INVESTIGATING THE EFFECT OF EXTERNAL DEBT ON THE BANKING SECTOR IN NIGERIA

Abstract

The study investigated the effect of external debt on the banking sector between 1981 and 2021 using the ARDLbounds test estimation technique. The test for cointegration result proves the incidence of a long-run association between external debt and the banking sector (with internal debt, inflation, foreign direct investment, exchange rate, and interest rate). The results confirm that external debt significantly improves long- and short-term banking performance. In addition, the internal debt, inflation, foreign direct investment, exchange rate, and interest rate were significant determinants of the banking performance in Nigeria. Therefore, external debt can finance investments in the banking sector, leading to tremendous economic growth and stability. This will increase the country’s creditworthiness and make it easier to access more external debts. Hence, we recommend that the banking sector has sufficient capital to absorb potential shocks from external debts. A strong banking sector can make external debts more manageable by providing the necessary liquidity to help manage debt obligations.