DETERMINANT OF COMMERCIAL BANK PROFITABILITY EVIDENCE FROM NIGERIA
TABLE OF CONTENT
CHAPTER ONE: INTRODUCTION
1.1 Background to the Study 1
1.2 Statement of the Research Problem
1.3 Objectives of the Study
1.4 Hypothesis of the Study
1.5 Significance of the Study
1.6 Scope of the Study
1.7 Limitations of the Study
1.8 Research Questions
CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction
2.2 Measures of Bank Profitability
2.3 Empirical Review of Literature
CHAPTER THREE: METHODOLOGY
3.1 Introduction
3.2 Data Sources
3.3 Population And Sampling Plan
3.4 The Model
3.5 Estimation Methods
CHAPTER FOUR: PRESENTATION AND ANALYSIS OF DATA
4.1 Introductions
4.2. Descriptive Statistics
4.3 Correlation Analysis
4.4 Empirical Results on the Gmm
CHAPTER FIVE: SUMMARY OF FINDINGS, RECOMMENDATIONS AND CONCLUSION
5.1 Summary of Findings
5.2 Recommendations
5.3 Conclusion
Bibliography
Appendix
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
In every economy the banking sector is considered to be a vital source of financing economic activities. In this case, the profitability of this sector is inevitable in order to encourage economic activities. The sector has witnessed various economic reform measures right from colonial era till date in order to improve its performance. The importance of bank profitability can be appraised at the micro and macro levels of the economy. At the micro level, profit is the essential prerequisite of a competitive banking institution and the cheapest source of funds. It is not merely a result, but also as a necessary for successful banking in a period of growing competition in financial markets. Hence, the basic aim of a bank’s management is to achieve a profit as the essential requirement for conducting any business (Bobakova, 2003:21).
At the macro level, a sound and profitable banking sector is better able to withstand negative shocks and contribute to the stability of the financial system. The importance of bank profitability at both the micro and macro levels has made researchers, academic, bank managements and bank regulatory authorities to develop considerable interest in the factors that determine commercial bank profitability (Athanasoglou 2005:5). Bokakova, 2003:21), (B.Sabo).
It is a common knowledge that Nigerian banking sector performance has been improved since the consolidation exercise in sector. But this cannot be accepted any more as eight (8) banks were found to be insolvent in 2009 by the Central Bank of Nigeria (CBN) which made the public to lose confidence in the sector (International Corporate Research, 2009). The federal government of Nigeria and the Central Bank of Nigeria (CBN) has perennially sought permanent measures that would enhance the profitability and stability of banks operating in the Nigerian banking industry. Unfortunately, they have never completely succeeded in achieving this feat. For instance, from 1987 – 1991 financial sector reforms (intended to enhance competition in the sector, mobilize saving that would lead to a more efficient allocation of resources) were implemented, encompassing elements of liberalization such as the decontrolling of interest rates, and measures to enhance prudential regulation to tackle bank distress (Oluranti, 1991). Also, between 1990 and 2004 bank regulators increased the minimum share capital requirement for banks operating in Nigeria five times, namely in 1991, 1997, 2000 and 2004 (Aburine and Uche, 2006). However, these measures were unsuccessful in curtailing the spate of bank distress and failures in the 1990s and beyond (Oluranti, 1991:59; Uche, 1996:436, Uche, 1998:30; Beck. Currently a set of banking sector reforms have been introduced to ensure inter alia a strong and reliable banking sector (Okagbue and Aliko, 2005:1). Unfortunately, if the historical antecedents of financial sector reforms in Nigeria are anything to go by, the current reforms may also not help to improve bank profitability and stability in Nigeria. Against this backdrop, the broad aim of this work is to dearly identify of the basis of empirical evidence the significant determinants for commercial banks profitability in Nigeria.
1.2 STATEMENT OF THE RESEARCH PROBLEM
The banking sector is one of the important sectors of an economy as it plays a major function of channeling funds from savers to investors. It has continued to attract greater attention of the government through the Central Bank of Nigeria.
However, there have been different ways in which the federal government of Nigeria through the Central Bank of Nigeria has been trying to restore the confidence of the masses in the banking sector of the country such as the banking recapitalization exercise of 2005, and the Nationalization of some commercial banks (Afribank, Keystone bank and Enterprise bank) in 2011. Despite all these effort the confidence of the masses is yet to be improved as the profitability of many commercial banks is nothing to write home about. This study therefore investigates the determinants of commercial bank profitability in Nigeria using recent data.
