Examining the Effects of Sectoral Credit on Liquidity of Banking Sector in Nigeria

Abstract

The study examined the effect of sectoral credit allocations (agricultural, manufacturing, and SME) on the liquidity stability of Nigeria’s banking sector, a dimension often overshadowed by profitability and capital adequacy studies. Using quarterly times series data for a period of 24 years, (from 2000Q1–2023Q4) obtained from the Central Bank of Nigeria and World Bank Development Indicators, the study applied the Fully Modified Ordinary Least Squares (FMOLS) method with supporting cointegration and error correction models. Findings revealed a long-run relationship between sectoral credit distribution and liquidity, where manufacturing credit significantly enhanced liquidity stability, reflecting its relatively predictable cash flows and lower default risks. In contrast, small and medium-sized enterprise (SME) credit exerts a negative impact, highlighting its vulnerability to defaults and financing constraints, while agricultural credit shows no significant effect. These results suggest that uniform credit expansion policies may undermine systemic resilience. The study therefore recommended sector-sensitive credit frameworks, including risk-sharing schemes for agriculture, credit guarantees for SMEs, and targeted incentives for manufacturing, which is believed are vital for safeguarding liquidity, depositor confidence, and long-term banking sector stability