MACRO-ECONOMIC AND BANK-SPECIFIC FACTORS AFFECTING NIGERIAN BANKS’ PROFITABILITY
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ABSTRACT
This study examines bank-specific and macroeconomic factors of the profitability of Nigeria’s banks. The overall population for the study consists of 200 bank employees in Lagos state. The researcher utilized questionnaires as the data gathering instrument. Descriptive Utilizing a survey research design, this study was conducted. The survey utilized a total of 133 respondents comprised of human resource managers, marketers, customer service representatives, and junior staff. The acquired data were tabulated and evaluated using straightforward percentages and frequencies.
FIRST PART
INTRODUCTION
Background of the study
There is no doubt that banks turn deposits into productive investments to promote economic progress in any nation (Levine et al., 2000; Tabash & Dhankar, 2014; Tabash,2018). A dependable and effective banking system must achieve three objectives: a substantial profit, high-quality customer service, and adequate cash to lend to borrowers. Any economy’s growth is primarily dependent on its banking industry. Consequently, the significance of bank profitability in the economy may be assessed at both the micro and macro levels. At the micro level, profit is essential for every competitive financial organization. In an era of intensifying competition on the financial markets, every bank strives to earn and attain substantial profits in order to remain in operation. A prosperous banking industry should be able to withstand external negative shocks and achieve financial system stability at the macro level.
In industrialized economies, the examination of the profitability of the banking sector is of enormous interest. However, in developing economies such as India, the number of research focusing on the profitability of commercial banks is rather low. In this light, policymakers and finance experts will be more interested in the examination of the profitability of commercial banks in India. This implies that an understanding of the drivers of bank profitability is crucial to the stability of the economy, since the health of the banking sector is crucial to the overall health of the economy.
Due to the crisis in the Nigerian banking sector, it was vital that the Central Bank’s monetary authorities implement new measures to remedy the inconsistencies. In his lecture on July 6, 2004, the Central Bank Governor, Professor Charles Soludo, made the following observation: “The Nigerian financial sector is currently unstable and marginal. Our vision is a financial system that participates in the global transformation and is robust, competitive, and dependable. The banking system is one on which depositors and investors can rely. The development of such a banking system is the common duty of all economic actors in Nigeria.” Among others, he cited prolonged illiquidity, bad corporate governance, poor asset quality, insider abuses, a weak capital basis, unprofitable operations, and excessive reliance on public sector funding as reasons why banking sector reform was necessary. Mergers and acquisitions accomplished the consolidation of the banking sector. Therefore, all commercial banks were forced to recapitalize to the tune of 25 billion Nigerian naira.
According to Ani, Ugwunta, Ezeudu, and Ugwanyi (2012), deposit money banks are financial entities whose revenues depend on several endogenous and exogenous factors. Therefore, the profitability of deposit money banks is determined by both internal and external factors. Internal elements comprise capital sufficiency (the amount of capitalization), earnings strength, liquidity level, and managerial efficiency. Bank-specific factors are under the management’s control to a great extent. External factors, on the other hand, are exogenous and include macroeconomic variables including interest rate, inflation, gross domestic product (GDP), exchange rate, and monetary policy rate (MRP). Banks strive to maximize profit in order to increase shareholder wealth and fulfill commitments to other industry stakeholders. The profitability of the banking sector is essential, as the sector’s safety is intrinsically connected to that of the entire economy. According to Sharma and Mani (2012), policymakers and economic planners are concerned about the performance of banks because the gains of the real sector of the economy depend on the efficiency with which banks perform the function of financial intermediation.
EXPRESSION OF THE PROBLEM
Banks strive to maximize profit in order to increase shareholder wealth and fulfill commitments to other industry stakeholders. The profitability of the banking sector is essential, as the sector’s safety is intrinsically connected to that of the entire economy. According to Sharma and Mani (2012), policymakers and economic planners are concerned about the performance of banks because the gains of the real sector of the economy depend on the efficiency with which banks perform the function of financial intermediation.
PURPOSE OF THE STUDY
The aims of the study are;
To evaluate the effect of liquidity on the profitability of megabanks
To determine the impact of credit risk on the profitability of megabanks
To determine the connection between macroeconomic performance and bank profitability
RESEARCH HYPOTHESES
The researcher seeks to investigate the following hypotheses:
First Hypothesis:
Ho: liquidity has no effect on the profitability of megabanks.
There is an effect of liquidity on the profitability of megabanks.
Second Hypothesis:
There is no correlation between the macroeconomy and the profitability of banks.
There is a connection between the macro economy and bank profitability.
THE IMPORTANCE OF THE STUDY
The study will be extremely important to students and the financial industry. This study will shed light on the macroeconomic and bank-specific drivers of Nigerian banks’ profitability. The paper will also serve as a resource for future researchers who investigate relevant topics.
SCOPE AND BOUNDS OF THE STUDY
The scope of the study includes Bank-specific and macroeconomic factors of the profitability of Nigeria’s banks. The researcher faces a constraint that restricts the study’s scope;
a) AVAILABILITY OF RESEARCH MATERIAL: The researcher has insufficient research material, consequently limiting the scope of the investigation.
b) TIME: The time allotted for the study does not allow for a broader scope because the researcher must mix it with other academic activities and examinations.
1.7 DEFINITION OF TERMS
Macroeconomics is the branch of economics that examines the overall performance, structure, behavior, and decision-making of an economy. This comprises regional, national, and international economies.
A element that decisively determines the nature or outcome of something.
Banking sector: The banking sector is the portion of the economy that holds financial assets on behalf of others, invests those financial assets as leverage to produce additional wealth, and is regulated by government authorities.
Profitability is the capacity of a business to generate a profit. A profit is the amount of income remaining after all expenses directly related to the generating of the revenue, such as creating a product, and other expenses associated to the conduct of business activities have been paid.
MACRO-ECONOMIC AND BANK-SPECIFIC FACTORS AFFECTING NIGERIAN BANKS’ PROFITABILITY
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