ABSTRACT
This study examines the impact of capital structure and macroeconomic uncertainty on the profitability of deposit money banks (DMBs) in Nigeria, addressing critical issues in corporate finance and banking. Specifically, it investigates the effect of capital structure on profitability, assesses the relationship between macroeconomic uncertainty and profitability, and explores their combined influence. The study adopts a quantitative research approach, utilizing secondary panel data from 10 DMBs in Nigeria from 2019 to 2023, including International, National, Regional, Non-interest, and Merchant banks. Key variables include Return on Assets (ROA), Return on Equity (ROE), Debt-to-Equity Ratio (DER), inflation rate (INF), monetary policy rate (MPR), exchange rate (EXR), money supply (MSS), and economic growth rate (GDPGR). Descriptive statistics, correlation analysis, and regression techniques such as Random-Effect and Fixed-Effect models were employed, validated by Panel Unit Root Tests, the Hausman Test, and Post-Estimation Tests. The findings reveal that capital structure significantly influences the profitability of DMBs, with the DER positively impacting ROA. Macroeconomic variables—MPR, EXR, MSS, and GDPGR—show significant relationships with profitability, though inflation exhibits no significant effect. Combined, capital structure and macroeconomic uncertainty significantly affect profitability, demonstrating the critical interplay between internal financial strategies and external economic conditions. The study highlights that DMBs leveraging debt financing, measured by DER, achieve improved asset returns due to enhanced revenue capacity and capital structure optimization. Macroeconomic factors such as MPR, EXR, and MSS influence profitability through their impact on lending rates, foreign exchange transactions, and liquidity, respectively. However, volatile exchange rates and inflation can adversely affect bank performance. The results align with prior research, confirming the significance of monetary policy rate and exchange rate stability in enhancing bank performance, while also noting the potential negative effects of high inflation and excessive volatility. The combined analysis underscores the necessity for banks to balance internal financing strategies with adaptive responses to macroeconomic changes. Based on these findings, the study recommends that DMBs prioritize debt financing to improve financial performance while maintaining prudent risk management practices. Policymakers, particularly the Central Bank of Nigeria, should implement monetary easing strategies to lower interest rates, stabilize exchange rates, and ensure sufficient money supply to enhance bank liquidity and profitability. Moreover, fostering economic growth through favourable macroeconomic policies will create a conducive environment for bank performance. This research contributes to the literature on corporate finance and banking in developing economies, providing actionable insights for stakeholders in Nigeria’s banking sector. It highlights the interconnectedness of capital structure decisions and macroeconomic factors, emphasizing their combined influence on bank profitability and the broader economic stability of the country.
TABLE
OF CONTENTS
Cover Page i
Certification ii
Dedication iii
Acknowledgement iv
Table of Contents v
List of Tables ix
List of Figures x
Abstract xi
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study 1
1.2 Statement of the Research Problem 3
1.3
Objectives of the Study 4
1.4 Research Questions 4
1.5 Research Hypotheses 5
1.6 Significance of the Study 5
1.7 Scope of the Study 7
1.8 Clarification
of Concepts 8
CHAPTER TWO
LITERATURE REVIEW
2.1 Preamble 10
2.2 Conceptual Review 10
2.2.1 Capital Structure 11
2.2.1 Debt-to-Equity Ratio 12
2.2.2 Macroeconomic Uncertainty 14
2.2.2.1 Inflation Rate as a Factor of
Macroeconomic Uncertainty 17
2.2.2.2 Monetary Policy Rate
(MPR) as a
Factor of Macroeconomic Uncertainty 19
2.2.2.3 Exchange Rate Fluctuations
as a Factor of Macroeconomic Uncertainty 21
2.2.2.4 Money Supply as a Factor of
Macroeconomic Uncertainty 24
2.2.2.5 Economic
Growth Rate as
a Factor of Macroeconomic Uncertainty 26
2.2.3 Profitability 28
2.2.3.1 Return
on Assets (ROA) 29
2.2.3.2 Return on Equity
(ROE) 30
2.3 Theoretical Review 31
