Exchange Rate Regimes and Financial Sector Stability in Nigeria

Purpose: This paper examined the role of exchange rate regimes in the stability of the financial sector in Nigeria, on the context of a long standing exchange rate volatility and the frequency of the exposure of the banking sector in an oil-intensive economy. Design/Methodology/Approach: The Macroeconomic Banking Theory and the Financial Intermediation Theory were adopted in the study. A facto post research design was adopted on the basis of annual secondary data accessed as the World Development Indicators (WDI) of the World Bank. The descriptive statistics, unit root tests and ARDL bounds cointegration method were used in the analysis. Findings: The findings show that exchange rate regimes and financial sector stability in Nigeria have a stable long-run relationship. Short-term, exchange rate fluctuations have a destabilising impact on the financial sector, which is a credit and balance sheet risk caused by currencies. Macroeconomic instability is seen in inflation and real exchange rate fluctuation due to their mixed and short-lived effects. In the long-term the existence of a persistent depreciated exchange rate will seriously weaken the stability of the financial sector, whereas the presence of foreign reserves will have a high and positive stabilising effect because of improving liquidity and confidence. Over the long-run, inflation is meaningless. Implications/Originality/Value: The paper has concluded that proper management of the exchange rates, continued accumulation of the foreign reserves, enhanced structures of banking risk management, and better coordination of macroeconomic policies all forms a resilience in the financial sector and long term stability.