







































Asian Themes in Social Sciences Research 
ISSN: 2578-5516 

Vol. 1, No. 2, pp. 60-75 
2018 

DOI: 10.33094/journal.139.2018.12.60.75 
© 2018 by the authors; licensee Online Academic Press, USA 

60 
© 2018 by the authors; licensee Online Academic Press, USA 

  
 

 
 
 

Banking Sector Operations and Foreign Direct Investment in 
Nigeria: A Causality Analysis 
 
 
 

Patrick Kanayo Adigwe1 --- Celestine Sunday Okaro2 --- Ikenna Justin Emejulu3 --- 
Amalachukwu Chijindu Ananwude4* 

 

1,2,3,4Department of Banking and Finance, Nnamdi Azikiwe University, Anambra State, PMB 5025, Awka, 
Nigeria 

 
 

 
 

Abstract 

This study examined the causality relationship between banking sector operations in Nigeria 
and foreign direct investment from 1997 to 2015. The causal relationship between Foreign 
Direct Investment (FDI) and banking sector development in Nigeria is not clear yet, while 
there abounds empirical and theoretical studies on the nexus between foreign direct investment 

and economy in general, considerable attempts has not been made on the causality relationship 
between and banking operations in Nigeria. Specifically, this study ascertained the causal 
relationship between banking sector deposits, loans and advances, foreign exchange 
transactions, domiciliary operations, international banking operations and foreign direct 
investment. To achieve these objectives, this study employed Ordinary Least Square (OLS) 
econometric technique, Auto Regressive Distributive Lag (ARDL) bound test and granger 
causality test among others. Secondary data were collected from Central Bank of Nigeria 
statistical bulletin of 2015. The result indicated significant causal bidirectional relationship 

between banking sector deposits, foreign exchange transactions and foreign direct investments; 
a significant unidirectional causal relationship between domiciliary operations and foreign 
direct investment, while no significant causal relationship existed between loans and advances, 
international banking operations and foreign direct investment. The study recommends that 
banking sector should adopt completely smart banking as this evidences low risk, reliability 
and stability of the banking sector which is essential for inflow of foreign direct investments. 
Central Bank of Nigeria should cautiously focus on tackling monetary policy variables such 
monetary policy rate, cash reserve ratio and loan portfolio which a capable of attracting 
investors from abroad. 
 
 

Keywords: Banking operation, Foreign direct investment. 
Licensed:  This work is licensed under a Creative Commons Attribution 4.0 License.  

 
 
1. Introduction 

Financial sector foreign direct investments, a relatively new phenomenon, typically takes the form of 
banks in industrialized countries establishing branches and facilities in developing countries (Goldberg, 2007). 
The Nigeria law allows inflow of foreign direct investments in the banking sector. Foreign investors or 
foreign banks are permitted to operate in Nigeria provided they meet the minimum capital requirements and 
Central Bank of Nigeria regulation in addition to other laws allowing foreign investment in Nigeria. 
According to the Central Bank of Nigeria Policy on foreign banks’ participation in the Nigerian banking 
system, foreign individuals or institutional investors could also invest in existing Nigerian banks, however, 
there is a condition that no single foreign individual/institutional investor should acquire more than the share 

https://www.doi.org/10.33094/journal.139.2018.12.60.75


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of the single largest Nigerian individual/institutional investor in any bank, provided the aggregate 
shareholding of the foreign investors do not exceed 10% of the total capital of the bank. The policy guidelines 
went further to assert that foreign banks could acquire or merge with a local bank existing in Nigeria but, 
such foreign bank must have operated in Nigeria for at least five years and established branches in at least 2/3 
of states of Nigeria (excluding the state capital), provided the foreign bank/investors’ sha reholding arising 
from the merger/acquisition should not exceed 40% of the total capital of the resultant entity.  

The banking sector is meritoriously controlled by domestic individual compared to foreigners. The 
overwhelming ownership by domestic individuals is a function of the outcome of the indigenization 
programme of 1977 which effectively transferred ownership of banks from foreigners to domestic individuals 
and institutions (Ani, Odo and Okelue, 2012). However, the reforms at different point in time in the financial 
system have attracted foreign banks to operate in Nigeria. The two foreign banks operating in Nigeria are 
Standard Chartered Bank from South Africa and Citi Bank from USA. Standard Chartered Bank and Citi Bank 
started operations in Nigeria in 1999 and 1984 respectively. As at today, Standard Chartered Bank have about 
forty (40) branches in Nigeria while Citi Bank has ten (10) branches. Besides, the presence of foreign banks in 
Nigeria, foreign investors have ownership interest in banks operating in Nigeria. As at 2015, based on banks 
annual reports and accounts, the percentage of foreign shareholding in some banks operating in the country 
were value to be 6.39% for Access Bank Plc, 41.54% for First City Monument Bank, 14.73% for First Bank 
Nigeria Limited, 54.46% for Stanbic IBTC Bank, 38.81% for Sterling Bank and 70.44% for Eco Bank 
Transnational Plc. Diamond Bank, Fidelity Bank, Guaranty Trust Bank, United Bank for Africa, Unity Bank, 
Wema Bank and Zenith Bank has no foreign shareholding. Based on the foregoing, this study is set out to 
examine the causal relationship between banking operations and foreign direct investments in Nigeria’s bank ing 
sector from 1997 to 2015. Specifically, the causal relationship between banking sector deposits, l oans and 
advances, foreign exchange transactions, domiciliary operations, international banking operation and foreign 
direct investments 

We arranged this study as follows: with the introduction of the study in section one, we proceeded to 
explaining the major concepts and reviewed relevant literature in section two. In section three, the 
methodology context was dispelled. Section four discussed the data, sensitivity analysis and regression output 
interpretation, while conclusion drawn from available data was spell out in section five.  
 

2. Review of Related Literature 
2.1. Clarification of Concepts 

2.1.1. Banking Operations 
Banking operations are the legitimate day to day activities carried out by banks such as acceptance of 

deposits, lending of credits, foreign exchanges provision, etc.  Owing to the sensitive nature of the banking 
sector, banking operations are strictly regulated compared to other sectors of the economy. The 
noncompliance to approved operations leads to sanction by the Central Bank of Nigeria- the sole regulator of 
the banking sector, and in some cases, withdrawal of operating license. Banking operation is central to money 
supply mechanism in an economy as it provides the aggregate credit to the domestic economy as well as 
international liquidity through net foreign assets both of which are essential variables of money supply 
(Ngerebo, 2012). The banking sector in Nigeria is one of the major player in the financial system coupled with 
its critical role in financial intermediation process. Virtually all the funds for productive economic activities are 
provided by the deposit money banks. The stock market is just the provider of funds to the privileged few who 
vividly meet requirements for listing. The stock market is completely of the reach of small and medium scale 
enterprises which are dominance players in economic activities in the country. The banking sector provides 

relevant financial services such as deposits, loans and advances, foreign exchange operations, domiciliary 
operations, international banking operations, trusts and information services among others. Notwithstanding 
the dominance of the banking sector over stock market, the financial services penetration to the populace are 
still very low compared to some developing countries in Africa like South Africa and other advances countries 
in the world, due to, but not limited to, changes in government economic policies, inst ability in 
macroeconomic fundamentals, operating environment and monetary policies variations.  

There are a lot of channels through which foreign direct investment affects banking growth sector 
growth, however, this study is limited to five selected fundamental via deposits, loans and advances, foreign 
exchange transactions, domiciliary operations and international banking operations. These fundamentals are 
succinctly discussed below. 
 