2.3.1 Trade-Off Theory 31
2.3.2 Pecking Order Theory 32
2.4 Empirical Review 34
2.4.1
Studies on Impact of Capital Structure
on Profitability. 34
2.4.1.1 Studies from Developed Countries on Impact of Capital Structure on
Profitability 34
2.4.1.2 Studies from Developing Countries on Impact of Capital Structure on
Profitability 35
2.4.1.3 Studies from Nigeria on Impact of Capital Structure on Profitability 39
2.4.2 Impact
of Macroeconomic Uncertainty on Profitability 41
2.4.2.1
Studies from Developed Countries on Impact of Macroeconomic Uncertainty on
Profitability 41
2.4.2.2 Studies from Developing Countries on Impact
of Macroeconomic Uncertainty on
Profitability 43
2.4.2.3 Studies from Nigeria on Impact
of Macroeconomic Uncertainty on Profitability 46
2.4.3 Impact
of Capital Structure and Macroeconomic
Uncertainty on Profitability 48
2.4.3.1 Studies from
Developed Countries on Impact of Capital Structure and Macroeconomic Uncertainty on Profitability 48
2.4.3.2 Studies from Developing Countries on Impact
of Capital Structure and
Macroeconomic Uncertainty on Profitability 50
2.4.3.3 Studies from Nigeria on Impact
of Capital Structure and Macroeconomic
Uncertainty on Profitability 52
2.5 Gaps
in Literature 54
CHAPTER THREE
METHODOLOGY
3.1 Preamble 56
3.2 Research Design 56
3.3 Population
of the Study 56
3.4 Sample
Size and Sampling Techniques 57
3.5
Sources of Data Collection 58
3.6
Operational Measurement of Variables 59
3.7 Model Specifications 59
3.8 A
priori Expectation 61
3.9 Methods of Data Analysis 63
CHAPTER FOUR
RESULTS AND DISCUSSION
4.0 Preamble
4.1 Descriptive Statistics
4.2 Graphical
Description of Variables
4.3 Correlation Analysis
4.4 Panel
Unit Root Test
4.1 Preamble 65
4.1 Descriptive Statistics of Variables 65
4.2 Graphical
Description of Variables 67
4.3 Correlation Analysis 72
4.4 Panel Unit Root Test 73
4.5 Test
of Hypotheses 74
4.5.1 Hypothesis
One Testing 75
4.5.1.1
Hausman Test 76
4.5.1. 2 Random Effect Regression 77
4.5.1.3
Post-Estimation Tests 78
4.5.2 Hypothesis
Two Testing 78
4.5.2.1 Hausman Test 79
4.5.2.2 Random-Effect Regression 79
4.5.2.3
Post-Estimation Tests 80
4.5.3 Hypothesis
Three Testing 81
4.5.3.1 Hausman Test 82
4.5.3.2 Random-Effect Regression 83
4.5.3.3 Post-Estimation Tests 85
4.5.4 Hypotheses Testing Summary 86
4.6 Discussion of Result 88
4.7 Theoretical Findings 89
CHAPTER FIVE
CONCLUSION AND RECOMMENDATIONS
5.0 Preamble 90
5.1 Summary of the Study 90
5.2 Summary of Findings 91
5.2 Conclusion 91
5.3 Recommendations
of the Study 92
5.4 Contribution
to Knowledge 92
5.5 Limitations of
Study 93
5.7 Suggestions
for Further Study 93
References 95
Appendix
I: List of Deposit Money Banks in Nigeria 95
Appendix 2: Data From Banks 105
Appendix 3: Unit
Root Test 107
Appendix 4: Regression
Results For Model 1 110
Appendix 5: Regression
Results For Model 2 112
Appendix 6: Regression
Results For Model 3 114
LIST
OF TABLES
Table 3.1: Deposit
Money Banks and Categories 57
Table 3.2: Sample Size Allocation 58
Table
3.3: Measurement of
Variables 59
Table
3.4: A priori Expectation 62
Table 4.1: Summary
Statistics 67
Table
4.2: Correlation Analysis (ROE) 72
Table
4.3: Correlation Analysis (ROA) 73
Table 4.4: Panel Unit
Root Test 74
Table
4.5: Hausman Test Result 75
Table 4.6: Random-Effect Regression 76
Table 4.7: Redundant
Fixed Effects Test Result 76
Table 4.8: Breusch
Pagan LM Test Result 77
Table 4.9: Hausman
Test Result 77
Table 4.10: Random-Effect
Regression 79
Table 4.11: Redundant
Fixed Effects Test Result 79
Table 4.12: Breusch
Pagan LM Test Result 80
Table 4.13: Hausman
Test Result 80
Table 4.14:
Random-Effect Regression 82
Table 4.15: Redundant Fixed Effects Test
Result 82
Table 4.16: Breusch Pagan
LM Test Result 83
LIST
OF FIGURES
Figure 1: Graphical Description of ROE 68
Figure 2:
Graphical Description of ROA 68
Figure 3:
Graphical Description of DER 69
Figure 4:
Graphical Description of INF 69
Figure 5:
Graphical Description of MPR 70
Figure 6:
Graphical Description of EXR 70
Figure 7:
Graphical Description of LMSS 71
Figure 8:
Graphical Description of GDPGR 71
CHAPTER
ONE
INTRODUCTION
1.1 Background to the Study
Capital
structure is an aspect of financial structure that refers to the use of
different sources of funds employed by a business organisation in the
acquisition of both fixed and current assets (Tirumalsety & Gurtoo, 2021).
