FINANCIAL INSTRUMENTS AND PERFORMANCE OF LISTED COMMERCIAL BANKS IN NIGERIA

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ABSTRACT

This study examined the Financial Instruments and Performance of Listed Commercial Banks in Nigeria. The study employed ex post facto research design. Data for analyses is got from the published financial reports of 8 listed deposit money banks for a period of 7 years (2014 to 2020). The pooled multiple regression method using ordinary least square regression (OLS) technique was used to analyze the data generated with the aid of Statistical Package for the Social Sciences (SPSS Version 21). Findings from the study revealed that forwards, futures and swaps assets and liability have no significant effect on return on assets and return on equity of the listed deposit money banks in Nigeria. Further findings revealed that Forward, future and swap assets has a positive significant effect on earnings per share of the listed deposit money banks in Nigeria. Furthermore, it was observed that Forwards, Futures and Swaps assets has a positive insignificant effect on liquidity of the listed deposit money banks in Nigeria and finally, it was revealed that Forward, future and swap assets and liability has a negative insignificant effect on leverage of the listed deposit money banks in Nigeria. Based on the findings, the study recommends amongst others that financial instrument accounting and valuation procedures be established and embraced to demystify Nigeria’s derivative market. This would enable the users of financial information analytics to understand each and every hedging practice’ advantages and disadvantages as currently most deposit money banks do not have a steady policy on derivative utilization; and financial risks management is merely left on the whims and devices of managers and thus making investors incur agency costs.






TABLE OF CONTENTS

Title page                                                                                                                                i

Declaration                                                                                                                             ii

Dedication                                                                                                                              iii

Certification                                                                                                                           iv

Acknowledgements                                                                                                                v

Table of contents                                                                                                                    vi

Abstract                                                                                                                                  ix

CHAPTER 1: INTRODUCTION

1.1  Background to the Study                                                                                            1

1.2 Statement of the Problem                                                                                                 3

1.3 Objectives of the Study                                                                                                    5

1.4  Research Questions                                                                                                    5

1.5  Research Hypotheses                                                                                                 6

1.6. Significance of the Study                                                                                                7

1.7. Scope of the Study                                                                                                           8

1.8 Operational Definition of Terms                                                                                      8

 

CHAPTER 2: REVIEW OF RELATED LITERATURE

2.1 Conceptual Review                                                                                                           11

2.1.1 Concept of financial instrument                                                                                    11

2.1.2 Risk associated with financial instrument                                                                     14

2.1.3 Derivatives as a financial instrument                                                                            15

2.1.3.2 Current developments in the use of financial derivative in Nigeria                                    19

2.1.4 Derivative swaps financial instrument                                                                          21

2.1.4.1 Swaps and risk exposures                                                                                           22

2.1.4.2 Hedging risks with swaps                                                                                           24

2.1.4.3 Measuring swaps hedging effectiveness                                                                    26

2.1.5 Derivative options financial instrument                                                                        28

2.1.5.1 Puts and calls, in option transaction.                                                                          29

2.1.5.2 Risks of buying and selling options:                                                                          31

2.1.5.3 Hedging risks with options                                                                                         32

2.1.5.4 Option cost premium                                                                                                  33

2.1.5.5 Timeframe                                                                                                                  33

2.1.6 Financial performance: a subset of performance                                                          34

2.1.7 Financial instrument in contemporary digital economy                                                37

2.1.7.1 Blockchain technology: A brief introduction                                                             37

2.1.7.2 The forward and futures contracts                                                                              39

2.1.7.3 The Commodity spot price and futures price                                                             42

2.1.7.4 Special considerations: spot price, futures price, and basis                                       44

2.1.7.5 The decentralized finance                                                                                          44

2.2 Theoretical Review                                                                                                           46

2.2.1 The Modern portfolio theory of investment                                                                  46

2.2.2 Agency theory                                                                                                               47

2.2.3 Information signalling theory                                                                                        47

2.3 Empirical Review                                                                                                                         47

2.4 Summary of literature Review                                                                                         62

2.5 Gap in Literature                                                                                                              67

CHAPTER 3: METHODOLOGY

3.1 Research Design                                                                                                               68

3.2 Population of the study                                                                                                     68

3.3 Sample and Sample Size Determination                                                                          68

3.4 Method of Data Collection and Data Sources                                                                  69

3.5 Data Analysis Technique                                                                                                 69

3.6 Definition of Variables                                                                                                     70

3.6.1 Independent variables                                                                                                    70

3.6.2 Dependent variable                                                                                                                                             70

3.7 Model Specification                                                                                                         71

CHAPTER 4: DATA PRESENTATION AND ANALYSIS

4.1 Data Presentation                                                                                                              73

4.2 Data Analysis                                                                                                                    73

4.2.1 Data validity test                                                                                                            73

