The study investigated “Credit Creation and Financial Instability in Nigeria”. It is argued that it is credit creation that fuels bubbles, makes the system unstable and leads the economy into crises. Time series data collected from the Central Bank of Nigeria (CBN) Statistical Bulletin between periods of (1992- 2015) was used to regress the model using The Error Correction Model (ECM) technique. The ECM showed a short run and long run relationship in the model. The economy adjusts back to equilibrium at 59%. As the lending rate decreases, while money supply and loans to deposit ratio increases, credit created to real estate increases. The implication of this is that an increase in speculative credit causes a bubble and eventually a burst in asset prices leading to banking sector crisis where debtors are unable to pay back loans when due. The central bank should get more involved, in form of enforcing credit-control, to restrict speculative credit creation.

The study investigated “Credit Creation and Financial Instability in Nigeria”. It is argued that it is credit creation that fuels bubbles, makes the system unstable and leads the economy into crises. Time series data collected from the Central Bank of Nigeria (CBN) Statistical Bulletin between per...