Determinants of Commercial Bank Performance in Nigeria
CHAPTER ONE
Objective of the study
The objective of this study is to examine the determinants of commercial banks’ performance in Nigeria. Specifically, the study aims to:
- Investigate the impact of Capital Adequacy on banks’ performance in Nigeria.
- Evaluate the effect of Asset Quality on banks’ performance in Nigeria.
- Examine the effect of Management Efficiency on banks’ performance in Nigeria.
- Investigate the impact of bank Liquidity on banks’ performance in Nigeria.
- Investigate the effect of Inflation rate on banks’ performance in Nigeria.
- Determine the relationship between gross Domestic Product and banks’ performance in Nigeria
CHAPTER TWO
REVIEW OF LITERATURE
Conceptual framework
Profit maximization is a core objective of every organization, including banks. performance can be defined as an outcome which arises from the effectiveness of management and optimal utilization of resources at its disposal; thus leading to reaping of higher return on capital employed. The management of any firm should be able to identify its strength and weakness, likewise exploit opportunities and tackle threats if it is determined to make profits.
A bank is said to be ‘profitable’ if it can accrue financial gains from the capital invested into the operational activity of the bank. The success of a bank is determined by how well the bank made profits in the course of a financial period. For banks to be profitable, they have to assume a reasonable level of risk. If management of a bank decides to be risk averse, then such decision is at the detriment of the bank’s performance.
Banks face lot of risks, which are capable of adversely affecting their performance. Banks are exposed to a high degree of risk than any other business because they are involved in the management of assets and liabilities. Banks are exposed to risks in varied dimensions; however these risks emerge prominently in form of credit risk, interest rate risk, and liquidity risk because they are closely associated to the banks’ lending activity from which a lion share of banks’ profit is generated.
- Credit Risk: It is the possibility of losing outstanding loan partially or totally due to credit events (default risk). Geiseche (2004) stated that credit risk is by far the most significant risk faced by banks and the success of their business depends on accurate measurement and efficient management of this risk to a greater extent than any other risk.
- Interest Rate Risk: It is the exposure of bank’s financial condition to adverse movements in interest rate. A key source of interest rate risk results from a common characteristic of banks in borrowing short and lending long, leading to the maturity mismatch or re-pricing (Zainol & Kassim, 2010).
- Liquidity Risk: It is the sudden increase in withdrawals which may require the financial institutions to seek to liquidate its assets in a very short time period (Saunders & Cornett, 2006). It arises from the inability of a bank to accommodate decrease in liabilities or to fund increase in assets.
The knowledge of the banking environment is of paramount importance to banks because level of performance hinges on it.
CHAPTER THREE
RESEARCH METHODOLOGY
Introduction
This chapter presents the study’s selected research methodology. As shall be seen, the methodology is influenced by the purpose of this study and is based on an assessment of the optimal strategy for responding to the research questions. As such, the current chapter discusses the statistical and econometric tools used to analyse data for the purpose of testing the research Hypothesis. It includes the approach adopted to examine data for the chosen variables and the construction of empirical models.
Research Design
This study utilizes the econometric model in the analysis of the determinants of commercial bank’s performance in Nigeria. It focuses mainly on secondary annual data taken from fourteen (14) commercial banks in Nigeria from 2000 to 2013.
Date sources
It focuses mainly on secondary annual data taken from fourteen 14 commercial banks in Nigeria from 2000 to 2013. These banks were selected with respect to availability of their financial data obtained from the individual website and African financials for the selected banks.
Population of the study
According to Udoyen (2019), a study population is a group of elements or individuals as the case may be, who share similar characteristics. These similar features can include location, gender, age, sex or specific interest. The emphasis on study population is that it constitute of individuals or elements that are homogeneous in description.
This study was carried out to examine the determinants of commercial bank performance in Nigeria. Selected commercial banks in Nigeria form the population of the study.
CHAPTER FOUR
PRESENTATION OF DATA AND ANALYSIS
This study investigates the determinants of commercial banks’ performance, using fourteen Nigerian commercial banks as case study. The data are analyzed using the pool regression analysis of the ordinary least square to test the relationships existing between the dependent variable and independent variables under the constant, fixed and random effects. The dependent variable which is performance measured with Return on Assets (ROA) as a function of Capital Adequacy Ratio (CAR), Asset Quality (ASQ), Management Efficiency (EFF), Liquidity Ratio (LQR), Inflation Rate (INF), and Gross Domestic Product (GDP).
Constant Effect Model
The table 1 shows the regression of the ordinary least square results conducted on the specified model. The OLS of constant effect results reveal the relationship that exists between the dependent variable and each of the independent variables.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
Summary
This study empirically investigated the determinants of commercial banks’ performance operating in the Nigerian banking industry using the panel regression analysis for fourteen commercial banks spanning 2000 to 2013. The internal determinants of performance were structured from CAMEL model and the external determinants were macroeconomic stability and economic growth.
Conclusion
From the findings in the fixed effect model, asset quality, management efficiency, and Nigeria’s economic growth are statistically significant on commercial banks’ performance; hence suggesting that they are the major determinants of banks’ performance. This showed that the internal determinants are asset quality and management efficiency while the external determinant is economic growth. Government policies in Nigerian banking sector must encourage banks to regularly raise their capital and provide the enabling environment that will accelerate economic growth in the country.
Recommendation
The study recommended that:
- The Central Bank of Nigeria should control inflation so as to ensure macroeconomic stability.
- Policies should be directed towards enhancing the efficiency of the financial institutions with the aim of intensifying the stability of the banking sector in Nigeria.
- Also, banks should also have strong capitalization which in turn can help to reduce the expected cost of financial distress and possibly make capital adequacy have a better effect in the performance of banks.
- Banks should ensure an effective credit administration and avoid mismatching of assets and liabilities.
Suggestions for further studies
This study suggests that further research in this area should investigate whether monetary policies, financial risks and some macroeconomic variables apart from economic growth and inflation can determine bank performance. Also, a wider coverage should be considered by increasing the number of banks in the sample and the span of study.
References
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- Athanasoglou, P.P., Brissimis, S.N. & Delis, M.D.(2005). Bank-Specific, Industry-Specific and Macroeconomic Determinants of Bank Profitability.Bank of Greece Working Paper, No.25
- Babalola, Y.A. (2012). The Determinants of Banks’ Profitability in Nigeria. Journal of Money, Investment and Banking, ISSN 1450-288X, Issue 24, 6-16
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- Chirwa, E.W. (2003). Determinants of Commercial Banks’ Profitability in Malawi: A Co -integration Analysis. Applied Financial Economics, Vol.13. Issue 8, 565-571
