Exchange rate volatility, stock price fluctuations and the lending behaviour of banks in Nigeria

Abstract

Following the recent global economic crisis, so many macroeconomic maladjustments have unfolded in the Nigerian economy. First, the naira exchange rate depreciated sharply and became more volatile than any other time in nearly a decade; the stock market indices have dived very south relative to their previous year's levels and banks, because of their exposure to foreign credit lines, the stock market by themselves and their loan customers- were feared to be on the brink of collapse. Consequently, the Central Bank of Nigeria went to no end of limits to provide liquidity for the banks with a view to forestalling the feared consequences of the crisis. The main concern of researchers and analysts has been to identify the nexus through which the international crisis passed through to the domestic economy. Was the depreciation in the naira exchange rate responsible for the stock market collapse? Or was the reverse the case? Did banks curtail lending because of the depreciation or the fluctuation in the stock indices? This study empirically answers these questions. The vector auto regression (VAR) methodology is applied, treating the data series for temporal properties unit roots and co integration. The impulse response function and the analysis of variance were used to filter the effects of the included variables on bank loans, while the Engel Granger causality confirmed the lines of causation among exchange rate volatility, equity prices and bank loans. Preliminary evidence show that exchange rate volatility and equity price fluctuations affected the behaviour of banks in Nigeria but that the effects were insignificant and that the fluctuation of the stock index caused the naira to depreciate and there was no reverse causality. Changes in bank loans also led to equity price fluctuations and again, there was no evidence of reverse causality. Key words: Exchange rate volatility, global crisis, bank lending behaviour.

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