4.2.2 Descriptive statistics                                                                                                      74

4.2.3 Correlation analysis                                                                                                       76

4.2.4 Regression of the estimated model summary                                                                77

4.3 Discussion and Interpretation of Results                                                                          87

CHAPTER 5: SUMMARY, CONCLUSION AND RECOMMENDATION

5.1  Summary of Findings                                                                                                 90

5.2 Conclusions                                                                                                                      91

5.3 Recommendations                                                                                                            93

5.4 Contribution to Knowledge                                                                                              94

5.5 Area of Further Research                                                                                                 94

            Reference                                                                                                                    96

            Appendices                                                                                                                 103

 

 





LIST OF TABLES

                                                                                                                        Page 

4.1       Source: SPSS Output V.21 in appendix ii                                                      74

4.2       Source: SPSS Output V.21 in appendix ii                                                      76

4.3       Source: SPSS Output V.21 in appendix ii                                                      77

4.4       Source: SPSS Output V.21 in appendix ii                                                      78

4.5       Source: SPSS Output V.21 in appendix ii                                                      79

4.6       Source: SPSS Output V.21 in appendix ii                                                      80

4.7       Source: SPSS Output V.21 in appendix ii                                                      81

4.8       Source: SPSS Output V.21 in appendix ii                                                      82

4.9       Source: SPSS Output V.21 in appendix ii                                                      83

4.10     Source: SPSS Output V.21 in appendix ii                                                      84

4.11     Source: SPSS Output V.21 in appendix ii                                                      85

4.12     Source: SPSS Output V.21 in appendix ii                                                      86

 

 


 






CHAPTER 1

INTRODUCTION


            1.1           BACKGROUND TO THE STUDY

The goal of an investment choice is to get required price of return with minimal threat (Gibson, 2007). To reap this aspiration, a range of financial instruments, strategies and techniques have been devised and developed in current time (Tijani & Mathias, 2013). With the opening of boundaries for global trade and business, the world exchange received momentum in the ultimate decade. The integration and incorporation of capital markets world-wide has given upward push to improved economic risk with the customary adjustments in the interest rates, foreign money trade fee and inventory expenditures (Wayne & Kothari, 2012). To overcome the threat springing up out of these fluctuating variables and improved dependence of capital markets of one set of international locations to the others, threat management practices have also been reshaped with the aid of inventing such financial instruments so as to mitigate the danger element that comes with uncertainty of doing enterprise globally. These hedge instruments are known as economic devices which now not only minimize monetary danger however additionally open new possibility for excessive threat takers to mission into exchange besides borders (Nwaorgu & Iormbagah, 2018).

Innovations in the contemporary monetary market have mostly been primarily based on the concept of derivatives instruments. What started out as a simple notion in historical times which came to be later developed into fashionable contracts for the duration of the Chicago Board of Trade generation has now become a maze of complex monetary devices and contracts. The asset orders on which the monetary instruments had been primarily based have gone through a speedy expansion. Nowadays, there is a financial instrument for exceptionally a great deal alternate contract (Steve, 2012).

There are economic instrument for stocks, commodities, actual property etc. We even have financial instrument that are primarily based on different derivatives; developing a Meta shape of sorts. The purpose behind this speedy growth is that these monetary instruments meet the exigency of a large variety of people and organizations worldwide. After the 2008 world economic crisis, financial instrument had to take the fall for the complete chain of events. They had been vilified with the aid of the media in general. That has come as rather of a setback. Barring that the upward push of financial instrument for risk buying and selling in current years has been nothing short of outstanding and this is predicted to proceed in the future (Gibson, 2007).

Financial instruments have been of specific interest to the accounting enterprise in current years, particularly the International Accounting Standards Board (IASB). Financial statement users, such as investors, preparers, and auditors, have consistently had difficulties with accounting for financial instruments, specifically complicated derivatives which information about it has extended dramatically in current years (Shea &; Gary, 2015). The standard for reporting financial instrument can be vast and puzzling to many users. It is additionally tremendously challenging to measure the fair cost of financial instruments and to decide when cognizance of impairment losses is appropriate. The impact of financial instruments on the 2008 monetary disaster in addition highlighted that the current accounting requirements for financial instruments are insufficient for today’s complex monetary environment (Hon, 2012).

Gibson (2007) asserted that the common conventional precept of commercial enterprise successes and making excessive corporate profits as a main tenant for commercial enterprise existence has been revolutionized into that of wealth maximization by corporate managers as a result company managers are exploring approaches to mitigate the hazard related with the ever altering commercial enterprise environment thereby using financial instruments. As mentioned in Kolapo and Ayeni (2012), the precept behind income making is not wrong, however in today’s cutting-edge world commercial enterprise dominated by international and multinational firms, financial instrument have been use for corporate positive factors and losses. These financial instruments are complicated in nature; they are in the shape of contracts, frequently used as tools for strategic danger management activities by using a variety of businesses and sophisticated investor (Nystedt, 2004).

