Issue #4 (Volume 14 2019)
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ReleasedDecember 27, 2019
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Articles19
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65 Authors
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95 Tables
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28 Figures
- bank
- bank efficiency
- banking sector
- bank performance
- banks
- bitcoin
- bubble
- capital adequacy ratio
- central bank
- central bank policy
- connectivity
- conventional banks
- conventional currencies
- cost of intermediation
- counteracting money laundering
- crises
- cryptocurrencies
- currency
- customers
- customers’ happiness
- customers’ satisfaction
- developing country
- digital currencies
- discretionary loan loss provision
- domestic inflation
- duration dependence test
- earning per share
- earnings
- economic growth
- environmental
- external inflation
- FATF international standards
- financial inclusion
- financial performance
- financial service sector
- financing
- financing strategy
- financing to deposit ratio (FDR)
- funding
- good corporate governance
- graph theory
- income smoothing
- independent board of commissioners
- Indian banks
- inflation
- inflation dynamics
- inflation targeting
- insurance companies
- Intellectual Capital (IC)
- internal processes
- international payments
- Islamic bank
- Islamic bank performance
- Islamic banks
- leverage
- liquidity determinants
- loss given default
- monetary policy
- money laundering
- Nigeria
- non-performing financing
- non-performing financing (NPF)
- operational calculations
- operational efficiency ratio (OER)
- ownership structure
- panel data regression
- policy-led sustainability
- price stability
- probability of default
- profitability
- ratios
- regulation
- return on assets
- Return on Assets (ROA)
- return on assets (ROA)
- Return on Equity (ROE)
- risk-oriented approach
- Saudi Arabia
- service quality
- Sharia-compliant banks
- sharia banking
- Sharia bank marketing
- sharia compliance
- sharia financing
- sharia supervisory board
- size
- social and governance (ESG) risks
- stability
- stepwise regression
- tax evasion
- TOPSIS
- transparency
- Turkish banks
- UkrSibbank
- Value Added Intellectual Coefficient (VAIC)
- virtual currencies
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Intellectual capital and financial performance of Sharia-compliant banks in Saudi Arabia
The current study is aimed at analyzing the impact of intellectual capital on the performance of Sharia-compliant banks in Saudi Arabia for the period 2013–2018. The intellectual capital efficiency has been measured by applying a widely-used proxy to intellectual capital, i.e., Value Added Intellectual Coefficient (VAIC). A multiple linear regression method, based on panel data using the pooled Ordinary Least Squares (OLS), was exerted. Regression equations were obtained to determine the impact of VAIC and its components (Human Capital Efficiency (HCE), Structural Capital Efficiency (SCE), and Capital Employed Efficiency (CEE)) on the financial performance of banks, designated as Return on Assets (ROA) and Return on Equity (ROE). The study has found out that VAIC has a statistically significant impact on the financial performance of Sharia-compliant banks in Saudi Arabia. But VAIC components fail to have a significant impact on ROE. However, these components significantly affect ROA. The study concludes that Sharia-compliant banks in the Kingdom of Saudi Arabia should pay particular attention to Intellectual Capital (IC) in general and Human Capital (HC), Structural Capital (SC), and Employed Capital (EC) in particular to increase Return on Assets and financial performance as a whole.
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Financial stability management in banks: strategy maps
Borys Samorodov , Galyna Azarenkova , Olena Golovko , Kateryna Oryekhova , Maksym Babenko doi: http://dx.doi.org/10.21511/bbs.14(4).2019.02Banks and Bank Systems Volume 14, 2019 Issue #4 pp. 10-21
Views: 1186 Downloads: 201 TO CITE АНОТАЦІЯTo prevent crises in the economy, it is necessary to ensure the financial stability of banks, which is one of the main tasks facing the banking system.
The purpose of this article is to develop tools for improving the efficiency of financial stability management in a bank based on strategy maps.
Using UkrSibbank (Ukraine) as an example, two strategy maps are developed: a general management map and a local map – for the international payments division of the operational payments department. Structural elements of the designed strategy maps are: finances, clients, internal processes, training and development.
Implementing the developed general strategy map in the bank’s practical activities involves the following measures: increasing financial stability; avoiding credit risk and optimizing the credit process; increase in profit; cost reduction; introducing new banking products; increase in the number of satisfied consumers; involvement and retention strategic clients.
