THE IMPACT OF FOREIGN DIRECT INVESTMENT ON THE NIGERIAN BANKING SECTOR

ABSTRACT

This work studies the level of impact foreign direct investment has on the Nigerian banking sector against the backdrop of persistent capital flow volatility in the Nigerian economy following successive periods of global financial instability. Secondary data were obtained from the Central Bank of Nigeria (CBN) and the National Bureau of Statistics (NBS). The ex-post-facto research design was adopted to determine the level of impact for twenty-five (25) deposit money banks over a recent study period. The Ordinary Least Square (OLS) estimation technique was employed for statistical analysis. 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. It is recommended that the Nigerian Government should take more seriously the responsibility of creating an enabling environment for effective, value-adding foreign direct investment in the banking sector without losing the prerogative of sovereignty (NIPC, 2024). It is also recommended that already-existing foreign direct investment in Nigeria should be sustained and that government should view FDI from a deeper, structural perspective. The quality and composition of FDI should now be assessed in terms of investment in the real economy (i.e., power, manufacturing, banking, and export-oriented industries) and linkages with local suppliers, rather than a lopsided focus on extractive industries. Lastly, it is recommended that stakeholders in the banking industry take the issue of human capital development more seriously (Opoku, Poku, & Domeher, 2024).

1.0 CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

Foreign direct investment (FDI) is widely recognized as a major stimulus to economic growth in developing countries. Its capacity to address two fundamental obstacles shortages of financial resources and gaps in technology and skills has made it a central concern for policymakers in low-income countries (Usman et al., 2022; Schroth, 2023). Despite its acknowledged importance, only a fraction of developing countries have succeeded in attracting significant FDI flows. Global FDI flows declined to approximately $1.3 trillion in 2023, affected by geopolitical tensions, tighter financial conditions, and investor uncertainty; however, signs of recovery were emerging (UNCTAD, 2024).

The fluctuating nature of private capital flows has historically played a key role in shaping development finance. Whereas official flows have remained broadly stable over recent decades, private capital flows especially FDI have experienced cyclical waves of growth and contraction driven by macroeconomic shifts, regulatory reforms, and global financial conditions (Schroth, 2023). Studies confirm that FDI has grown to be a reliable, though volatile, source of capital flows in emerging economies and has increasingly become an important mechanism for financing development (Usman et al., 2022; Omar, 2022).

According to UNCTAD's World Investment Report 2024, FDI flows to Nigeria surged to USD 1.87 billion in 2023, compared to USD 895 million the preceding year. The total stock of FDI in Nigeria was estimated at USD 73.37 billion at the end of 2023, representing approximately 19.6% of the country's GDP (UNCTAD, 2024). At the same time, FDI stock in the country was dampened by significant divestments from multinational companies, including Shell, GlaxoSmithKline, Procter & Gamble, and Unilever, reflecting an ongoing challenge in sustaining FDI amid a difficult business environment. Nigeria is nonetheless recognized as among the most promising growth poles in Africa, and continues to attract investors in the energy, construction, and financial services sectors (Lloyds Bank Trade Portal, 2024).

Historically, FDI in Nigeria was concentrated in the extractive industries, but there has been a progressive diversification into manufacturing, services (including the banking sector), and technology. The regulatory framework for promoting FDI received a foundational boost with the enactment of the Nigerian Investment Promotion Commission Act and the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act, both in 1995, which opened nearly all sectors to foreign investment and allowed full foreign ownership outside the petroleum sector (Lloyds Bank Trade Portal, 2024). More recently, the Business Facilitation (Miscellaneous Provisions) Act signed into law in February 2023 further strengthened the investment climate by empowering the NIPC to negotiate special incentives for strategic investments (UNCTAD Investment Policy Monitor, 2023). In 2024, Nigeria attracted over $26 billion in foreign direct investment, reclaiming its position as sub-Saharan Africa's largest recipient of FDI, with investor confidence rising across energy, technology, and agribusiness (NIPC, 2024).

The Nigerian banking sector, propelled by successive recapitalization and consolidation exercises, is today positioning itself as a key driver of the national economy. The most recent such exercise the CBN's 2024 recapitalization directive introduced tiered minimum capital requirements across banking categories: commercial banks with international authorization, national banks, regional banks, and non-interest banks, among others. This policy is directly linked to Nigeria's broader ambition of attaining a $1 trillion economy by 2030 (CBN, 2024; Iwedi, Edeh, & Oriakpono, 2023). Research by Akani (2023) affirms that banking sector reforms significantly affect the financial performance and deposit mobilization of commercial banks in Nigeria. The 2024 consolidation wave exemplified by the merger of Providus Bank and Unity Bank, the first under the new policy reflects the continuing structural transformation of the sector (234 Digest, 2025).

