Bank Specific and Macro-economic Determinants of Nigeria’s Banks Profitability
CHAPTER ONE
OBJECTIVE OF THE STUDY
Objective of the study are;
- To assess the effect of liquidity on mega banks’ profitability
- To ascertain the effect of credit risk on mega banks’ profitability
- To ascertain the relationship between macro economy and bank profitability
CHAPTER TWO
REVIEW OF RELATED LITERATURE
INTRODUCTION
There is no doubt that proper regulation is required as a prudential measure for banks to maintain adequate capital so as to prevent insolvency. According to Rime (2001), regulation has a significant impact on regulatory capital to asset ratio, indicating that banks increase their Tier capital under stricter regulatory pressure. It then means that imposition of regulation can lead to a desired outcome whereby banks hold more capital for periods of stress and are less vulnerable. More evidence to this effect has also been documented by Heid et al. (2004), where they argued that banks with lower capital buffers (capital in excess of regulatory minimal) try to increase capital and try to lower their risk exposures. Unfortunately, Rime (2001) and Heid et al. (2004) did not expressly test the impact of regulatory pressure on banks’ profitability but this can be inferred from the impact of adequate capital on risk asset creation. Two possible theoretical explanations have been advanced in the literature for the relationship between the equity-to-asset ratio and bank performance. The first possible explanation from theoretical literature is that a higher equity-to-asset ratio is associated with lower risk taking (decreasing leverage will reduce risks of financial distress). Second, corporate finance literature suggests that lower risk taking will negatively influence the expected return. Saunders and Schumacher (2000) applied the model of Ho and Saunders (1981) to analyse the determinants of interest margins in six countries of the European Union and the US during the period 1988–1995. They found that macroeconomic volatility and regulations have a significant impact on bank interest rate margins. Their empirical evidence supports an important trade-off between ensuring bank solvency, as defined by high capital to asset ratios, and lowering the cost of financial services to consumers, as measured by low interest rate margins. Based on an unbalanced panel of 389 SSA commercial banks, Flamini et al. (2009) used annual bank and macroeconomic data for 41 SSA countries over the period 1998- 2006 to analyse the determinants of commercial banks’ profitability using the Arellano Bonds Two-step General Method of Moments (GMM) to correct errors and biases in the model. Their regression results showed that macroeconomic variables significantly affect banks’ profitability in Africa. They noted that inflation has a positive effect on bank profits. They drew the inference that banks forecast future changes in inflation correctly and promptly enough to adjust interest rates and margins.
CHAPTER THREE
RESEARCH METHODOLOGY
Research design
The researcher used descriptive research survey design in building up this project work the choice of this research design was considered appropriate because of its advantages of identifying attributes of a large population from a group of individuals. The design was suitable for the study as the study sought to Bank specific and macro economic determinants of Nigeria’s banks profitability
Sources of data collection
Data were collected from two main sources namely:
Primary source and Secondary source
Primary source:
These are materials of statistical investigation which were collected by the research for a particular purpose. They can be obtained through a survey, observation questionnaire or as experiment; the researcher has adopted the questionnaire method for this study.
Secondary source:
These are data from textbook Journal handset etc. they arise as byproducts of the same other purposes. Example administration, various other unpublished works and write ups were also used.
CHAPTER FOUR
PRESENTATION ANALYSIS INTERPRETATION OF DATA
Introduction
Efforts will be made at this stage to present, analyze and interpret the data collected during the field survey. This presentation will be based on the responses from the completed questionnaires. The result of this exercise will be summarized in tabular forms for easy references and analysis. It will also show answers to questions relating to the research questions for this research study. The researcher employed simple percentage in the analysis.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
Introduction
It is important to ascertain that the objective of this study was on Bank specific and macroeconomic determinants of Nigeria’s banks profitability. In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of Bank specific and macro economic determinants of Nigeria’s banks profitability
Conclusion
Deposit money banks’ profitability is significantly affected these factors. Bank share capital regulation has remained in force over the years in Nigeria. Constant recapitalization enhances fixed tangible assets multiplication and the entire banking sector growth through mergers and acquisitions, little wonder that bank size was found to be statistically significant. The statistical significance of credit risk against profitability indicates a striking result. However, the determinants of deposit money banks’ profitability are bank-specific, industry-specific and macroeconomic in nature
Recommendation
- Management of deposit money banks should implement strategies that will guarantee tradeoff between liquidity and profitability for smooth operations. This is because large asset portfolios may affect their profit margins.
- Compliance with capitalization requirements prescribed by regulatory authorities would sustain adequate capital for bank-specific and sector-specific growth.
- The ratio of total loans and advances total assets as a measure of credit risk should be in direct proportion to minimize excessive risks by banks
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