The developed strategy map for the international payments division of the operational payments department provides for the following measures: ensuring sufficient liquidity level of the bank’s balance sheet; introducing an effective system of analysis of origin of individuals’ and legal entities’ funds; direct correlation between employees of the international payments division and bank customers; timely informing customers regarding requirements updated. -
Transformation of the Ukrainian banking system regulation: a new horizon of compliance with the international framework
Banks and Bank Systems Volume 14, 2019 Issue #4 pp. 22-33
Views: 747 Downloads: 180 TO CITE АНОТАЦІЯThis article discusses the latest methodological recommendations of the Basel Committee on Banking Supervision developed in response to the effects of the global financial crisis and known as Basel III. The purpose of the study is to explore scientific approaches to justifying bank regulation as a key condition for overcoming the economic crisis and improving financial sustainability. The object of research is Basel III instruments that will be implemented in the bank regulatory policy of Ukraine. The systematic approach and systemic thinking used in the article allow one to substantiate the expediency of Ukrainian banking institutions’ governance based on the risk-oriented approach and to determine the strategy of bank supervision for the next 1-3 years. The study evaluates the results of stress testing of the largest banks in Ukraine. Thus, the results confirm that the banking sector in Ukraine is sufficiently capitalized in the absence of macroeconomic shocks, but in case of a crisis, some of these banks are not protected. Therefore, the article formulates recommendations for improving the regulation of these banks, the phased implementation of Basel III, the application of new principles, standards, tools and methods, corporate governance and risk management in Ukrainian banks.
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The impact of discretionary loan loss provision of sharia financing on financial performance
Banks and Bank Systems Volume 14, 2019 Issue #4 pp. 34-41
Views: 1002 Downloads: 239 TO CITE АНОТАЦІЯThis study aims to investigate the role of discretionary loan loss provision of sharia financing on the Islamic commercial banks’ financial performance in Indonesia. Partial Least Squares-Structural Equation modeling (PLS-SEM) is used to examine the relationship between loan loss provisions and financial performance in 13 Islamic commercial banks for 4.5 years. The analysis of the outer model shows that the probability of default and loss given default are determinants of loan loss provision, while financial performance is determined by return on assets, non-performing financing, net operating margin, and operating costs on operating income. The results of this study indicate that loan loss provisions have a direct effect on financial performance. Further investigation shows that the return on sharia financing contributes to increasing the impact of loan loss provisions on financial performance (indirect influence). The findings contribute to the literature by showing that discretionary loan loss provision can occur in sharia financing. The study is very important in terms of awareness of management behavior related to financial performance. The study has implications for management policies related to the prerequisites of potential clients.
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Determining the level of bank connectivity for combating money laundering, terrorist financing and proliferation of weapons of mass destruction
Nataliya Vnukova , Sergii Kavun , Oleh Kolodiziev , Svіtlana Achkasova , Daria Hontar doi: http://dx.doi.org/10.21511/bbs.14(4).2019.05Banks and Bank Systems Volume 14, 2019 Issue #4 pp. 42-54
Views: 958 Downloads: 126 TO CITE АНОТАЦІЯThe study aims at developing an approach to determining the bank connectivity level. This will contribute to implementing a risk-oriented approach to counteracting money laundering, terrorist financing and the proliferation of mass destruction weapons. The article proposes to assess the degree of bank connectivity and determine the impact of these circumstances on money laundering risk using banks from foreign banking groups, whose capital share in the Ukrainian banking system amounts to more than 40 percent. Using the resulting correlation dependencies, two-dimensional binary matrices were constructed, which became the basis for creating graphs of links between banks. The institutions under study are found to be predominantly connected in terms of their sets (varieties), since the average proportion of banks with close direct links is over half, and the non-connectivity coefficient for them is about 40%. Each surveyed bank, on average, has direct links with eight other banks and inverse links with four other banks. Considering banks as tops of the graph, one can assume that there is a hidden relationship between some banks. This approach allows calculating all existing relationships between banks to assess risk. Transforming the graph from non-oriented to oriented made it possible to identify and clearly demonstrate possible directions of links between the investigated financial institutions, which should be further verified to determine the risk of money laundering, terrorist financing, etc.
