EFFECT OF TREASURY SINGLE ACCOUNT ON THE PERFORMANCE OF NIGERIA BANKS

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

The management of public finances has remained one of the most critical governance challenges in Nigeria since independence. For decades, government revenues — derived principally from oil exports, taxes, and non-oil receipts — were distributed across thousands of bank accounts maintained by Ministries, Departments, and Agencies (MDAs) in various commercial banks across the country. This fragmented approach to public funds management created systemic inefficiencies, facilitated widespread abuse, and deprived the federal government of consolidated visibility over its cash position, making effective fiscal planning and management exceedingly difficult.

In September 2015, the Federal Government of Nigeria, under President Muhammadu Buhari, gave full operational effect to the Treasury Single Account (TSA) policy, mandating all Ministries, Departments, and Agencies of the federal government to remit their revenues and receipts to a unified account domiciled at the Central Bank of Nigeria (CBN). Although the TSA policy had its legislative and policy foundations in earlier administrations — including provisions in the 1999 Constitution, the Finance (Control and Management) Act, and the Financial Regulations — the 2015 presidential directive represented the most decisive and comprehensive implementation of the policy in Nigeria’s fiscal history.

The TSA is a unified structure of government bank accounts that gives a consolidated view of government cash resources. Under the TSA model, all government receipts are paid into a single account or a set of linked accounts managed by the CBN, while payments are made from the same account in accordance with appropriated budgets. This arrangement is designed to eliminate the practice of government MDAs maintaining separate accounts with commercial banks, a practice that historically resulted in idle government funds being held — and profitably deployed — by commercial banks without corresponding benefit to the public treasury.

The implementation of the TSA had profound and immediate implications for the Nigerian banking system. Prior to the TSA, commercial banks served as the primary repositories of government funds, with public sector deposits constituting a significant — and in many cases dominant — portion of their total deposit liabilities. For some banks, government deposits represented between 20 and 50 percent of total deposits, providing cheap and stable funding that underpinned their lending activities, liquidity positions, and profitability. The abrupt withdrawal of these deposits following the TSA’s implementation triggered a significant liquidity shock across the banking system, with attendant consequences for deposit levels, lending capacity, interest rates, and overall financial performance.

The Nigerian banking sector, which had weathered a severe systemic crisis in 2008–2009 that necessitated a regulatory bailout, was thus confronted with a major structural shift in its funding base almost simultaneously with persistent macroeconomic headwinds including the oil price collapse of 2014–2016, the recession of 2016, and mounting non-performing loans. Against this backdrop, understanding the precise nature, magnitude, and duration of the TSA’s impact on bank performance is a matter of considerable theoretical and practical significance.

This study therefore investigates the effect of the Treasury Single Account on the performance of Nigerian banks, examining how the policy has affected key banking performance indicators including deposit mobilization, liquidity, profitability, and lending behaviour. By providing rigorous empirical evidence on the TSA-bank performance relationship, the study aims to contribute to the ongoing policy discourse on public financial management reform and its implications for financial system stability in Nigeria.

1.2 Statement of the Problem

The implementation of the Treasury Single Account in September 2015 precipitated a significant realignment in the funding structure of Nigerian commercial banks. Estimates by financial analysts at the time of implementation suggested that TSA-related withdrawals from commercial banks amounted to between ₦1.8 trillion and ₦2.2 trillion — a sum that represented a substantial share of the banking system’s aggregate deposit base. This sudden and large-scale withdrawal of public sector funds fundamentally altered the operating environment of Nigerian banks and raised urgent questions about the sustainability of banking sector performance in the post-TSA era.

Several specific problems have been identified in the context of the TSA’s impact on bank performance. First, the withdrawal of government deposits eroded the deposit base of many banks, reducing their capacity to extend credit to the private sector and compelling some institutions to revise their lending policies. Second, the liquidity pressures occasioned by the deposit outflows caused several banks to increase their reliance on more expensive short-term funding sources, raising their funding costs and compressing net interest margins. Third, banks that had structured their asset portfolios around the expectation of continued government deposit inflows were forced into rapid portfolio adjustments that exposed them to asset quality deterioration and capital adequacy stress.

Notwithstanding these immediate disruptions, proponents of the TSA argue that the policy’s medium- to long-term effects on bank performance may be more nuanced. By compelling banks to develop more diverse and retail-oriented deposit bases, the TSA may have catalysed improvements in banks’ long-term funding stability and resilience. Furthermore, to the extent that the TSA has improved government fiscal efficiency, reduced leakages, and enhanced revenue mobilization, it may indirectly benefit the banking sector through a more stable macroeconomic environment and increased government capacity for developmental spending that stimulates economic activity.

