Banking Sector Operations and Foreign Direct Investment in Nigeria: A Causality Analysis

Abstract

This study examined the causality relationship between banking sector operations in Nigeria and foreign direct investment from 1997 to 2015. The causal relationship between Foreign Direct Investment (FDI) and banking sector development in Nigeria is not clear yet, while there abounds empirical and theoretical studies on the nexus between foreign direct investment and economy in general, considerable attempts has not been made on the causality relationship between and banking operations in Nigeria. Specifically, this study ascertained the causal relationship between banking sector deposits, loans and advances, foreign exchange transactions, domiciliary operations, international banking operations and foreign direct investment. To achieve these objectives, this study employed Ordinary Least Square (OLS) econometric technique, Auto Regressive Distributive Lag (ARDL) bound test and granger causality test among others. Secondary data were collected from Central Bank of Nigeria statistical bulletin of 2015. The result indicated significant causal bidirectional relationship between banking sector deposits, foreign exchange transactions and foreign direct investments; a significant unidirectional causal relationship between domiciliary operations and foreign direct investment, while no significant causal relationship existed between loans and advances, international banking operations and foreign direct investment. The study recommends that banking sector should adopt completely smart banking as this evidences low risk, reliability and stability of the banking sector which is essential for inflow of foreign direct investments. Central Bank of Nigeria should cautiously focus on tackling monetary policy variables such monetary policy rate, cash reserve ratio and loan portfolio which a capable of attracting investors from abroad.