The basic rule of capital structure is to minimise the cost of capital and maximise
the value of shareholders. The achievement of this goal depends on the balance
of the various sources of funds and its efficient management by the directors
of the organisation (PeiZhi
& Ramzan, 2020). Thus, commercial banks as businesses may
need some borrowed capital and long-term capital with some specific objectives
in mind. These include the provision of liquidity for loans, boosting solvency,
and minimising the costs associated with the acquisition of potential
insolvency. Each of those objectives requires banks to carefully manage the
structure of their liabilities, making sure that at each point in time, the
right balance is achieved according to the specific circumstances and
objectives (Demeuova et al.,
2020).
Capital structure is very
important in ascertaining the financial strategy and sustainability of any organisation,
all the more so in the banking sector, where stability and efficient capital
management form the core foundation of both operational success and broader
economic stability (Abiodun & Obembe, 2021). The determination of an
optimal capital structure is of great importance to the Deposit Money Banks in
Nigeria in view of the peculiar susceptibility to economic cycles, regulatory
limitations, and the ever-dynamic nature of the macroeconomic environment.
Several factors commonly contribute to the volatility of Nigeria's economy,
including exchange rates, inflation, oil price changes, and policy changes. All
these factors further complicate the effective management of the capital
structure. The importance of capital structure in banking is vital because of
the regulatory requirements and the risk profile inherent in the financial
sector.
Financial institutions often
rely on a blend of retained earnings, debt, and equity when trying to achieve
financial leverage by abiding by regulatory requirements, which include the
Basel Accords (Sanni & Aliyu, 2022). For instance, according to Basel III,
there is an expectation of increased quality of capital and improved liquidity
profile in an attempt to ring-fence the risks, especially in periods of adverse
economic conditions.
In financial theory, the
capital structure is discussed through various models, including the
Modigliani-Miller theorem, which assumes, under ideal market conditions, that
the value of the firm does not change under either debt or equity financing. In
imperfect markets with asymmetric information, bankruptcy risks, and tax implications,
the mix of debt and equity becomes a strategic issue. Banks have high leverage
ratios, particularly compared with non-financial firms, with their ability to
hold large volumes of deposits and to lever off their position in the financial
market (Oseni & Akanbi, 2023). Therefore, the capital structures of Nigerian banks
are largely influenced by internal factors such as profitability and the
structure of assets and by external conditions such as macro-economic
uncertainties, which directly influence their cost of borrowing and risk
management practices. In the case of DMBs, one of these various influencing
factors is their capital structure.
Capital structure refers to
the mix of debt and equity used by a bank in financing its activities,
investments, and growth. Being a determinant of cost, risk, and returns,
capital structure decisions are vital in realizing profits, as noted by Adebayo
& Olojede (2019). This means that the capital structure impinges on
profitability via risk-adjusted returns and overall financial stability, as
noted by Adeniyi et al., (2020). The major driving factors of macroeconomic
uncertainty in Nigeria include crude oil price volatility, foreign exchange
rate volatility, pressure from inflation, and changes in fiscal and monetary
policies. The economy of Nigeria is driven by oil exports, and the fluctuations
in global oil prices have an impact on foreign reserves, exchange rates, and
government revenues, hence contributing to economic instability, as shown by
Adegbite and Ogunbiyi (2023). This instability renders borrowing costly, debt
management cumbersome, and affects the banks' capital structure as a way of
trying to reach a trade-off between debt and equity for cost reduction and risk
management purposes. These macroeconomic factors, therefore, affect the
profitability and operational resilience of DMBs. They are made to bear a
heightened risk of default, volatile asset values, and more costly operations.
