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THE INFLUENCE OF POLITICAL INSTABILITY AND INSECURITY ON FOREIGN DIRECT INVESTMENT (FDI) FLOWS INTO NIGERIA’S BANKING SECTOR

ABSTRACT
This study examines the impact of political instability and insecurity on Foreign Direct Investment (FDI) flows into Nigeria’s banking sector. Political instability, characterized by electoral violence, policy unpredictability, and governance inefficiencies, alongside insecurity manifested in insurgency, terrorism, kidnapping, and communal conflicts, exacerbates risk perceptions among foreign investors. While Nigeria’s banking sector has historically attracted FDI due to its comparative stability relative to extractive industries, persistent security threats and political volatility erode investor confidence, escalate operational costs, and depress capital inflows. Drawing on empirical evidence, this research demonstrates a negative correlation between these factors and FDI, particularly within financial services. The study assesses the magnitude of these influences, evaluates sector-specific effects, and proposes policy interventions. Findings indicate that although the banking sector exhibits resilience, chronic insecurity and instability constitute significant deterrents to foreign investment, with implications for financial sector development and broader economic growth in Nigeria.

CHAPTER ONE
INTRODUCTION

1.1 Background of the Study
Foreign Direct Investment (FDI) serves as a critical driver of economic development in emerging economies such as Nigeria, enabling capital mobilization, technological transfer, employment creation, and enhanced financial intermediation. Within Nigeria, the banking sector has emerged as a leading recipient of FDI, benefiting from structural reforms including the 2004–2005 banking recapitalization and liberalization of foreign ownership regulations. These reforms have enhanced the sector’s attractiveness relative to higher-risk industries like oil and gas, where price volatility prevails. However, persistent political instability marked by electoral irregularities, erratic policy changes, systemic corruption, and weak institutions and escalating insecurity fueled by Boko Haram insurgency in the northeast, banditry in the northwest, separatist agitations in the southeast, and widespread kidnappings nationwide continue to distort investment dynamics, elevating risk assessments and shaping global investor strategies.

Danjuma (2022) identifies terrorism, political violence, corruption, and sectarian tensions as detrimental to FDI inflows into Nigerian banking, revealing sectoral vulnerabilities despite regulatory safeguards. Similarly, Okafor et al. (2025) utilize econometric analysis to establish inverse relationships between insecurity indicators (e.g., insurgency, crime rates) and FDI growth in Nigeria from 2002 to 2023, noting operational disruptions in financial services. Eze et al. (2023) further document the adverse short- and long-term effects of political unrest and terrorism on FDI, particularly in non-extractive sectors like banking, where investor sensitivity to stability is pronounced. Udeh et al. (2024) demonstrate how kidnappings and ethnic conflicts diminished Nigeria’s investment appeal between 2010 and 2024, diverting capital away from otherwise stable sectors. Additionally, Chuku et al. (2022) highlight fiscal spillovers, showing that insecurity-induced economic volatility indirectly stifles banking FDI through inflated risk premiums and operational expenditures. Collectively, these studies confirm that while regulatory advancements have historically sustained FDI in Nigerian banking, the synergistic effects of political instability and insecurity perpetuate declining investor trust, underscoring the urgency of targeted risk-mitigation frameworks to unlock the sector’s developmental potential.

1.2 Statement of the Problem

The Nigerian banking sector, despite its strategic positioning and regulatory safeguards, faces stagnation or decline in foreign direct investment (FDI) inflows due to escalating political instability and insecurity. These conditions amplify both perceived and actual risks, leading to capital flight, increased security and insurance costs, and reluctance among foreign investors to establish or expand operations. While certain niches, such as fintech, have attracted limited foreign interest, broader FDI inflows remain constrained, limiting the sector’s potential for innovation and growth.

Existing research supports these observations. Danjuma (2022) highlights that political risks including violence and corruption significantly deter FDI in the banking sector by creating an atmosphere of uncertainty that outweighs institutional strengths. Okafor et al. (2025) employ time-series analysis to demonstrate that insecurity directly suppresses FDI, evidenced by negative coefficients indicating both immediate and prolonged declines in foreign capital inflows. Eze et al. (2023) further establish a bidirectional relationship between terrorism and economic instability, showing that insecurity not only repels FDI but also worsens macroeconomic vulnerabilities, indirectly undermining banking stability.

