The Impact Of Macro Economic Variable On Bank Performance
ABSTRACT
This research was undertaken in order to determine the impact of macro economic variable on bank performance. So far, the studies available have arrived at different findings. This study aimed at contributing to determining to what extent macro-economic variables influence financial performance of commercial banking sector in Nigeria. The researcher ran a descriptive as well as a correlational study on all the commercial banks in Nigeria between January 2006 and December 2015. Data was analyzed using SPSS software version 21 and was presented using graphs and frequency tables. Secondary data on quarterly bank performance was obtained from the individual banks annual financial reports while data on macroeconomic variables was obtained from both Central Bank of Nigeria and Nigeria National Bureau of Statistics and was analyzed through multiple linear regressions. Return on assets was used to measure financial performance while quarterly interest rates, quarterly exchange rates (USD/N), quarterly GDP, and quarterly inflation rates were used to measure interest rates, exchange rates, GDP and inflation rates respectively. The results of the study indicated that there is a strong (R=0.792) relationship between macroeconomic variables and financial performance of commercial banks. The study also recorded an adjusted R-squared value of 0.585. This implies 58.5% of the total variance in financial performance of the commercial banking sector in Nigeria can be attributed to macro-economic variables. ANOVA statistics revealed that the regression model was ideal since it had a significance level of 0.001. The study further established that Interest rates and Exchange rates affect financial performance of the commercial banking sector negatively while Inflation rates and GDP affect it positively. The study recommends the commercial banking sector in Nigeria should consider macro-economic variables such as rates, interest rates, exchange rates and GDP in their policy formulation to manage their impact on the financial performance of the banking sector. The Nigerian Government through the Central Bank of Nigeria should come up with policies that create a conducive environment for commercial banks to operate since it will translate to economic growth.
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
1.1 Background of the Study
1.1.1 Macroeconomic Variables
1.1.2 Financial Performance
1.1.3 Macro-economic Variables and Financial Performance
1.1.4 Commercial Banks in Nigeria
1.2 Statement of the Problem
1.3 Research Objective
1.3.1 Specific Objectives
1.4 Significance of the Study
CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction
2.2 Theoretical Review
2.2.1 Efficient Market Hypothesis (EMH)
2.2.2 Modern Portfolio Theory (MPT)
2.2.3 Behavioral Finance Theory
2.3 Determinants of Financial Performance
2.4 Empirical Review
2.5 Conceptual Framework
2.6 Literature Review Summary
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Introduction
3.2 Research Design
3.3 Population
3.4 Data Collection
3.5 Data Analysis
3.5.1 Analytical Model
3.5.2 Test of Significance
CHAPTER FOUR: DATA ANALYSIS, FINDINGS AND INTERPRETATION 33
4.1 Introduction
4.2 Descriptive Statistics
4.2.1 Financial Performance (ROA)
4.2.3 Average Quarterly Interest Rates charged by Lenders
4.2.4 Average Quarterly Exchange Rate Between USD and N.
4.2.5 Average Quarterly Inflation Rate
4.3 Inferential Statistics
4.3.1 Model
4.3.2 Coefficients of Determination
4.3.3 Analysis of Variance (ANOVA)
4.4 Summary of Findings
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS 46
5.1 Introduction
5.2 Summary of Findings
5.3 Conclusion
5.4 Recommendations
5.5 Limitations of the study
5.6 Suggestions for Future Studies
REFERENCES
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
In Nigeria there are various sectors which contribute to economy. In this study we will focus on financial transactions sector (sector in banking) which plays a momentous part in the process of country economy growth by serving intermediary role in the financial process. The strength of financial institutions is very critical in stimulating economic development and growth, foreign and domestic investment poverty reduction and employment creation (Kyalo, 2002). Banking in Nigeria and the financial services in general has been identified as a success pillar to attaining Vision 2030 of making Nigeria a middle income country by providing a facilitating macro-economic stability for long term development (CBN, 2007). Since banks are such critical entities in an economy the stability and success as going concerns is given a lot of attention by various stakeholders including the national government through the central Bank of Nigeria by enacting regulations as mandated.