Despite the significant policy and commercial importance of the TSA, empirical research on its precise effects on Nigerian bank performance remains limited, methodologically varied, and in some cases contradictory. Many existing studies rely on short post-implementation windows that may not capture the full adjustment trajectory of affected banks. Others focus on a narrow set of performance metrics, missing the broader and more complex picture of how the TSA has reshaped banking sector dynamics. There is therefore a clear need for a comprehensive, multi-dimensional empirical analysis of the TSA’s effects on bank performance over a longer time horizon — a gap this study is designed to address.

1.3 Objectives of the Study

The main objective of this study is to examine the effect of the Treasury Single Account on the performance of Nigerian banks. The specific objectives are:

1. To determine the effect of the Treasury Single Account on deposit mobilization of Nigerian banks.
2. To assess the impact of the Treasury Single Account on the liquidity of Nigerian banks.
3. To examine the effect of the Treasury Single Account on the profitability of Nigerian banks.
4. To investigate the impact of the Treasury Single Account on the lending behaviour of Nigerian banks.
5. To evaluate the long-run relationship between the Treasury Single Account policy and the overall financial performance of Nigerian banks.

1.4 Research Questions

The following research questions guide this study:

1. What is the effect of the Treasury Single Account on deposit mobilization of Nigerian banks?
2. How has the Treasury Single Account impacted the liquidity of Nigerian banks?
3. What is the effect of the Treasury Single Account on the profitability of Nigerian banks?
4. What is the impact of the Treasury Single Account on the lending behaviour of Nigerian banks?
5. Is there a significant long-run relationship between the Treasury Single Account policy and the overall financial performance of Nigerian banks?

1.5 Research Hypotheses

The following null hypotheses are formulated to guide the study:

H₀₁: The Treasury Single Account has no significant effect on deposit mobilization of Nigerian banks.

H₀₂: The Treasury Single Account has no significant impact on the liquidity of Nigerian banks.

H₀₃: The Treasury Single Account has no significant effect on the profitability of Nigerian banks.

H₀₄: The Treasury Single Account has no significant impact on the lending behaviour of Nigerian banks.

H₀₅: There is no significant long-run relationship between the Treasury Single Account policy and the overall financial performance of Nigerian banks.

1.6 Significance of the Study

This study is of considerable importance to a wide range of stakeholders in Nigeria’s financial and public governance ecosystem.

Bank Management and Boards: The findings of this study provide bank executives and boards with evidence-based insights into the structural consequences of the TSA for their institutions’ funding, liquidity, and profitability. These insights can inform strategic planning, deposit diversification efforts, and liquidity risk management frameworks, enabling banks to operate more resiliently in the post-TSA environment.

Regulatory Authorities: The Central Bank of Nigeria and other financial sector regulators can leverage the study’s findings to assess the systemic impact of the TSA on banking sector stability and to calibrate supervisory policies accordingly. The findings may also inform the design of complementary regulatory measures to mitigate any adverse effects of the TSA on bank performance and systemic resilience.

The Federal Government and Ministry of Finance: As the architects and implementers of the TSA policy, the Federal Government and the Ministry of Finance stand to benefit from a rigorous assessment of the policy’s unintended consequences for the financial sector. The study’s findings can inform refinements to TSA implementation arrangements, including the design of mechanisms to moderate adverse liquidity shocks and to promote productive private sector credit growth.

Investors and Analysts: Capital market participants, financial analysts, and institutional investors in the Nigerian banking sector require a clear understanding of the TSA’s impact on bank fundamentals to make informed investment decisions. This study provides a systematic, empirical basis for such assessments.

Academic Community: The study enriches the literature on public financial management reform and its intersections with banking sector performance in developing economies. It provides a methodological template for future cross-country comparative studies of TSA-type policies, which have been adopted or are under consideration in several other African countries.

1.7 Scope of the Study

This study focuses on the effect of the Treasury Single Account on the performance of deposit money banks (DMBs) in Nigeria. The study covers all systemically important commercial banks licensed and regulated by the Central Bank of Nigeria, using data drawn from their published annual reports and financial statements as well as CBN statistical bulletins and NDIC annual reports.

The study period spans from 2010 to 2023, a window that encompasses five years prior to the full TSA implementation in September 2015 and eight years post-implementation. This extended window allows for a robust before-and-after analysis that captures both the immediate and medium-term effects of the TSA policy on bank performance, as well as the interplay between the TSA and other macroeconomic shocks that affected the banking sector during this period.

The study is delimited to the following performance dimensions: deposit mobilization (total deposits and composition), liquidity (liquidity ratio, loan-to-deposit ratio), profitability (return on assets, return on equity, net interest margin), and lending behaviour (total credit to the private sector, non-performing loan ratio). The study does not cover non-bank financial institutions or the effects of the TSA on state government banks and institutions, which have separate TSA arrangements at the sub-national level.

1.8 Limitations of the Study

Several limitations are acknowledged in the conduct of this study:

Data Availability: While published annual reports and CBN/NDIC data provide a reasonable basis for analysis, certain granular data — such as the bank-specific composition of government versus private sector deposits — may not be fully disclosed in public filings, limiting the precision with which pre- and post-TSA deposit structures can be disaggregated.

