Bank Specific And Macro-Economic Determinants Of Nigeria’S Banks Profitability

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CHAPTER ONE

INTRODUCTION

Background of the study

There is no doubt that banks convert deposits into productive investments as a method to facilitate economic growth in any country (Levine et al., 2000; Tabash & Dhankar, 2014; Tabash,2018). A reliable and efficient banking system has to achieve three goals: to give a considerable profit, to offer a high-quality service to customers, and to have sufficient funds to lend to borrowers. The growth of any economy largely depends on its banking sector. Hence, the importance of bank profitability in the economy can be determined at the micro and macro levels. At the micro level, profit is a determinant and required for any competitive banking institution. Every bank tries to earn and achieve good profits in order to be in the business especially at the time of growing competition in the financial markets. At the macro level, a profitable banking sector should be able to absorb external negative shocks and to achieve the stability of the financial system.

The study of profitability of the banking sector is of a great interest in the developed economies. However, in emerging economies like India, the number of studies that focus on profitability of commercial banks is not too many. In this context, the study of the profitability of commercial banks in India will be of greater interest for policymakers and finance scholars. This means the understanding of the determinants of bank profitability is essential and pivotal to the stability of the economy because the well-being of the banking sector is very critical to the welfare of the economy at large.

Upon the crisis in the Nigerian banking industry, it was imperative for the monetary authority of the Central Bank to introduce fresh reforms to correct the anomalies. In his address on 6th July, 2004, the Central Bank Governor, Professor Charles Soludo, observed thus, “the Nigerian banking system today is fragile and marginal. Our vision is a banking system that is part of the global change, and which is strong, competitive and reliable. It is a banking system which depositors can trust, and investors can rely upon. Evolving such a banking system is a collective responsibility of all agents in the Nigerian economy.” He gave reasons such as persistent illiquidity, weak corporate governance, poor assets quality, insider abuses, weak capital base, unprofitable operations, and over-dependency on public sector funds, among others, that necessitated the banking sector reform. Banking sector consolidation was consummated through mergers and acquisitions. All commercial banks were consequently required to recapitalize to the sum of 25 billion naira

According to Ani, Ugwunta, Ezeudu and Ugwanyi (2012), deposit money banks are financial institutions whose profits are affected by numerous factors determined endogenously and exogenously. Therefore, the determinants of deposit money banks’ profitability are categorized into internal and external factors. Internal factors are bank-specific factors and they include: capital adequacy (the level of capitalization), earning strength, liquidity level and managerial efficiency. Banks specific factors are to a large extent under the control of the management. On the other hand, external factors are exogenous and include macroeconomic variables such as interest rate, inflation, gross domestic product (GDP), exchange rate and monetary policy rate (MRP). Banks thrive to maximize profit with a view to enhancing shareholders’ wealth and meeting obligations to other stakeholders in the industry. Profitability of the banking sector is crucial, as the safety of the sector is closely linked to the safety of the entire economy. According to Sharma and Mani (2012), banks’ performance has become a cause for concern to policy makers and economic planners due to the fact that the gains of the realistic sector of the economy depends on the efficiency of the banks in carrying out the function of financial intermediation.

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