A Nexus of Capital Base, Profit Generating Capacity and Operational Efficiency of Commercial Banks in Nigeria

8/11/2019 A Nexus of Capital Base, Profit Generating Capacity and Operational Efficiency of Commercial Banks in Nigeria

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European Journal of Business and Management www.iiste.org

ISSN 2222-1905 !aper" ISSN 2222-2#$9 %nline"

&ol.'( No.25( 201)

1

A Nexus of Capital Base, Profit Generating Capacity and

Operational Efficiency of Commercial Banks in Nigeria

%*E+%,N /BEJ !.+"

ssoiate !rofessor and ead of +epartment

+epartment of ounting( Josep 3o Ba4alola niersit3( %sun State( Nigeria

!.M.B 500'( Ilesa( %sun State( Nigeria

o3edo6unag4e7a83aoo.om

Abstract

e stud3 anal3:ed te main determinants and te relationsip 4etween apital 4ase( profit-generating apait3

and operational effiien3 of Nigerian ommerial 4an6s. is was wit a iew to proiding empirial

information on te relationsip 4etween apital 4ase re;uirements and profit-generating apait3 and effiien3

in te Nigerian ommerial 4an6ing setor.Seondar3 data oering 1'3ears on 6e3 performane indiator of te4an6s su as total inome( interest rates( total redits( and 4ran networ6s were soured from te ange NSE" and offiial pu4liations of te seleted 4an6s. e data were

su47eted to te two-stage least s;uareS?S" teni;ue for te purpose of estimating te model. e results

sowed tat apital 4ase re;uirement was ineffetie in reduing distress in te 4an6ing industr3. e results

furter sowed tat te main determinants of 4an6 apital 4ase were lagged apital t @ -2.'0( pA0.05"( ris6 t

@2.$0( pA0.05"( si:et@ -$.2( pA0.05"( profit 4efore ta> t @'.2$( pA0.05"( regulator3 pressure t@$.9( pA0.05"and profit generating apait3 t @2.5)( pA0.05". It was also found tat 4an6 apital 4ase signifiantl3 influened

4an6 effiien3 t@ 2.1)( pA0.05" and tat anges in te 4an6 apital determined te degree of effiien3 of te

4an6s t @2.1)( pA0.05". Curtermore( te apital 4ase of te 4an6s signifiantl3 influened teir profit

generating apait3 [email protected]( pA0.05". is reealed tat te Dentral Ban6 of Nigeria ould use te regulator3

power of raising te apital 4ase of 4an6s to stimulate greater profita4ilit3 and effiien3 in te 4an6ing setor.Keyords! Cinanial +eepening( Dommerial Ban6s( Dapital Base( Effiien3( !rofit /eneration( Nigeria.

"EC#$ON ONE

%& $N#'O()C#$ON

It is ;uite 6nown tat well-funtioning 4an6ing s3stems aelerate long-run eonomi growt 4ut poorl3funtioning 4an6ing s3stems an impede eonomi progress( e>aer4ate poert3 and desta4ili:e eonomiesBat( Dapro and ?eine( 2001". erefore( effiient 4an6 operation and sta4ilit3 sould 4e a ma7or maro-

eonomi onern of a nation. o ensure tat te 4an6ing s3stem is effiient and operationall3 effetie( te

goernment of eer3 ountr3 does e>ert some regulator3 ontrols. e solid finanial 4ase will assist te 4an6s

to witstand flutuations in te lia4ilities portfolio and 4e a4le to a4sor4 some une>peted losses due to

as3mmetri information on teir ustomers. e a4ilit3 of 4an6s to proide needed redit in a fast deeloping

eonom3 and to ro4ustl3 ompete in an eer inreasingl3 ompetitie enironment is enaned wit strongapital 4ase( eteris pari4us.

oweer( wile some finanial teorists ontinued to empasi:e te importane of apital 4ase in

4an6ing effetie operation( empirial studies in some ountries ad reealed tat iger 4an6 apital leels do

not( 43 temseles( guarantee tat 4an6s are ade;uatel3 apitali:ed. is is so weneer 4an6s ae ig ratios

of ris6-weigted assets to un-weigted assets See( for e>ample( Sries and +al( 1992"..Cor instane( despite

te fat tat te DBN as 4een enforing apital ade;ua3 re;uirements( te Nigerian 4an6ing s3stem as alwa3s4een under distress. Cor instane( si> teniall3 insolent 4an6s were ta6en oer 43 te DBN in 199$. In 1995(

seenteen oter teniall3 insolent 4an6s were ta6en oer 43 te ape> 4an6. Between 199) and 199#( te

operating lienses of tirt3 one 4an6s were reo6ed 43 te DBN %gun4unmi( 200)". Surprisingl3( te reform

alaimed panaea to te 4an6ing distress in Nigeria as 4egun to sow sign of defet as tree of te 25 4an6s

were teniall3 grounded 7ust two 3ears after te N25 4illion naira minimum reapitali:ation reforms of 2005.

erefore tis stud3 attempts to inestigate te relationsip 4etween te apital 4ase re;uirement( profit

generating apait3( and te operational effiien3 of ommerial 4an6s in Nigeria.

