The Impact of Macro Economic Variables on Bank Performance
Chapter One
Research Objective
The overall objective of the research is to find out the impact of macro-economic variables on the financial performance of commercial banking sector in Nigeria.
Specific Objectives
The specific objectives of this study are:
- To define consequence of Gross Domestic Product (GDP) on financial performance of commercial banks in Nigeria
- To examine the outcome of real interest rates on financial performance of commercial banks in Nigeria
- To evaluate the influence of exchange rates on financial performance of commercial banks in Nigeria.
- To evaluate the impact of inflation on financial performance of commercial banks in Nigeria.
CHAPTER TWO
LITERATURE REVIEW
Introduction
This chapter is comprised of five sections, the first segment will cover the theories in the study, the second section will cover the determinants of financial performance, the third section will cover empirical studies, the fourth section covers the conceptual framework and the last section will cover the summary of the theoretical and empirical reviews.
Theoretical Review
The main purpose of this literature review is identifying and examining what has been done by other scholars and researchers about the impact of macro-economic variables on the financial performance of banks. The theoretical review will provide detailed knowledge of what has been done and form a framework within which the research findings are to be interpreted and also to overcome the shortcomings of earlier studies. The following section will describe and discuss different theories such as Efficient Market Hypothesis, Modern Portfolio Theory and Behavioral Finance Theory.
Efficient Market Hypothesis
Fama (1970) proposal was an efficient market hypothesis (EMH) dictating that earning due to investors competition following a profit-maximizing behavior high profits would be impossible to be experienced. Fama (1970) differentiated three systems of EMH: the weak one, the semi-strong one and the strong one. The most empirical research has been formed by the semi-strong form of EMH. The EMH presumed actors in economy have everything necessary in regards to facts relating to all fluctuations in macroeconomic variables giving reflection in stock prices.
Source of stock prices changes is determined by Macroeconomic variables such as supply of money in the country, inflation, and exchange rate been expounded by various researchers (Fama, 1981; Chen et al., 1986 and Mayasami and Sims, 2002). EMH enables us to make an inference that changes in these macroeconomic factors definitely have results on the stock prices. The study is therefore geared towards determining the expected connection of the numerous macroeconomic variables and market performance of Nigeria’s stock.
Modern Portfolio Theory
Finance theory named as Modern Portfolio Theory (MPT) minimizes a specified amount of holdings risk against holdings expected return for a given period, or equivalently maximizes return rate for a given investment level of risk through considerately choosing the fractions of various assets. In doing portfolio construction, four fundamental steps are used as a guide. The steps are: Allocation in relation to assets, valuation concerning the security, optimization in relation to Portfolio and Performance measurement. According to fact, this models ascertain that return of an asset is a naturally circulated utility (also meaning further fundamentally an elliptically distributed random variable) defining risk as the standard deviation of return and models as portfolio of a weighted assets combination hence assets weighted combination returns is the return of a portfolio. In bringing together assets that are distinct whose returns are not associated ideally positively, MPT pursues to decrease the overall inconsistency of the assortment return. MPT also undertakes that markets are well-organized and investors are balanced (Daniel, Hirshleifer & Subramanyam, 1997).
CHAPTER THREE
RESEARCH METHODOLOGY
Introduction
This chapter provides information on the research design, the population and sample that was selected for the study. We will also discuss the data assortment means, methods of data analysis and data presentation techniques that to be used in this section.
Research Design
Mugenda and Mugenda (2003) conclude that a research design is a frame of methods and procedures for acquisition of information that is needed. It forms the entire backbone of the project that specify the information that is to be collected and by what procedure from the source.
The study employs descriptive as well as correlation research designs. Time series empirical data was used by the researcher on the variables to find out the relationship among particular macroeconomic variables i.e GDP, lending interest rate, exchange rate and inflation rate by establishing either constructive or destructive correlation coefficients of the variables and the financial performance of commercial banks as measured by ROA.
Population
A population simply refers to whole group of individuals, events or objects having joint noticeable features among them (Mugenda & Mugenda, 2003). The selected target sample for this study was all the 42 Nigerian commercial banks that were operational for the period between 1st of January 2006 and 31 December 2015. This target population provides data that is useful in answering the research questions raised by the researcher on how macroeconomic variables affect Nigerian commercial financial performance.
CHAPTER FOUR
DATA ANALYSIS, FINDINGS AND
INTERPRETATION
Introduction
This chapter presents the findings of the analysis and interpretation of the secondary data gathered from the Central Bank of Nigeria (CBN) and the audited financial statements of the Commercial Banks operating in Nigeria for the study period 2006-2015. Analysis was done with the help of Statistical Package for Social Science (SPSS) version 21 and Microsoft’s Excel (2016). Descriptive statistics such as means and standard deviations were used to analyze the performance of commercial banks and the impact of macroeconomic variables. Correlation analysis and regression analysis was used to establish the impact of macroeconomic variables on the performance of commercial banks. Analysis of variance (ANOVA) was used to test the goodness of fit and reliability of the regression model,
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
Introduction
This chapter presents a summary of the research findings, the conclusion drawn based on the study objectives and the recommendations for policy change and suggestions for further research as well as limitations of the study.
