sector is negative and significant in both the short and long-run. Consequently, we recommend that different policy measures should be adopted to suit different shocks to the macroeconomic environment.

Keywords: ARDL, Capital inflows, Private sector credit, Inflation rate, oil price

JEL Classification: C22, O24

1. Background to the Study

The stability of an econometric model is necessary as it enables the model’s coefficients to be valid. Lucas (1976) contended that if regime changes are not accounted for during analysis, econometric estimates are rendered invalid. Several factors can engender structural breaks in a model which may affect the model’s parameter stability. It has been noted that the occurrence of structural break in many time series can be traced to so many factors such as crises in the economy, institutional adjustments, changes in policy and shifts in regime. It is proper therefore to test the null hypothesis of structural stability which is compared against the alternative of a one-time structural break. In their separate studies, Perron (1997) and Leybourne and Newbold (2003) observed that should structural changes occur in the data generating process and these changes are not accommodated in the specification of an econometric model, whatever results obtained may be biased.
Exogenous shock to the main source of a country’s income can introduce a regime shift. Capital flows has become a major source of revenue to many countries as it assists in cushioning the shortfall in projected revenue. However, there is a tendency for shocks to hit capital inflows in a way that it affects the macroeconomic environment since cyclical fluctuations is a major phenomenon in capitalist economies. Steffen (2011) observed that the integration of financial markets across countries has encouraged huge capital flows to emerging markets over the years. According to the study, evidence show that net capital inflows penetrating emerging market economies are pro-cyclical and highly volatile and capable of causing aggregate output volatility and financial instability. It is further contended that bank intermediated capital inflows within an expansionary phase in the run-up to a financial crisis fuels domestic credit expansion and GDP growth. Barbosa and Celerier (2020) noted that the mechanism through which huge inflows of capital create instability in recipient countries is an issue that is highly debated. Accordingly, in economies where banks are pivotal in channeling international funds, the penetration of large capital inflows results in financial crises.

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