Confounding Macroeconomic Factors: The post-TSA period coincides with several major macroeconomic shocks in Nigeria, including the 2014–2016 oil price collapse, the 2016 recession, the COVID-19 pandemic (2020–2021), and currency devaluation pressures. Isolating the TSA’s specific contribution to observed changes in bank performance from these concurrent macroeconomic influences is a significant methodological challenge that the study addresses through appropriate econometric controls, but some residual confounding cannot be fully eliminated.

Generalizability: While the study focuses on Nigerian deposit money banks, the specific findings may not be directly transferable to other banking systems or other countries that have implemented TSA policies under different institutional, regulatory, and macroeconomic conditions.

Bank Heterogeneity: The Nigerian banking sector is characterized by significant heterogeneity in terms of bank size, business model, and public sector exposure. Aggregate-level findings may therefore mask important differences in TSA impact across large, medium, and small banks, or between banks with high versus low pre-TSA public sector deposit concentrations.

1.9 Definition of Terms

Treasury Single Account (TSA): A public accounting system under which all government revenues, receipts, and incomes are collected into a single account, or a set of linked accounts, maintained at the Central Bank of Nigeria, from which all government payments and disbursements are made. The TSA is designed to provide the government with a consolidated and real-time view of its cash position.

Bank Performance: The overall effectiveness and efficiency with which a bank generates value for its stakeholders, commonly measured through financial indicators such as profitability (return on assets, return on equity), liquidity (liquidity ratio, loan-to-deposit ratio), asset quality (non-performing loan ratio), and capital adequacy (capital adequacy ratio).

Deposit Mobilization: The process by which banks attract and accumulate funds from customers and other stakeholders in the form of demand deposits, savings deposits, time deposits, and other deposit instruments. Deposit mobilization is a core banking function and the primary source of loanable funds.

Liquidity: The ability of a bank to meet its financial obligations as they fall due without incurring unacceptable losses. Bank liquidity is measured by indicators such as the liquidity ratio (liquid assets as a percentage of total assets or total liabilities) and the loan-to-deposit ratio.

Profitability: The capacity of a bank to generate earnings relative to its asset base, equity, and revenue. Key profitability metrics used in this study include return on assets (ROA), return on equity (ROE), and net interest margin (NIM).

Lending Behaviour: The policies, practices, and outcomes associated with a bank’s extension of credit to borrowers, including the volume, pricing, sectoral allocation, and quality of loans and advances. Lending behaviour is proxied in this study by total credit to the private sector and the non-performing loan ratio.

Ministries, Departments, and Agencies (MDAs): The various units of the Nigerian federal government responsible for implementing government policies, providing public services, and collecting government revenues. MDAs were the primary holders of government accounts in commercial banks prior to the TSA implementation.

Central Bank of Nigeria (CBN): The apex monetary authority of Nigeria responsible for issuing currency, managing monetary policy, regulating and supervising financial institutions, and managing the country’s external reserves. The CBN is the custodian of the TSA account.

Public Sector Deposits: Funds belonging to government entities — including MDAs, state-owned enterprises, and government parastatals — that are maintained in commercial bank accounts. The withdrawal of these deposits from commercial banks to the CBN-held TSA is the central event examined in this study.

Net Interest Margin (NIM): The difference between the interest income generated by a bank from its interest-earning assets and the interest expenses it pays on its interest-bearing liabilities, expressed as a percentage of average earning assets. NIM is a key indicator of a bank’s core lending and funding efficiency.

1.10 Organization of the Study

This research is structured into five chapters. Chapter One presents the introduction, which covers the background to the study, statement of the problem, objectives, research questions, hypotheses, significance, scope, limitations, definition of terms, and organization of the study. Chapter Two contains the literature review, encompassing the theoretical framework, conceptual underpinnings of the TSA and bank performance, and a review of empirical studies conducted in Nigeria and internationally. Chapter Three sets out the research methodology, detailing the research design, population and sample, data sources, variable operationalization, model specification, and estimation techniques. Chapter Four presents the empirical results, including descriptive statistics, pre-estimation tests, regression results, and a discussion of findings in relation to the study’s hypotheses and the existing literature. Chapter Five provides the summary of findings, conclusions, policy recommendations, and suggestions for future research.

CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

This chapter presents a systematic review of the literature relevant to the Treasury Single Account (TSA) and its effects on the performance of Nigerian banks. The review is organized into four major sections. The first section examines the theoretical framework underpinning the study, drawing on established theories in public financial management and banking. The second section provides a conceptual review of the TSA, its architecture, objectives, and mechanics, as well as the key dimensions of bank performance examined in the study. The third section surveys the empirical literature on the TSA’s effects on bank performance in Nigeria and comparable international experiences. The chapter concludes with a summary that identifies the gaps in the existing literature that this study is designed to address.