e 19## Basle standards are almost entirel3 foused on redit portfolio ris6( te ris6 of loss due to

ounter part3 default o3( 200$". e 4asis of te 19## ord was tat a onsistent standard 4e applied for

determining minimum apital re;uirements aross internationall3 atie 4an6s. ese apital re;uirements were

strutured to ma6e regulator3 apital sensitie to differenes in ris6 portfolios aross 4an6s( wit 4an6s olding

ris6ier assets re;uired to old a iger leel of apital Cord and Feston( 200$". In effet( te 19## Basle ord

mandates 4an6s to old iger perentages of e;uit3 apital as te pereied redit ris6 of assets inreases Cordand Feston( 200$". In 200)( te #9 4an6s were s;uee:ed to 25 wit 1) ompletel3 li;uidated wile te rest

regrouped for 4usiness as usual. It is ama:ing to o4sere tat 7ust two 3ears of te onsolidation one )G" of te


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&ol.'( No.25( 201)

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25 4an6s tat remained after te onsolidation as 4een ta6en oer 43 te DBN due to insolen3 and a sign of

ollapse.

!eraps te reent pro4lems of some of te newl3 reapitali:ed 4an6s in Nigeria migt ae 4een

aerted if te reform was 4ased on proper appraisal of te past efforts and te underlining fators generating

risis in te 4an6ing s3stem. File seeral attempts were made in te past to assess te oerall effets of

finanial reforms on 4an6ing operation in Nigeria( less attention was paid to te issue of apital 4ase espeiall3te operational effetieness of inreasing apital 4ase in te 4an6ing industr3. e neglet of tis important

aspet of te 4an6ing regulation migt undermine te poli3 releane of te e>isting eidene on te

operational effiien3 of Nigerian 4an6ing industr3. ppraising te ontri4ution of 4an6 apital on te 4an6ing

operation in Nigeria is ineita4le and urgent to la3 solid foundation for furter reforms in te 4an6ing industr3 in

Nigeria. ene( tis stud3 attempts to fill tis empirial gap in te e>isting literature on apital 4ase and 4an6ing

operation in Nigeria.

/ermane to tis resear in te rigt perspetie( a pertinent issueisraised for inestigationH

ii" Fat are te main fators determining anges in te 4an6 effiien3 in Nigeria

ii" Is tere an3 signifiant relationsip 4etween te regulator3 apital struture and 4an6

soundness

e oerall o47etie of te resear is to inestigate te releane or oterwise of 4an6 reapitali:ation

to improing te operational effiien3 of 4an6s in Nigeria. erefore( it is furter narrowed down speifiall3H

+etermine te relationsip 4etween apital 4ase( profit-generating apait3 and operational effiien3 ofNigerian ommerial 4an6s.

In order to aiee te a4oe speifi o47etie tis proposition will 4e tested empiriall3H

*o! ere is no relationsip 4etween apital 4ase and profit generating apait3 of Nigerian Dommerial

Ban6s.

e inreasing reliane of regulators on apital re;uirements raises some fundamental ;uestions tat

ae dominated te disussions on te 4an6 apital ade;ua3H one( do 4an6s respond to apital re;uirement( tat

is( are te penalties for falling 4elow te regulator3 guidelines large enoug to indue 4an6s to raise teir apital

ratio wo( ow do 4an6s improe teir apital ratio wen te3 approa te regulator3 minimum( tat is( do

te3 inrease teir apital or redue teir iger ris6 assets ree( does inrease in apital re;uirement indue

4an6s to redue or inrease te ris6iness of teir portfolio wo( deades after te adoption of te ord and

wilst new regulator3 guidelines ae 4een designed( it is fair to sa3 tat empirial resear is still far from

aing answered te ;uestions posed a4oe. Cinanial anal3sts and solars were diided oer tese ;uestions.

Man3 studies ae tried to assess empiriall3 te impats of apital re;uirement on 4an6s 4eaior.

us( as efforts are 4eing direted to e>amine issues tat will improe te performane of te apital

mar6et in deeloped ountries su efforts need to 4e e>tended to deeloping ountries. Indeed( te deeloping

eonomies li6e Nigeria desere more attention tan te deeloped eonomies su as , and S in iew of

te fragile and transition stage of finanial s3stems in deeloping eonomies us( tere is an important launa

to filled in te empirial studies on te impliation of 4an6 reapitali:ation on finanial deelopment in Nigeria

in partiular and deeloping eonomies in general. is stud3 attempts to ta6e up tis allenge 43 proiding

furter eidene on 4an6 apital 4eaior outside te deeloped eonomies.

e e>amination of Nigerian 4an6s apital 4eaiour is of interest in seeral oter respets. Cirst(

Nigeria as suffered from finanial rises arising from te ris6 ta6ing and wea6 apital 4ase pro4lem tat nearl3su4merged te mar6et in te 1990s. E>amining te effet of reapitali:ation poli3 of Nigerian 4an6s will furter

sed ligt on possi4le fators responsi4le for te rises and te appropriate poli3 response to preent future

ourrene. Seond( regulator3 pressure in Nigeria implied 43 te apital re;uirement ma3 4e stronger in Nigeria

were a 4ea of te guidelines rapidl3 leads to te losure or ta6eoer of te 4an6K unli6e te ase in some

deeloped ountries were underapitali:ed 4an6s are not neessaril3 losed( 4ut are su47et to restritions on

teir atiities and to iger deposit insurane premia. ird( finanial struture and institutions in Nigeria areless deeloped tan tose in deeloped eonomies were te e>isting eidene are 4ased( tus ma6ing te

eidene from tose ountries less releant in poli3 design and ealuation in Nigeria. is stud3 terefore

inestigates te effet of apital regulation on 4an6 performane in Nigeria.

