Banking Reforms and Deposit Money Banks Profitability in Nigeria

Tonprebofa Okotori and Peter Ayunku

MPRA Paper from University Library of Munich, Germany

Abstract: The study carried out an investigation into how banking reforms have enhanced or inhibited Deposit Money Banks (DMB’s) profitability in Nigeria. The data set comprising 12 of the 22 banks that have national and international authorisation was annual data that covered the period 2006 to 2018 and were analysed by adopting a dynamic GMM econometric methodology for the derived panel data. The conclusions from the study was that bank credit risk exposure, the inflation rate, and the exchange rate were significant indicators of profitability of DMB’S in Nigeria. The estimated results show that when bank credit risk exposure rise by 10%, the return on equity will drop by about 9%. It further shows that when inflation rises by 10%, return on equity will decrease by about 1.4% and that when the exchange rate appreciates by 10%, return on equity will rise by 0.06%. The result allows us to conclude that the banking reforms may have reduced the credit risk exposure of DMB’s thereby increasing their profitability, whilst enhancing the benefits of recapitalisation of deposit money banks. The reforms seem to have enhanced market concentration as envisaged by the structure conduct performance (SCP) hypothesis as well as efficiency as postulated by the efficiency structural hypotheses .The CBN should intensify efforts at tackling the exposure of DMB’s to exchange rate volatility and spikes in the inflation rate due to increasing national indebtedness, falling foreign reserves and the falling value of the naira due drop in revenue from crude oil sales.

Keywords: GMM; DMB; Econometric methodology; Profitability; Banking; Reforms (search for similar items in EconPapers)
JEL-codes: A29 G2 G21 (search for similar items in EconPapers)
Date: 2020-08-12
New Economics Papers: this item is included in nep-ban
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