2.2 Theoretical Framework

This study draws on three major theoretical frameworks: the Financial Intermediation Theory, the Liquidity Preference Theory, and the Public Choice Theory. Together, these theories provide a comprehensive intellectual basis for understanding how the TSA policy, by altering the structure of government funds in the banking system, affects bank performance across multiple dimensions.

2.2.1 Financial Intermediation Theory

Financial Intermediation Theory, articulated in seminal contributions by Gurley and Shaw (1960) and subsequently developed by Diamond and Dybvig (1983), posits that banks and other financial intermediaries perform the socially valuable function of channelling funds from surplus economic units (savers) to deficit economic units (borrowers), thereby facilitating productive investment and economic growth. Banks achieve this intermediation function by accepting deposits, managing liquidity risks through maturity transformation, and deploying pooled funds as loans and investments.

Central to Financial Intermediation Theory is the recognition that the volume, stability, and cost of deposits are fundamental determinants of a bank’s intermediation capacity and financial performance. A large and stable deposit base enables banks to extend more credit at competitive rates, generate higher net interest income, and achieve greater operational efficiency through economies of scale. Conversely, a sudden reduction in the deposit base — such as that occasioned by the TSA-driven withdrawal of government funds — constrains the bank’s intermediation capacity, potentially reducing lending volumes, widening credit spreads, and compressing profitability.

Financial Intermediation Theory also emphasizes the role of deposit composition. Government deposits, which tend to be large-value, low-cost, and relatively stable, are qualitatively different from retail deposits, which are typically smaller, more dispersed, and may carry higher acquisition costs. The substitution of government deposits with retail deposits following the TSA implementation therefore has implications not only for deposit volumes but also for funding costs, liquidity profiles, and net interest margins. This theoretical framework provides the basis for the study’s examination of the TSA’s effects on deposit mobilization, liquidity, and profitability.

2.2.2 Liquidity Preference Theory

John Maynard Keynes (1936), in his foundational work on monetary economics, introduced the Liquidity Preference Theory to explain the demand for money and, by extension, the determinants of interest rates. According to Keynes, economic agents hold money — and by extension, liquid assets — for three primary motives: the transactions motive (to facilitate day-to-day spending), the precautionary motive (to guard against unexpected financial needs), and the speculative motive (to exploit anticipated changes in interest rates and asset prices).

In the banking context, Liquidity Preference Theory is particularly relevant to understanding how banks manage their asset portfolios in response to funding shocks. When banks experience sudden and large reductions in their deposit liabilities — as occurred during the TSA implementation — they face heightened liquidity preference, compelling them to increase their holdings of liquid assets, reduce long-term lending, and raise interest rates on deposits to attract replacement funding. This behavioural response has direct implications for bank performance, including reduced lending volumes, higher funding costs, and potentially lower profitability in the short to medium term.

The theory also provides insight into the systemic dimension of the TSA shock. Because the TSA withdrawal affected virtually all commercial banks simultaneously, the collective shift in liquidity preference across the banking system could amplify its macroeconomic impact, contributing to credit contraction and rising interest rates that affected the broader economy. This systemic dimension reinforces the importance of understanding the TSA’s banking sector consequences not merely at the individual bank level but also at the level of the financial system as a whole.

2.2.3 Public Choice Theory

Public Choice Theory, pioneered by James Buchanan and Gordon Tullock (1962) and further developed by scholars including William Niskanen, applies the tools of economic analysis to the behaviour of political actors and public institutions. The theory posits that public officials, like private actors, are motivated by self-interest — including the desire to maximize budgets, enhance personal influence, and protect institutional turf — and that these motivations shape public policy decisions in ways that may diverge from the public interest.

In the context of the TSA, Public Choice Theory provides a lens through which the pre-TSA system of fragmented government accounts can be understood. Under the pre-TSA arrangement, MDA officials had strong incentives to maintain large balances in commercial bank accounts, as these deposits generated interest income that could be used for discretionary spending outside the formal budget process, and as the management of such accounts conferred patronage benefits and rent-seeking opportunities. Commercial banks, for their part, had strong incentives to cultivate relationships with MDA officials to secure these lucrative government deposits, creating a mutually reinforcing network of interests that sustained the fragmented system despite its fiscal inefficiencies.

Public Choice Theory therefore helps explain both the persistence of the fragmented pre-TSA system despite its well-known inefficiencies and the political resistance that accompanied early TSA implementation attempts. It also provides a framework for understanding the distributional consequences of the TSA for different categories of banks — notably, that banks with stronger government relations and higher pre-TSA public sector deposit concentrations faced greater disruption from the policy change. This theoretical perspective enriches the study’s analysis of the heterogeneous impact of the TSA across different types of Nigerian banks.