is stud3 oers a period of si>teen 3ears from 1992 to 200. e period was osen as it oinided

wit te period Nigeria 4eame a signator3 to te Basle ord and te period a new 4an6 apital regulator3

meanism was introdued. In 200) a new 4an6 order in wi reapitali:ation( merger( and a;uisition ofontrolling interest as te entral meanism to aiee wat te Basle ord was also set to aiee. B3

impliation( te stud3 will sere as an appraisal of e>isting regulator3 order as 4asis for te implementation of

te new order in Nigeria. E>tending te anal3sis to 200 terefore seres as an appraisal of te ongoing reformsand te reapitali:ation poli3 of 200). ross-setional time data were olleted on te ommerial 4an6s tat

were in e>istene during tis period E>istene of 4an6s 4ranes in te rural areas of te ountr3 and


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&ol.'( No.25( 201)

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aaila4ilit3 of data on te 4an6 were te riteria for 4an6 seletion.

2. Empirical +iteratureIn tis setion( we reiew te empirial 4an6 literature wi ma3 gie impliations for te optimal

apital struture( ris6-ta6ing( and interation wit regulation and superision. Fe start wit a presentation of te

most e>tensie strand wi studies te relationsip 4etween apital and ris6 under different regulator3 regimesflat and ris6-4ased apital regulation". en( we ontinue wit more speifi studies on ;uestions onerning te

impat of deposit insurane( arter alue( and ownersip struture on 4an6 ris6-ta6ing. Fe round up wit a

reiew of apital mar6et reations to reapitali:ation.

"tudies on 'elationsip Beteen Capital, 'isk, and 'egulation

Most autors tr3 to e>plain anges in ris6 and apital in partial ad7ustment model. Danges in ris6 and apital

are assumed to depend on two omponents( one disretionar3 and an e>ogenousl3 determined random so6.

e endogenous omponents are proportional to te differene 4etween a 4an6s target leel of ris6 apital" and

te ris6 apital" leel at te 4eginning of te period - te lag period. e target leels of ris6 and apital depend

on e>ogenous aria4le su as te mar6et interest rate( te degree of ta> adantage of deposit relatie to e;uit3

finane( and te degree of regulator3 pressure as well as( for simultaneous e;uations models( apital and ris6

respetiel3.

Before te earl3 19#0s( S regulation ould 4e arateri:ed 43 a peer group approa wi means

tat superisors oriented temseles at te aerage 4an6 4alane seet. Marcus (1983), wo tries to e>plain tedeline in apital to asset ratios in .S. ommerial 4an6s 4etween 19'5 and 19( onfirms te peer group

teor3 of regulator3 pressure. is implies tat wen all 4an6s suffer apital losses for e>ample( from a rise in

te interest rate"( te inrease in regulator3 osts for a partiular 4an6 is mu smaller tan it would 4e if tat

4an6 alone lowered its apital.


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&ol.'( No.25( 201)

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output rendered 43 te 4an6 relatie to te inputs. erefore te 4an6 finanial prodution funtion an 4e

written in te form of Do44+ouglasfuntionasH

* @ ?P

,QOOOOOOOOOOOOOOOOOOOOO $.5"

* represents serie output" produed 43 te 4an6s 43 om4ining finanial resoures apital K and

uman resoures L and4, 5 are te parameters representing te output serie elastiit3 of ea input.

represents oter fators tat an affet output apart from p3sial and uman apital. Su inputs aptured 43 are leel of tenolog3 and oter institutional fators. , in e;uation 3# an 4e replaed wit D! from e;uation

$.) So tat e;uation 3#4eomesH

R* @ R ?P" RD!"

QOOOOOOOOOOOOOOOOOO. $.'"

Su4stituting for D! in e;uation $.' wit e;uation $.) ten e;uation $.' 4eomes

R*@ R?P

" (C!+"#$ - C!"#$#1)& '"#$)4# $."

E>pressing E;uation $. in ?og linear form we ae

RIn*% In PRIn1 In4In (cap+"#$- 5ncap"#$1)& '"#$#$.#"

e target apital ratio (cap+) is not o4sera4leK it is assumed to depend on a set of o4sera4le aria4les

desri4ing te 4an6s finanial onditions and te state of te eonom3. e aria4les tat we used to

appro>imate te target apital ap were te si:e of te 4an6 SITE"( te loan ratio ?%NS"( urrent profit

!B"( anges in te ris6 ratio IS,"( and te degree of regulator3 pressure E/". part from tese 4an6

aria4les( D! is appro>imated and redefined as 43

CAP6 7f(LLOSS, RISK, CAP, SIZE, 'EG8OOOOOOOO.3#9)%ter aria4les onsidered important as ma7or determinants of anges in 4an6 operating performane

are te 4an6 input aria4les. e most ommonl3 used are te la4our inputs( apital input and deposit. Input

aria4lesH la4our and p3sial apital will 4e pro>ies 43 te prie of la4our !?" and prie of apital !D". In

addition te prie of deposits !+" tat also seres as apital to te 4an6 4ut also lia4ilities is also inluded.

