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Analysing the Financial Strength of Nigeria: An Approach to Estimate the Index of Financial Safety

Victor U. Oboh

,

Adegoke I. Adeleke

,

Grace G. Bikefe

Victor U. Oboh 1 ,

Adegoke I. Adeleke 1 Grace G. Bikefe 1 
  1. Monetary Policy Department, Central Bank of Nigeria. 1

Pages: 14-26

DOI: 10.18488/journal.62.2020.71.14.26

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Article History:

Received: 03 October, 2019
Revised: 06 November, 2019
Accepted: 10 December, 2019
Published: 28 January, 2020


Abstract:

This study seeks to construct a financial safety index (FSI) for Nigeria. FSI is important for early detection of financial stress and ensures that the financial system is better positioned to reduce the likelihood of financial crisis and negative outcomes on real economic activities. It has capacity to guide policies that are likely to ensure the safety of financial system as well as those that are likely to distort the system. It also has ability of providing support for policy on external economic factors that can affect a country’s financial system. Hence, the developed index incorporates factors that have made significant impacts on Nigeria’s financial system in recent years. It is estimated using principal component analysis (PCA) and some major incidents of systemic pressure were identified from the constructed FSI. The constructed FSI was able to largely capture key macroeconomic trends and developments that shaped the financial industry within the study period. This confirms the relevance of the indicators selected for building the index and implies that the selected indicators played critical roles in the determination of Nigeria’s financial safety. Therefore, the index would assist both the fiscal and monetary policymakers in taking preventive measures against financial instability.
Contribution/ Originality
This study contributes to the existing literature by constructing a financial safety index (FSI) for Nigeria, based on major factors that have made significant impacts on the financial system in recent years. The study, therefore, tests previous theories with recent data and suitable methodology.

Keywords:

Financial safety indexes, Financial stability, Principal component analysis, Nigeria.

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Funding:

This study received no specific financial support.

Competing Interests:

The authors declare that they have no competing interests.

Acknowledgement:

All authors contributed equally to the conception and design of the study.

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