2.1.2. Deposits 

Past literatures have laid claim that increase inflow of foreign investment causes upsurge in host country’s 
banking sector deposits as foreign direct investment comes with money. Deposits are total funds of 
individuals, firms, organizations, state and local governments among others in demand, savings, time and 
other types of accounts operated by banks. The deposits of the banking sector has rising over the years owing 
to various reforms in the banking system. The total deposits in the banking sector as at 1981 was N10.7 
billion, however, the end of 2015, it has tremendously risen to N29, 161.98 billion, an indication of stability 



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and reliability of the banking system. With the exception of the financial crisis that hit the economy in 2009 
which depreciated banking sector deposits by 7.80%, the deposits of the banking sector has not witnessed any 
fluctuation. Okeke (2015) reported that Nigerian banks were much healthier and stronger than in the 
tumultuous period of the 2008-09 crisis in Nigeria’s financial sector as customers withdrew their money and 
the banks’ deposit ratios deteriorated. Within the period of the crisis, the Central Bank of Nigeria injected 
funds into some banks discovered to have had huge toxic assets in their balance sheet, and some managing 
directors/CEO were removed and forensic audit of the entire banking sector conducted. 
 
2.1.3. Loans and Advances 

Increased inflow of foreign capital in the banking sector through foreign ownership would in no small 
magnitude increase the loans and advances extended to economy for productive activities which ul timately 
results in growth and development of the economy. Similar to deposits, the loans and advances extended by 
the banking sector to the economy have also witnessed undeniable appreciation. The sectorial allocation of 
loans and advances favours the oil and gas sector to other sectors of the economy. The preference of the oil 
and gas sector is due to the huge nature if their assets and considering the fact that oil is the major source of 
government revenue. In 2015, the total credit to the oil and gas sector was N3, 328.58 billion compared to N1, 
870.56 billion for manufacturing, N498.36 billion for power and energy and N467.63 billion for agriculture. 
To meet with up with growing demand for loan amidst the global financial crisis, the banking sector has to 
borrowed abroad resulting in increase in their foreign liabilities from N100.8 billion in 2007 to N146.2 billion 
in 2010, balances held for other banks outside Nigeria felled to 15.8 billion in 2010 as against N124.0 billion in 
2007. Following the Sanusi reform that prevailed in the banking sector during the global financial meltdown, 
stability has returned in the banking system and the capacity to extend credits to the economy boosted. The 
total credits of the banking sector appreciated to N13, 222.65 billion in 2015 compared to N8, 912.10 billion in 
2009. 
 
2.1.4. Foreign Exchange Transactions 

It is the conversion of a country’s currency to another for the purpose of transaction executed by the 
banking sector over a specified period of time. Foreign exchange transactions operations of the banks is the 
facilitator of international trade between Nigeria and the outside world as it involves the sales and purchase of 
foreign exchange. As international competitiveness increases, the demand and supply for foreign exchange 
also increases in the same magnitude, and this increases the volume of foreign exchange transaction which also 
translates to increase in the volume of banking sector activities as they remain the major player in foreign 
exchange market (Manyo, Sabina and Ugochukwu, 2016). The proper documentation of foreign exchange 
transactions in Nigeria for the banking sector following series of foreign exchange regimes in Nigeria based 
on Central Bank of Nigeria 2015 report, started in 1997. Since then, the banking sector remains an active 
player in the foreign exchange market. The foreign exchange operations of the banking sector are sectorial 
divided visa viz: imports and invisibles. Imports include foreign exchange services for agricultural, industrial, 
finished goods, transport, personal effects, minerals and oil and gas services while invisibles such as education, 
airlines remittance, estacode, re-insurances and contract services among others are cared for in foreign 
exchange operations of the banks. The imports constitute 68.99% of foreign exchange operations of the 
banking sector while 31.01% are invisibles. 
 
2.1.5. Domiciliary Operations 

Domiciliary accounts are banks accounts in foreign currencies such as British Pound, US dollar, Japanese 
Yen, etc. other than the local currency: Naira for the purpose of international transactions, and maintained by 
individuals, firms, corporate organization, etc. deposits are made in foreign currency and same applies to 
withdrawals. The banking sector operated two types of domiciliary accounts: savings and current domiciliary 
accounts which are equivalent to the savings and current accounts in the local currency. From 1981 till 1993, 
there was no domiciliary account operations in the banking sector. However, in 1993, deposit money banks 
engaged in the financial service of domiciliary account operation. According to the 2015 statistical bulletin of 
the Central Bank of Nigeria, banking sector domiciliary operations was valued at N1.7 billion. Contemporary, 
domiciliary operations have vehemently expanded from a value of N1.7 billion in 1994 to N4, 357.03 billion in 
2015. 
 

2.1.6. International Banking Operations 
International banking operations refer to the banking activities of the banking sector outside Nigeria. Put 

differently, there are banking transaction across national boundaries. The banking sector international 
banking operations cover claims on non-residents banks, balances held with banks, offices and branches, loans 
and advances, bills discounted payable outside Nigeria, treasury bills of foreign governments, attached assets, 
international gold tranche, special drawing rights, regional monetary corporation and other foreign assets. 
The international banking operation of the banking sector was valued at N0.3 billion in 1981 but, this has 
magnificently surged over the years. As at 2015, the international banking operation of the banking sector was 



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summed to worth N1, 735.6 billion. Nigerian banks have expanded operations in some countries in Africa and 
other countries of the world owing to banking reform of 2004 which increased the minimum capital base for 
national regional and international banking. For instance, Access Bank Plc operates in Gambia, Burundi, 
Rwanda, Ghana, London, China and UK among other countries in the globe. The same applies to United Bank 
for Africa Plc, Zenith Bank International Plc, Union Bank Plc, Skye Bank Plc, First Bank Nigeria Limited, 
Guaranty Trust Bank, First City Monument Bank and Diamond Bank. 
 
2.2. Theoretical Buttress 

Many theories have been advanced in connection with foreign direct investments and economic growth as 
it passes through the financial system. Among these theories are Production Cycle Theory , Eclectic Paradigm 
Theory, Internationalization Theory and Theory of Exchange rate on imperfect capital market. However, this 
study discussed briefly two of the theories: Eclectic Paradigm Theory and Endogenous Optimum Currency 
Area Hypothesis due their closeness in explaining banking sector foreign direct investments. This study is 
anchored on the Endogenous Optimum Currency Area Hypothesis because offers the closets reason for foreign 
direct investments in the banking sector. 
 
2.2.1. Eclectic Paradigm Theory 

The Eclectic Paradigm Theory was introduced by John Dunning in 1973 otherwise called the Dunning 
OLI’s theory because it was modelled from the aspects of other theories. Eclectic paradigm theory of foreign 
direct investment centres on three factors via ownership, location and internationalization. In the words of 
Louangrath (2014) if one asks whether all the three factors pass the test in each foreign direct investment case. 
The answer is no; it might be the case that only one factor is caught in the nest, especially in the banking 
sector. The ownership factor implies the intangible assets at the possession of a firm which it can, at its 
discretion, transfer such intangible assets to other firms abroad to earn profit or reduced cost of production 
usually via contract agreement. The aspect of location come to play depending on transnat ional country where 
such intangible assets is highly needed or where the utilization will provide higher returns. However, the 
choice of location may be hindered by macroeconomic environment, infrastructural potency and political 
consideration among others. The third factor: internationalization depends on actualization of the 
assumption/conditions of ownership and location aspects. Internationalization is the various channels 
available to a company to exercise its control from the sale of its goods or serv ices based on the contract 
agreement with other companies.  
 
2.2.2. Endogenous Optimum Currency Area Hypothesis 

According to Mundell who popularised this theory in 1973, barriers to trade lead to increase inflow of 
foreign direct investment. It is also called the capital market theory of foreign direct investment. The 
Endogenous Optimum Currency Area Hypothesis assumed that if there is a trade barrier between countries, 
the ideal option would be to take the bold step and enter the country in focus, then set  up business machineries 
for production and make products or services available for sale. Following Louangrath (2014), Toyota of Japan 
setting up car production plant in US that produces Lexus cars to bypass US barriers on foreign cars 
vehemently fit into the Endogenous Optimum Currency Area Hypothesis of Mundell. The same applies to 
Nissan motors of Japan which also established production plant in the US that produces Infinity cars. Makoni 
(2015) noted that foreign investment in general arose as a result of capital market imperfections. While this 
capital market theory holds true in the case of developed countries such as the United States, United Kingdom 
and Canada, it was challenged by later scholars on the basis of ignoring basic currency risk management  
fundamentals (Makoni, 2015). 
 