Based on te o47etie of te stud3( two aria4les represent te dependent aria4les*"K tese are !rofit

generating apait3 !/D" and 4an6 operating effiien3 measured as returns on sset %".

%n te 4asis of te anal3sis in su4-setion $.2( and in line wit te o47eties of te stud3( te model

defined 43 e;uations $.)" and $.'" are remodified as followsH

UCAPj,t= 0+1RISK j,t+ 2LLOSSj,t9 3NM1j,t1+ 4MLj,t+ 501j,t+ 6F!j,t"1

9 #ROA+ $SIZEj,t9 %RE&j,t9 :7(t (3'10

P&!Cj,t=0+ 1PLj,t ) 19 2P*j,t ) 19 3PCj,t ) 1 +4CAPj,t+ j,t(3'11

;'OAj,t7 0+ 1PLj,t+ 2P*j,t"1 9 3PCj,t+ 4CAPj,t+ :j,t(3'12


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&ol.'( No.25( 201)

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and profit 4efore ta> wi ae a4out 20G orrelation oeffiient( te orrelation oeffiients of all oter

aria4les are less tan 10G. e ta4le furter reeals tat return on assets is onl3 negatiel3 orrelated wit prie

of 4an6 la4our and anges in loan loss ??%SS". e orrelation 4etween te apital 4ase re;uirement and

profit generating apait3 as well as profit 4efore ta> are also wort mentioning. Bot!rofit generating apait3

and profit 4efore ta> ae positie 4ut low orrelation wit most all te aria4les e>ept loan loss ratio. e si:e

of te orrelation is low 4ut te fat tat te3 are positie sows tat te aria4les moe in tandem.%ne ma7or sortoming of orrelation oeffiient anal3sis is tat te diretion of te influene ould not

4e deteted and also te ig or low orrelation 4etween two aria4les does not impl3 te e>istene or non-

e>istene of ausal ne>us 4etween te aria4les. e granger ausalit3 approa is adopted to e>amine te ausal

ne>us 4etween te 4an6 effiien3 fators and profit generating apait3. e granger 4iariate ausalit3 is done

to determine te one-to-one ausal effets among te aria4les.

#able


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&ol.'( No.25( 201)

0odel Estimations, Analyses of Estimation 'esults and $nferences

/inancial (eterminants of Bank Capital Base 'e.uirement/ien te simultaneit3 of relationsip in te model( te onentional %rdinar3 ?east S;uare %?S"

teni;ue will 4e inappropriate in estimating it. e %?S assumes( among oter tings( tat te e>planator3

aria4les are eiter not stoasti or if stoasti are distri4uted independentl3 of te stoasti distur4ane term.

In a model of simultaneous relationsip( su as our model( te a4oe ondition is iolated. e use of %?S inte estimation of su a model would produe not onl3 4iased estimates 4ut also inonsistent estimates. at is(

as te sample si:e inrease indefinitel3( te estimates would not onerge to teir true population" alues

/u7arati( 2005". Sine te %?S is inappropriate tere is te need to use alternatie estimation teni;ue tat will

ma6e te model estimates un4iased( onsistent and effiient.

toroug e>amination of te model reeals tat it is oer identified 4ased on te order and ran6 of

onditions for identifiation. Fen a model is oer identified( te most appropriate single e;uation estimation

teni;ue for it is te two-stage least s;uare teni;ue S?S". e S?S is well 6nown for its a4ilit3 to proide

satisfator3 results for te estimates of strutural parameters and as 4een aepted as te most important single-

e;uation teni;ue for te estimation of oer identified models Madallas( 2001". erefore te 4eaioral

relationsip of te model will 4e estimated 43 S?S teni;ue( using annual data tat run from 1992 to 200.

It as also 4eome fasiona4le in ontemporar3 eonometri anal3sis to onsider issues of stationar3(

o integration and error orretion meanism EDM" wen dealing wit models inoling time series aria4les.

Stationar3 assures non-spurious resultsK o integration aptures e;uili4rium long run or relationsip 4etween ointegrating" aria4les( and error orretion meanism is a means of reoniling te sort run 4eaior of an

eonomi aria4le wit its long run 4eaior /u7arati 1995". oweer( te foregoing issues are not neessar3

for tis partiular model 4eause it is onsidering sort run effets and it is a multi-e;uation s3stem. Curtermore

it is using a powerful funtional form-logaritmi inde>ation( were te inde> forms of irtuall3 all te aria4les

are ta6en and te logaritmi of all te aria4les are used. is ensures te ro4ustness of estimates.

s an 4e seen from a4le =#2te e>planator3 powers as 7udged 43 te ad7usted 2( is relatiel3 ig

gien te fat tat te aria4les are in log-linear form. e signifiane of te proportion e>plained 43 te

aria4les in te model wi is aptured 43 te 2 te oeffiient of determination is not in dou4t as te C-

statistis suffiientl3 onfirms te signifiane of te 2. ene te model ade;uatel3 aptured te empirial

relationsip 4etween eonomi growt and te aria4les inluded as its determinants in te model. s a furter

onfirmation of a4sene of serial orrelation among te aria4les and 4eause of te general onerns a4out te

statistial relia4ilit3 of %?S estimates wen pooled data series are inoled( te Breus-/odfre3 Serial

Dorrelation ?M est was onduted and te output of te estimation is proided in ta4le ).'. s learl3 indiated

43 te C- statistis te presene of serial orrelation is re7eted( tus onfirming te low orrelation reported

among te aria4les in te orrelation matri> reported earlier.