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A comparative study of Indonesian and Malaysian Islamic banks
Mochammad Chabachib , Anafil Windriya , Robiyanto , Hersugondo Hersugondo doi: http://dx.doi.org/10.21511/bbs.14(4).2019.06Banks and Bank Systems Volume 14, 2019 Issue #4 pp. 55-68
Views: 1296 Downloads: 150 TO CITE АНОТАЦІЯThe aim of this study is to analyze the influence of the non-performing financing (NPF), financing to deposit ratio (FDR), operational efficiency ratio (OER), and firm size (SIZE) on return on assets (ROA). The object of the research is the Islamic bank in Indonesia and the Islamic bank in Malaysia for the period of 2010–2015. Another aim of this research is to determine if there are differences in the impact of FDR, NPF, OER and firm size on ROA between the Islamic bank in Indonesia and the Islamic bank in Malaysia. The findings show that not all studied independent variables affect the ROA of the Indonesian Islamic Bank and the Malaysian Islamic bank. OER has a negative and significant effect on the Indonesian Islamic Bank’s ROA, while FDR and size have a positive and significant influence on the Indonesian Islamic Bank’s ROA. In the Islamic bank of Malaysia, NPF affects ROA positively, while OER affects ROA negatively. In the Indonesian Islamic bank, independent variables that influence ROA are FDR, OER, and SIZE. In Malaysian Islamic bank, only OER influences ROA significantly. Based on the Chow test, one can conclude that there is a significant difference between the Indonesian Islamic bank and the Malaysian Islamic bank. Regarding operational costs, banks should pay more attention to validation of the costs to be incurred, so there is no need to spend unnecessary costs.
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The role of the sharia banking service quality in creating customers’ satisfaction and happiness (a survey of state-owned sharia banks in Indonesia)
Edy Sulistiyawan , Ubud Salim , Ainur Rofiq , Rofiaty doi: http://dx.doi.org/10.21511/bbs.14(4).2019.07Banks and Bank Systems Volume 14, 2019 Issue #4 pp. 69-77
Views: 970 Downloads: 221 TO CITE АНОТАЦІЯThe study aims to explore the effect of the quality of state-owned sharia banks’ services on consumers’ satisfaction and happiness. It contributes to knowledge of marketing management theory and management practices. The expected final effect is that the right quality of customers` service practice can increase customers’ satisfaction and happiness in the Islamic context. The study uses quantitative approach. It relies on primary data obtained from questionnaire results and secondary data in the form of information from state-owned sharia banks including Bank BRI Syariah, Bank BNI Syariah and Bank Syariah Mandiri. The study considers PLS-SEM as the right tool for data analysis. The findings of the study are as follows: 1) only two of seven dimensions of service quality that significantly affect consumers’ satisfaction, are the Islamic Service System and the Responsiveness System, while the remaining effects come from other hypotheses not included in the model; 2) consumers’ satisfaction has a significant effect on consumers` happiness, and the remaining effects come from other concepts that are worth exploring.
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Factors affecting the liquidity of commercial banks in India: a longitudinal analysis
Banks and Bank Systems Volume 14, 2019 Issue #4 pp. 78-88
Views: 5158 Downloads: 1437 TO CITE АНОТАЦІЯThis paper examines the long-term effect of various regulatory, bank-specific and macroeconomic factors on the determination of liquidity in Indian banks. For this purpose, the study uses a random effect panel data regression model and tests it with data on Indian banks for 21 years, covering the period from 1996 to 2016. The model considers the effect of regulatory factors, cash reserve ratio, and statutory liquidity, and incorporates four different liquidity ratios specific to the Indian banking scenario. The results of the analysis show contrasting relationships between the independent variables and the dependent variables measured by four liquidity ratios.
It is interesting to note that Indian banks rely more on asset-based liquidity and less on liability-based liquidity. More specifically, the most important liquidity ratio of L1 (liquid assets to total assets ratio) showed a significant relationship with macroeconomic variables of discount rates, call rates, foreign exchange reserve, exchange rate with US dollar, consumer price index and gross domestic product. L1 also showed a significant relationship with bank-specific variables of capital to total assets and bank size. However, the regulatory factors of cash reserve ratio and profitability determined by return on equity (ROE) and non-performing assets were not found to have any effect on liquidity of Indian banks. -
The policy-led sustainability and financial performance linkage in the banking sector: case of Bangladesh
Samiul Parvez Ahmed , Sarwar Uddin Ahmed , Mohammad Fahad Noor , Zaima Ahmed , Uttam Karmaker doi: http://dx.doi.org/10.21511/bbs.14(4).2019.09Banks and Bank Systems Volume 14, 2019 Issue #4 pp. 89-103
Views: 1175 Downloads: 168 TO CITE АНОТАЦІЯResearchers in developed countries argue that banks should be free to decide about their sustainability initiatives without the interference from regulators. However, researchers in developing countries tend to think differently. This study aimed to focus on this argument by examining the linkage between sustainability and financial performance (SFP) aided through regulatory policy guidelines. In doing so, a comparative study was conducted between 2012 and 2018 to compare the pre- and post-status of SFP due to implementation of policy measures. Environmental, social and governance (ESG) scores were calculated and related with financial performance (return on assets) through regression analysis. The sample data includes 30 private commercial banks (PCBs) in Bangladesh. The analysis of the data shows that during these years, the overall sustainability performance, i.e., environmental, social and governance scores of the banks increased by 33 percent. However, the transformation of this performance into better financial performance could not been established even when age and size were taken into account. The current turbulent state of the banking sector due to growing non-performing loan has been identified as the single most influential factor for this neutral result. Research findings suggest that policy guideline initiatives do have a positive impact on bank sustainability. However, exogenous factors, such as political interference, may appease, deviate and prolong its impact on financial performance. This work will enhance the understanding of academics and policy-makers about the feasibility and impact of the policy-led sustainability model in the banking sector, particularly in developing countries.