Udeh et al. (2024) reveal that persistent security threats such as hostage-taking and regional conflicts between 2010 and 2024 have resulted in significant FDI deficits, threatening financial deepening and inclusive economic growth. Additionally, Chuku et al. (2022) illustrate how insecurity imposes fiscal strains, including diminished tax revenues and elevated public spending, indirectly weakening the investment climate for banking FDI.

Collectively, these challenges compromise the Nigerian banking sector’s resilience, risking reputational damage, regulatory non-compliance, and lost opportunities in global financial integration. This underscores the urgent need for targeted policy interventions to restore investor confidence and enhance FDI attractiveness.

1.3 Objectives of the Study

1. To assess the extent of political instability and insecurity’s influence on FDI flows into Nigeria’s banking sector.
2. To examine the sector-specific impacts of these factors on foreign investment decisions and inflows.
3. To recommend policy and strategic measures for mitigating the adverse effects and enhancing FDI attractiveness in the sector.

1.4 Research Questions

1. To what extent do political instability and insecurity influence FDI flows into Nigeria’s banking sector?
2. What are the sector-specific impacts of political instability and insecurity on foreign investment decisions and inflows?
3. What policy and strategic measures can mitigate the adverse effects and enhance FDI attractiveness in the banking sector?

1.5 Significance of the Study

This study provides valuable insights for policymakers, regulators like the Central Bank of Nigeria, and banking executives by highlighting the quantifiable and qualitative impacts of instability and insecurity on FDI. It informs targeted interventions to bolster investor confidence, such as improved security frameworks and political reforms. Academically, it contributes to the literature on risk factors in emerging market finance, particularly sector-specific analyses in Nigeria. Investors benefit from a clearer understanding of risks, while the broader economy gains from recommendations that could attract more FDI, fostering financial stability, job creation, and sustainable growth.

1.6 Scope of the Study

The study focuses on the influence of political instability and insecurity on FDI flows specifically into Nigeria’s banking sector, encompassing commercial banks and financial institutions regulated by the Central Bank of Nigeria. It covers the period from 2010 to 2025, capturing key events such as intensified insurgency, electoral cycles, and recent security challenges. The analysis draws on empirical data, sectoral reports, and scholarly studies, with a geographic emphasis on Nigeria as a whole, though noting regional variations in insecurity.

1.7 Limitations of the Study

The research relies on secondary data from reports, journals, and official sources, which may suffer from inconsistencies in reporting or underrepresentation of certain FDI channels. Access to proprietary bank-level FDI data is limited, potentially restricting granularity. External shocks like global economic conditions or policy shifts may confound isolated effects of instability and insecurity. Despite these, the study uses robust recent evidence to ensure validity.

1.8 Operational Definition of Terms

• Political Instability: Unpredictable governance, electoral violence, policy inconsistency, corruption, and institutional weaknesses affecting investor perceptions.
• Insecurity: Threats from insurgency, terrorism, kidnapping, banditry, and communal conflicts impacting safety and operations.
• Foreign Direct Investment (FDI): Long-term investments by foreign entities in Nigerian banks, including equity stakes, branch establishments, or significant portfolio commitments.
• Banking Sector: Commercial banks and deposit money institutions licensed to provide financial services in Nigeria.
• FDI Flows: Inward investments into the sector, measured by inflows, stock, or sectoral allocations.

REFERENCES

Chuku, C., Oduor, J., Simpasa, A., & Otondi, L. O. (2022). Growth and fiscal effects of insecurity on the Nigerian economy. The European Journal of Development Research, 35(3), 743–769. https://doi.org/10.1057/s41287-022-00531-3

Danjuma, I. (2022). Insurgency, political risk, and foreign direct investment inflows in Nigeria: A sectorial analysis. CBN Journal of Applied Statistics, 13(1), 27–57. https://dc.cbn.gov.ng/jas/vol13/iss1/3

Eze, O. R., & Nwatu, R. (2023). Effects of insecurity, terrorism and political instability on foreign direct investment inflows in Nigeria. International Journal on Informatics Visualization, 7(4), 2567–2574. https://doi.org/10.30630/joiv.7.4.2059

Okafor, G., Piesse, J., & Webster, A. (2025). Effect of insecurity on foreign direct investment in Nigeria, 2002-2023. International Journal of Research and Innovation in Social Science, 9(4), 123–145. https://doi.org/10.47772/IJRISS.2025.904008

Udeh, S. N., Ugwu, J. I., Onwuchekwa, F. C., & Ugwu, O. C. (2024). Security challenges and foreign direct investment in Nigeria: Implications for economic growth (2010-2024). SSRN Electronic Journal. https://doi.org/10.2139/ssrn.4845577