2.2.3. Justification for Endogenous Optimum Currency Area Hypothesis as Theoretical Underpin 

The banking sector is one of the most regulated sector in Nigeria compared to other sectors because of 
the critical role of banking operations and the resultant effect on the financial system in general. The strict 
regulation in the banking sector does not only applies to Nigeria but to other countries especially, developing 
economies with the aim of guaranteeing sound, reliable and stable financial system capable mobilizing funds 
needed for growth and development. Foreign direct investment in the banking sector by a single 
foreign/institutional investor is limited 10% of a bank total capital. This restriction on foreign ownership in 
banks have automatically created a barrier to foreign investments in the banking sector compared to, say a 
country like Thailand that allows 49% foreign ownership stake. If any single foreign/institutional investor 
who despite this restriction, acquire an ownership stake of not more than 10%, he/she has indirectly 
fulfilled/abide by postulation of Endogenous Optimum Currency Area Hypothesis which envisaged that trade 
barrier increases the inflow of foreign direct investments in host economy. If this study should anchor on the 
Eclectic Paradigm Theory foreign direct investment by John Dunning based on foreign ownership restriction 
as applicable in the Nigeria banking sector, then the ownership aspect assumption of Eclectic Paradigm 
Theory has failed thus favouring Endogenous Optimum Currency Area Hypothesis as the theoretical basis for 
this study is pursued. 



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2.3. Empirical Review 
Owing to the heavy regulation in the banking sector, empirical studies on foreign direct investments and 

banking sector operations are few and in most scare particularly, for emerging economies as emphasis are 
placed on manufacturing through setting up of industries. However, the few available literatures that closely 
related foreign direct investment in the banking sector were reviewed.  

Tajgardoo, Noormohamadi and Behname (2012) studied the causality relationship between FDI and 
Islamic banking. Panel unit root tests show that the variables are stationary at level. Pedroni test indicates 
that there is not log run relationship between FDI and Islamic banking. Data chosen 9 countries from 
Organization Islamic Conference (OIC) over the period 1995-2010 were used for analysis. The results showed 
that there is a bidirectional relationship between these variables (the feedback relationship). I t means that FDI 
reinforce Islamic banking and Islamic banking attracts foreign direct investment.  

O’Connor, Santos-Arteaga and Tavana (2014) proposed a game-theoretical model for commercial bank 
foreign direct investment strategy, government policy and domestic banking industry interactions in 
emerging market economies and demonstrate the application of this strategy to the banking system. The 
paper develops a game-theoretical model to analyse the optimality of the limiting entry strategy followed by a 
given domestic institutional sector when considering the entry applications of foreign banks in the domestic 
financial system. The paper showed that the progressive liberalization of entry restrictions would define the 
perfect Bayesian equilibria of the subsequent set of continuation games and the respective payoffs derived from 
this liberalization as the domestic economy integrates and competes within the global financial system.  

Tsaurai (2014) investigated if there is a causality relationship between banking sector development and 
FDI inflows in Botswana. Three arguments were raised regarding the relationship between banking sector 
development and FDI inflows into the host country. The first perspective says that banking sector 
development attracts FDI inflows into the host country. The second perspective suggests that there is a 
positive feedback effect between banking sector development and FDI inflows whilst the third perspective 
maintains that there is no direct causality relationship between the two variables. The results from the study 
were consistent with the third perspective that says there is no direct causality relationship between banking 
sector development and FDI net inflows. This confirms that the long run relationship between banking sector 
development and FDI net inflows is an indirect one and the two set of variables affect each other indirectly 
through other factors in Botswana.  

Poelhekke (2014) hypothesized whether global banks facilitate foreign direct investments. Using a new 
detailed data set of outward FDI and exploiting heterogeneity in banking sector deregulation across countries 
and time, the paper found that banks’ direct investment abroad increased the volume of non -financial FDI 
from the same home-market. This effect is stronger in countries where investing is more hazardous, those 
with worse corruption and rule of law. Importantly, they did not find that host -market domestic or third-
country foreign banks facilitate FDI.  

Kim (2013) using data collected from 60 countries for the years 1990-2010 examined the relationship 
between Foreign Direct Investment and a banking crisis in addition to the linkage between a banking crisis 
and domestic investment. The pooled ordinary least squares was used for the first empirical method. The 
lagged investment is done for robustness and the fixed effects is used to check a final robustness. The results 
indicated that banking crisis is highly correlated with domestic investment rate while the lagged value of 
banking crisis does not seem to have any significant impact.  However, the results with fixed effects show that 
the lagged effect of banking crisis has a large impact on investment while the banking crisis variables turn out 
to be not correlated with investment.  For FDI, both the banking crisis and the lagged value of banking crisis 
do not show any significance in all specifications. 

Onyekwena (2012) investigated the impact of Foreign Direct Investment on Nigerian manufacturing 
firms and banks. Unique data obtained from a survey of Nigerian firms conducted by the Centre for the Study 
of African Economies, University of Oxford, and United Nations Industrial Development Organization was 
employed for the estimations based on manufacturing firms. For the investigation based on Nigerian banks, 
the study used the BankScope data base. Ordinary Least Squares and Fixed Effects techniques were used to 
estimate the coefficients of foreign presence measures in augmented Cobb-Douglas models for manufacturing 
firm data, and augmented Dealership models for data on banks. Results of the estimations show evidence of 
positive effects of foreign presence on domestic manufacturing firms, while no effects were obtained from the 
estimations based bank data.  The differences in FDI effects reflect on the sector-specific characteristics of 
manufacturing firms and banks in Nigeria. Manufacturing firms in Nigeria operate at low technology levels 
and are open to foreign direct investment, while the opposite seems to be case of banks in the country. The 
results therefore support earlier thoughts in literature on FDI which assert that positive spillovers exist were 
technology gaps between foreign firms and domestic firms exist, or in sectors open to FDI.  

Wezel (2004) assessed the factors crucial in the locational decisions of multinational German banks in 
selected emerging market of central and Eastern Europe, Latin America and Asia from 1994 to 2001. 
Emphasis was placed on testing macroeconomic variables and financial risk factors along with measures of 
bank-client integration and host country market characteristics. Results indicated that FDI by non-bank 
exerted a strong pull effect on banking FDI inflows.  



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Oke (2012) explored the relationship between foreign direct investment and financial sector growth, 
providing empirical evidence from Nigeria. Annual time-series data were gathered on foreign direct 
investment, market capitalization, Gross Domestic Product, External Debt, Inflation rate, Exchange Rate and 
Degree of openness (ratio of imports and exports to gross domestic product) from 1981-2010. The empirical 
model was analysed using the econometric techniques of ordinary least square method, unit root test, co-
integration test, Error correction Mechanism, and Granger causality test. The findings suggested that the 
inflow of FDI has a positive impact on the Financial Sector in the short run but fail to translate to real long 
financial sector growth that could promote speedy economic growth due to the fact that the bulk of foreign 
direct investment has been channelled to other sectors of the economy namely the oil and gas sector.  

Adeniyi, Omisakin,  Egwaikhide and Oyinlola (2012) examined the causal linkage between foreign direct 
investment and economic growth in Cotr’d”Ivoire, Gambia, Nigeria and Sierra Leone with financial 
development accounted for a period 1970 to 2005 within a trivariate framework which applies granger 
causality tests in VECM setting. Three alternative measures of financial development -total liquid liabilities, 
total banking sector credit and credit to private sector were employed. The findings supported the view that 
the extent of financial sophistication matters for the benefits of FDI to register on economic growth in Ghana, 
Gambia and Sierra Leone. In Nigeria on the other hand, displays no evidence of any short or long run causal 
relationship from FDI to growth with financial deepening accompanying. 