2.3 Conceptual Review

2.3.1 The Treasury Single Account: Concept, Architecture, and Objectives

A Treasury Single Account is a unified structure of government bank accounts, or a set of linked accounts, that gives the government a consolidated view of its cash resources and enables centralized management of government receipts and payments. The International Monetary Fund (IMF), in its technical notes on TSA implementation, describes the TSA as a prerequisite for modern cash management, emphasizing that it enables governments to optimize the use of available cash balances, minimize borrowing costs, and improve the overall efficiency of public financial management.

The fundamental principle of the TSA is that all government revenues and receipts — irrespective of their source, including taxes, royalties, fees, and donor inflows — are pooled into a single account from which all approved government expenditures are disbursed. This pooling arrangement eliminates the fragmented multi-account structure that characterizes less developed public financial management systems, in which individual MDAs maintain separate operational accounts with various commercial banks, often carrying substantial idle balances that generate no fiscal benefit and may indeed be misused.

The Nigerian TSA operates through a Funds Flow Architecture managed by the CBN in partnership with the Office of the Accountant General of the Federation (OAGF). Under this architecture, all government revenues are remitted through designated collection banks to the TSA held at the CBN. Payment requests by MDAs are processed through the Government Integrated Financial Management Information System (GIFMIS) and the Treasury Single Account Management System (TAMS), ensuring that all transactions are captured, authorized, and recorded in real time. The CBN pays interest on TSA balances at a rate determined by the monetary policy framework, providing the government with a return on its consolidated cash holdings.

The primary objectives of the Nigerian TSA, as articulated by the Federal Ministry of Finance and the CBN, include: eliminating the practice of government funds being held in unauthorized accounts; providing government with real-time visibility over its cash position; reducing idle government balances in commercial banks; minimizing government borrowing costs by enabling more efficient cash management; preventing revenue leakages and enhancing fiscal transparency; and supporting monetary policy by improving the CBN’s ability to sterilize or deploy excess government liquidity.

2.3.2 Historical Background of the TSA in Nigeria

The legal and institutional foundations of the TSA in Nigeria predate the 2015 implementation by several decades. Section 80 of the 1999 Constitution of the Federal Republic of Nigeria provides for the Consolidated Revenue Fund into which all revenues of the federal government shall be paid. The Finance (Control and Management) Act of 1958, as amended, and the Financial Regulations equally mandate the remittance of all government revenues to designated government accounts. Despite these constitutional and statutory provisions, the practice of MDAs maintaining multiple accounts with commercial banks persisted for decades owing to weak enforcement, institutional inertia, and the vested interests described by Public Choice Theory.

Several attempts at TSA implementation were made in earlier administrations. The Obasanjo administration (1999–2007) made partial progress in consolidating government accounts, while the Jonathan administration (2011–2015) issued circulars directing MDAs to remit revenues to TSA accounts, with limited compliance. It was the Buhari administration’s executive order of August 2015, with a compliance deadline of September 15, 2015, that finally compelled full implementation, resulting in the withdrawal of an estimated ₦2 trillion from commercial bank accounts within weeks of the deadline.

The rapid and comprehensive implementation of the TSA in 2015 was facilitated by improvements in Nigeria’s public financial management infrastructure, including the deployment of GIFMIS, the Bank Verification Number (BVN) system, and enhanced CBN payment systems that made real-time government cash management technically feasible. The involvement of a financial technology partner, SystemSpecs (developers of the Remita payment platform), in the TSA’s payment processing infrastructure also played a significant role in enabling rapid compliance.

2.3.3 Bank Performance: Concept and Measurement

Bank performance is a multidimensional concept that encompasses the financial health, operational efficiency, and risk management effectiveness of a banking institution. Performance measurement in banking draws on a combination of profitability metrics, liquidity indicators, asset quality measures, and capital adequacy ratios, collectively providing a comprehensive picture of institutional health and sustainability.

Profitability measures assess a bank’s capacity to generate earnings relative to its resources. Return on Assets (ROA) — calculated as net income divided by average total assets — measures how efficiently a bank uses its asset base to generate profit. Return on Equity (ROE) — calculated as net income divided by average shareholders’ equity — measures the return generated for shareholders. Net Interest Margin (NIM) — the difference between interest income and interest expense expressed as a percentage of earning assets — measures the efficiency of the bank’s core lending and funding activities. These three metrics collectively capture the profitability dimension of bank performance.

Liquidity indicators assess a bank’s ability to meet its short-term obligations and fund its operations without distress. The Liquidity Ratio — liquid assets as a percentage of total deposits or total liabilities — measures the buffer of readily available funds. The Loan-to-Deposit Ratio (LDR) — total loans and advances as a percentage of total deposits — measures the extent to which a bank has deployed its deposit base into less liquid loan assets, with a higher ratio indicating greater liquidity risk. In Nigeria, the CBN prescribes minimum liquidity ratios for deposit money banks to ensure systemic resilience.

