Determinant of asymmetric risks in Nigerian loan market: any dichotomy between the banks and borrowers’ perspectives?

Abstract

The goal of this study is to provide evidence that the determinants of asymmetric risks in contractual lending relationship among the Nigerian banks are not affected by the sources of asymmetry. This study examined the implication of bank and borrower-advantaged information asymmetry in typical bank lending relationships where information disclosure was asymmetric. It used data from a survey of investment loans made to 210 borrowers in the past ten years among 18 commercial banks. Bank lending in Nigeria was dominated by the presence of asymmetric information, a wedge to financial intermediation. Using probit and correlation test methodology, evidence of low level asymmetric risk was found and the determinants of asymmetric risks in the market were not significantly different. The size of default probability by borrowers and the extent to which borrowers were fully informed about the cost implications of their loans were the two key factors that determined asymmetric risk in Nigerian loan market.

Keywords: Information asymmetry, Credit constraint, Default risk, Adverse selection, Moral hazard.