Desbordes and Wei (2013) using a novel database on bilateral real green field manufacturing FDI and two 

distinct but complementary econometric approaches studies foreign direct investment, financial development 

and the 2007-2010 global financial crisis. They exploited differences in firm- or sector-specific dependence on 

external finance and the occurrence of the 2007-2010 banking crises in developed countries. The main results 

are that source countries’ financial development (FD) tends to contribute strongly to the promotion of FDI, 

especially in sectors typically dependent on external finance, whereas destination countries’ FD matter much 

less and may, in sectors not typically dependent on external finance, even have a negative impact on FDI. 
Using a panel dataset of bilateral flows of banking sector foreign direct investment (FDI) in developed and 
developing countries, we study the impact of regional integration agreements (RIAs) on the location of 
banking sector FDI.  

Laifi (2008) ascertained whether regional integration agreement matters in FDI attraction in the banking 
sector. The results indicated that the impact of RIAs vary depending on different kinds of regional int egration.  
Hope, Laurenceson and Qin (2008) analysed the impact of foreign participation on Chinese banking by 
studying its different manifestations in China’s commercial banks. They found that strategic investors play an 
important role when stated owned commercial banks (SCBs) and other shareholding banks start their IPO 
processes, either abroad or in the local market. Data show that most banks entering partnerships with foreign 
interests derive “direct benefits:” they improve their capability for financia l innovation – in structural 
reorganization, and new products and services -- by this transfer of management knowledge from their foreign 
partners. 

Asante (2015) examined the impact of foreign direct investment on the performance of the banking sector 
of Ghana. To accomplish this objective, the study used panel data for sixteen (16) financial institutions 
(universa1 banks) from the year 2000 to 2012. Random effect models were estimated and the results suggested 
that Foreign Direct Investment inflows into the country positively and significantly impact on banks’ capital 
stock. The results also suggest that, FDI positive and significant impact on the liquidity position of financial 
institutions in Ghana. However, the study found a negative and insignificant re lation between FDI and banks’ 
profitability.  

Korna, Ajekwe and Idyu (2013) studied the level of impact; foreign direct investment has on the Nigerian 
banking sector in the wake of the unprecedented capital flight from the Nigerian economy during the recen t 
global economic recession (the credit crunch). Data which are secondary data nature were obtained from 
statistical bulletins of the Central Bank of Nigeria. The expost-facto research design was adopted to determine 
the level of the impact for 25 deposit money banks for the period 2006-2010. The ordinary least square (OLS) 
estimation technique was employed and the results revealed that there is a non-positive significant impact of 
foreign direct investment on the equity capital of the Nigerian banking sector, there is a negative insignificant 
impact of foreign direct investment on the liquidity position of the Nigerian banking sector and there is a 
negative insignificant impact of foreign direct investment on the total assets of the Nigerian banking sector.  
 

3. Data and Method 
A test of causation was utilized in determining the causal relationship between foreign direct investments 

and banking operations using yearly data from the Central Bank of Nigeria (CBN) statistical bulletin of 2015. 
Foreign Direct Investments is the dependent variable and was symbolized by (FDI). The independent 
variables are the surrogates of banking sector operations which include: Total Deposits (TDP) in the banking 
sector, Loans and Advances (LAD), Foreign Exchange Transactions (FET), Domiciliary Operations (DOMP) 
and International Banking Operations (IBKP). 

 
 



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3.1. Model Estimation 
This study adopted a modified model of Tajigardon, Noormohamadi and Behname (2012) for a study in 

nine selected countries from Organisation Islamic Conference (OIC): Bahrain, Iran, Malaysia, United Arab 
Emirates, Pakistan, Kuwait, Saudi Arabia, Qatar and Turkey. The researcher expressed foreign direct 
investments as a function of Islamic banks assets, the original model thus: 

 
Where  is foreign direct investment,  is ratio of Islamic banks assets divided by Central Bank assets 

plus Islamic banks assets,  captures time effect and  captures individual effect. 
To determine the causal relationship between foreign direct investments and banking operations variables: 
total deposits, loans and advances, foreign exchange transactions, domiciliary operations and international 
banking operation, the following models in functional form were estimated: 

 

 

 

 

 
To avoid the possible effect of any outlier that may cast a dent on the result of analysis or result in non-
normality distribution of variables, the models were transformed in log-linear format as follows: 
Model 1 

 
Model 2 

 
Model 3 

 
Model 4 

 
Model 5 

 
 
3.2. Variables Explanation 

FDI is foreign direct investments: This are the investments made by foreign investors in the form of 
either setting up a business enterprise or having controlling right or ownership privilege in business 
enterprise in Nigeria. In financial account section of the balance of payment statement, it is the liability of 
Nigeria to other countries of the world. Foreign direct investment was utilized in the works of Tajigardon, 
Noormohamadi and Behname (2012) and O’Connor, Santos-Arteaga and Tavana (2013). 

TDD is total deposits of the banking sector: In this study, total deposit are the funds of private sector, 
state and local government in different account types operated by the banks that can be withdrawn anytime. 
Total deposit encompasses demand, savings and time deposits in the banking sector. To the banks, deposits 
are short term, medium or long term obligation to customers. 

LAD is the total loan and advances of the banking sector: This is the credit the banking sector 
extends private sector, state and local government. Put differently, it is total credit the banks extends to the 
economy productive economic activities, services, etc. 

FET is foreign exchange transactions: Foreign exchange transaction details the sales and purchase of 
foreign currencies for international trade and other services outside a country. The foreign exchange 
transaction as applied in this research work encompass the total foreign exchange provided by the banking 
sector and utilized for transactions valid for foreign exchange. 

DOMP is domiciliary operations: This is the foreign currency deposits of private sector, federal, state 
and local governments in domiciliary accounts of deposit money banks in Nigeria. It is foreign currency 
liability of the banking sector. 

IBKP is international banking operations: International banking operation as used in this research 
work are monetary value of banking sector operations outside Nigeria. They include bill discounted payable, 
claims on non-resident banks, balances held with banks, balances held with offices and branches, loans and 
advances outside Nigeria. 
 
 
 
 



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4. Result and Discussion of Data Estimations 
4.1. Summary of Data Descriptive Properties 

Table 1 shows the summary of the descriptive properties of the variables estimated. The summary of the 
descriptive statistics shows the mean, median, maximum, minimum, standard deviation, skewness, kurtosis, 
Jarque-Bera, p-value and number of observations. As can be seen in Table 1, the mean of variables were 
586442, 2352896, 4729901, 26132.6, 1140292 and 977893 for FDI, TDP, LAD, FET, DOMP and IBKP while  
624500, 1497900, 2524300, 18678.9, 302400 and 930700 entails the median respectively for FDI, TDP, LAD, 
FET, DOMP and IBKP. The maximum and minimum values were 1360300 and 80700 for FDI, 5436000 and 
128200 for TDP, 13222650 and 272900 for LAD, 65990.4 and 4783.0 for FET, 4357025 and 5500 for DOMP 
and 977893 and 930700 for IBKP. The standard deviation discloses 424775.5 for FDI, 2105019 for TDP, 
4349060 for LAD, 19217.39 for FET, 1442967 for DOMP and 743478.0 for IBKP. The variables were 
positively skewed towards normality. As depicted by the Kurtosis, the variables are by nature not leptokurtic.  
 

Table-1. Summary of Descriptive Statistics. 