In term of relatie ontri4utions of ea aria4le in te model( results in ta4le =# sows tat te signs

on te oeffiients of te aria4les are mi>ed. Some ae positie wile a reasona4le num4er also as negatie

sign. Cor instane lag apital D! -1""( 4an6 si:e ?SITE" and loan loss proision ??%SS" are negatie. e

signifiant negatie effet of te preious leel of 4an6 apital indiates tat te 4an6s were onl3 slowl3

ad7usting teir apital to desired leels in period under stud3. Indeed( 4an6s( most often( wait for te DBN

diretie 4efore initiating an3 signifiant ange in teir 4an6s apital si:e. e fear of un6nown in te Nigerian

4an6ing industr3 ma6es some 4an6s relutant to inrease teir apital 4ase.

e oeffiient on ris6 ratio is signifiant and positie. Suggesting tat te iger te inrease in teris6 leels te more te 4an6s are ompelled to inrease apital 4ase. Ban6 si:e as signifiant negatie impat

on 4an6 apital ratios. !ossi4le interpretations are tat large 4an6s ae aess to apital mar6et( and an

terefore operate wit lower amount of apital or tat te3 feel less pressure to inrease apital 4eause of a $oo

.i$oaileec$- a larger si:e also allows greater diersifiations to mitigate te redit ris6 e>posure. s

3potesi:ed( net loans as perentage of total assets are good pro>3 of target ris6 profile of 4an6s as te3 alwa3s

inrease signifiantl3 te redit ris6 43 less tan wat is neessar3 to ompensate te inrease in ris6. eoeffiient on ris6 e>posure is positie and signifiant. is positie relationsip 4etween ris6 e>posure and

4an6 apital does not support ,oen and Santomeros onlusion tat 4an6s will tr3 to offset te loss in utilit3

from te upper limit on leerage 43 oosing a ris6ier portfolio. Indeed( iger ris6 ratios do lead to an inrease

in apital. e return on asset was found to ae a positie effet on 4an6 apital ratios( a result onsistent wit

te 3potesis tat 4an6s wit iger earnings ould retain more apital. Cinall3( loan loss proision as

perentage of total asset ??%SS" ad no signifiant effet on 4an6 apital. More important( e>amining teoeffiient on te regulator3 pressure 43 DBN E/" wi is positie and signifiantK 4an6s in Nigeria

generall3 are not proatie in te apital mo4ili:ation. e3 tend to wait till te3 are e>ternall3 foredVompelled

to sift teir apital 4ase. Most often te DBN stri6es te 4ig sti6 weneer tere are serious signs of distressand te 4an6s apital 4ase is seriousl3 undermined. e impliation of tis is tat( entral 4an6 in Nigeria pla3s a

signifiant role in 4an6 apital determination. us( suggesting tat 4an6 apital of Nigerian 4an6s at least


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&ol.'( No.25( 201)

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during te stud3 period depended less on mar6et fores 4ut more on institutional pressure.

!rofit generating apait3 and profit 4efore ta> are oter aria4les wit signifiant positie effets on

4an6 apital. is strong relationsip is e>peted sine te iger te profit made 43 4an6s te iger te ratings

of te 4an6s and te onfidene of inestors and ore sareolders. s te apait3 of te 4an6s inreases and

te 4an6s ma6e more profit( te e>isting apital ma3 4eome inade;uate to witstand te finanial pressure

generated from te inrease profit and earnings apait3. us te 4an6 apital will 4e reiewed upward eenwen tere is less regulator3 pressure from te DBN. areful anal3sis of te si:e of oeffiient sows tat

regulator3 pressure is te most important fator tat determines te si:e of 4an6 apital. part from te

regulator3 pressure( te ne>t most important fator is return on sset and followed 43 profit 4efore ta> leel and

ris6 e>posure. !rofit generating apait3 and loss proision trailed 4eind.

#able 1=9 0.0115 >

?JS, 0.)01229 0.1)#$' 2.29)##) 0.0225 >>

???%SS 0#01?3 0.0'5#' -0.#2#$$ 0.)$))

?SITE -0.225'5 0.0'#99) -$.209$ 0.0012 >?!B 0.)'11 0#0>==2 '.2'$' 0.0000 >

?!/D 0.121)) 0.05012$ 2.5$'')0 0.011# >

E/ 1.95000 0#?3309 $.922)' 0.0001 x

?% 1.9$2'9' 1.0050#0 1.92292# 0.055' >>

-s;uared 0.5#9)$ Mean dependent ar 1).010'

d7usted -s;uared 0.)'''# S.+. dependent ar 2.0#922

S.E. of regression 1.5$0)01 6ai6e info riterion $.1#1

Sum s;uared resid 599.5#)# Swar: riterion $.#2 1$$

?og li6eliood -)#2.## C-statisti $$.)#11'

+ur4in-Fatson stat 1.95#50' !ro4C-statisti" 0.000000

Guide to analyses of estimates!@ Beta coefficient is significant at % le-el of significance and @@ Beta

coefficient is significant at le-el of significance&

"ource! Panel "tudy =>>?

