DETERMINANTS OF COMMERCIAL BANKS PROFITABILITY IN NIGERIA
ABSTRACT
This research work investigate the main determinants of commercial banks profitability in Nigeria. The specific objective of this study are to:  Examine the relationship between inflation and commercial banks profitability.  Investigate if there is a relationship between interest rate and commercial banks profitability.  Evaluate the effects of economic growth on commercial banks profitability. Ascertain the impact of capital adequacy and commercial banks profitability.     Examine the relationship between banks size and commercial banks profitability.
The research design for this study takes the form of an explanatory survey as it takes to explain the relationship between Profitability (dependent variable) and Inflation, Interest rate, Economic growth, Capital adequacy and bank size (independent variables). Secondary data were sourced for the purpose of answering and testing the hypothesis as well as building up literature review of the study. The panel data regression analyses tool was used to analyze the data. Using the data collected, the models are estimated using the Ordinary Least Square technique (OLS)
The research find out that, the fact that gross domestic product (GDP) is statistically significant with bank profitability indicates that economic performance is the single most significant factor that determines the profitability of Nigerian banks. Other internal/macroeconomic variables do not appear to be major determinants of bank profitability in Nigeria.
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
Background to the study    -    -    -    -    -    
Statement of  Research  problem    -    -    -        
 Objectives of the study    -    -    -    -    -    -     
Research hypothesis    -    -    -    -    
Scope of the study        -    -    -    -    -
Significance of the study    -    -    -    -    
Limitation of the study    -    -    
Definition of terms    -    
CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction    -    -    -
2.2 Theoretical framework    -    -    -
2.2.1 Signaling Theory    -    -    -    -    -
2.2.2 Market Power and Efficiency Structure Theory    -
2.2.3 Economic Theory and  Theory of Banking Firm     
2.2.4 Endogenous Growth Theory     -
2.3 Concept of Profitability     -    -    -
2.4  Macro Economic Determinants of Banks Profitability     -
2.4.1 The Concept of Inflation
2.4.2 The Concept of Interest Rate     -
2.4.3 The Concept of Economic Growth          
2.5  Microeconomic Determinants of Bank     -    -
2.5.1 The Concept of Capital Adequacy    -    -    -     
2.5.2 The Concept of Bank Size     -    -    -    -    
2. 6 Empirical Literature    -    -    -    -    -    
CHAPTER THREE: METHODOLOGY
3.1 Introduction     -    -    -    
3.2 Research Design    -    -    -    -    
3.3 Population of the study    -    -    -    -     
3.4 Sample and Sampling Procedure    -    -    
3.5 Source of Data    -    -    -    -    -    
2.6 Data Analysis Method    -    -    -    -
3.7 Model Specification    -    -    -    
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS    
4.1 Introduction    -    -    -    -    -    -
4.2 Data presentation and analysis-    -    -    -    -    
4.2.1 Panel Least Squares Estimation      -    -
4.2.2 Fixed Effect Model Estimation    -    -    -    -    -
4.3 Result and Discussion of Finding    -    -    
CHAPTER FIVE: SUMMARY OF FINDINGS, RECOMMENDATIONS AND CONCLUSION
5.1 Introduction    -    -    -    -    -
5.2 Findings of Study    -    -    -    -    -    -
5.3 Conclusion    -    -    -    -
5.4 Recommendation.     -    -    -    -    -    
Bibliography    -    -    -    -    -    -
Appendix  -    -    -
CHAPTER ONE
INTRODUCTION
BACKGROUND  TO THE STUDY
The important role performed by various commercial banks in developing the economy of a country cannot be over emphasized. The banking sector is the back bone of any economy and plays it important role in the economic development of a country. Aburime (2008) acknowledged the role of profits and efficiency that act as important keys for banks to conduct a business as it will contribute to the stability of the financial system and protecting a country from any undesirable waves. The efficient performance of the banking industry over time is an index of financial stability in any nation. The extent to which a bank extends credit to the public for productive activities accelerates the pace of a nation’s economic growth and its long-term sustainability. Having the knowledge on the factors influencing commercial banks’ profitability is not only relevant but also essential in stabilizing the economy as well as for the benefits of other parties involved such as the stakeholders, government and other financial authorities. Bank performance has been one of the main concerns of management experts, investors and economic analysts. Banks with better performance are better able to resist negative shocks and contribute to the stability of the financial system (Athanasoglou, et al., 2008). Profitability plays a key role in persuading depositors to supply funds in terms of bank deposit on advantageous terms. Levine (1998) opined that knowledge of the underlying factors that influence the financial sector’s profitability is therefore essential not only for the managers of the banks, but also for numerous stakeholders such as the central banks, bankers associations, governments, and other financial authorities.  