 
Mean Median Maximum Minimum Std. Dev. Skewness Kurtosis 

Jarque-
Bera 

P-value Obs 

FDI 586442 624500 1360300 80700 424775.5 0.283734 1.817577 1.361780 0.506166 19 

TDP 2352896 1497900 5436000 128200 2105019 0.351700 1.434011 2.333114 0.311440 19 
LAD 4729901 2524300 13222650 272900 4349060 0.484063 1.791750 1.897742 0.387180 19 
FET 26132.6 18678.9 65990.40 4783.00 19217.39 0.537186 1.993545 1.715721 0.424068 19 

DOMP 1140292 302400. 4357025 5500.00 14429670 1.089136 2.773449 3.796989 0.149794 19 
IBKP 977893 930700 2132175. 53300.00 743478.0 0.222246 1.539981 1.843973 0.397730 19 

Source: Output Data from E-views 9.0. 

 
Table-2. Lilliefors Test of Normality. 

Variables Lilliefors Test Statistic P-value 

FDI 0.201076 0.04 
TDP 0.221639 0.01 

LAD 0.220289 0.02 
FET 0.194852 0.05 

DOMP 0.2567180 0.00 
IBKP 0.221596 0.02 

                  Source: Output Data from Gretl. 

 
The p-value of the Jarque-Bera statistic in Table 1 entails that all the variables were not normally 

distributed. To this effect and having obtain the mean and standard deviation of the variables , the Lilliefors 
test of normality was applied to further ascertain the distribution of the variables and result presented in Table 
2. The Lilliefors test of normality, which is advancement on the Kolomogorov-Smirnov (K-S) test-correcting 
the K-S for small values at the tail of probability distribution confirmed that all the variables were normally 
distributed and does not have any outlier that may results in bias in the regression outcome.  
 
4.2. Preliminary Test 

Preliminary Analysis of the data via serial LM test, heteroskedasticity and Ramsey reset specification 
were performed in line with econometric assumption and results summarized in Tables 3 – 5. This is to ensure 
that the model estimated have no problem associated with heteroskedasticity, serial correlation and Ramsey 
specification. Serial correlation LM test is dispelled in Table 3, heteroskedasticity in Table 4, while Ramsey 
reset specification in Table 5. 
 

Table-3. Breusch-Godfrey Serial Correlation LM Test. 

Models F-statistic P-value 
Model 1 1.247085 0.3010 
Model 2 0.012605 0.9160 
Model 3 2.288013 0.1811 

Model 4 0.237596 0.6432 
Model 5 0.580704 0.4749 

                 Source: Data output via E-views 9.0. 

 
Table-4. Harvey Heteroskedasticity test. 

Models F-statistic P-value 

Model 1 1.546456 0.2772 
Model 2 1.127018 0.4726 
Model 3 0.279738 0.9427 

Model 4 0.944036 0.5293 
Model 5 0.552241 0.7742 

                Source: Data output via E-views 9.0. 



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Table-5. Ramsey Reset Specification test. 

Models F-statistic df p-value 

Model 1  0.148775 (1, 7)  0.7112 
Model 2  0.149132 (1, 4)  0.7190 

Model 3  0.032834 (1, 6)  0.8622 
Model 4  1.067699 (1, 6)  0.3413 

Model 5  0.438683 (1, 6)  0.5324 
             Source: Data output via E-views 9.0. 

 
4.4. Unit Root Test Result 

The variables were cleaned of stationarity defect that may impede inferences from results of analysis using 
the Augmented Dickey-Fuller (ADF), Phillips Perron (PP) and Kwiatkowski-Phillips-Schmidt-Shin (KPSS). 
The unit root test of ADF and PP were performed at level and first difference and three parapets: intercept, 
trend and intercept and none while KPSS was performed at level and first difference and two parapets: 
intercept, trend and intercept.  Tables 6 and 7 present the ADF test as level and first difference: intercept, 
trend and intercept. The PP test at level and first difference were summarized in Tables 8 and 9 whereas, 
Tables 10 and 11 detail the KPPS test at level and first difference in three sets: intercept, trend and intercept 
and none.  
 
4.4.1. Augmented Dickey-Fuller (ADF) 

As can be seen in Table 6, all the variables were not stationary at level thus the need for first difference. 
The first difference ADF test as condensed in Table 7 depicts that the variables were all stationary at the three 
estimation was effected. 
 

Table-6. Result of ADF Test at Level. 

Variables Intercept Trend and Intercept  None Remark 

FDI -1.369726 (0.57) -1.107371 (0.89) -0.354609 (0.54) Not Stationary  
TDP  0.275598 (0.96) -2.064448 (0.52)  2.245654 (0.99) Not Stationary 

LAD  1.195632 (0.99) -3.043118 (0.15)  2.542564 (0.99) Not Stationary 
FET  0.154252 (0.95) -3.639597 (0.05)**  1.801511 (0.97) Stationary 
DOMP  4.510935 (1.00)  1.058447 (0.99)  6.728763 (0.10) Not Stationary 

IBKP -0.556207 (0.86) -3.834645 (0.03)**  1.254026 (0.94) Stationary 
Source: Data output via E-views 9.0. 
Note: The optimal lag for ADF test is selected based on the Akaike Info Criteria (AIC), p -values are in parentheses where (*) and (**) denote 
significance at 1% and 5% respectively. 

 
Table-7. Result of ADF Test at First Difference. 

Variables Intercept Trend and Intercept  None Remark 

FDI -5.094248 (0.00)* -3.440724 (0.02)** -5.111365 0.00)* Stationary  
TDP -3.475949 (0.02)** -3.385869 (0.04)** -2.495405 (0.01)* Stationary 

LAD -3.776471 (0.01)* -4.437350 (0.01)* -0.523367 (0.05)** Stationary 
FET -5.020553 (0.00)* -3.092641 (0.01)* -4.466161 (0.00)* Stationary 

DOMP -3.503700 (0.03)** -4.173875 (0.02)** -2.422262 (0.03)** Stationary 
IBKP -6.609190 (0.00)* -6.331161 (0.00)* -5.563022 (0.00)* Stationary 

Source: Data output via E-views 9.0. 

Note: The optimal lag for ADF test is selected based on the Akaike Info Criteria (AIC), p -values are in parentheses where (*) and (**) 

denote significance at 1% and 5% respectively . 
 
4.4.2. Phillips Perron (PP) Test 

The result of the Phillips Perron (PP) unit root test in Tables 8 is similar to the ADF test in Tables 6 as 
all the variables were found to be non-stationary.  Consequently, the first difference test was conducted which 
affirmed the stationarity of all the variables at order one 1(1) as enshrined in Table 9. 
 

Table-8. Result of PP Test at Level. 

Variables Intercept Trend and Intercept  None Remark 
FDI -1.301638 (0.60) -1.122965 (0.89) -0.301879 (0.56) Not Stationary  

TDP  0.228217 (0.96) -2.064763 (0.52)   2.010187 (0.98) Not Stationary 
LAD  0.741168 (0.98) -1.854213 (0.63)   2.950667 (0.99) Not Stationary 

FET -1.046224 (0.72) -3.570194 (0.06)   0.176031 (0.72) Not Stationary  
DOMP  4.221902 (1.00)  1.293148 (0.99)   6.728763 (1.00) Not Stationary 
IBKP -0.876423 (0.77) -3.834645 (0.0)**   0.639342 (0.85) Stationary 

            Source: Data output via E-views 9.0. 
Note: In determining the truncation lag for PP test, the spectral estimation method selected is Bartlett kernel and Newey -West method for 
Bandwidth, p-values are in parentheses where (*) and (**) denote significance at 1% and 5% respectively. 

 
 



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Table-9. Result of PP Test at First Difference. 

Variables Intercept Trend and Intercept  None Remark 

FDI -5.018450 (0.00)* -5.360473 (0.00)* -5.024417 (0.00)* Stationary  
TDP -3.463545 (0.02)** -3.361929 (0.02)* -2.409524 (0.01)* Stationary 

LAD -2.062961 (0.05)** -2.240121 (0.04)** -2.579283 (0.03)** Stationary 
FET -7.687628 (0.00)* -6.747777 (0.00)* -4.458500 (0.00)* Stationary  

DOMP -3.282087 (0.02)** -4.281323  (0.01)* -2.690806 (0.03)** Stationary 
IBKP -6.826198 (0.00)* -6.513785 (0.00)* -5.409914 (0.00)* Stationary 

Source: Data output via E-views 9.0. 

