Analysis of Bank Distress and Failure Predictability in Nigeria

After the 2005 banking sector reform and consolidation exercise, Nigerian banks were deemed to be strong and resilient to shocks. However, the global financial crisis of 2007–2009 and ensuing widespread economic instability brought in its wake incidences of bank distress and failure globally, and Nigeria was not spared. Since the 2007–2009 global financial crisis, there has been renewed interest in bank failure and financial system vulnerability analysis. Considering the far-reaching negative consequences of bank failure, especially the loss of jobs, loss of investment by shareholders, and erosion of confidence in the banking sector, it has become most pertinent to determine if it is possible to identify early warning signs of frailty (distress) in the Nigerian banking sector with a view to predicting the likely incidence of future failure. Therefore, this study analyses bank distress and failure predictability in Nigeria using financial covariates and non-financial variables between 2006 and 2015. Using quarterly data of all Nigerian banks from BankScope, and employing the Cox proportional hazards model and Kaplan-Meier estimate, the study identified the financial covariates and non-financial variables that contribute to bank distress and failure in Nigeria, and predicted the probable time to failure of Nigerian banks.