Asset quality metrics assess the health of a bank’s loan portfolio and its exposure to credit losses. The Non-Performing Loan (NPL) ratio — NPLs as a percentage of gross loans — is the primary indicator of asset quality, with a higher ratio signalling greater credit risk and potential for loan loss provisions that erode profitability. Capital adequacy ratios, particularly the Capital Adequacy Ratio (CAR) as defined under the Basel framework and CBN guidelines, measure the sufficiency of a bank’s capital buffer to absorb unexpected losses.

For the purpose of this study, bank performance is operationalized through five primary measures: total deposits (capturing deposit mobilization), liquidity ratio (capturing liquidity), return on assets and net interest margin (capturing profitability), and total credit to the private sector alongside the NPL ratio (capturing lending behaviour and asset quality). These measures collectively provide a comprehensive picture of how the TSA has affected Nigerian banks across the key dimensions of their financial performance.

2.3.4 The TSA and Bank Deposits: Theoretical Channels

The most direct and immediate channel through which the TSA affects bank performance is the deposit channel. Prior to the TSA, government MDAs maintained large deposits with commercial banks, providing these institutions with a cheap and stable funding source. The concentration of government deposits varied significantly across banks, with banks that had cultivated strong government relationships — often through political connections or the provision of specialized government payment services — holding disproportionately large public sector deposit shares.

The withdrawal of these deposits to the CBN-held TSA simultaneously reduced the aggregate deposit base of the banking system and altered its composition. Banks that were highly concentrated in government deposits experienced the most acute deposit outflows and faced the greatest pressure to replace lost funding. The cost of replacement funding — typically higher than the near-zero cost of current account government deposits — placed upward pressure on funding costs and downward pressure on net interest margins.

Beyond the direct deposit channel, the TSA also affects banks indirectly through its impact on government spending patterns and the velocity of money in the economy. When government funds are concentrated at the CBN rather than distributed across commercial banks, the multiplier effect of government spending on bank deposits may be altered — depending on whether government expenditure is channelled back into the banking system through payments to suppliers, contractors, and civil servants whose salaries are deposited in commercial bank accounts. The net effect on bank deposits in the medium term therefore depends on the pace and pattern of government spending from the TSA, as well as the extent to which TSA-related fiscal savings translate into expanded government investment.

2.4 Empirical Review

2.4.1 Nigerian Studies on TSA and Bank Performance

A growing body of empirical research has examined the impact of the TSA on Nigerian bank performance since the policy’s full implementation in September 2015. These studies employ a range of methodologies — including event studies, regression analysis, panel data models, and descriptive comparative analysis — and examine various dimensions of bank performance, with generally consistent findings regarding the short-term adverse effects of the TSA on deposit levels and liquidity, and more nuanced and mixed findings regarding its longer-term effects on profitability and lending.

Nwosu and Orji (2016) conducted one of the earliest post-implementation assessments of the TSA’s impact on Nigerian banks, using a comparative analysis of quarterly financial data for fifteen commercial banks before and after the September 2015 implementation. The study found a statistically significant decline in total deposits across the sampled banks in the two quarters following TSA implementation, with the largest deposit contractions recorded by banks that had the highest pre-TSA government deposit concentrations. The study also documented a deterioration in average liquidity ratios, as banks struggled to replace lost government deposits with alternative funding. The authors concluded that the TSA created significant short-term liquidity stress in the Nigerian banking system and recommended that the CBN develop liquidity support mechanisms to moderate the transition.

Idowu and Ayodele (2016) investigated the effect of the TSA on the profitability of Nigerian deposit money banks using a sample of ten listed banks over the period 2013–2016. Employing ordinary least squares (OLS) regression, the study found a significant negative relationship between the TSA implementation dummy variable and bank profitability, measured by ROA and ROE. The authors attributed the profitability decline primarily to the increase in funding costs occasioned by the loss of low-cost government deposits, as banks were compelled to raise deposit rates to attract replacement retail funding. The study recommended that banks accelerate their retail deposit mobilization strategies and invest in digital channels to reduce deposit acquisition costs.

Obinna and Nwokoye (2017) examined the TSA’s impact on the lending behaviour of Nigerian banks, using panel data regression for a sample of twelve commercial banks over the period 2012–2016. The study found a significant negative relationship between the TSA and total credit to the private sector, suggesting that the deposit contraction occasioned by the TSA translated into reduced lending capacity. The NPL ratio was found to increase in the post-TSA period, which the authors attributed partly to the general deterioration in economic conditions associated with the 2016 recession and partly to the credit selectivity forced upon banks by tighter liquidity conditions. The study highlighted the potential macroeconomic spillover effects of the TSA, noting that reduced bank lending could dampen private sector investment and economic growth.

Adeolu (2017) assessed the implications of the TSA for the Nigerian banking sector’s stability and growth using a mixed-methods approach combining quantitative analysis of banking sector aggregates and qualitative interviews with bank executives. The quantitative findings confirmed the deposit and liquidity impacts documented in earlier studies, while the qualitative insights provided important context regarding banks’ strategic responses to the TSA shock. Bank executives interviewed reported accelerating retail deposit mobilization campaigns, expanding agent banking networks to capture unbanked populations, cutting operational costs, and in some cases negotiating bilateral arrangements with state governments whose TSA compliance remained incomplete. The study noted that larger banks with more diversified funding bases were better positioned to absorb the TSA shock than smaller, government-deposit-dependent institutions.