Knowledge of these factors would be useful in helping the regulatory authorities and commercial banks managers formulate future policies aimed at improving the profitability of the banking sector. Researchers from different countries investigated on the relevant of profitability in the banking sector, Gaddard et al, (2004) conducted a research in using panel data and dynamic estimation to investigate European countries banking sector: Denmark, France, Germany, Italy, Spain, and the UK, for the period 1992-98. The result suggested that among model determinants of profitability in corporate; size, capital asset ratio, credit risk and ownership, by measuring profitability in term of return an equity (ROE), checked that bank specific determinants and profitability relationship is very strong. It has been discovered that banks’ performances in Nigeria over the last decade as not be impressive there have been a progressive decline of profit before tax (PBT) of Nigeria banks since 2008. Obamuyi (2012) gave an analysis of how the opportunities of banks in Nigeria to make profits gradually reduced. The Nigerian banking industry has been hit by many crises in the banking reform of 2004 and the subprime crises that affected almost the entire world in 2008   though Nigerian banking industry was only hit by the aftermath effect of the crisis (Sanusi, 2010). In Nigeria, commercial banks play important role as financial intermediaries in the economic growth process, channeling funds from savers to borrowers for investment. An understanding of determinants of their profitability and the drivers of bank profitability for that matter is essential and crucial to the stability of the economy. However, substantial amount of studies to the best of my knowledge have not been conducted to investigate the status of bank profitability as well as the determinants of profitability of the Nigeria banking system. This study therefore examines the effect of the internal and external determinants of profitability of Nigeria commercial banks industry from the period 2005-2014.
STATEMENT OF RESEARCH PROBLEM.
The performance of banks have policy makers concern for economic planner and policy makers due to the fact that the gains of the real sector of the economy depend on how efficiently the banks are performing the function of financial intermediation (Sharma & Mani, 2012). Although the monetary authorities have taken some measures (such as banks consolidation, reviews of prudential guidelines and bail-out strategy) to stabilize the financial system and build confidence in the banking system, it is still germane to know about the determinant that affect banks profitability in order to influence policy making in the banking sector in Nigeria. Although, number of earlier studies have made to add their own contribution to the theory of profitability and stated their own policy implication, they were inclined towards to the and less developed countries including Nigeria receive little attention in various literature on this issue developed economy, Alhanasoglou, et al. (2006), carried out research on the profitability performance of the south eastern European banking diligence over the period of 1998-2003. The experimental result presented showed that the improvement of the profitability of banks in those countries necessitate new improved principles in risk administration and operating effectiveness, and which judging by the evidence presented in the research paper showed it significantly affect the profit specifically in Nigeria today, a lot as not been conducted on the determinants of commercial bank profitability.
    The study therefore focus on how Nigeria commercial banks can examine the operate factors that could enhance efficient and effective performance of the banking industry in order to achieve desired profitable ventures.
Research Questions
The following questions would therefore be examined in this study.
1.    Is there a significant relationship between inflation and commercial banks profitability?
2.    Does interest rate show significant effect on commercial banks profitability?
3.    Is there any significant relationship between economic growth and commercial banks profitability?
4.    What impact does capital adequacy and commercial banks profitability have?
5.    Is there a relationship between bank size and commercial banks profitability?
1.3     OBJECTIVE OF THE STUDY
    The broad objective of this study is to investigate the main determinants of commercial banks profitability in Nigeria, since much attention has not been given to both internal and external determinant of commercial banks profitability. As a result of this, the Nigerian commercial banks managers and policy makers have not clearly identified and understand the determinants of banks profitability at banks specific and macroeconomic level during the decade operation time.