Summary of Findings
The objective study was to examine the impacts of macroeconomic variables on the financial performance of commercial banking sector in Nigeria. The study was a census where all the commercial banks were considered. The study used 10 year (2006-2015) data for analysis. Analysis was done with the help of Statistical Package for Social Science (SPSS) version 21 and Microsoft’s Excel (2016). Descriptive statistics such as means and standard deviations were used to analyze the GDP growth rate in a quarterly basis, Average quarterly interest rates charged by lenders, Average quarterly exchange rate between USD and N. and average quarterly inflation rate. Regression analysis was used to establish the impacts of macroeconomic variables on the financial performance of the commercial banking sector in Nigeria. Analysis of variance (ANOVA) was used to test the goodness of fit of the regression model to the data collected.
The results of the study indicated that there is a strong (R=0.792) relationship between macroeconomic variables and the financial performance of commercial banks in Nigeria.
The study also established that 58.5% of the total variance in financial performance of the commercial banks in Nigeria can be attributed to macroeconomic variables. The remaining 41,5 % of the variance in financial performance can be attributed to other determinants of financial performance which were not the subject of this study. ANOVA statistics revealed that the regression model was ideal since it had a significance level of .001. The study further established that inflation and GDP affects financial performance of the commercial banking sector positively and Interest rates and exchange rates negatively and in a statistically significant way. The findings were in line with the findings of Mamatzakis and Remoundos (2003), Naceur (2003), Pasiouras and Kosmidou (2007), Desaro (2012), Mwangi (2013), Njuguna (2013).
Conclusion
The study concludes that there is a strong relationship between macroeconomic variables and financial performance of commercial banks and that 58.5% of the total changes in financial performance of the commercial banking sector in Nigeria can be attributed to changes in the macroeconomic variables. The study also concludes that GDP growth rate in a quarterly basis, Average quarterly interest rates charged by lenders, Average quarterly exchange rate between USD and N. and average quarterly inflation rate affects financial performance of the commercial banking sector and in a statistically significant way. From the ANOVA statistics, the study concluded that the regression model derived is reliable and has goodness of fit.
The study showed that macroeconomic variables combined influenced the performance of the banking sector as measured by ROA. It was found that ROA was correlated with the individual macroeconomic variables, as it was negatively correlated with the interest rates and exchange rates. It was positively correlated with the GDP growth rates and the inflation rates. The study main objective which was to establish the impact of the macroeconomic variables on the financial performance of the banking sector was thus established. Thus the banking sector highly depends on the changes in the macroeconomic factors that will affect its financial performance in both the short and the long run.
Recommendations
The study established that inflation rates, interest rates, exchange rates and GDP have an impact on the financial performance of commercial banking sector in Nigeria. As a result, the study wishes to make the following recommendations for policy change:
Commercial banking sector in Nigeria should consider macro-economic variables such as rates, interest rates, exchange rates and GDP in their policy formulation to manage their impact on the financial performance. The Nigerian Government through the Central bank should come up with policies that create a conducive environment for commercial banks to operate in since it will translate to economic growth of the country.
Limitations of the Study
The study was mainly dependent on the secondary data available at the Central Bank. This implies that the accuracy of the study findings is dependent on the data that was available. The researcher cross-checked the data available on individual commercial banks website as a way of ensuring reliability and validity of the data.
The study was based on a ten year study period from the year 2006 to 2015 since this is the latest period and thus availability of data that is more applicable to the current economic situation. However, a longer duration of the study would have captured periods of various economic significances such as booms and recessions. This would have probably given a longer time focus hence given a broader dimension to the problem.
Further, academic studies are usually subjected to tight academic deadlines. If more time was available, the researcher could be in a position to make more detailed conclusions and observation on how macroeconomic variables influences financial performance of commercial banking sector.
Suggestions for Future Studies
The macro economic variables namely inflation rates, interest rates, exchange rates and GDP contribute to 58.5% of factors affecting financial performance of commercial banking sector. In future, a similar study should be carried to establish the other factors influencing performance of commercial banking sector in Nigeria. An inquiry into the challenges facing the commercial banks should be done. This will explain help to reveal how best the challenges can be overcome hence promoting efficient implementation, monitoring and evaluation of commercial banks. Finally a research aimed at benchmarking the performance of commercial banks against other international banks should be done. This will serve to highlight the differences between them and also identify the best practices that can be borrowed from them.
The study concentrated on the last ten years since it was the most recent data available.
Future studies may use a range of many years e.g. from 1970 to date and this can be helpful to confirm or disapprove the findings of this study. Finally, due to the shortcomings of regression models, other models such as the Vector Error Correction Model (VECM) can be used to explain the various relationships between the variables.
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