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The effect of Al-Bai’ and wadiah contracts on sharia compliance and the sharia banking system performance through the Maqashid Index in sharia banks in Indonesia
Wahyuniati Hamid , Ubud Salim , Djumahir , Siti Aisjah doi: http://dx.doi.org/10.21511/bbs.14(4).2019.10Banks and Bank Systems Volume 14, 2019 Issue #4 pp. 104-113
Views: 1008 Downloads: 919 TO CITE АНОТАЦІЯThis study sought to test and find empirical evidence on the effect of Al-Bai’ and wadiah contracts on sharia compliance and the performance of sharia banking system through the Maqashid sharia index. The study employed the explanatory research design, aimed at explaining a causal relationship among variables using a quantitative approach. The Partial Least Square (PLS) model was used as the analysis method to answer the hypotheses of this study. The authors found out that increases and decreases in wadiah contracts did not influence the financial performance of sharia banks. Another finding also showed that Al-Bai’ and wadiah contracts and sharia compliance had a significant effect on the performance of public sharia banks. This result evidenced that the concept of an Islamic bank should be a mediator, which should neither allow profiting from the fund, nor should be used to invest in the real sector of various funding systems.
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Applying a two-stage TOPSIS approach and stepwise regression in evaluating bank performance: evidence from Turkish banks
Banks and Bank Systems Volume 14, 2019 Issue #4 pp. 114-125
Views: 1089 Downloads: 145 TO CITE АНОТАЦІЯAs a crucial component of the financial sector, banks play an intermediary role in creating and providing financial services to customers. Therefore, the evaluation of banking sector activity is important for stakeholders and managers. This paper investigates the key criteria in analyzing bank performance and efficiency and the relative performance of Turkish banks in terms of the pre-determined criteria during 2008–2018. This study aims to introduce a robust and easy-to-calculate mathematical model for estimating bank performance using stepwise regression and TOPSIS methods. The TOPSIS ranking of banks from the best to the worst allows establishing that the bank with the highest mean score is Akbank (AB), while Ziraat Bank (ZB) and Garanti Bank (GB) follow AB over the period. The results of the stepwise regression analysis show that managing non-performing loans and expenses (both personnel and interest expenses) are critical to high performance in the banking sector.
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Income smoothing in banks and insurance companies and its impact on earnings per share – evidence from Jordan
Banks and Bank Systems Volume 14, 2019 Issue #4 pp. 126-132
Views: 925 Downloads: 278 TO CITE АНОТАЦІЯThis study aims to determine the existence of practices of income smoothing in banks and insurance companies in Jordan. Also, it focuses the to determining the impact of the income smoothing on earning per share (EPS). The study covered all the companies in the study population, which are 38 companies – 15 banks and 23 insurance companies listed on the Amman Stock Exchange (ASE). The results show that income smoothing is practiced by Jordanian banks and insurance companies. The number (and percentage) of insurance companies that practiced income smoothing is greater than the number of banks: 34.8% of insurance companies and 20% of banks practiced income smoothing. The results also clearly indicate that financial institutions, which practice smoothing, have a higher EPS compared to those that do not practice income smoothing; this also indicates that the most important goal of using income smoothing is to maintain a positive earnings level.
