The Role of Information Asymmetry in Credit Market Failure and Policy Design in Nigerian Banking: An Original Theoretical Contribution

Information asymmetry between banks and borrowers generates adverse selection and moral hazard problems that contribute to credit market failure and financial exclusion in Nigeria, yet a unified theoretical treatment of these mechanisms specific to the institutional features of Nigerian credit markets is absent from the literature. This study develops an original theoretical framework for understanding how information asymmetry produces credit market failure in Nigeria, and derives welfare-maximising policy interventions under realistic institutional constraints. The theoretical model integrates Stiglitz-Weiss credit rationing theory, the costly state verification model, and the social capital intermediation hypothesis into a multi-period, multi-type borrower model that captures the Nigerian informal sector's distinctive informational environment. Original theoretical results include the derivation of a credit market failure condition specific to markets combining formal and informal credit segments, the identification of a social capital threshold below which credit bureau information is insufficient to resolve adverse selection, and the welfare analysis of alternative policy instruments including credit guarantees, interest rate subsidies, and information platform subsidies. The model is empirically calibrated using microdata from the 2023 Access to Financial Services Survey and bank-level credit underwriting data from five commercial banks. Structural estimation via maximum likelihood confirms the model's key parameters. Counterfactual policy simulations demonstrate that interest rate subsidies are welfare-inferior to credit information platform investments in the Nigerian context. The study advances the theoretical frontier of credit market design for sub-Saharan African emerging economies.

Keywords: information asymmetry, credit market failure, adverse selection, credit rationing, Nigerian banking