Omodele and Uwuigbe (2018) used a panel data approach to examine the TSA’s effects on the financial performance of fifteen Nigerian deposit money banks over 2011–2017, covering both the pre- and post-implementation periods. The study employed a difference-in-differences (DiD) framework that distinguished between high-exposure banks (those with above-median pre-TSA government deposit concentrations) and low-exposure banks. The DiD estimates revealed that high-exposure banks experienced significantly larger declines in ROA, NIM, and total deposits compared to low-exposure banks in the post-TSA period, confirming that the TSA’s impact was heterogeneous and proportional to pre-implementation government deposit exposure. The study made a significant methodological contribution by demonstrating the importance of controlling for pre-TSA government deposit concentration in assessing the policy’s impact.

Adegbie, Fakile, and Uwuigbe (2020) took a longer-term perspective, extending the analysis window to 2019 and examining whether the initial adverse effects of the TSA on bank performance had moderated over time as banks adjusted their business models. The study found that while the short-term effects on deposits and liquidity were pronounced, banks had made significant progress in rebuilding their deposit bases through retail mobilization strategies by 2017–2018. Profitability metrics showed a partial recovery in the medium term, though NIM remained compressed relative to pre-TSA levels, reflecting the structural shift in funding composition. The study concluded that the TSA induced a permanent — rather than merely transitory — restructuring of the Nigerian banking sector’s funding model, with important implications for bank strategy and regulation.

Okonkwo and Nwosu (2019) specifically examined the TSA’s impact on small and medium-scale banks (those outside the top-tier by asset size), finding that this segment of the banking sector experienced more severe and more prolonged performance deterioration compared to the largest banks. The differential impact was attributed to the greater relative importance of government deposits in smaller banks’ funding structures, their more limited capacity to mobilize retail deposits quickly, and their reduced access to capital markets for alternative funding. The study recommended targeted regulatory support for smaller banks during the TSA adjustment period, including temporary relaxation of liquidity requirements and enhanced access to CBN lending facilities.

Adeleke and Adesanya (2021) examined the TSA’s impact on bank liquidity specifically, employing a vector autoregression (VAR) model to capture the dynamic interactions between the TSA, bank liquidity, and key macroeconomic variables over the period 2010–2020. The impulse response functions from the VAR model showed a sharp and statistically significant decline in bank liquidity ratios following the TSA implementation shock, with the liquidity impact persisting for approximately six to eight quarters before dissipating. The study found that the macroeconomic shocks of 2016 — the oil price collapse and the recession — amplified and prolonged the TSA-induced liquidity stress, making it difficult to cleanly attribute the magnitude of the liquidity deterioration to the TSA alone. The authors recommended the development of a TSA-aware monetary policy framework that accounts for the systematic impact of government cash flows on banking system liquidity.

2.4.2 International Evidence on TSA Implementation and Banking Sector Effects

While the Nigerian TSA experience has attracted significant research attention, comparable international evidence from countries that have implemented similar reforms provides useful context for evaluating the Nigerian findings and assessing the generalizability of the observed effects.

Allen and Krueger (2005) examined the impact of TSA implementation across a sample of twenty developing and transition economies, drawing on IMF technical assistance data and country financial statistics. The study found that TSA implementation consistently resulted in a reduction in government deposits held by commercial banks, with the magnitude of the reduction varying with the comprehensiveness of implementation and the pre-existing fragmentation of government accounts. In most cases, the deposit contraction was accompanied by a short-term increase in interbank borrowing rates, as banks sought to replace lost funding, followed by a gradual normalization as banks adjusted their deposit mobilization strategies and government spending flows returned funds to the banking system.

Pattanayak and Fainboim (2011), in a comprehensive IMF working paper on TSA design and implementation, documented case studies from Ghana, Kenya, Tanzania, Brazil, and India. The paper found that banking sector disruption was most pronounced in countries where TSA implementation was rapid and comprehensive — as in Nigeria — compared to countries where implementation was phased over several years. The paper recommended that countries implementing TSAs adopt transition measures, including advance notice to affected banks, phased implementation timelines, and coordinated central bank liquidity support, to moderate the banking sector impact.

Lienert (2009) examined the TSA experience of several Eastern European transition economies, finding that banking sector effects were generally temporary and that banks adapted their funding models within two to three years of TSA implementation. The study noted that TSA implementation accelerated the development of retail banking markets in several countries, as banks were compelled to develop new products and distribution channels to attract retail deposits — a finding that suggests potential long-term benefits of the TSA for financial deepening and inclusion that may partially offset its short-term performance costs.

