AN EMPIRICAL ANALYSIS OF BANK PERFORMANCE IN NIGERIA

AN EMPIRICAL ANALYSIS OF BANK PERFORMANCE IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.           Background to the Study     

Banks serve vital intermediary role in a market oriented economy and have been seen as the key to investment and growth. Falegan (2016) and Bashir and Kadir (2017) observed that commercial banks play a crucial role in the nation’s economy, by using various financial instruments to obtain surplus funds from those that forgo current consumption for the future. They also make same funds available to the deficit spending unit (borrowers) for investment purposes. In this way, they make available the much need investible funds required for investment as well as for the development of the nation’s economy.

Performance failure among Nigerian banks has resulted in loss of public confidence in the banking sector. Performance links an organization’s goal and objectives with organization decisions. Public confidence on the banking industry in Nigeria depends greatly on the profitability of the participating banks in Nigeria. This explains why the call for the critical assessment of the performance of the banking system in Nigeria. The efficiency of the banking system has been one of the major issues, in the new monetary and financial environment of the world today. The efficiency and competitiveness of financial institutions cannot easily be measured, since their products and services are of an intangible nature.

There have been several attempts in the past to improve the performance of Nigeria’s banking sector through the periodic review of bank reforms. However, the recent policy reform tagged “Bank Consolidation and Restructuring” was aimed at resolving the critical issue of financial distress, restoring public confidence in the banking industry and putting the banks in a leadership position to compete with banks in other countries of the world (Soludo, 2004). In Nigeria, the ability of the banking industry to play its role has been periodically undermined by its vulnerability to systemic financial crises and macroeconomic instability. Some banks are still tottering, and worse still are at the verge of distress and liquidation. Even though several studies have been embarked upon in this area, still the paramount truth is that there are inconsistencies in the findings of these studies. Thus, the present study would go beyond determining the effectiveness of these reforms for ensuring the stability of bank industry to determining their impact on bank performance.

Several bank reforms have been adopted by the CBN to resolve issues of financial distress, restore public confidence in banking industry and to put the banks in a leadership position to compete with banks in other countries (Akingbola, 2006). Notably, the Nigerian banking industry has evolved through four major reforms including the laissez-faire regime(1930-1959), the control regime(1960-1985), the de-control regime(1986-2004) and the consolidation and restructuring regime(2005-present). In spite of this, the base of Nigeria’s bank industry has continued to remain too fragile to play the supportive role to the public and private sectors. The continuing rise in interest rate and the prevailing macroeconomic instability in Nigeria have raised the issue bordering on the effectiveness of the various reforms in the banking industry. It is against this background that this study seeks to carry out an empirical analysis of Bank performance in Nigeria.

1.           Statement of the Problem

The problem which this study seeks to solve is to ascertain the reasons for banks poor performance in the post consolidation era in Nigeria. As a result of poor performance the Nigerian banking sector have witnessed several regulations, despite the regulation in place, more banks have continued to be in distress even with forceful merger and acquisition initiated over the years aimed at reducing the rate of bank distresses in Nigeria. The Soludo administration in CBN started in 2004 with a new form of reform. Soludo (2004), the then governor of the CBN described the industry as being generally characterized by small-sized and marginal players with very high overhead cost. The primary objective of his reform was to guarantee an efficient and sound financial system. These reforms were designed to enable the banking system develop the required resilience to support the economic development of the nation by efficiently performing its functions as the fulcrum of financial intermediation (Lemo, 2005). The CBN 2004/2005 raised the share capital to twenty-five billion Naira (N25Bn) from the existing two billion (2Bn) and upheld the existing 2005 compliance period under. It is against the backdrop of several reforms and consolidations that this study seeks to empirically analyse the bank performance in Nigeria.

1.3     Objectives of the Study                   

The general objective of this study is to carry out an empirical analysis of bank performance in Nigeria. The specific objectives include to:

1. Ascertain whether shareholders fund have positive significant impact on Return on Asset (ROA)
2. Determine if shareholders fund have positive significant impact on Return on Equity (ROE)
3. Examine if shareholders fund have positive significant impact on Net Interest Margin (NIM)

1.4     Research Questions

1. Does Shareholders fund have positive significant impact on Return on Asset (ROA)?
2. Does Shareholders fund have positive significant impact on Return on Equity (ROE)?
3. Does Shareholders fund have positive significant impact on Net Interest Margin (NIM)?

1.5     Statement of Hypothesis       

H₀₁: Shareholders fund does not have positive significant impact on ROA.

H₀₂: Shareholders fund does not have positive significant impact on ROE.

H₀₃: Shareholders fund does not have positive significant impact on NIM.

1.6     Significance of the Study      

The findings of this study will of great significance to the following peoples:

1. Policy Makers and Regulators in the Industry:  To policy makers and regulators in the industry, it will present a scheme, through its analysis that could assist them in enunciating policies that will not only positively impact on banks’ performances but also remain relevant in the economy of Nigeria.
2. Bankers: To bankers in general, it will expose the relationship existing between our relevant variables, which will be of great interest to them in their respective banks. Specifically, to bankers in the banks under study, it will expose to a large extent the goings-on in their organizations with respect to our relevant variables and a comparative analysis of their actions over some relevant years.
3. Academicians: In the academic arena, this study will prove to be significant in the following ways: v It will serve as a body of reserved work and knowledge to be referred to by researchers.  It will add value and enrich other literatures on banks’ performances in Nigeria and the world at large. It will suggest ways of enhancing the performance of the banking industry in Nigeria and the entire Nigerian economy. This will in turn, boost development positively which is usually affected by banks and their activities.

1.7     Scope of the Study                

The research covers all the commercial banks in Nigeria which amount to 21 Banks operating presently in the country. The scope of the study is further limited to the period of 2010-2019.

1.8     Definition of Terms

Bank: A bank is a financial institution that accepts deposits from the public and creates credit. Lending activities can be performed either directly or indirectly through capital markets.

Performance: Performance can be defined as an approach to determining the extent to which set objectives or goals of an organization are achieved in a particular period of time. Bank Performance is defined as the capacity to generate sustainable profitability (European Central Bank, 2010).

Return on Asset (ROA): Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. It shows the percentage of how profitable a company’s assets are in generating revenue.

Return on Equity (ROE): The Return on Equity is a measure of the profitability of a business in relation to the equity, also known as net assets or assets minus liabilities. ROE is a measure of how well a company uses investments to generate earnings growth.

Net Interest Margin (NIM): Net Interest Margin is a measure of the difference between the interest income generated by banks or other financial institutions and the amount of interest paid out to their lenders (for example, deposits), relative to the amount of their (interest-earning) assets.