Financial Contagion Channels Between Nigerian Banks and Non-Bank Financial Institutions: A Network Theory Approach

Financial contagion through balance sheet interconnectedness between banks and non-bank financial institutions, including pension funds, insurance companies, and investment houses, represents an underexplored systemic vulnerability in the Nigerian financial system that requires original theoretical and empirical treatment. This study develops an original network-theoretic framework for modelling financial contagion channels between Nigerian banks and non-bank financial institutions, drawing on financial network theory, default contagion models, and the Eisenberg-Noe clearing mechanism. The theoretical framework generates original results on the conditions under which bilateral exposures between banking and non-banking sectors produce systemic cascades under idiosyncratic shock scenarios. Empirically, bilateral exposure data were assembled from the Central Bank of Nigeria and the Securities and Exchange Commission regulatory returns, covering interbank funding, securities holdings, pension fund bank deposits, and insurance company bank placements for the period 2015 to 2022. Bipartite network analysis, eigenvector centrality, and contagion simulation using Monte Carlo methods were employed. Results show that Nigerian pension funds are the largest non-bank financial institution funders of the banking system, with aggregate placements of 3.2 trillion Naira creating significant bilateral interdependence. Contagion simulations reveal that the failure of any two of the five largest deposit money banks would trigger pension fund liquidity shortfalls exceeding their 5% liquidity reserves. Network centrality analysis identifies three systemically important banks as critical contagion nodes. The study provides the first formal network contagion model calibrated with Nigerian cross-sectoral exposure data.

Keywords: financial contagion, network theory, non-bank financial institutions, systemic risk, Nigerian financial system