#able


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&ol.'( No.25( 201)

9

Contribution of Bank Capital to Bank Operational Efficiency

e effets of 4an6 apital on 4an6 effiien3 measures in terms of returns on asset are e>amined in tis

setion. e estimated alues of 4an6 apital are used as te pro>3 for te effets of oter aria4les in te 4an6

apital model on 4an6 effiien3. In tis wa3( te effets of all te 4an6 aria4les in te apital model are

inorporated in addition to te separate effet of apital 4ase itself. ene( te oter 4an6 aria4les are e>luded

from te model sine teir effets are alread3 aptured 43 te predited 4an6 apital series deried from modelused in model for 4an6 apital a4oe. a4le ).5 presents te estimates of te model wit predited alues for

4an6 apital D!C" as measures of 4an6 apital. e oter aria4les in te model are prie of la4our ?!?"(

prie of apital ?!D"( prie of deposit ?!+"( non mortgage loans ?NM"( mortgage loans (@M@), and oter

loans and inestment ?%".

e e>planator3 power as 7udged 43 te ad7usted 2( 0G" is relatiel3 ig. e signifiane of tis

te 2 is not in dou4t as te C-statistis suffiientl3 onfirms te signifiane of te 2. ene te model

ade;uatel3 aptured te empirial relationsip 4etween 4an6 apital and 4an6 effiien3 and te aria4les in te

model.

#able

?!? -0.2#)'1 0.1))')5 -1.9'#0'9 0.0501 >>

?!D 0.0$ 19) 0.0#'9)9 0.)2'9 0.''92

?M? 0#00=?> 0#0=2= -1.1151#5 0.2'5#

?NM -0.0$'90 0.0559'9 -0.'59)15 0.5102

+Ol >&>&>2F =&F >&>%>? x

D!C 0.1$'0$$ 0.0'$$0 2.1)#$ 0.0$2' >>

D -$.#25$ 0.919$ -).219))0 0.0000

-s;uared 0.2))$$ Mean dependent ar -2.$9#'

d7usted -s;uared 0.00)92 S.+. dependent ar 1.25#$)

S.E. of regression 1.1929'0 6ai6e info riterion $.2205#'

Sum s;uared resid $').$22 Swar: riterion $.$2#9)9

@o li6eliood -)1.11) C-statisti 5.19))5

+ur4in-Fatson 2.0'5$$ !ro4C-statisti" 0.000015

"ource! Panel "tudy =>>?

Guide to analyses of estimates!@ Beta coefficient is significant at % le-el of significance and

@@ Beta coefficient is significant at le-el of significance&

$nferenceording to ta4le ).5( te 4eta oeffiient of apital 4ase D!C" is signifiant and positie at 5G leel of

signifiane. e null 3potesis - tere is no relationsip 4etween apital and operational effiien3 of Nigerian

Dommerial Ban6s is re7eted.

Before anal3:ing te effet of apital 4ase of 4an6s on teir performane( it is important to e>amine te

relatie ontri4utions of oter determinants of 4an6 performane first starting from te input aria4lesH te prieof deposits ($ % =#3) and prie of la4our t @ - 1.9" are 4ot signifiant( wile te effet of prie of apital

emplo3ed is insignifiant t @ 0.)". oweer( te effet of ost of la4our in te 4an6ing industr3 as negatie

effet on te effiien3 of te 4an6s. e oeffiient is negatie and indeed a 10 perent inrease in te ost of

la4our is li6el3 to result in redution of te effiien3 and or in return on asset of te 4an6s 43 as mu as $

perent. is implies tat wor6ers emoluments are one of te main fators determining te profita4ilit3 and

performane of Nigerian 4an6s. is is not surprising as tere is salar3 war among te Nigerian 4an6s. e rateof staff turnoer is ig and most 4an6s tend to lure teir strategi wor6ers wit salar3 inenties.