For example, loans extended
by banks and denominated in foreign currencies are very vulnerable to exchange
rate volatility and, by extension, affect their liabilities to debt servicing
and net income. Inflation, which has been chronic in Nigeria, erodes the value of
the loans and thus affects interest and fee income generated from the loans,
further reducing overall profitability. High inflation further imposes
operational costs on banks, thereby reducing net income and influencing the
reconsideration of the latter's debt-equity ratios when these institutions try
to maintain profit margins. Profitability is an important measure of bank
health and sustainability with regard to capital structure and the
macroeconomic environment.
Commonly, profitability in
DMBs is usually measured using ROA, ROE, and NIM (Ebiringa, 2024).
Profitability determines the ability of banks to attract investors and obtain
reasonable debt. Highly profitable banks usually enjoy better access to capital
with lower costs of borrowing, hence placing them in stronger financial
positions to further advance their growth (Harrison, 2021). Banks in Nigeria
have conventionally experienced profitability problems caused by economic
conditions, regulatory policies, and structural issues facing the banking sector.
Stability in macroeconomic conditions would, on the other hand, impact
profitability directly and indirectly through loan demand, interest rates, and
default rates (Renato et al., 2023).
1.2 Statement of the Research Problem
The sustainability of DMBs
in Nigeria depends very much on profitability, as it has a direct effect on the
stability of the whole financial system and, by extension, the growth of the
economy. However, this sector has been challenged by profit impairment due to
the interaction between capital structure choices and macroeconomic
uncertainties. This has very important implications for the financial health of
any such firm: high debt levels increase the cost of capital and expose banks
to risks of financial distress. In emerging economies like Nigeria, where
capital markets are not well developed and debt financing tends to be
expensive, other factors also combine to challenge banks in their efforts at
optimizing capital structure for maximum profitability. It is therefore, complicated
to understand the impact of capital structure on profitability, especially in
the face of unpredictability in the macroeconomic environment of Nigeria.
Threat of macroeconomic
uncertainty to the profitability of banks in Nigeria is a major factor. For instance,
inflationary pressures in Nigeria will wipe off asset values and diminish
purchasing power, while exchange rate volatility raises foreign exchange risk
and mounts aberrations on financial forecasting. Further, high and volatile
interest rates complicate costs and return on capital, impacting the potential
for banks to offer competitive lending rates and be at the same time
profitable. The recent economic environment, including changes in global
commodity prices and domestic policies, only aggravated these challenges.
Considering their strong dependence on oil-related revenues, Nigerian banks are
peculiarly exposed to external shocks that may boost inflation and cause
currency weakening, which could, in turn, increase loan defaults, decreased
margins of interest, and lower profitability in general.
Furthermore, the regulatory
environment in Nigeria does not help matters. For instance, the CBN stipulates
minimum capital requirements for the banks, which forces them to hold such
large equity that it may be constricting on their profitability, particularly
in times of low growth. Meant to maintain stability, this very regulatory
framework may paradoxically have an impact on the flexibility of capital
structure and, by extension, profitability more so in uncertain economic
climates. Despite these regulations, the Nigerian DMBs still find it very
difficult to achieve maximum profitability because capital adequacy
requirements restrain their ability to leverage high-growth opportunities by
debt financing. Hence, one of the major issues that existing studies have not
fully explored is the impact of regulatory constraints on capital structure
decisions.
This study therefore seeks
to fill the existing research gap by investigating how macroeconomic
uncertainty influences the relationship between capital structure and
profitability in the banking sector of Nigeria.
1.3 Objectives of the Study
The general objective of
this study is to examine the impact of capital structure and macroeconomic
uncertainty on the profitability of deposit money banks (DMBs) in Nigeria.
However, the specific objectives are;
i.
To
analyse the effect of capital structure on the profitability of deposit money
banks in Nigeria.
ii.
To assess
the relationship between macroeconomic uncertainty and profitability of deposit
money banks in Nigeria.
iii.
To
investigate the combined effect of capital structure and macroeconomic
uncertainty on the profitability of deposit money banks in Nigeria.
1.4 Research Questions
This study tends to provide answers
to the following research questions.
i.
To what
extent does capital structure influence deposit money banks' profits in
Nigeria?
ii.
What is
the relationship between macroeconomic uncertainty and the profitability of
deposit money banks in Nigeria?
- How does the combined influence of
capital structure and macroeconomic uncertainty affect the profitability
of DMBs in Nigeria?
1.5 Research Hypotheses
In order to realize the objectives of this
study, the following hypotheses will be tested:
H01: Capital structure has no significant on profitability
of the deposit money banks in Nigeria.
H02: There is no significant relationship between
macroeconomic uncertainty on the profitability of deposit money banks in
Nigeria.