According to Pelen (2016), swaps and options as financial instruments have mushroomed and   surged very rapidly from easy monetary futures to a large range of distinctive and complex securities around the world. Financial markets can facilitate the administration of financial threat exposure, seeing that they allow investors to unbundle and transfer economic risk. In principle, such markets ought to make contributions to a greater efficient allocation of capital and cross-border capital flow, create extra opportunities for diversification of portfolios, and facilitate risk transfer, fee discovery, and greater public statistics (Patnaik 2009; Nystedt 2004). This is the bedrock for assessing the function financial instrument has performed in altering the dynamics of danger mitigation in a global enterprise phenomenon.


1.2 STATEMENT OF THE PROBLEM

Accounting for financial instrument has created reservations and skepticism for preparers, and customers of financial statements as there are certain imprecisions differing from measurement to disclosure which is an issue for concern (Nwaorgu &; Iormbagah, 2018). In the last few years, organizations in the rising market have expanded the use of financial instruments to hedge towards market threat which is as a result of market uncertainties such as interest rate fluctuations and overseas exchange fluctuations which has triggered many corporations to operate adversely.

Even though statistics on firm economic instrument usages is extensively accessible in the developed world, the empirical lookup concerning the use of futures, forwards and swaps is nonetheless problem of debate especially in emerging economies as solely few sectors that are listed in Nigeria, document the use of these financial instruments (Olawale, 2015). Financial establishments derive some advantages from engaging in transactions that entails buying and selling on financial derivatives such as swaps, options, forwards and futures. These transactions, aside from appropriating income for the corporations are additionally main risk management techniques used by the company to hedge towards incalculable commercial enterprise situations (Hon, 2012).

Most of the empirical works on financial instrument and their impact on firm’s overall performance shows off some methodological borderline. One of the foremost obstacles is that most research use the notional quantity of derivatives as just financial instrument but inferentially, financial instruments are broken down into swaps, options forwards and futures which are all exemplified into derivatives but need to be looked at discretely. Also, a company can also have a greater notional spinoff quantity which does not necessarily mean a greater risk exposure. For instance, a company may additionally have a high notional price of derivatives, but can also be proactive enough to fit its derivatives positions with different positions in the spot market or with the contrary positions in the derivatives market using swaps, options or forward contracts; as such, the various financial instruments and how they have an effect on overall performance of corporations need to be looked at separately. Studies such as Chaudhry (2010) used options as economic instrument and discovered that options have a non-significant advantageous effect on bank risk, While in Nigeria the research of Adebisi, and Oladunjoye (2013) additionally looked at financial instrument in the perspective of whole derivatives and observed out that there exist an inverse relationship between performances of firms and the use of financial instruments. As such, there appear to be complexity in preceding findings of authors.

In the light of the foregoing, the study seeks to check out the effect of financial instruments on the performance of listed commercial banks in Nigerian with an adapted methodology to see if outcomes now conform to that of preceding studies.


1.3       OBJECTIVES OF THE STUDY

The main objective of this study is to examine the effect of financial instrument on performance of listed commercial banks in Nigerian. However, the specific objectives of the study are to: 

i.      Examine the effect of Futures, Forwards, and Swaps assets and liability on return on asset of listed firms in Nigeria

ii.     Examine the effect of Futures, Forwards, and Swaps assets and liability on return on equity of listed firms in Nigeria

iii.   Ascertain the effect of Futures, Forwards, and Swaps assets and liability on earnings per share of listed firms in Nigeria

iv.   Determine the effect of Futures, Forwards, and Swaps assets and liability on liquidity of listed firms in Nigeria

v.     Study the effect of Futures, Forwards, and Swaps assets and liability on the leverage of listed firms in Nigeria


1.6  RESEARCH QUESTIONS

The following research questions are set to be answered during the course of the study;

i.               To what extent does Futures, Forwards, and Swaps assets and liability affect the return on asset of listed firms in Nigerian?

ii.              How does Futures, Forwards, and Swaps assets and liability affect return on equity of listed firms in Nigerian?

iii.            To what extent does Futures, Forwards, and Swaps assets and liability affect the earnings per share of listed firms in Nigerian?

iv.            How does Futures, Forwards, and Swaps assets and liability affect the liquidity of listed firms in Nigerian?

v.              How does Futures, Forwards, and Swaps assets and liability affect the leverage of listed firms in Nigerian?


