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CHAPTER ONE

GENERAL 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 necessity for successful banking in a period

2

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

3

to withstand negative shocks and contribute tothe stability of the

financial system. The importance of bank

profitability at both the micro and macro

levels has made researchers,

academics, bank managements and bank regulatory

authorities to develop considerable interest in

the factors that determine commercial bank

profitability (Athanasoglou et al., 2005:5).

It is a common knowledge that Nigerian bankingsector performance

has been improved since the consolidation exercise

in the 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

At the macro level, a sound and profitable banking sector is better able

4

(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

5

feat. For instance, from 1987 – 1991 financialsector 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 (Aburineand 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;

Unfortunately, they have never completely succeeded in achieving this

6

Uche, 1998:30; Beck, et al.,).

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

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may also not help to improve bankprofitability and stability in

Nigeria. Against this backdrop, the broad aim of

this work is to clearly identify on the basis of

empirical evidence the significant determinants of

commercial banks profitability in Nigeria.

1.2 Statement of 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 have been trying to restore

the confidence of the masses in the banking sector

of the country such as the banking recapitalization

sector reforms in Nigeria are anything to go by, the current reforms

8

exercise of 2005, and the Nationalization of some

commercial banks (Afribank, Bank PHB and Spring

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

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the determinants of commercial bankprofitability in Nigeria.

1.3 Objectives of theStudy

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 fund 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

banks is nothing to write home about. This study therefore investigates

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1.4 ResearchQuestions

The study is undertaken to answer the followingresearch questions:

1. What is the impact of banks liquidity

on commercial banks profitability?

2. Howdoes shareholders fund influencecommercial banks

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profitability?

3. What is the role of total assets on commercialbanks profitability?

4. Does the number of branches have effect on

commercial banks profitability?

1.5 Significance of theStudy

Since the banking sector is considered to be an

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

2. Howdoes shareholders fund influencecommercial banks

12

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

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can be compared to the overall banking situationbecause this serves as

a good indicator to managers of banks to understand

the strength of the banks against the overall

banking industry. More so, banks that are unable to

meet its customers’ demands leaves itself exposed to

a systemic 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

accommodate shock such as financial crisis. This profitability of banks

14

sector.

Three,it is alsosignificant 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

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deposits or invests to earn more returns that will enable them

maximize their wealth. This study provides

depositors as well 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

terms profitability of the banks to know if it will be beneficial to

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investor friendly and profitable. As this will have

multiple effects to the economy of Nigeria.

1.6

Scope and Limitations ofStudy

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The study covers a sample of 16 banks out of the 25commercial banks

in Nigeria for the periods of 2002 to 2007. 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 (2002 – 2004) commercial banks

profit before consolidation to that ofthree

years (2005 – 2007) after

consolidation of the 16 commercial banks that

scaled 31st December,

2005 deadline of the bankrecapitalization exercise.

It is obvious that one has to confront some

limitations on whatever study he or she is embarking

1.6

Scope and Limitations ofStudy

18

upon. The major limitations confronting this study

are inaccessibilityof 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.

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Scope and Limitations ofStudy

19

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 studycarefully used ROA and ROE as measures ofcommercial banks profitability because of itsdominancy in finance studies as measures ofcommercial banks profitability or performance.

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