H03: The combined influence of capital structure and
macroeconomic uncertainty has no significant effect on the profitability of
deposit money banks in Nigeria.
1.6 Significance of the Study
This paper on the impact of
capital structure and macroeconomic uncertainty on the profitability of DMBs in
Nigeria is very important to various stakeholders within and outside the
banking sector. As such, the findings of this research, by establishing how
financial structuring and economic fluctuations have an impact on bank
performance, will provide very important insights for the way of banking,
regulation policies, and economic planning.
This study is very
instrumental to the management of banks and financial strategists.
Understanding the relationship existing between capital structure choices, such
as the debt-equity ratio and profitability, equips bank managers with more
informed decisions concerning financing options. The cost of debt in the
Nigerian economic environment is usually high; hence, managers are usually
faced with stiff challenges in balancing the benefits of leverage against the
attendant financial risks. This research will help explain whether a higher
debt ratio is sustainable or destructive during times of economic instability,
which empowers managers to take more resilient strategies that are in line with
both profit goals and economic conditions.
This makes the study very
important to policymakers, especially the Central Bank of Nigeria (CBN) and
other financial regulatory institutions. One of the core objectives of the CBN
is to ensure a stable and profitable banking sector that would contribute
meaningfully to economic growth. This study will also provide important
insights on how key macroeconomic variables, such as inflation, interest rates,
and exchange rate volatility, relate to bank profitability, which will be very
helpful for policymakers in the assessment and modification of current
regulations. For example, understanding how inflation impacts bank returns
might prompt regulatory interventions that stabilize inflation rates to enhance
banking sector performance. Also, the results may cause reforms in capital
adequacy requirements or policies to dampen the effect of economic fluctuations
on the banking sector.
This will be a very useful
study to investors and shareholders, as it provides useful information on
factors that influence bank profitability and risks associated with choices
concerning the capital structure in Nigeria. Generally, investors are concerned
with the assurance of the profitability and stability of their investments in
banks, especially when operating in volatile economic environments. These
findings can help investors assess the risk and return profile of banks and
make informed decisions on shareholding or investing in the Nigerian banking
sector. Secondly, understanding how profitability was influenced by uncertainty
at the macroeconomic level would also help the investor to know when there is a
decline and take losses.
This will also be important
to academics and researchers as a contribution to the existing literature.
Although several studies have examined the relationship existing between
capital structure and profitability, only a few have fully explored such
dynamics within an emerging market like Nigeria, characterized by high economic
volatilities. As a result of this, filling the lacuna in the research
literature, the study contributes to the academic literature through its
voluminous analysis of the interrelationship subsisting between capital
structure and macroeconomic uncertainty. This becomes the foundation upon which
future studies could have based their work on its findings and, as a result,
explore related issues in different economic sectors or under variable economic
conditions.
Finally, this study is very
significant to the Nigerian economy as a whole. A strong and healthy banking
system is an essential requirement for the development of any economy. Banks
have a classic function of mobilizing savings, extending credit, and
engendering investment. The findings of whether economic instability influences
bank profitability in Nigeria would be informative for the attainment of stable
economic policies and more sound financial institutions, and perhaps enhancing
economic growth, jobs, and sustainable development in the country.
1.7 Scope of the Study
The study is aimed at
establishing the relationship between capital structure and macroeconomic
uncertainty on the profitability of DMBs in Nigeria. In particular, it
discusses how capital structure options represented by the debt-equity ratio
macroeconomic variables characterised by inflation rates, volatility of
interest rates, and fluctuating exchange rates affect the profitability of such
banks. This study, therefore, examines how financial structuring decisions
relate to profitability within the context of a country in economic
instability.
This study will, therefore, be restricted to deposit money banks operating
within Nigeria and will cover a sample of 10 DMBs to ensure full understanding
of how various financial strategies and economic conditions interface to affect
profitability within the sector. The data will range from 2014 to 2023, a period totalling 10 years.
This period forms the focal point of interest in this study as an attempt to
reflect the impact of recent turbulences in the economy, especially considering
erratic fluctuations in oil prices, instabilities in exchange rates, and
inflationary tendencies coupled with adjustments in monetary policy.
With regard to variables,
the dependent variable for this paper would be the profitability of DMBs as
measured by key financial indicators ROA and ROE, while the independent
variables involve indicators of capital structure, particularly debt-to-equity
ratios and indicators of macroeconomic uncertainty, such as monetary
policy rate (MPR), inflation rate (INF), exchange rate (EXR), money supply
(MSS), and economic growth rate (GDPGR). Data quantification will also be made through
analysis of relevant financial statements, economic reports, and databases,
using econometric models that outline the relationships among variables.