Note: In determining the truncation lag for PP test, the spectral estimation method selected is Bartlett kerne l and Newey-West method for 
Bandwidth, p-values are in parentheses where (*) and (**) denote significance at 1% and 5% respectively.  

 
4.2.3. Kwiatkowski-Phillips-Schmidt-Shin (KPSS) Test 

From Table 10, the KPSS results reveal that stationarity was attained for all the variables hence, Table 11 
which confirmed the non-stationarity of the data at first difference. 
 

Table-10. Result of KPSS Test at Level. 

Variables Intercept Trend and Intercept Remark 
FDI  0.447413 (0.00)* 0.124001 (0.00)* Stationary  
TDP  0.147316 (0.00)* 0.147316 (0.00)* Stationary 

LAD  0.564478 (0.00)* 0.128589 (0.00)* Stationary 
FET  0.550867 (0.00)* 0.116738 (0.00)* Stationary  

DOMP  0.517106 (0.02)** 0.163957 (0.02)**  Stationary 
IBKP  0.558389 (0.00)* 0.090017 (0.00)* Stationary 

Source: Data output via E-views 9.0. 

Note: The spectral estimation method selected for KPSS test is Bartlett kernel and Newey-West method for Bandwidth, p-values are in 
parentheses where (*) and (**) denotes significance at 1% and 5% respectively.  

 
Table-11. Result of KPSS Test at First Difference. 

Variables Intercept Trend and Intercept Remark 
FDI 0.166038 (0.38) 0.261180 (0.68) Not Stationary  

TDP 0.238368 (0.00)* 0.140987 (0.38) Stationary 
LAD 0.362011 (0.00)* 0.054791 (0.05)** Stationary 

FET 0.431323 (0.38) 0.500000 (0.85) Not Stationary  
DOMP 0.606919 (0.00)* 0.155838 (0.00)* Stationary 
IBKP 0.054296 (0.22) 0.053407 (0.86) Not Stationary 

Source: Data output via E-views 9.0. 
Note: The spectral estimation method selected for KPSS test is Bartlett kernel and Newey-West method for Bandwidth, p-values are in 
parentheses where (*) and (**) denotes significance at 1% and 5% respectively.  

 
4.5. Dependability of Long Run Relationship  

Prior to estimating the long run relationship between foreign direct investments and banking operation, it 
is ideal to ascertain the reliability of this relationship. With regard to this, the VAR lag order selection criteria 
was estimated to determine the lag length. The optimal lag level are evaluated with the aid of Akaike 
information criterion (AIC) and Schwarz information criterion (SC) test statistics. In VAR estimation 
technique, the reliability of a model is dependent on a low Akaike information criterion (AIC) and Schwarz 
information criterion (SC) values. Tables 12 - 16 summarize the VAR lag order selection criteria which the lag 
lengths were automatically selected by econometric software: e-views 9.0. 
 

Table-12. Lag Length Criteria for FDI and TDP. 

 Lag LogL LR FPE AIC SC HQ 
0 -535.8269 NA   3.08e+23  59.75855  59.85748  59.77219 

1 -499.5433   60.47269*   8.57e+21*   56.17148*   56.46827*   56.21240* 
Source: Data output via E-views 9.0. 
* Indicates lag order selected by the criterion, LR: sequential modified LR test statistic (each test at 5% level), FPE: Fina l prediction 
error, AIC: Akaike information criterion, SC: Schwarz information criterion and HQ: HannanQuinn information criterion.  

 
Table-13. Lag Length Criteria for FDI and LAD. 

 Lag LogL LR FPE AIC SC HQ 

0 -551.1735 NA   1.69e+24  61.46372  61.56265  61.47737 
1 -518.6129   54.26772*   7.13e+22*   58.29032*   58.58711*   58.33124* 

Source: Data output via E-views 9.0. 
* Indicates lag order selected by the criterion, LR: sequential modified LR test statistic (each test at 5% level), FPE: Fina l prediction 

error, AIC: Akaike information criterion, SC: Schwarz information criterion and HQ: HannanQuinn information criterion . 

 
 
 



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Table-14. Lag Length Criteria for FDI and FET. 

 Lag LogL LR FPE AIC SC HQ 

0 -452.6207 NA   2.97e+19  50.51342  50.61235  50.52706 
1 -433.4116   32.01521*   5.52e+18*   48.82351*   49.12030*   48.86444* 

Source: Data output via E-views 9.0. 
* Indicates lag order selected by the criterion, LR: sequential modified LR test statistic (each test at 5% level), FPE: Fina l prediction 
error, AIC: Akaike information criterion, SC: Schwarz information criterion and HQ: HannanQuinn information criterion . 

 
Table-15. Lag Length Criteria for FDI and DOMP. 

 Lag LogL LR FPE AIC SC HQ 

0 -535.3386 NA   2.91e+23  59.70429  59.80322  59.71793 
1 -481.2051   90.22254*   1.12e+21*   54.13390*   54.43069*   54.17483* 

Source: Data output via E-views 9.0. 
* Indicates lag order selected by the criterion, LR: sequential modified LR test statistic (each test at 5% level), FPE: Fina l prediction 

error, AIC: Akaike information criterion, SC: Schwarz information criterion and HQ: HannanQuinn information criterion . 

 
Table-16. Lag Length Criteria for RGDPGR and IBKP. 

 Lag LogL LR FPE AIC SC HQ 
0 -517.0209 NA   3.81e+22  57.66899  57.76792  57.68263 

1 -493.5491   39.11955*   4.40e+21*   55.50546*   55.80225*   55.54638* 
Source: Data output via E-views 9.0. 
* Indicates lag order selected by the criterion, LR: sequential modified LR test statistic (each test at 5% level), FPE: Fina l prediction 
error, AIC: Akaike information criterion, SC: Schwarz information criterion and HQ: HannanQuinn information criterion . 

 

4.6. Co-integration Relationship 
The long run relationship was estimated with the aid of Johansen co-integration and Auto-Regressive 

Distribute Lag (ARDL) model techniques. The result of the ARDL long run relationship between foreign 
direct investments and banking operations indices as presented in Tables 17 – 21 reveal the presence of a long 
run relationship between foreign direct investments, total deposits and foreign exchange transactions of the 
banking sector. The F-statistic values of 6.24, 16.39 and 13.53 for total deposits, loans and advances and 
foreign exchange transactions of the banking sector respectively are greater than the lower and upper bound 
test statistic of 4.94 and 5.73 sequentially at 5% level of significance.  
 

Table-17. Bound Test for FDI and TDP. 

T-Test 5% Critical Value Bound Remark 

F-Statistic Lower Bound Upper Bound  
 6.241097 4.94 5.73 Null Hypothesis Rejected 

                Source: Data output via E-views 9.0. 

 
Table-18. Bound Test for FDI and LAD. 

T-Test 5% Critical Value Bound Remark 

F-Statistic Lower Bound Upper Bound  
16.38591 4.94 5.73 Null Hypothesis Rejected 

                  Source: Data output via E-views 9.0. 

 
Table-19. Bound Test for FDI and FET. 

T-Test 5% Critical Value Bound Remark 

F-Statistic Lower Bound Upper Bound  

13.533234 4.94 5.73 Null Hypothesis Rejected 
                   Source: Data output via E-views 9.0 

 
Table-20. Bound Test for FDI and DOMP. 

T-Test 5% Critical Value Bound Remark 

F-Statistic Lower Bound Upper Bound  
 3.008311 4.94 5.73 Null Hypothesis Accepted 

                   Source: Data output via E-views 9.0. 

 
Table-21. Bound Test for FDI and IBKP. 