1.3 OBJECTIVES OF THE STUDY
The broad objective of this study is to provide an understanding of the determinants of commercial banks profitability in Nigeria. However, the specific objectives of the study are:
1. To assess the impact of banks liquidity on bank profitability.
2. To examine the influence of shareholders hind on banks profitability.
3. To assess the impact of total assets on banks profitability.
4. To investigate the effect of number of branches on banks profitability.
1.4 HYPOTHESIS OF THE STUDY
For the purpose of achieving the objective of this research work, the below null hypothesis were formulated as follows:
Ho1: Banks liquidity is no a significant determinant of commercial bank profitability.
Ho2: Shareholders fund does not significant after commercial banks profitability.
Ho3: Total assets do not significant determine commercial banks profitability.
Ho4: The number of branches is not a significant indicator of commercial banks profitability.
1.5 SIGNIFICANCE OF THE STUDY
Since the banking sector is considered to be in important source of financing economic activities in every economy, it becomes necessary to device every means possible to identify determinants of commercial banks profitability. This study is significant to all stakeholders such as managers of banks, regulators of banks (monetary authorities), depositors – investors, researchers, and the government of the country. The significance of this study can be seen in the following ways:
One, findings of this study are significant to managers of banks since the level of profitability of banks indicate the ability of banks to accommodate shock such as financial crisis. This profitability of banks can be compared to the overall banking situation because this serves as a good indicator to managers of banks to understand the strength of the banks against the overall banking industry. Moreso, banks that are unable to meet its customers’ demands leaves itself exposed to a systematic lack of confidence in the banking system.
Two, this research is also significant to the monetary authorities since it is a major role of the Central Bank of Nigeria to improve liquidity and financial stability in the Nigerian banking system due to the fact that a well funded banking sector is essential in order to maintain financial system stability and confidence in the country. With the findings of this study the monetary authorities will be able to strengthen their policies and advisory services in order to stabilize the banking sector.
Three, it is also significant to depositors/investors since bank performance (profitability) serves as an indicator whether to invest or withdraw their funds from the bank. They need past performance in terms profitability of the banks to know if it will be beneficial to deposits or invest to earn more returns that will enable them maximize their wealth. This study provides depositors as investors more and reliable information that will enable them to analyze the profitability of banks in order to know the strength of the commercial banks in Nigeria.
Four, this study is significant as a reference material to further researchers who may wish to carry out further research in this area. This is due to the fact that interested researchers in this area can consult this study as guide to further research in this area of studies.
Last, but not the least, this study is also significant to the government of Nigeria. With this study the government may decide whether to adopt policies that will make the banking sector more investor friendly and profitable. As this will have multiple effects to the economy of Nigeria.
1.6 SCOPE OF THE STUDY
The study covers a sample of 16 banks out the 22 commercial banks in Nigeria for the periods of 2000 to 2010. The period as well as its sample size should not be considered as a limitation, since it is the only sample period with complete information on pre-and post-consolidation of commercial banks profitability in Nigeria. That is, the study will compare three years (2000-2004) commercial banks profit before consolidation to that of three year (2005-2010) after consolidation of the 16 commercial banks that scaled 31st December, 2005 deadline of the bank recapitalization exercise.
1.7 LIMITATIONS OF THE STUDY
It is obvious that one has to confront some limitations on whatever study he or she is embarking upon. The major limitations confronting this stud y are inaccessibility of relevant materials and non-availability of adequate data. However, measure such as subscribing to get journals on the internet has been used to curb the problems of relevant materials and inadequate data. Furthermore, the study used only two measures of profitability – return on assets (ROA) and return on equity (ROE) which serves as a limitation this study finding, while there are numerous measures of profitability. In order to overcome this limitation, the study carefully used ROA and ROE as measures of commercial banks profitability because of its dominancy in finance studies as measures of commercial banks profitability or performance.
1.8 RESEARCH QUESTIONS
The study is undertaken to answer the following research questions:
1. What is the impact of banks liquidity on commercial banks profitability?
2. How does shareholders thud influence commercial banks profitability?
3. What is the role of total assets on commercial banks profitability?
4. Does the number of branches have effects on commercial banks profitability?