FDI inflows into the banking sector remain significant. According to the National Bureau of Statistics (NBS, 2024), the banking sector recorded the highest capital inflow in Q2 2024, attracting USD 1,123.95 million and representing 43.15% of total capital imported into Nigeria during that quarter. The United Kingdom remained the dominant source, accounting for 43.01% of total capital importation, while Citibank Nigeria Limited, Standard Chartered Bank Nigeria Limited, and Rand Merchant Bank Plc were the leading recipients. These figures underscore the centrality of the banking sector in Nigeria's FDI landscape.

For the banking sector to fully maximize its potential in driving Nigeria's economic resurgence and positioning itself as a regional financial centre, experts continue to emphasize the need for an infusion of foreign players and capital (Bouzidi & Nefzi, 2024). The entrance of foreign investors can deepen market liquidity, introduce competitive pressure, and reduce the cost of financial intermediation outcomes that ultimately impact on production, employment, and living standards (Qi, Hui, & Ongena, 2023). However, evidence also shows that the quality and stability of FDI matter as much as its quantity. Umar and Abdullahi (2022) find a bidirectional causal relationship between FDI and economic growth in Nigeria, suggesting that the absorptive capacity of the host economy is pivotal to realizing sustainable gains.

The risks inherent in FDI dependence have been underscored by recent volatility. Following the COVID-19 pandemic, Nigeria's FDI turned negative in 2022 at -$186.79 million as equity divestments exceeded inflows (Macrotrends, 2023). While flows recovered in 2023 and 2024, such swings highlight the structural vulnerability of economies heavily reliant on external capital, particularly in the banking sector where liquidity sensitivity is acute. This study is therefore motivated by the need to rigorously examine the extent to which FDI impacts the Nigerian banking sector, and to offer evidence-based recommendations for policy.

1.2 STATEMENT OF THE PROBLEM

In spite of the laudable benefits the Nigerian banking sector stands to derive from FDI inflows, a fundamental problem arises as to what extent the sector and indeed the broader economy should depend on foreign direct investment. Scholarly evidence consistently reveals that the impact of FDI on Nigeria's economy is mixed: while several studies, including Eniekezimene et al. (2024) and Lawal and Olusegun (2023), document positive though sometimes statistically insignificant effects of FDI on growth, others such as Binuyo et al. (2022) report a significant negative impact using ARDL methodology, attributing this to structural constraints and the composition of FDI inflows.

The challenge of capital flight remains particularly acute. Nigeria's FDI flows turned sharply negative in 2022, declining by 105.64% from the preceding year to -$186.79 million as a result of equity divestments by major multinationals (Macrotrends, 2023; UNCTAD, 2023). Hedge funds, private equity firms, and institutional investors from Asia, the United States, and Europe have periodically withdrawn substantial capital from Nigeria's equity and bond markets in response to global monetary tightening, rising geopolitical tensions, and currency depreciation factors that disproportionately affect emerging market economies (UNCTAD, 2024; U.S. State Department, 2025).

Within the banking sector specifically, the credit-to-private-sector ratio in Nigeria stood at only 14.1% of GDP in 2022, far below the 90.7% average recorded for BRICS countries (World Bank, 2023), reflecting the limited depth of financial intermediation. This structural gap is partly attributable to the irregular and volatile nature of FDI inflows, which hinder the sustained long-run capital accumulation needed for meaningful banking sector development (Dongyan et al., 2023). Moreover, divestments by multinational corporations including Shell's sale of onshore oilfields for USD 2.4 billion and exits by GlaxoSmithKline, Unilever Nigeria, and others have further strained the investment climate (Lloyds Bank Trade Portal, 2024).

Worried by the persistent volatility of foreign capital flows and its consequences for the Nigerian banking sector, this work examines and studies the extent to which FDI impacts an economy heavily reliant on external financing. The challenge of developing economies (Nigeria inclusive) is their overdependence on foreign capital which delivers not only positive impacts but also significant negative externalities. This work therefore tries to assess the extent of such impact on the Nigerian banking sector, with a view to proffering evidence-based recommendations.

1.3 RESEARCH OBJECTIVES

The objectives of the study are as follows:

(1) To ascertain the total amount of cumulative FDI capital inflow that has come into the Nigerian banking sector over the study period.

(2) To ascertain the level of impact foreign direct investment has on the liquidity position of the Nigerian banking sector.

(3) To determine the level of impact foreign direct investment has on the total asset size of the Nigerian banking sector.

(4) To ascertain whether it is advisable for the Nigerian banking sector to depend largely on foreigners for management efficiency.

(5) To determine the level of impact foreign direct investment has on the contribution of the Nigerian banking sector to gross domestic product.

1.4 RESEARCH QUESTIONS

The research questions are:

(1) What level of impact does foreign direct investment have on the capital base of the Nigerian banking sector?