T-Test 5% Critical Value Bound Remark 

F-Statistic Lower Bound Upper Bound  
2.841479 4.94 5.73 Null Hypothesis Accepted 

                   Source: Data output via E-views 9.0. 

 
 



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4.7. OLS Regression Results 
The short run relationship for the subject matter was ascertained through the OLS methodology and the 

results presented in Tables 22 - 26. The interpretations were anchored on the global and relative statistics of 
the variables. From Table 22, there is a positive and significant relationship between foreign direct 
investments and total deposits.  The coefficient of the constant 173607.6 implies that total deposits foreign 
direct investments would be N173, 607.6 million. As shown by the total deposits coefficient of 0.387442, a unit 
increase in total deposits of the banking sector results in N0.38 million increase in foreign direct investments. 
From the Adjusted R-squared, 65.39% variation in foreign direct investments was explained by changes in 
total deposits of the banking sector. The p-value of the F-statistic unveils that total deposit of the banking 
sector significantly explained the variation in foreign direct investments within the period studied. Durbin 
Watson of 1.31 is not that quite close to the bench mark of 2.0. Nevertheless, the deficiency that may be 
associated this was corrected by the serial correlation test in Table 3 which affirms that the variables in the 
model are not serially correlated. 
 

Table-22. OLS Regression Result for FDI and TDP. 

Variable Coefficient Std. Error t-Statistic Prob. 

C  173607.6 95312.09  1.821465 0.0885 

TDP  0.387442 0.146526  2.644190 0.0184 
TDP(-1) -0.238457 0.151495 -1.574026 0.1363 

R-squared  0.694677 Mean dependent var 612883.3 
Adjusted R-squared  0.653967 S.D. dependent var 420693.4 

S.E. of regression  247471.2 Akaike info criterion 27.82699 
Sum squared resid  9.19E+11 Schwarz criterion 27.97538 

Log likelihood -247.4429 L Hannan-Quinn criter. 27.84745 

F-statistic  17.06411 Durbin-Watson stat 1.319426 
Prob (F-statistic)  0.000137   

Source: Data output via E-views 9.0. 

 
As can been seen in Table 23, loans and advances extended to the economy by the banking sector has a 

positive and significant relationship with foreign direct investments. Looking at the constant coefficient of 
319874.2, if loans and advances of the banking sector is kept constant, foreign direct investme nts would be 
N319, 874.2 million. Similarly, a percentage rise in loans and advances of the banking sector leads be N0.11 
million increase in foreign direct investments. Only 47.96% changes in foreign direct investments that was 
attributed to variation in loans and advances of the banking sector. The adjusted R-square discloses that loans 
and advances of the banking sector significantly accounted for the variation in foreign direct investments. The 
Durbin Watson value of 1.12 does not portray any danger of autocorrelation based on the affirmation from 
Table 3 that the variable are free from serial correlation. 
 

Table-23. OLS Regression Result for FDI and LAD. 

Variable Coefficient Std. Error t-Statistic Prob. 
C  319874.2 139414.4 2.294413 0.0424 

LAD  0.114601 0.032298 3.548246 0.0046 
LAD (-5) -0.098365 0.042259 -2.327677 0.0400 
R-squared  0.559665 Mean dependent var 757857.1 

Adjusted R-squared  0.479604 S.D. dependent var 359808.0 
S.E. of regression  259560.0 Akaike info criterion 27.95877 
Sum squared resid  7.41E+11 Schwarz criterion 28.09571 

Log likelihood -192.7114 L Hannan-Quinn criter. 27.94610 
F-statistic   6.990489 Durbin-Watson stat 1.125897 

Prob (F-statistic)   0.010985   
                Source: Data output via E-views 9.0. 
 

The regression result in Table 24 shows that foreign exchange transactions of the banking sector has a 
significant and positive relationship with foreign direct investments. The coefficient of the constant depicts 
foreign direct investment to be N 314, 949.5 million when foreign exchange transactions of the banking sector 
is held constant. A unit appreciation in foreign exchange transactions entails a N19.71 million upsurge in 
foreign direct investments. Considering the adjusted R-square coefficient, 36.07% variation in foreign 
exchange transactions was owed to volatility in banking sector foreign exchange transactions. Foreign 
exchange transactions was significantly responsible for variation in foreign exchange transactions as evidence 
by p-value of the F-statistics which is significant at 5% level of significance. There is no problem of 
autocorrelation in the model even though the Durbin Watson value is 1.31. This study hinged on the serial 



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correlation test in Table 3 which clears the model of serial correlation. Furthermore, the serial correlation LM 
test is superior to Durbin Watson in testing autocorrelation in a model. 

 
Table-24. OLS Regression Result for FDI and FET. 

Variable Coefficient Std. Error t-Statistic Prob. 
C  314949.5 168077.3  1.873838 0.0877 

FET  19.70869 7.540493  2.613714 0.0241 
FET (-5) -11.88926 10.24660 -1.160313 0.2705 
R-squared  0.459079 Mean dependent var 757857.1 

Adjusted R-squared  0.360730 S.D. dependent var 359808.0 
S.E. of regression  287682.2 Akaike info criterion 28.16451 

Sum squared resid  9.10E+11 Schwarz criterion 28.30145 
Log likelihood -194.1516 L Hannan-Quinn criter. 28.15183 
F-statistic  4.667847 Durbin-Watson stat 1.318624 

Prob (F-statistic)  0.034059   
Source: Data output via E-views 9.0. 

 
The regression output in Table 25 lays credence to the presence of a positive significant relationship 

between foreign direct investments and domiciliary operations of the banking sector. The constant coefficient 
of 431867.4 is an indication that foreign direct investments will experience N431, 867.4 million in growth if 
domiciliary operations of the banking sector is kept constant. Each time domiciliary operations increases by a 
unit, foreign direct investments will rise by N0.58 million. The revelation from the adjusted R-square shows 
that domiciliary operations of the banking sector accounted for 60.72% changes in foreign direct investments, 
and this is statistically significant based on the 0.00 p-value of F-statistic. The Durbin Watson value of 1.65 is 
within the acceptable range of no autocorrelation in the model. 
 

Table-25. OLS Regression Result for FDI and DOMP. 

Variable Coefficient Std. Error t-Statistic Prob. 

C  431867.4 98614.69 4.379341 0.0011 
DOMP  0.584285 0.125749 4.646428 0.0007 
DOMP (-5) -1.490119 0.359545 -4.144452 0.0016 

R-squared  0.667663 Mean dependent var 757857.1 
Adjusted R-squared  0.607238 S.D. dependent var 359808.0 

S.E. of regression  225494.2 Akaike info criterion 27.67739 
Sum squared resid  5.59E+11 Schwarz criterion 27.81433 
Log likelihood -190.7417 L Hannan-Quinn criter. 27.66471 

F-statistic  11.04948 Durbin-Watson stat 1.652187 

Prob (F-statistic)  0.002337   
Source: Data output via E-views 9.0. 

 
Table-26. OLS Regression Result for FDI and IBKP. 

Variable Coefficient Std. Error t-Statistic Prob. 
C  137623.3 125230.3 1.098962 0.2903 

IBKP  0.615405 0.228103 2.697929 0.0173 
IBKP (-2) -0.186484 0.231791 -0.804536 0.4345 
R-squared  0.618594 Mean dependent var 644188.2 

Adjusted R-squared  0.564108 S.D. dependent var 411463.2 
S.E. of regression  271656.9 Akaike info criterion 28.02125 

Sum squared resid  1.03E+12 Schwarz criterion 28.16829 
Log likelihood -235.1806 L Hannan-Quinn criter. 28.03587 
F-statistic  11.35315 Durbin-Watson stat 1.131078 

Prob (F-statistic)  0.001174   
Source: Data output via E-views 9.0. 

