IMPACT OF FINANCIAL SECTOR DIVERSIFICATION ON FINANCIAL STABILITY IN NIGERIA

Abstract

The financial system serves as a core component of the entire economic system as it plays strategic role in facilitating capital accumulation, resource allocation and other financial intermediation roles to easily influence the direction of flow of available resources. The study established the impact of financial sector diversification on financial system stability in Nigeria using aggregate or pooled, time series data. Aggregate financial stability index (AFSI) was developed to represent financial stability. This study used secondary data covering the period 1989 to 2017. The period experienced some financial instability which necessitated several reforms measures to stabilize the system. The data used were captured by the Central Bank of Nigeria (CBN), the National Bureau of Statistics (NBS), the National Insurance Commission (NAICOM), the National Pension Commission (PenCom), the Securities and Exchange Commission (SEC) and the Nigerian Stock Exchange (NSE). Ordinary Least Square (OLS) technique was used to estimate the research model using Econometric Views (EViews 8.0) software. The study found that financial sector diversification (ratio of bank assets to total financial assets) had statistically non-significant impact on financial system stability in Nigeria during the period examined. The study recommended that policy makers should watch the relative composition and diversification of the financial sector as a parameter for assessing the direction of financial stability in Nigeria.