(2) What impact does foreign direct investment have on the liquidity position of Nigerian banks?

(3) What is the impact of foreign direct investment on the total asset size of the Nigerian banking sector?

(4) To what extent does foreign direct investment contribute to management efficiency of the Nigerian banking sector?

(5) What level of impact does foreign direct investment have on the contribution of the Nigerian banking sector to gross domestic product?

1.5 HYPOTHESES OF THE STUDY

The hypotheses of the study are:

(1)H_o Foreign direct investment does not have a significant positive impact on the capital base of the Nigerian banking sector.

(2)H_o Foreign direct investment does not have a significant positive impact on the liquidity position of the Nigerian banking sector.

(3)H_o Foreign direct investment does not have a significant positive impact on the total asset size of the Nigerian banking sector.

(4)H_o Foreign direct investment does not have a significant positive impact on management efficiency of the Nigerian banking sector.

(5)H_o Foreign direct investment does not have a significant positive impact on the contribution of the Nigerian banking sector to gross domestic product.

1.6 SCOPE OF THE STUDY

The emphasis of this study is on twenty-five (25) deposit money banks operating in Nigeria. The study covers a recent period that captures ongoing structural changes in the Nigerian banking sector, including successive recapitalization exercises. The banking sector reforms within this period focused on strengthening and consolidating the system. The major emphasis of the reforms on recapitalization and proactive regulation has structurally repositioned the industry to perform its role of intermediation and economic development. The 2024 CBN recapitalization directive introduced tiered minimum capital requirements for instance, commercial banks with international authorization are required to maintain a minimum capital base of N500 billion, national banks N200 billion, and regional banks N50 billion representing the most ambitious capital strengthening exercise since the 2005 consolidation (CBN, 2024). The programme is also designed to attract fresh FDI inflows into the sector as banks seek external investors and strategic partners to meet the new thresholds (234 Digest, 2025). The Central Bank of Nigeria (CBN) has simultaneously pursued complementary monetary and regulatory reforms including foreign exchange unification, aimed at improving the macro-financial environment for investment (U.S. State Department, 2025).

1.7 SIGNIFICANCE OF THE STUDY

The research study is significant in two major ways practical and academic.

(a) Practical Significance:

(i) This research will enable policymakers and regulators to develop policies and regulations that ensure effective administration and management of foreign investment in Nigeria, particularly in the context of the 2024 CBN recapitalization exercise (Iwedi, Edeh, & Oriakpono, 2023).

(ii) It will assist investors who have interest in the banking sector to understand the key dynamics on the ground, including recent capital importation trends (NBS, 2024).

(iii) To bankers, the research will help them know whether to do more to attract investors into the sector or not.

(iv) Specifically, to bankers, it will expose to a large extent the dynamics of the banking sector with regard to relevant variables and a comparative analysis of FDI-related performance over time.

(v) To the Nigerian Investment Promotion Commission (NIPC), the research will help them understand what is obtainable in the banking sector with respect to FDI, so as to take informed decisions consistent with Nigeria's updated National Investment Policy (UNCTAD, 2023).

(b) Academic Significance:

(i) It will contribute to the enrichment of literature on foreign investment in the banking sector, building on recent empirical evidence from Nigeria and comparable developing economies (Bouzidi & Nefzi, 2024; Qi, Hui, & Ongena, 2023).

(ii) The research will serve as a body of reserved knowledge to be referred to by future researchers.

(iii) It will suggest ways to further build academic research interest among scholars working on FDI-financial sector nexus in sub-Saharan Africa.

1.8 PROBLEMS AND LIMITATIONS OF THE STUDY

Research in developing countries is usually faced with a lot of challenges and limitations. In this particular research, the following problems were encountered:

(i) The problem of sourcing for reliable and up-to-date data.

(ii) The challenge of financial inadequacy.

(iii) The problem of limited time frame.

(iv) Insufficient access to ICT infrastructure in some instances.

1.9 OPERATIONAL DEFINITION OF TERMS

Foreign capital: This means convertible currency, plant, equipment, spare parts, machinery, raw materials, and other business assets, other than goodwill, that is brought into Nigeria with no initial disbursement of Nigerian foreign exchange and is intended for the production of goods and services related to an enterprise.

Negative list: This includes those sectors of investment prohibited to both foreign and Nigerian investors, such as production of arms, ammunition, narcotic drugs, and psychotropic substances.

Portfolio investment: This is an investment in shares or other securities traded on the Nigeria Stock Exchange.

Transfer price: This is the bookkeeping price at which a good or service is sold by one unit or company within a firm or group to another.

Authorized dealer: These are local banks or any other financial institutions licensed to deal in foreign exchange in Nigeria.

Imputed service charge: This is the excess of property income received on loans and deposits held over the interest paid out to the depositors.

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