The study is then
geographically limited because it focuses only on Nigeria, with its peculiar
economic characteristics and challenges impinging on the banking sector. It is,
therefore, likely that the findings might be particular to the Nigerian
environment and may not generalise to other economies that are differently
constituted in terms of economic structures or regulatory frameworks. However,
such knowledge obtained may still have useful implications for other emergent
markets that grapple with similar levels of macroeconomic uncertainties and
financial sector problems.
1.8 Definition of Operational Terms
These terms are
defined to present clarity and standardisation of the terminology used
throughout the study for consistency and clear understanding.
Capital Structure: The debt-equity mix used by a firm in
financing activities and/or growth. For the purpose of this research, capital
structure shall be taken to refer to the debt-to-equity ratio of deposit money
banks, which characterizes the level of debt relative to the equity with which
the bank finances its activities.
Macroeconomic uncertainty: The degree of imprecision
or volatility in the general economic environment is usually defined with
fluctuations of key indicators like inflation rates, interest rates, and
exchange rates. In this paper, macroeconomic uncertainty denotes the impact of
such volatility on the profitability of banks.
Profitability: Can be defined as the ability of an institution to
make profits concerning its operation and financial efficiency. The ROA and ROE
are usually used as indicators to measure the profitability of deposit money
banks.
Deposit Money Banks: These are financial institutions licensed
to mobilize deposits from the general public, and they grant loans and provide
a wide range of other financial transactions. In the Nigerian case, the DMBs
include commercial banks and merchant banks operating under the regulations of
the Central Bank of Nigeria.
Debt-to-Equity Ratio: The financial ratio that
describes the firm's capital structure in terms of the relative proportion of
debt to equity. A very important leverage ratio showing the amount of debt
financing relative to owners’ equity.
Return on Assets: This is the ratio of profitability
calculated as net income over the total assets. ROA reflects how well a bank
uses its assets in generating profit; hence, it tells much about the bank's
operational efficiency and management of assets.
Return on Equity: Reflects a profitability measure as net
income calculated against equity of shareholders. It reflects how well the bank
uses shareholders' investment to create profit; hence, it represents efficiency
and gives a light of the aspect of financial performance.
Inflation Rate: This refers to the rate at which the general level of
prices of goods and services rises, thus reducing purchasing power. The rate
will influence the state of the economy, coupled with the financial performance
of the banks since this influence interest rates, price of lending, and
borrowing costs.
Monetary Policy
Rate (MPR): is the benchmark interest rate set by a
central bank to guide lending and borrowing in an economy. It influences
inflation, liquidity, and economic growth by regulating money supply and credit
availability, serving as a tool for maintaining price stability and overall
financial equilibrium.
Money Supply:
In Nigeria, money
supply represents the total currency in circulation and
deposits in the banking system, categorized as M1 (narrow money) and M2 (broad
money). Managed by the Central Bank of Nigeria (CBN), it influences inflation,
interest rates, and economic growth, ensuring monetary stability and
sustainable development.
Economic
Growth Rate: Measures the percentage increase in a country's
gross domestic product (GDP) over a specific period, usually annually or
quarterly. It reflects the economy's ability to produce more goods and
services, indicating improvements in living standards, productivity, and
overall economic health.
Interest Rate Volatility: A simple sentiment of the
degree of fluctuation of interest rate within a period. High volatility of
interest rates would directly influence the banks' cost of borrowing and return
on lending, thus potentially affecting their profitability.
Exchange Rate: Exchange rates refer to the
value of the Naira relative to foreign currencies, such as the US Dollar.
Managed by the Central Bank of Nigeria (CBN), exchange rates are influenced by
demand, supply, inflation, and government policies. They impact trade,
investments, and the country's economic stability.
Central Bank of Nigeria: This is the apex regulating
body of banking activities in the nation of Nigeria. It carries out monetary
policy and ensures that there is financial stability in the country. CBN
policies affect capital requirements and the regulatory framework within which
deposit money banks operate.
Emerging Markets: Economies that are in the process of
rapid growth and industrialization and are often marked by economic volatility
and evolving regulatory frameworks. Nigeria can be classified under the
category of emerging markets, and this research addresses the special problems
that the banking sector faces while working within the precincts of such an
economy.
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