INFORMATION ASYMMETRY AND THE EFFICIENCY OF BANK LENDING IN NIGERIA

Abstract

The efficiency of commercial bank lending decision often depends on the quality of information with which the loan consideration is made. Information asymmetry inhibits banks from accurately predicting the quality of borrowers and the suitability of projects during funding considerations. In Nigeria’s bank lending situation, lopsidedness in information possession has manifested in high incidence of credit risks and financial market disequilibrium. Existing studies on the implications of information asymmetry have focused on stock market price predictions but not on bank lending efficiency. This study, therefore, investigated the impact of the unequal possession of information on the efficiency of bank lending in Nigeria. The theory of relationship banking as proposed by Boot (2000) provided the framework for this study. A combination of Chiappori-Salanie test statistics (W) and probit models was used. The Chiappori-Salanie statistics tested for the presence of information asymmetry while the probit model was used to examine the impact of the default variables on lending efficiency. Two hundred and ten borrowers from fifteen commercial banks across twelve states in Nigeria were covered in the survey using structured questionnaires. The states were selected based on banks’ concentration and accessibility of the target group. At least, one old generation bank was sampled in all states selected. Borrowers were categorised into four groups of the lowest (below N500,000), low (between N500,001 and N2,000,000), high (between N2,000,001 and N5,000,000) and highest sized borrowers (above N5,000,000). Information asymmetry was prominent for the lowest sized borrowers (W=181.75) and the high sized borrowers (W=146.69). This was followed by the highest sized borrowers (W=113.08), while the low sized borrowers had the lowest (W=103.08). 59 percent of the total loans examined were repaid. Thirty-four percent of the borrowers diverted some part of the loans without the knowledge of the banks. Borrowers who diverted up to 30 percent from the intended purpose of the loans had 56.5 percent likelihood of default. Default likelihood was positively related with the loan sizes in all of the loan categories. Collateral requirement was inversely related with default likelihood and increased the possibility of repayment by 23.5%. Increase in lending rate was likely to increase default risk by 10.9%. Loans with longer duration of repayment were more likely to default. The banks and borrowers earned 50% and 33% returns respectively in the loans considered, while the remaining (17%) reflected the efficiency loss arising from information asymmetry. Information asymmetry contributed to the inefficiency in banks’ lending activities in Nigeria. It is important that financial and monetary authorities work together to reduce information asymmetry problems.

Keywords: Information asymmetry, Lending efficiency, Loan consideration, Chiappori-Salanie test statistics, Nigerian commercial banks Word count: 419