An Original Framework for Understanding Regulatory Capture in Nigerian Financial Sector Supervision

Regulatory capture, whereby regulated entities exert undue influence over their supervisors, is theorised to undermine the effectiveness of financial sector regulation, and its mechanisms, extent, and consequences in the Nigerian banking supervisory context have not been formally theorised or empirically examined, representing a significant gap. This study develops an original theoretical framework for understanding regulatory capture in Nigerian financial sector supervision, drawing on public choice theory, principal-agent theory, and the political economy of regulation. The framework formally models the conditions under which the revolving door between the banking industry and regulatory bodies, concentrated bank lobbying, and informational capture produce suboptimal supervisory outcomes in the Nigerian context. An original Regulatory Capture Index for Nigerian financial sector supervision is constructed from primary data collected through anonymous structured surveys of 80 senior regulatory officials and 60 banking industry senior executives, measuring regulatory forbearance frequency, revolving door movement rates, and regulatory process transparency. Econometric analysis using structural equation modelling and ordered probit regression was applied to assess the consequences of measured capture for supervisory effectiveness, measured by enforcement action frequency and non-performing loan misclassification incidence. Results confirm significant regulatory capture effects: regulatory officials with prior banking industry experience were 2.8 times more likely to recommend forbearance over enforcement in marginal supervisory cases. Capture was more pronounced at the Central Bank of Nigeria's examiners-in-charge level than at executive leadership level. The study makes original contributions to regulatory capture theory adapted for a developing economy banking supervisory context and proposes structural reforms including cooling-off periods and independent supervisory review mechanisms.

Keywords: regulatory capture, financial sector supervision, public choice theory, Central Bank of Nigeria, supervisory effectiveness