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tions for twenty-one banks in nine developing countries using pooled econometric tests.In the case of direct sales to strategic investors,this type of cross- country analysis is more difficult,because share prices cannot be used as performance indicators and listed banks are generally subject to lower disclosure standards.3
This paper assesses the effect of privatization on bank performance in Nigeria over the period 1990-2001.Nigeria undertook a major privatization program in the early 1990s, divesting a total of 14 banks,constituting more than 50%of total banking system assets.
However,this period was also characterized by other major changes in the financial system. The privatizations were part of a larger liberalization process that included interest rate and entry liberalization and the loosening of credit allocation quotas.At the same time,a multi- tiered exchange rate market offered plenty of arbitrage and rent opportunities for licensed banks.Consequently,the late 1980s saw a massive entry of new banks specializing in foreign exchange operations.While the number of banks multiplied during this period and the financial sector boomed,financial intermediation,as measured by credit to the private sector and deposits,decreased.Finally,economic recession and political instability brought the boom to a halt in 1992,with a major banking crisis crippling the financial system until the late 1990s.
The volatile macroeconomic and financial environment,in which the privatization took place,makes it difficult to compare the effects of the Nigerian privatization program to privatization in other countries.We therefore evaluate the effects of privatization on bank
performance relative to the same banks before privatization and to other privately owned banks in Nigeria.Specifically,we assess the performance of privatized banks,i.e.the return on assets and equity as well as the share of non-performing loans(NPL),relative to other banks in the Nigerian financial system and relative to their performance before privatization.
Given the large reliance of banks on foreign exchange revenue during the sample period,we use profit measures both including and excluding foreign exchange profits.We apply different robustness tests and estimation techniques.4 Our results indicate some performance improvement due to privatization.While privatized banks performed significantly worse than privately owned commercial banks
before privatization,this gap was effectively closed by privatization.This is remarkable given the macroeconomic and regulatory environment that was very inhospitable to true financial intermediation during our sample period.However,there were no further
performance gains beyond the performance of other private banks in the Nigerian banking system.In addition,our results give evidence of the poor performance of banks that continued with minority government ownership during the sample period.
Our results also provide microeconomic evidence on the distorted incentives that banks faced in Nigeria during the sample period.Long established banks that focused on retail banking performed significantly more poorly than new wholesale banks that focused on
lending to the government and on fee-based business.These results are the microeconomic complement to the aggregate picture of declining financial intermediation that Nigeria suffered during this period.
Our results are subject to some caveats.First,poor data quality makes