Interestingl3( te effet of ost of deposit is positie and 43 impliation an inrease in te interest rate

on deposits results in inrease in 4an6 effiien3 and performane. is ma3 loo6 unintuitie as one would ae

e>peted te inrease in ost of deposit to ae negatie effet on te profita4ilit3 and return on assets. oweer(

a deep tougt will sow tat inrease in ost of deposit need not result in redution in effiien3 of 4an6s. s

te interest on deposit inreases( te pu4li will 4e enouraged to onert teir mone3 4alane from e6a4leaount to long term saings. is inrease in saings due to inrease in deposit rate( proides 4an6s wit funds

to engage in long term inestment( and 4e a4le to earn iger returns tat an ade;uatel3 pa3 for te inrease inte ost of deposit. e determining fator terefore is not te a4solute inrease in te ost of deposit 4ut te

differenes 4etween te ost of deposit and lending. If te differential is wide and ig ten 4an6 will ma6e


10/14



&ol.'( No.25( 201)

10

more profit. ene( inrease in te ost of deposit ma3 promote 4an6 effiien3 and iger profita4ilit3.

e ost of p3sial apital is not signifiant toug positie. is means tat 4an6s returns on assets

respond sluggisl3 to stimulus from anges in te ost of apital prourement. %ne possi4le reason for tis is

tat most 4an6ing operations are 4eoming less of p3sial apital intensie. e tenologial reolution as

4rougt a lot of anges into te 4an6ing industr3. /one are te da3s were u4iles and walls are te orders of

te da3s. e most important p3sial apital now is omputer and te use of te internet as een redued teneed for seeral omputer points. e use of Ms as also allowed te saring of ost on apital among 4an6s.

ese ae resulted in redution in oeread ost and inrease in return and 4an6 operational effiien3 and

performane. It as also resulted in iger profit and 4etter ustomer relations and 4an6 aess 43 te pu4li.

e effet of inestment in mortgage loans" is negatie -0.05( t-l. 12" and insignifiant. Similar pattern

is o4sered in te ase of none mortgage loans. e effet of non-mortgage loans was also insignifiant and

negatie. is implies tat 4an6s finanial intermediation in general and speifiall3 into properties deelopment

is not a signifiant determinant of 4an6 performane. is ma3 not 4e surprising. Most of Nigerian 4an6s are

leaing teir ore finanial intermediation atiities to none onentional 4an6ing atiities. In present da3

Nigeria( 4an6s engage more in sales of forms for institutions( olletion of dues for goernment agents and

indeed earn mu of teir inome from fore> trading and finaning. %n te oter and( te effets of oter

inestments su as engaging in sto6 trading( redit finaning and oter ommerial papers as signifiant

positie effets on 4an6 performane.

o te main fous of te stud3( te relatie effet of 4an6 apital 4ase on 4an6 performane. s an 4eseen from te estimates in a4le ).5( te oeffiients of 4an6 apital 4ase is 0.1$ wit t-alue of 2.1) and a p-

alue of less tan 0#0, tus impl3ing tat te effet of anges in 4an6 apital 4ase is positie and signifiant at

least at < ritial alue. e onse;uene of tis is tat( te si:e and anges in te apital 4ase of 4an6

determine to a large e>tent te degree of ealtiness and profita4ilit3 of 4an6s. is e>plains w3 te Dentral

4an6 of Nigeria empasi:es te entralit3 of strong apital 4ase as sine ;uo non to sound and effiient 4an6ing

s3stem. e apital 4ase of te 4an6 is er3 importantK it is te main lin6age 4etween te sareolders and te

4an6s. e more te apital inested and ommitted 43 te .4an6 sareolders( te more teir interest in te

surial of te 4an6. Ban6ing setor is a speial ase of general profit and rent see6ing 4usiness. e speialt3

arises from te fat tat te3 utili:e oter peoples mone3 to trade. If tere are no e6s and 4alanes on te

4an6 management( it ma3 not 4oter a4out wat appens to teir lia4ilities sine teir own lia4ilities are limited

43 law. So te onl3 wa3 to entren ommitment and dediation to pu4li interest is to ma6e it mandator3 for

4an6s to ae suffiient proportion of te funds te3 trade wit as teir ontri4ution troug apital 4ase. e

reent e>periene in Nigeria( wen te apital 4ase minimum 4en mar6 was raised from mere N24illion to

N254illon( as reall3 turned around te 4an6ing operations in Nigeria.

Contribution of Bank Capital to Bank Profit Generating Capacity

s part of seond and te tird o47eties is te e>amination of te determinants of profit generating apait3 of

4an6s and te relatie ontri4ution of 4an6 apital 4ase to te anges in profit generating apait3 of 4an6s. e

profit generating apait3 is terefore made te dependent aria4le as done in te ase of return on asset. e

results of te estimation of te model are presented in ta4le ).#. s te estimates in a4le ).# sow( unli6e te

ase of return on asset( te onl3 output tat is signifiant in te determination of profit generating apait3 of

4an6s is te oter inestment ?%l" of te 4an6s. ll te osts of inputs are insignifiant and also te effet of

mortgage inestment finaning is also inonse;uential on te determination of 4an6. profit generating apait3.

e same reason for non-signifiane of te mortgage inestment finane in te ase of return on assets alsoapplies. at is( 4an6s engage more in none onentional 4an6 4usiness praties and tis rowd out teir

finanial intermediation to real setors oweer( despite te insignifiane of 4ot 4an6 input and output

aria4les( te effet of 4an6 apital is penomenal and oerwelming. In relatie terms( it is rougl3 a4out te

sum of all te effets 0.$" of te inputs and output aria4le togeter. In essene( onl3 none mortgage

inestment finane and apital 4ase of 4an6s are te main determinants of profit generating apait3 of 4an6s.

Moreoer( apital 4ase is te most outstanding determinant of 4an6 apait3 to generate profit in Nigeria.


