ABSTRACT
This study examines the effect of Banking Regulation via capital adequacy ratio and monetary policy variables on the performance of commercial Banks operating in Nigeria during 2000-2016. The monetary policy tools considered for the study were monetary policy rate and liquidity ratio, while profitability of commercial banks was measured by their return on assets (ROA). The data used for the study was Time series secondary data sourced from Nigeria Deposit Insurance Corporation Annual Report and Central Bank of Nigeria Statistical Bulletins. The data used for the study was analyzed with multiple regression analysis. The findings revealed that capital adequacy ratio and monetary policy rate had a positive and significant effect on commercial banks profitability while the effect of liquidity ratio was negative and insignificant. Hence, it was recommended among other things that Central Bank of Nigeria should maintain the policy rate at a level so that commercial banks would concentrate on their profitability by charging lower interest rate and providing handsome return to depositors.
TABLE OF CONTENTS
Title Page i
Declaration ii
Certification iii
Dedication iv
Acknowledgements v
List of Tables viii
Abstract ix
CHAPTER ONE
INTRODUCTION
1.1 Background
of the Study 1
1.2 Statement
of problem 3
1.3 Objectives
of the study 5
1.4 Research
Questions 5
1.5 Research
hypothesis; 5
1.6 Significance
of the study 6
1.7 Scope
of the study 6
1.8 Limitations
of the study 7
CHAPTER TWO
LITERATURE REVIEW
2.1 Conceptual
Framework 8
2.1.1 Concept
of Regulation 8
2.1.2 Reasons
for the Regulation of Nigerian Banks 11
2.1.3 The
Concept of Capital Adequacy 12
2.1.4 Concept
of monetary policy in Nigeria 17
2.1.5 Instruments
of Monetary Policy 20
2.1.6 Objectives
or Goals of Monetary Policy: 24
2.1.7 The
Concept of Financial Performance 25
2.2 Theoretical
Framework 26
2.3 Empirical
Review 30
CHAPTER THREE
RESEARCH METHODOLGY
3.1 Research
Design 37
3.2 Area of
study 37
3.3 Sources
of Data Collection 37
3.4 Validity
and Reliability of the instrument 38
3.5 Analysis
Techniques 38
3.6 Model Specification 38
3.7 Description
of variables 39
3.7.1 Dependent
variable
39
3.7`.2
Independent variables; 39
CHAPTER FOUR
PRESENTATION OF DATA, ANALYSIS AND DISCUSSION
4.1
Presentation of Data 40
4.2 Data Analysis and Discussion of Results 41
4.2.1 Descriptive Statistic
41
4.2.2 Regression Analysis
42
4.2.2.1 Discussion of Results and Hypotheses Testing 43
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Findings 46
5.2 Conclusion 46
5.3 Recommendations 47
REFERNECES
APPENDIX
LIST OF TABLES
Table 4.1: Aggregate data used for the analysis
(2000 to 2016) 40
Table 4.2: Descriptive Statistic 41
Table 4.3: Regression Results (Dependent variable,
return on assets) 42
CHAPTER ONE
INTRODUCTION
1.1 Background of the
Study
The intermediation role of banks can be said to be a
catalyst for economic growth and development as investment funds are mobilized
from the surplus units in the economy and made available to the deficit units.
In doing this, banks provide an array of financial services to their customers.
As a result of these sensitive activities of gathering of deposits and
allocation of credits, banks are vulnerable to liquidity problems and loss of
public confidence, (Soludo, 2004).
Beyond their intermediation functions, the performance
of financial institutions and banks has significant implications for economic
growth. Sound financial performance rewards the stakeholders for their
investments and encourages additional investments. On the other hand, poor
banking performance may result in banks’ failure and collapse which may also
affect/hamper the economic growth of the country. According to Ezike and Oke
(2013) due to the nature of banking and the crucial role of banks in capital
formation, banks should be looked at more closely. Like in its developed counterparts this was also one of the key
functions of the Central Bank of Nigeria
(CBN) which led to banks’
consolidation in 2004 (CBN, 2010).
Regulation of banks has been defined as a body of
specific rules or agreed behavior either imposed by government or other external
agency, or self imposed by explicit or implicit agreement within the industry
that limit the activities and business operations of banks. Regulation is also
defined as an administrative rule issued by an organization used to guide,
control, direct the conduct of members of that organization. Banking regulation
could come in various form. It could be in form of effecting changes in the
capital base of banks to ensure capital adequatecy, effecting changes in
monetary policy variables to monitor bank credit and avoid excess lending by
banks which could hamper it's existence if not recovered, conducting on site
and off site examination to ensure banks are carrying out operation in
accordance with the laid down rules and regulations stipulated by the Regulatory
authorities, all these changes in no doubt affect bank's performance (Ezike and
Oke, 2013).