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The study of bubbles in bitcoin behavior
Usama Adnan Fendi , Asem Tahtamouni , Yaser Jalghoum , Suleiman Jamal Mohammad doi: http://dx.doi.org/10.21511/bbs.14(4).2019.13Banks and Bank Systems Volume 14, 2019 Issue #4 pp. 133-142
Views: 1110 Downloads: 508 TO CITE АНОТАЦІЯBitcoin is an online communication system that facilitates the use of virtual currency, including electronic payments. This paper aims at analyzing the behavior of Bitcoin returns as a proposal for future currencies while making a comparison between Bitcoin and other conventional currencies.
This paper uses quantitative approach to analyze the time series of Bitcoin and that of other conventional currencies during the period 2010–2018. It uses 1) a descriptive statistics for the weekly returns for Bitcoin which includes the mean, standard deviation, maximum value, minimum value, skewness, kurtosis, and Jarque-Bera normal distribution test statistics, and 2) duration dependence test on Bitcoin weekly returns by extracting the weekly returns for the Bitcoin that behave in irregular way of the general Bitcoin return level through autocorrelation regression, and taking the residuals for this regression as a time series for irregular returns.
This paper has confirmed no empirical evidence for the existence of a speculative bubble in the Bitcoin values and returns. In addressing the question of whether Bitcoin can act as a reliable substitute for conventional currencies, the returns based analysis shows a huge difference between the behavior of Bitcoin returns from conventional currency returns when comparing both aspects of level and stability. The paper concluded that bitcoin is more an investment than a currency.
This paper represents a significant contribution in the path of financial economics and financial risk management, and represents a contribution to the stability of the financial system around the world and mitigating financial crises. -
The determinants of Islamic governance disclosure: the case of Indonesian Islamic banks
Ahmad Nurkhin , Agus Wahyudin , Hasan Mukhibad , Fachrurrozie , Satsya Yoga Baswara doi: http://dx.doi.org/10.21511/bbs.14(4).2019.14Banks and Bank Systems Volume 14, 2019 Issue #4 pp. 143-152
Views: 829 Downloads: 142 TO CITE АНОТАЦІЯThis paper aims to examine the determinants of Islamic Governance Disclosure (IGD) in Islamic banks in Indonesia. The research method used is a quantitative approach involving Islamic commercial banks in Indonesia, where their annual reports can be accessed during the 2011–2018 observation period. The data collection methods used are analysis of documentation and content analysis. Content analysis was used to calculate the IGD index. Path analysis with WarpPLS software was used to analyze data. The results show that the number of members of the Sharia supervisory board had a negative and significant effect on IGD, while leverage, size, and age can influence the IGD positively and significantly. In addition, institutional ownership has a negative and significant effect on IGD. Profitability and composition of the independent board of commissioners do not significantly affect the IGD.
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Macroeconomic effects of inflation targeting in advanced and emerging market economies
Igor Chugunov , Mykola Pasichnyi , Anton Nepytaliuk doi: http://dx.doi.org/10.21511/bbs.14(4).2019.15Banks and Bank Systems Volume 14, 2019 Issue #4 pp. 153-165
Views: 917 Downloads: 181 TO CITE АНОТАЦІЯThe article assessed the treatment effects of targeting inflation regime on the real output and consumer inflation persistence in both advanced and emerging market economies. An empirical analysis is based on data from 35 OECD and 40 emerging countries and covers inflation and non-inflation targets over the period 1990–2017. The results showed that inflation targeting (henceforth – IT) had no significant impact on the GDP per capita growth rate but slightly reduced the output volatility. This study founded out that full-fledged IT had the effect of slowing down consumer inflation and reducing its volatility. Moreover, in the OECD countries, the monetary framework had certain advantages during the Great Recession. The authors argued that in order to maintain price stability in emerging economies, a high level of central bank independence and accountability is required.
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Promoting full-fledged electronic money in South Asia: evidence from Bangladesh
Mohammad Saiful Islam , Md. Foysal Hasan , Md. Mashiur Rahman , Dr. Md. Azizul Baten , Mohammad Ziaul Islam doi: http://dx.doi.org/10.21511/bbs.14(4).2019.16Banks and Bank Systems Volume 14, 2019 Issue #4 pp. 166-182
Views: 999 Downloads: 306 TO CITE АНОТАЦІЯThe study aims to develop several models for instigating full-fledged electronic money and to study prospects and challenges in the digitization process in the context of South Asian countries such as Bangladesh. Besides, the economic effect of full digitization of currency was analyzed considering its impact on vital economic indicators. Regression analysis, factor analysis and structural equation modeling were used to analyze data. The study suggests some models within the existing financial framework to support the process of instigating and implementing full-fledged electronic money in Bangladesh. The research defines a full-fledged e-money mechanism as a consumption-driven, production-oriented, creditworthy, cost-effective, prompt, technologically based inclusive payment system, as a prospect of full-fledged e-money. Besides, the requirement of an advanced technological infrastructure having secured and user-friendly software with high-speed internet services is identified as a major challenge to full-fledged e-money. The study also found out that a revolutionary change in GDP growth rate and inflation rate will occur through this mechanism.