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&ol.'( No.25( 201)

11

#able posure( loan proisions( si:e and input and output aria4les on te oter and. is

low orrelation implies little presene of multiollinearit3 tat usuall3 affets te statistial ro4ustness of te

result from regression and te positie orrelation sows tat te aria4les moe in tandem and a signifiant

ausal effet an 4e deteted among tem.ii" ere was a signifiant ausal ne>us 4etween 4an6 apital 4ase and te two measures of 4an6

performane. oweer( apital 4ase re;uirement as onl3 indiret signifiant ausal effet on 4an6 effiien3

4eause 4an6 apital 4ase did not ause return on asset diretl3. Ban6 apital 4ase auses profit generating

apait3 wi in turn auses prie of deposit tat as diret ausal effet on return on asset. en it an 4e said

tat apital 4ase re;uirement ma3 influene anges in te 4an6 performane troug ost of deposit

mo4ili:ation and redit annel. Similarl3( ris6 e>posure 4eaior as indiret effet trougte deposit ostannel.

iii" e preious leel of 4an6 apital as negatie effets on urrent 4an6 effiien3. e

signifiant negatie effet of te preious leel of 4an6 apital indiates tat te 4an6s were onl3 slowl3

ad7usting teir apital to desired leels.

i" e ma7or determinants of anges in 4an6 apital are 4an6 si:e( ris6 e>posure( loan loss

proision( te regulator3 pressure( !rofit generator g apait3 and profit 4efore ta>. oweer( wile ris6e>posure( profit generating apait3 and regulator3 pressure ae positie effets( 4an6 si:e as negatie effets

on 4an6 apital 4ase.

" Ban6 apital was found to 4e a signifiant determinant of 4ot 4an6 operating effiien3 and

profit generating apait3. Indeed( 4an6 apital was te most signifiant ontri4utor to growt and inrease in te

apait3 of 4an6s to generate greater profit and to enane its operating effiien3.

i" %ter aria4les found to 4e signifiant are la4our and deposit prie( and oter 4an6 inestments.

Mortgage and none mortgage loans( and ris6 e>posures were not signifiant. Ban6 si:e as negatie effet as

against te positie effet apriori postulated.


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&ol.'( No.25( 201)

12

& CONC+)"$ON AN( 'ECO00EN(A#$ON"

Conclusione tesis as sown tat te regulator3 pressure is an integral fator in 4an6 effiien3 determinant. It was

ruial to ensuring 4an6 effiien3 and a4ilit3 to generate greater profit and 3ield iger returns for te

sareolders. More important( 4an6 apital was a ma7or determinant of 4an6 performane and effiien3. is

suggests tat te entral 4an6 of Nigeria an use te regulator3 power of raising te apital 4ase of 4an6s tostimulate greater effiien3 and ensure tat te 4an6 still generate suffiient profit for te sareolders. Indeed(

te more effiient te 4an6s te more teir a4ilit3 to generate greater profit and te more te3 re;uire more

apital for operation. In essene te tree aria4les are interwoen. ene( an3ting tat affets one of tem will

affet te oter two. e regulator3 autorit3 must ensure tat poli3 tat ma3 inder an3 4an6 apital growt or

profit generating apait3 ma3 affet oerall 4an6 effiien3. oweer( a aeat needs to 4e added. e fat tat

apital 4ase as positie effets on 4ot profit generating apait3 and 4an6 effiien3 does not translate

automatiall3 tat at iger apital leel 4an6 will surel3 ma6e profit. e reent deelopment in te mega 4an6s

in te S and oter adaned European ountries is signal tat 4an6 as optimal tresold leel at wi

additional inrease in apital 4ase ma3 4e inimial to te ealtiness of te 4an6ing industr3 and te oerall

eonom3. e regulator3 autorit3 must ensure tat e6 and 4alanes are put in plae to e6 te e>esses of

4an6s so as to preent finanial rises.

'ecommendations

Sine apital 4ase as signifiant positie effet on 4an6 operational effiien3 and apait3 to generate profit( it

an 4e instrumental in promoting 4an6 soundness and sta4ilit3. e followings are terefore reommendedH

1. Ban6 apital regulation must 4e anored on a sound monitoring s3stem wi regularl3 assesses te

eonom3( asertains( and esta4lises te leel of apital ommitment re;uired 43 te 4an6ing setorK

2. d7ustment must 4e made to te esta4lised leel of apital ommitment in i" a4oe so tat te

wea6ness in 4an6 asset portfolio and lia4ilit3 portfolio are ade;uatel3 ta6en into ogni:aneK

$. prudentl3 esta4lised new apital re;uirement must 4e promptl3 and rigorousl3 enforedK

). e s3stem of internal ontrol must ensure e6s and 4alanes at all time and tere must 4e

transparen3 and aounta4ilit3 in ea 4an6 so tat te efforts of reapitali:ation will not 4e in ain.

B$B+OG'AP*3

BooksBart( J.( Dapro( /.( ?eine( . 2001"H


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&ol.'( No.25( 201)

1$

Iorking papers

Cord( +. 2000"H dles( Belgium( Ce4ruar3.

Stol:( S. 2002"H


14/14

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A Nexus of Capital Base, Profit Generating Capacity and Operational Efficiency of Commercial Banks in Nigeria