The following therefore are the specific objective of this study. They are to:
  Examine the relationship between inflation and commercial banks profitability.
 Investigate if there is a relationship between interest rate and commercial banks profitability.
 Evaluate the effects of economic growth on commercial banks profitability.
Ascertain the impact of capital adequacy and commercial banks profitability.    
 Examine the relationship between banks size and commercial banks profitability.
  RESEARCH HYPOTHESES
In order to achieve the objective of the study, a number of hypotheses were tested regarding the determinants of profitability in Nigeria commercial banks based on different empirical research and theoretical reviewed made.
    The following hypotheses will therefore be tested in the course of this research work.
Hypothesis 1: There is no significant relationship between inflation and commercial banks profitability.
Hypotheses 2: There is no significant relationship between interest rate and commercial banks profitability.
Hypothesis    3: Economic growth has no significant effect on commercial banks profitability.
Hypothesis    4: Capital adequacy has no significant impact on commercial banks profitability.
Hypothesis    5: There is no significant relationship between bank size and commercial banks profitability.
1.5    SCOPE OF THE STUDY
Identifying the determinants of the commercial banks profitability in Nigeria is the major focus of this study. The study covers the period from 2005-2014 using panel data analysis. The study examined the effect of the internal and external factors determinants on profitability of Nigeria commercial banks by focusing on different variables like profitability, inflation, interest rate, economic growth, stock market capitalization and banks size, as can be obtained from the central and the Nigeria fact book.
1.6    SIGNIFICANCE OF THE STUDY.
This study therefore significantly focus on how Nigeria commercial banks can  choose an appropriate determinants and see to what extent they can affect the profitability of the banks and suggest policy implications after critical examination of the profitability determinants of the commercial studies have been undertaken on the determinant of commercial banks profitability in developing countries. This therefore makes this study significant. This study will revise, extend or create new knowledge, because developing countries like Nigeria have different institutional structures from developed economies. The study would serve as a reference point for future researchers who wish to carry out further studies on this topic. It will enable policy makers and management body of the commercial banks to adjust the bank management system and mechanisms. It will also help investors to measure the performance of their portfolios and proceed with readjustment as required. It will also give direction for economic policy makers to measure the impact of the bank industry performance on the economy.
1.7 LIMITATION OF THE STUDY
Limitations are factors beyond our control which tend to impede the accomplishment of objectives (Shaibu, 2012). In this study therefore, such limitations are the smallness of the sample size used, the inability of the researcher to obtain 100% random sample, the probability of imprecise measurement of variables, the probability of the researcher employing inappropriate methodology and test statistics. Effort should therefore be made to look at this study in a more elaborate viewpoint and across borders.
1.8    DEFINITION OF TERMS
Presented below are the definitions of all key unfamiliar terms.
Banks Size: Bank size is usually estimated by the size of the total asset of a particular bank. The bigger the size of the total asset also means the higher the profitability of that bank and vice versa as stated by Athanasoglou, et al. (2005).
Commercial Bank: Is a type of bank that provides services such as accepting deposits, making business loans and offering basic investment products.
Economic Growth: Is a widely common macroeconomic variable used to determine bank performance.
Interest Rate: Is the rate at which interest is paid by borrowers (debtors) for the use of money that they borrow from lenders (creditors). It is the rate that is charged or paid for the use of money. The interest rate directly impact bank interest income and expenses and the net result that further affect profitability.
Inflation: Inflation shows the rate at which the general price level of goods and services keep rising while their pursing power is moving on the other direction.
Profitability: Profitability is the ability to make profit from all the business activities of an organization, company, firm, or an enterprise. It is the ability of a given investment to earn a return from its use (Herward & Uptom, 1991).
Capital adequacy: This is another internal factor for the measurement of profitability and the amount retain by the bank to meet unexpected loss and danger involved.