DETERMINANTS OF COMMERCIAL BANKS PROFITABILITY IN NIGERIA

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DETERMINANTS OF COMMERCIAL BANKS PROFITABILITY IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

In every economy the banking sector is considered to be the vital source of financing economic activities. As such, the profitability of this sector is inevitable in order to encourage economic activities. The importance of bank profitability can be appraised at the micro and macro levels of the economy (Bobakova, 2003) at the micro level; profit is the essential pre-requisite of a competitive banking institution and the cheapest source of finds. It is not merely a result, but also a necessity for successful banking in a period of growing competition in finical market. Hence, the basic aim of a bank’s management is to achieve a profit as the essential requirement for conducting any business (Bobakova, 2003). At the macro level, a sound and profitable banking sector is better able to withstand negative shocks and contribute to stability of the finical system.

The importance of bank profitability at both micro and macro level has made researchers, a academics, banks management and banks regulatory authorities of develop considerable interest in the factor that determine commercial bank profitability (Athanasoglou etal, 2005). An attempt to determine the factors that determine profitability has caused the sector some series of reforms right from colonial era till date in order to improve its performance. Some of these reforms include; the sectoral credit allocation and interest rate cap of the 1970s and early 1980s, the small and medium industry enterprises equity investment schemes (SMIEEIS).

The rediscounting and refinancing facility initiated in 2002 (Economic and financial Review volume48/4 December, 2010) and in 1987-1991 financial sector reforms (intended to enhance competition in the sector, mobilize saving that would lead to more efficient allocation of resources) were implemented, encompassing elements of liberation 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 bank operating in Nigeria five times, namely in 1991, 1997, 2000 and 2004 (Aburine and uche, 2006). However, these measures were unsuccessful in curtailing the spate of bank distress and failures in the 1990s and beyond (Oluranti 1991; uche, 1996; 1998; Back, et al).

Currently a set of banking sector reforms have been introduced to insure inter alia a strong and reliable banking sector (Okagbue and Aliko, 2005). Unfortunately, if the historical antecedents of financial sector reforms in Nigeria are anything to go by, the current reforms may also not help to improve bank profitability and stability in Nigeria. The federal government of Nigeria through 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. Against this backdrop, this study is aimed at clearly identifying the significant determinant(s) 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 servers to investors. It has continued to attract attention of the government through the Central Bank of Nigeria. However, there have been different ways in which the federal governments of Nigeria through the Central Bank of Nigeria have been trying to restore the confidence of the masses in banking recapitalization exercise of 2005, and the nationalization of some commercial banks (Afribank, Bank PHB, and Spring Bank) in 2011. Despite all these efforts, 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 intends to proffer solution as it is geared towards ascertaining what factor(s) determines the profitability of Nigerian banks. This will help the regulatory authorities know where to center their concern.

1.3 Objectives of the Study

The broad objective of this study is to provide an understanding of the determinants of commercial banks profitability in Nigeria.

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