1.7  RESEARCH HYPOTHESES

The following research null hypotheses are set to be tested during the course of the study;

Ho1: Futures, Forwards, and Swaps assets and liability has no significant effect on return on asset of listed firms in Nigeria

Ho2: Futures, Forwards, and Swaps assets and liability has no significant effect on return on equity of listed firms in Nigeria

Ho3:  Futures, Forwards, and Swaps assets and liability has no significant effect on earnings per share of listed firms in Nigeria

Ho4: Futures, Forwards, and Swaps assets and liability has no significant effect on liquidity of listed firms in Nigeria

Ho5: Futures, Forwards, and Swaps assets and liability has no significant effect on leverage of listed firms in Nigeria


1.6. SIGNIFICANCE OF THE STUDY

This study is going to be of huge importance to managements, corporations, Investors, Government and academics.

Management: Management of corporations shall be made to know the theories that under pins accounting for financial instrument and the way it affects the performance of corporations. It will conjointly enhance the data of the management team within the facet of the utilization of accounting for hedge and speculative functions which will enhance the firms’ prospective wealth maximization objective.

Investors: Existing investors are however, made to grasp how effective the employment of monetary instrument is in hedging against market risk such they'll support the policies of management that's tailored towards the employment of financial instrument and the way efficient they're been accounted for.

Government: The government will be made to know the importance of contributing to smooth market operation to mitigate the various market risks that will affect the use of financial instrument via sound policy creation.

Academics: Scholars will find this study’s findings to be significant as it will provide an up to date and top notch information on how the commercial bank’s financial performance is affected by the use of financial derivatives. Fellow researchers will also find this study’s findings to be of significance as they will rely on it for further proof and knowledge on how the commercial bank’s financial performance is affected by the use of financial derivatives


1.7. SCOPE OF THE STUDY

This study is constrained to the listed firms in Nigerian. But it particularly viewed the listed deposit money banks as it is ascertained by Adebisi, &; Oladunjoye, (2013) as the only sector that comprehensively divulge records on the various financial instruments. The timeframe for this study covers a duration of 7 years (2014-2020). The purpose for limiting the study to the listed deposit money banks is as a result of their high adherence to financial reporting regulatory framework. As a sector they are the only corporations that have entirely adopted and complied with International Financial Reporting Standard (IFRS) as stipulated via the Financial Reporting Council of Nigeria. Finally, the preference of time is constrained so as to seize the length within the timeframe IFRS 9 was issued and adopted by the listed commercial banks that pertains to financial instrument which is groundwork of this study.


1.8 OPERATIONAL DEFINITION OF TERMS

Financial instrument: International Accounting Standards (IAS 32 and 39) outline a financial instrument as "any contract that gives rise to a financial asset of one entity and a monetary legal responsibility or equity instrument of another entity".

Swaps: This represents a bilateral settlement between individuals or entities to trade cash flows (payments) over a detailed duration and rate; it can also contain an intermediary or a ‘swap bank’ that brings collectively the counterparties for a premium.

Options: Serving as a by-product security, an option represents a contractual settlement which offers the buyer (holder) the right, however not the obligation, to purchase or sell a targeted volume of a specified asset within a distinctive time period.

Profit after tax: As a Performance measurement tool, this variable represents the complete quantity that a commercial enterprise earns after all tax deductions have taken place. It is used as an indicator to decide how a whole lot a commercial enterprise truly earns and how much it can make use of for its day to day activities. Profit after tax is additionally considered as a measure of a company’s profitability after all its costs have been deducted and can be utterly utilized by the organization to conduct its business. Shareholders are additionally paid dividends from this amount.

Earnings per share: This variable is used to measure the market value of an entity. It is typically derived from the net earnings after the income statement has been prepared.  Earnings per share can be calculated by way of dividing the net profit or loss of the duration attributable to shareholders by the weighted average number of ordinary shares outstanding. In this study it will be derived via taking the figures of the corporations reported earnings per share in their financial statement that represents the share of total income to total outstanding shares of the firm at a time.

Liquidity: Liquidity refers to the availability of cash or cash equivalents to meet temporary operating needs. In other words, liquidity is the amount of liquid assets that are accessible to pay expenses and debts as they become due. Obviously, the most liquid property of all is cash. Creditors and investors frequently use liquidity ratios to gauge how well a commercial enterprise is performing. Since lenders are particularly concerned with a company’s capability to repay its debts, they prefer to see if there is sufficient money and equivalents on hand to meet the contemporary parts of debt.

Derivatives: Derivative as it is used in this research is a contract between two or more parties whose price is based totally on an agreed-upon underlying monetary asset (like a security) or set of assets (stock or digital assets).

Return on assets: ROA is a measurement of how worthwhile a commercial enterprise is in contrast to its assets. The researcher in this context used it as a ratio that helps us to understand what the business enterprise is doing with the assets they have available to them. Are they managing their belongings wisely? For computation sake, the figures for the return on asset had been gotten by means of dividing the Net Income with the total asset.

 


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