The study however centered on the use of monetary
policy variables and capital adequacy ratio by the CBN to control, direct
credit supply and also ensuring capital adequacy of banks. Capital adequacy
ratio (CAR) is basically the proportion of the bank's tier1 and tier2 equity as
a proportion of its risk weighted assets (loans). It is the proportion of a
banks own equity in relation to its risk exposure. However, the capital
adequacy ratio of banks in Nigeria currently stands at 10% and 15% for
national/regional banks and banks with international banking license
respectively. Basel Accord demand that banks should maintain a minimum capital
adequacy ratio of 8% of risk-weighted assets. On the other hand, commercial
banks is the avenue through which the monetary authorities like the CBN
regulate the credit/money supply. The Central Bank defines money supply in two
ways: narrow and broad money. Narrow money (M1) is defined to include currency
in circulation plus current account deposits with commercial banks. Broad money
measures the total volume of money supply in the economy and is defined as
narrow money plus savings and time deposits with banks including foreign denominated
deposits. These changes in no doubt adopted by the Central Bank of Nigeria in
one time or the other in the course of regulation exercise, such as the
increase of capital base of commercial banks in Nigeria from 2billion in 2000
to 25billion in 2004/2005 to ensure capital adequacy of banks and the change in
monetary policy rate from 12% in 2012, to 14% in 2016, however, affect banks
performance either positively or negatively. However, whether these changes
significantly affect banks performance or not is a matter of investigation.
1.2 Statement of problem
Financial system are prone to periods of instability.
In recent years, a number of financial crisis around the world (Southeast Asia,
Latin America and Russia) have brought about a large number of bank failures.
Some argue that this suggest a case for more effective regulation and
supervision. Others attributes many of these crises to the failure of
regulation. Advocates of the so-called free banking argue that the financial
sector would work better without regulation, supervision and central banking .In
the absence of government regulation, they argue, banks would have greater
incentives to prevent failures. One of the earliest theories about regulation
developed by economist George Strigler, contends that firms in regulated
industries actually seek out regulation because it brings benefits in the form
of monopolistic rents due to the fact that regulations often block entry into
the regulated industry. Thus, some financial firms may lose money if regulation
are lifted because they will no longer enjoy protected monopoly rents that
increase their earnings. Edward Kane has argued that regulations can increase
customers confidence, which in turn, may create greater customer loyalty toward
regulated firms. When a country’s banks experienced major financial setbacks,
usually the stakeholders such as the public, depositors, markets and the
regulator –Central Bank will have to respond. The aim of the intervention is to
prevent bank distress/failure. The setbacks are in terms of profitability,
loans, deposits and continuous flow of liquidity to various sectors of the
economy for the banks to maintain their role as engine of economic growth and
development. The responses are that the public will tend to lose confidence not
only in the affected banks but in the entire banking system. For example,
depositors of affected banks may rush to withdraw their money for fear of loss
and quest for safety. Other banks, that is, those that are not affected will
equally experience the bank run/rush and the markets will make it very
difficult for the banks to raise funds. The response by the regulatory
authorities could take the form of either recapitalization to ensure capital
adequacy or effecting changes in monetary policy variables to regulate money
supply and limit excessive lending by banks. Financial problems in a banking
system can cause great damages to a country if not timely and properly
addressed, given its role as finance provider to other sectors of the economy and
its ability to create liquidity. Banks do not operate in a vacuum, they operate
within the framework of monetary and banking policies provided by the
regulatory authority. Nigeria has over the years employed these policy, that is
monetary and recapitalization policy at one time or the other to regulate and
control capital adequacy and credit supply of banks. It is in no doubt that all
these regulation moves significantly affects banks performance.
In view of this scenario, the basic problem to tackle
by this research is to examine the effect of banking regulation through
recapitalization and monetary policy on the performance of commercial banks in
Nigeria ranging from the period of 2000-2016.
1.3 Objectives of the study
The broad objective of this study is to examine the
effect of banking regulation on the performance of commercial banks in Nigeria
ranging from the period of 2000 - 2016.
The specific objectives are;
i.
To ascertain the effect of Capital adequacy ratio on banks
profitability.
ii.
To determine if Liquidity Ratio has a significant effect on
banks profitability.
iii.
To ascertain if Monetary Policy Rate has a significant effect
on banks profitability.
1.4 Research Questions
i.
To what extent does capital adequacy ratio affect banks
profitability
ii.
To what extent does liquidity ratio affect banks
profitability?
iii.
To what extent does monetary policy rate affect banks
profitability?
1.5 Research hypothesis;
The following
hypothesis were formulated to guide the study;
HO1: The capital
adequacy ratio has no significant effect on banks profitability.
HO2: The liquidity ratio has no significant effect on banks
profitability.
HO3: The monetary policy rate has no significant effect on banks profitability
1.6 Significance of the study
The purpose of this study is to examine the effect of
banking regulation via monetary policy variables and capital adequacy ratio on
the performance of commercial banks in Nigeria. However, the research work will
be of interest and useful to :
1. Regulatory and Supervisory authorities: It will provide a platform
for the regulatory and supervisory authorities such as CBN and NDIC to
appreciate the effect of their activities on commercial banks and underscore
areas for improvement.
2. Banking sector: The banking sector will be better improved by
consummating the findings and recommendations from the study in stemming down
the incidence of bank failure arising from fraud, non adherence to regulatory
measures and poor management.
3. Students and
Depositors: They will be well exposed on the various monetary and
recapitalization policies available to bank regulators and how each influences
the performance of commercial banks in particular and the economic growth in
general. It will also be useful to undergraduates of management and related courses
and potential researchers in this area.
1.7 Scope of the study
The research work will focus on the effect of banking
regulation via monetary policy variables and capital adequacy ratio on the
performance of commercial banks in Nigeria from the year 2000 - 2016. The scope
is limited to commercial banks and not the entire banking system in Nigeria.
1.8 Limitations of the study
Inability to access vital information: One of the
major problems which the researcher encountered was her inability to have access
to some information and materials that would adequately guide her in this work,
certain information was difficult to be obtained.
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