EFFECT OF FINANCIAL STABILITY ON ECONOMIC GROWTH IN NIGERIA

ABSTRACT This study investigated the effect of financial stability indicators on economic growth in Nigeria from 2015 to 2024. The study specifically examined how Non-Performing Loans, Capital Adequacy Ratio, and Liquidity Ratio influenced economic performance, measured by real Gross Domestic Product. Secondary annual data were obtained from the Central Bank of Nigeria, National Bureau of Statistics, and World Bank databases. The data were analyzed using descriptive statistics, trend analysis, and Spearman rank correlation to evaluate the strength and direction of relationships among the variables. The descriptive results revealed that Nigeria’s economic growth fluctuated considerably during the decade, with periods of contraction in 2016 and 2020 coinciding with rising levels of non-performing loans. The correlation results showed a strong and statistically significant negative relationship between Non Performing Loan and Gross Domestic Product, implying that increased loan defaults reduce banks’ lending capacity and dampen economic expansion. Liquidity Ratio exhibited a positive but statistically insignificant association with Gross Domestic Product, suggesting that liquidity supports stability but does not directly drive growth. Capital Adequacy Ratio also showed a negative and insignificant relationship with Gross Domestic Product, indicating that higher capitalization ensures resilience but does not automatically stimulate output growth. The study concludes that credit quality plays a more decisive role in shaping Nigeria’s economic performance than liquidity or capitalization. It recommends strengthening credit risk management, optimizing liquidity utilization, and aligning capital regulation with productive lending to enhance the banking sector’s contribution to sustainable economic growth.