Macroeconomic variables and banking sector index performance: evidence from the Nigerian Exchange Group (NGX)

Purpose: This study investigates the effect of exchange rates, interest rates, and inflation on the Banking Sector Index of the Nigerian Exchange Group. It addresses the gap in sector-specific evidence, as aggregate market analyses often obscure how macroeconomic shocks uniquely influence banking sector performance separately. Methodology: Using an ex post facto design, the study analyzes monthly secondary data from 2012 to 2024 obtained from the Nigerian Exchange Group and the National Bureau of Statistics. The Vector Error Correction Model (VECM) was employed to examine both short-run dynamics and long-run equilibrium relationships among the variables. Results and conclusion: The findings confirm a significant long-run cointegrating relationship between the macroeconomic variables and the Banking Index. Exchange rate depreciation negatively affects the banking sector’s performance over the long term, while inflation exerts a strong positive long-run impact. Interest rates show no significant long-run relationship with the index. The error correction mechanism indicates a stable adjustment process, correcting approximately 13.2% of monthly disequilibrium. The study concludes that while the banking sector benefits from inflation, sustained currency depreciation poses a long-term threat. Implication of findings: The results imply that policymakers should place more priority on exchange rate stability. For investors and analysts, the findings suggest a need to emphasize exchange rate trends and inflation over interest rates when evaluating banking sector performance.