 
Finally, Table 26 regression outcome reveals a positive and statistically significant relationship between 

foreign direct investments and international banking operations of the banking sector. Foreign direct 
investments would stand at N137, 623.3 million if the banking sector international banking operations is 
unbroken.  Foreign direct investments will rise by N0.62 million if international banking operations rises by a 
unit. International banking operations significantly explained 56.41% variat ion in foreign direct investments 
by unarguable relying on the adjusted R-square value of 0.368425. There is no autocorrelation in the 
estimation as this study vehemently relied on the serial correlation LM test in Table 3 for autocorrelation 
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4.8. Causal Relationship: Foreign Direct Investment and Banking Operations 
The casual significant relationship between foreign direct investments and banking operations was 

determined using the Granger causality test which ascertains the direction of relationship between variables of 
interest based on the default number of lag. Table 27 presents the output of the Granger Causality analysis.  
From Table 27, there is a significant two way causal/bidirectional relationship between foreign direct 
investments and total deposits of the banking sector. Causality flows from total deposits of banking sector to 
foreign direct investments and from foreign direct investments back to total deposit of banking sector at 5% 
level of significance. This implies that total deposits of the banking sector has significant effect on foreign 
direct investments on one hand, while on the other hand, foreign direct investments also exerts significant 
effect on banking sector total deposits.  
 

Table-27. Granger Causality Output for Foreign Direct Investment and Banking Operations. 

Null Hypothesis: Obs F-Statistic Prob. Remarks 

TDP does not Granger Cause FDI 
FDI does not Granger Cause TDP 

 17 
 

11.0533 
3.94618 

0.0019 
0.0482 

Causality 
Causality 

LAD does not Granger Cause FDI 
FDI does not Granger Cause LAD 

 17 
 

0.60054 
1.33750 

0.5642 
0.2990 

No Causality 
No Causality 

FET does not Granger Cause FDI 
FDI does not Granger Cause FET 

 17 
 

4.38318 
3.42494 

0.0372 
0.0069 

Causality 
Causality 

DOMP does not Granger Cause FDI 
FDI does not Granger Cause DOMP 

 17 
 

4.74806 
2.65928 

0.0303 
0.1107 

Causality 
No Causality 

IBKP does not Granger Cause FDI 
FDI does not Granger Cause IBKP 

 17 
 

0.89086 
3.27254 

0.4358 
0.0734 

No Causality 
No Causality 

                   Source: Data output via E-views 9.0 . 

 
Again, there is also bidirectional significant causal relationship between foreign exchange transactions of 

the banking sector and foreign direct investments in Nigeria. At 5% level of significance, causality runs from 
foreign exchange transactions to foreign direct investments, and from foreign direct investments back to 
foreign exchange transactions. The disclosure from Table 27 is that foreign exchange transactions exerts 
significant influence on inflow of foreign direct investments in Nigeria, and at the same t ime, foreign direct 
investments significantly affects the banking sector foreign exchange transactions. Domiciliary operations of 
the banking sector was found to have significantly (at 5% level of significance) affected foreign direct 
investments as evidenced by the unidirectional causal relationship between foreign direct investment and 
domiciliary operations of the banking sector. Finally, international banking operations and loans and advances 
have no significant causal relationship with foreign direct investment in Nigeria. Causality does not flow/run 
from either direction at 5% level of significance. 
 
4.9. Discussion of Findings 

The positive significant relationship between foreign direct investments Table 22 and total deposit of the 
banking sector as well as the bidirectional causal relationship between total deposit of the banking sector and 
foreign direct investments Table 27 implies that total deposits of the banking sector fortifies foreign direct 
investment in Nigeria and foreign direct investment propels and increases deposits of the banking sector. 
Adeniyi, Omisakin, Egwaikhide and Oyinlola (2012) achieved the same result in Ghana, but Tajgardoon, 
Noormohamadi and Behname (2012) established the absent of a causal relationship between international  
banking operations and foreign direct investments in nine (9) countries from Organization Islamic Conference 
(OIC): Bahrain, Iran, Malaysia, United Arab Emirates, Pakistan, Kuwait, Saudi Arabia, Qatar and Turkey 
which is similar to the finding of this study as evidenced in Table 37. On the contrary, the positive and 
significant relationship between foreign direct investments and international banking operations would not 
affirm the result of Korna, Ajekwe and Idyu (2013) who envisaged that foreign direct investments and total 
assets of banks are negatively and significantly correlated. The international banking operations of the 
banking sector is a subsect of their total assets and as such, fit in the Korna, Ajekwe and Idyu (2013) research 
on foreign direct investments and total assets of banks. The long run relationship between foreign direct 
investment and loans and advances of the banking sector supports the works of Tsauran (2014) for Bostwana, 
Asante (2015) for Ghana and Adeniyi, Omisakin, Egwaikhide and Oyinlola (2012) for cross country analysis of 
Nigeria, Ghana and Gambia on one hand, but on the other hand, disagrees with Adeniyi, Omisakin, 
Egwaikhide and Oyinlola (2012) that loans and advances of the banking sector does not enhance foreign direct 
investments in selected countries in Africa. 
 

5. Conclusion, Policy Implications and Contribution to Knowledge 
It is unarguably staunch that developing countries can attain a considerable height with respect to 

economic growth and development through the inflow of foreign direct investments which facilitates the 
transfer of technology, human capital and services among others. This study has vividly proved that the 
development of the financial system especially, the banking sector for an emerging economy like Nigeria will 



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© 2018 by the authors; licensee Online Academic Press, USA 

in no small measure spur inflow of foreign direct investments. This study does not in any way put to end 
further studies on the nexus between banking operations and foreign direct investments in the context of 
Nigeria, rather a driving force to broaden the horizon of studies with regard to banking operations and foreign 
direct investments in a bid to developing the financial system to attract more foreign direct investment and 
realizing the ambition of being among the top twenty (20) economies in the world even though not in 2020 
that is very near, but in the nearest future. 

From the findings emanating from this study, the following recommendations are offered for attention 
and consideration by policymakers to assuage development in the banking sector to attract more foreign direct 
investments in Nigeria. 
1. To increase deposit base, the banking sector should adopt completely smart banking as this evidences low 

risk, reliability and stability of the banking sector which is essential for inflow of foreign direct 
investments. The inflow of foreign direct investment raises deposits in banks as foreign direct investment 
itself comes with fund in the host economy. 

2. The Central Bank of Nigeria should cautiously focus on tackling monetary policy variables such monetary 
policy rate, cash reserve ratio, loan portfolio, etc. which a capable of attracting investors from abroad. A 
reduction in the monetary policy rate would possible results in low cost of capital thus attracting foreign 
directing investments which in turn increase the international banking operations of the banking sector. 
Frequent changes in the banking sector’s reserve requirements and loan portfolio may shy away foreign 
investors. 

3. The Central Bank of Nigeria should complement the fiscal policies of the federal government (government 
expenditure and fiscal deficit which lead to high money in circulation) with monetary policies in such a 
way as reduce inflation and exchange rate fluctuations among others. A lower inflation rate increases the 
purchasing power of money and a stable exchange rate enhances the foreign exchange transactions of the 
banking sector. 

4. The government should make an ideal climate for foreign investors such as tax holidays and reduction in 
taxes. This gives room for foreign investors in the banking sector to have enough profit to expand 
operations thus increasing the domiciliary operations of the banking sector. 

5. The foreign equity restriction to 10% for foreign participation in the banking sector in favour of 
indigenous investors should be looked into and raised to a range of say 20%-30%. In period of boom, high 
equity participation in the banking sector will results to more capital inflows which in turn increases the 
credit the banking sector extends to the economy through loans and advances. 
This study contributes to knowledge by explicitly ascertaining the causality between banking operations 

and foreign direct investments by using up-to-date data in the context of Nigeria. To the best of our 
knowledge based on the literature reviewed, this study is the first of its kind to succinctly determined the 
direction of causality between banking sector operations and foreign direction investments in Nigeria by 
utilizing the core banking sector operations indices: total deposits, loans and advances, foreign exchange 
transactions, domiciliary operations and international banking operations. 
 

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