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Corporate governance and financial performance in Islamic banks: the role of the sharia supervisory board in multiple-layer management
Darwanto , Anis Chariri doi: http://dx.doi.org/10.21511/bbs.14(4).2019.17Banks and Bank Systems Volume 14, 2019 Issue #4 pp. 183-191
Views: 2128 Downloads: 373 TO CITE АНОТАЦІЯThis study aims to investigate the impact of Good Corporate Governance (GCG) on the financial performance of sharia banking. GCG is measured by the Board of Commissioners Performance, the Board of Commissioners Composition, the Number of Audit Committees, the Board of Directors, and the Sharia Supervisory Board Performance, whereas financial performance is proxied by Return on Assets, financing risk (Non-Performing Financing), and capital (Capital Adequacy Ratio). Sharia commercial banks registered by Bank Indonesia made the sample of this study. Annual reports and GCG reports of sharia commercial banks from 2014 to 2017 are used as a data source. The study uses a panel data regression approach to analyze the data; some interesting results have been obtained. The Sharia board positively affected financial performance of Islamic banks in terms of return on assets and capital adequacy ratio, and negatively as to non-performing financing. Similarly, the board of directors had a significant impact on the financial performance of Islamic banks in the same direction as the sharia supervisory board in terms of the three components. Meanwhile, the board of commissioners had a significant and positive impact only on the return on assets of Islamic banks in Indonesia.
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Financial performance of conventional and Islamic banks in Bahrain: a comparative study
Sayel Ramadhan , Mohammad Selim , Ahmad Sahwan doi: http://dx.doi.org/10.21511/bbs.14(4).2019.18Banks and Bank Systems Volume 14, 2019 Issue #4 pp. 192-205
Views: 1301 Downloads: 286 TO CITE АНОТАЦІЯThe main purpose of this study is to identify the variables that influence the financial performance of both types of banks, Islamic and conventional, and compare their financial performance over the period of 2003–2016. Banks listed on the Bahrain Bourse as of December 31, 2016 were used in the study, with a total of seven banks, of which three are Islamic and four are conventional. To make an appropriate comparative study, financial ratio analysis is used. Multiple regression and paired sample t-test are used to analyze the data. Return on assets (ROA) and return on equity (ROE) are considered as the basis for measuring financial performance and are set as dependent variables. The analysis of the results shows that conventional banks perform better than Islamic banks in terms of profitability. The results also show that ROA is significantly related to risk, cost of intermediation and efficiency ratios, while ROE is highly influenced by risk ratios only. Moreover, it was found out that the relationship between asset size and the performance of banks is insignificant, while the relationship between the number of branches and both ROA and ROE is significant.
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Internal and external drivers of inflation in Nigeria
Ngozi Adeleye , Adeyemi A. Ogundipe , Oluwatomisin Ogundipe , Ifeoluwa Ogunrinola , Oluwasogo Adediran doi: http://dx.doi.org/10.21511/bbs.14(4).2019.19Banks and Bank Systems Volume 14, 2019 Issue #4 pp. 206-218
Views: 663 Downloads: 213 TO CITE АНОТАЦІЯThis study contributes to the literature on inflation dynamics by examining whether internal or external factors drive inflationary pressure in Nigeria. Using the annual time series data from 1981 to 2017 and applying Johansen cointegration analysis, the vector error correction mechanism and the impulse response function, the study reveals some compelling evidence to suggest that external forces are responsible for inflationary pressure in Nigeria. The results, amongst others, reveal that: external drivers – exchange rate, imported inflation and openness – induce a positive and direct relation to inflation. This is because a percentage change in these variables results in an increase in inflation of 0.49%, 0.47% and 4.28%, respectively, on average, ceteris paribus; the internal drivers – government expenditures, net food exports and lending interest rate – dampen inflation by 0.48%, 1.70% and 0.02%, respectively, on average, ceteris paribus; there is evidence of cointegration indicating that 57.48% of short-run errors will be corrected in the long run; imported inflation contributes to a deviation of about 33% deviation in the first five periods and accounts for cumulative average of over 100% deviation in inflation. Policy implications are discussed.