Re-examining the determinants of bank profitability in Nigeria

Abstract

Purpose The purpose of this paper is to re-examine the determinants of bank profitability in Nigeria. Specifically, the study investigates the effect of managerial cost efficiency on bank profitability. Also, since there exist mixed results and controversies in the literature, in both developed and developing countries, regarding the effect of efficiency on bank profitability, this study employs the standard measure of efficiency. In addition, the work incorporates the role of persistence, which is often neglected in the literature in developing countries. Design/methodology/approach This study employs system generalized method of moments. Findings The findings, using the case of Nigeria, show that cost efficiency is a strong determinant of bank profitability in developing countries. In addition, the profitability of banks in Nigeria persists over time; hence, the industry is fairly competitive. Research limitations/implications The recent policies of banking industry recapitalization meant to increase profitability and stability in Nigeria and other African countries’ banking industry will not be effective if the issue of managerial efficiency is not properly addressed. Practical implications Improving the banking managerial efficiency will positively reduce bad loans, hence leading to the stability in the banking system. Originality/value The authors introduce efficiency using standard measure of stochastic frontier analysis for its measurement. Also, this study introduces the role of persistence in the literature in developing countries.

Is there a nonlinear relationship between nonperforming loans and bank profitability? Evidence from dynamic panel threshold

“…Considering the smallness of the sample size of the models adopted, the study adopts a 10% level of significance in reporting the empirical results throughout the study. Moreover, the significance of the lagged of profitability in most of the models confirm the dynamism of profitability in the literature (Bolarinwa et al, 2019; Dietrich & Wanzenried, 2014; Yanikkaya, Gumus, & Pabuccu, 2018). This implies that the Nigerian banking industry is competitive and exercises speedy adjustment because the estimated coefficients range between −0.51 and −0.67 and 0.37 and 0.38 for ROAA and ROAE, respectively.…”

“…The paper provides separate estimations for two renowned measures of profitability in the literature, ROAA and ROAE. It should be noted that while ROAA accounts for the riskiness of loan portfolio, ROAE does not (Bolarinwa et al, 2019; Dietrich & Wanzenried, 2014). Moreover, for measures of profitability, two models are estimated.…”

“…These authors have adopted panel of countries (Athanasoglou, Brissimis, & Delis, 2008; Bourke, 1988; Căpraru & Ihnatov, 2015; Dietrich & Wanzenried, 2011, 2014; Flamini, McDonald, & Schumacher, 2009; Petria, Capraru, & Ihnatov, 2015; Short, 1979) and the individual banking industry (Abid, Ouertani, & Zouari‐Ghorbel, 2014; Akinlo & Emmanuel, 2014; Amuakwa‐Mensah et al, 2017; EL‐Maude, Abdul‐Rahman, & Ibrahim, 2017; Alandejani & Asutay, 2017; Ali, 2018; Bolarinwa, Obembe, & Olaniyi, 2019; Gabriel, Victor, & Innocent, 2019; Atoi, 2019). Moreover, several studies examined the determinants using firm‐level, industry‐level, and the macroeconomic determinants separately whereas other studies have simultaneously adopted these variables (Bolarinwa et al, 2019). Because the present study concentrates on the firm‐level determinants, this review focuses on the firm‐level determinants.…”

“…Because the present study concentrates on the firm‐level determinants, this review focuses on the firm‐level determinants. Following the literature, bank size, capitalization, nonperforming loans, growth of deposits, and efficiency are the major variables (Adelopo, Lloydking, & Tauringana, 2018; Athanasoglou et al, 2008; Bolarinwa et al, 2019; Căpraru & Ihnatov, 2015; Chowdhury & Rasid, 2015; Dietrich & Wanzenried, 2011, 2014; Garcia & Guerreiro, 2016; Petria et al, 2015; Salike & Ao, 2017).…”

“…Studies have documented a positive effect of bank size on profitability (Bolarinwa et al, 2019; Chowdhury & Rasid, 2015; Dietrich & Wanzenried, 2011; Garcia & Guerreiro, 2016; Sufian, 2012). These works argue that bank size allows banks to enjoy economies of scale thereby increasing profitability.…”