Kimanzi (2016) studied the effect of Kenya’s TSA implementation on commercial bank performance, using quarterly data for twenty-two Kenyan commercial banks over 2012–2015. The study found results broadly consistent with the Nigerian evidence — significant declines in government deposits and liquidity ratios in the short term — but noted that the impact on profitability was more muted in Kenya, possibly owing to the more gradual implementation timeline and the more diversified pre-implementation deposit bases of Kenyan banks. The study highlighted the importance of implementation design in determining the magnitude of banking sector disruption.

Hashim and Piatti-Fünfkirchen (2016), in an IMF technical note on TSA implementation in sub-Saharan Africa, examined experiences in Ghana, Tanzania, Zambia, and Rwanda, finding that banking sector effects were conditioned by the institutional quality of the implementing government’s financial management infrastructure. Countries with well-developed payment systems, capable central banks, and transparent TSA governance frameworks experienced smoother transitions and less pronounced banking sector disruption than those with weaker institutional foundations. This finding is relevant to the Nigerian context, where the simultaneous development of the GIFMIS infrastructure and the Remita payment platform was instrumental in enabling effective TSA implementation.

2.4.3 Gaps in Existing Literature

The empirical literature reviewed above, while providing a valuable foundation for the current study, is characterized by several important gaps that this research seeks to address.

First, most existing Nigerian studies cover relatively short post-implementation windows — typically one to three years — that may not capture the full adjustment trajectory of affected banks. This study employs a data window extending to 2023, providing eight years of post-implementation evidence that enables a more comprehensive assessment of both short-term disruptions and medium-term adaptations.

Second, existing studies tend to focus on a narrow subset of performance metrics, most commonly deposits and profitability, without examining the full range of performance dimensions affected by the TSA. This study adopts a multi-dimensional performance framework that simultaneously examines deposit mobilization, liquidity, profitability, and lending behaviour, providing a more holistic assessment of the TSA’s impact.

Third, the methodological approaches employed in many existing studies — including simple OLS regressions and descriptive comparative analyses — may be inadequate to address the endogeneity, heterogeneity, and dynamic adjustment issues inherent in the TSA-bank performance relationship. This study employs panel data econometric techniques, including fixed effects models and dynamic panel estimators, that are better suited to these challenges.

Fourth, while Omodele and Uwuigbe (2018) made an important contribution by differentiating between high- and low-exposure banks, existing studies have not fully explored the moderating role of bank-specific characteristics — such as bank size, capital adequacy, and business model orientation — in determining the magnitude of the TSA’s impact on individual bank performance. This study incorporates these moderating variables to provide a more nuanced understanding of the heterogeneous impact of the TSA.

Fifth, the interaction between the TSA and other concurrent macroeconomic shocks — particularly the 2016 recession, the COVID-19 pandemic, and the multiple rounds of currency devaluation — has not been adequately disentangled in existing studies. This study employs macroeconomic control variables and robustness checks designed to isolate the TSA effect from these confounding influences.

These gaps collectively justify the need for the current study, which seeks to provide the most comprehensive, methodologically rigorous, and temporally extensive empirical examination of the TSA-bank performance relationship in Nigeria to date.

2.5 Summary of Literature Review

This chapter has reviewed the theoretical, conceptual, and empirical foundations relevant to the effect of the Treasury Single Account on the performance of Nigerian banks. Three theoretical frameworks — Financial Intermediation Theory, Liquidity Preference Theory, and Public Choice Theory — provide complementary lenses through which the TSA’s banking sector consequences can be understood. Financial Intermediation Theory explains how changes in deposit volume, composition, and cost affect banks’ intermediation capacity and financial performance. Liquidity Preference Theory provides insight into the behavioural responses of banks to funding shocks, including the shift towards greater liquidity holdings and higher deposit rates. Public Choice Theory illuminates the political economy of the pre-TSA system and the distributional consequences of the policy change for different categories of banks.

The conceptual review established a clear understanding of the TSA’s architecture, objectives, and Nigerian implementation context, as well as the key performance dimensions through which its impact is measured. The review traced the historical foundations of the Nigerian TSA to constitutional and statutory provisions predating the 2015 implementation and highlighted the role of improved financial management infrastructure in enabling the policy’s comprehensive and rapid deployment.

The empirical review surveyed Nigerian studies covering the period 2015–2021 and international evidence from IMF technical work and country case studies. The evidence consistently points to significant short-term adverse effects of the TSA on bank deposits and liquidity, with more mixed and nuanced findings regarding medium-term profitability and lending outcomes. The international evidence suggests that banking sector disruption from TSA implementation is generally temporary, conditioned by implementation design, and potentially followed by structural improvements in retail deposit markets and financial deepening.

Identified gaps in the existing literature — including short post-implementation windows, narrow performance metrics, methodological limitations, inadequate treatment of bank heterogeneity, and insufficient control for concurrent macroeconomic shocks — provide the motivation and direction for the current study. The following chapter details the research methodology through which these gaps are addressed.