The interrelation between macroeconomic factors and performance of firms has been a focal point of interest by scholars in the current phenomenon. It is frequently concluded that a firm’s performance is as a result of some core variables which are macroeconomic in nature for instance: interest rate, gross domestic product, inflation and exchange rate. .Financial media affirmation shows that investing people commonly presume that fiscal rule and macroeconomic events have an impact which is considerable on the unpredictability of earnings. As a result of this the variables in macroeconomic impact peoples’ investment decision and prompt immeasurable investigators to explore the relationship between investment returns and macroeconomic variables (Gan et al, 2006).
The financial sector in Nigeria is bank-centered largely since the principal marketplace is yet deemed constricted and light (Ngugi et al, 2006).This sector is controlled by Nigeria’s banks. This resulting to the methodology of intermediation in the country’s financials relays greatly on banks especially commercial ones (Kamau, 2009).There is a link that embraces the country’s economy together in the Nigerian banking subdivision as concluded by (Oloo, 2009). Agricultural and manufacturing which are major Segments essentially hinge on this sector for their actual existence and progression. Over a period of last ten years this industry performance(banking industry) has greatly upgraded gradually and only three banks failed to meet the CBN statutory requirement and have been put under it as compared to a large number of banks in the previously same period where 37 bank were put under CBN statutory between 1986 to 1998(Mwega, 2009).
1.1.1 Macroeconomic Variables
Macro-economic variables refer particularly to factors of overall importance to the position of countries economic mutually at regional or national face .This Factors affect a very large proportion of population. This factors are economic output, unemployment, inflation, savings and investment .They are closely watched and checked by the governments in place since they are major guide of economic activity performance (Khalid et al., 2012).There is a broad area of study in microeconomic especially understanding how this factors relate with one another and their interaction impact on the economy as illustrated by (Fischer ,1993). Whereas macroeconomics is a broad study of the economy as a whole, microeconomics is concerned with the expounding individual
,group or company level resulting to impact on the decision making process.
Macro-economic variables are majorly closely scrutinized by business, governments, and consumers but due to their influence on the banking sectors they are focal points been observed by commercial. Kwon & Shin (1999) consent that GDP, currency exchange rate, interest rates, inflation and market risk are the most impactful macroeconomic variables. Sharma and Singh, (2011) found out that there is a positive relationship between how they carry out investments over an elongated period of time since the variables stabilize over a period and this become favorable to the banks daily operation and impact them positively.
The largest quantifiable measures of over-all economic occurrences in a nation’s is GDP and precisely represents all goods and services monetary worth made over a definite duration inside geographical borders of a country. Escalation in the rate of prices over a period of time is called inflation. Price increase is caused by Constituents which normally affects it which are: fiscal guidelines and policies, the consumer price index, commercial banking, and credit accessibility all which have a playing part in prompting its rise or downfall. Unemployment measures of the number of residents enthusiastically in search of employment but not currently working. Mishkin(2004) states that economic growth areas are majorly influenced by Individual macroeconomic variables. This variables are banking, the Consumer price index, and government regulations changes.
1.1.2 Financial Performance
Financial performance is an independent evaluation of a company efficient utilization of its resources to generate revenues in its primary mode of doing business. The term performance refers to the overall quantifier of a firm’s general monetary standing over a certain duration, and it is commonly relied upon in comparing the performance of entities in the same sector or comparison of industries in aggregates. Individual items in the same line such as total income from a firm’s daily operational activities,opearational cashflow, operating income among others can be used. Furthermore, an interested party such as a financial analyst uses financial statements in carrying out analysis of the growth rates margin and declining debt (Maria et al., 2002).
The common financial indicators of financial performance applied by most commercial banks include: the portion of a company’s profit allocated to each outstanding share of common stock (earnings per share), amount of net income returned as a percentage of shareholders equity (return on equity (ROE), yield in sales, profit on investment (ROI), as well as sales growth. The popular ratios that are used to measure the performance of a business organization are summarized as growth and profitability and they include: return on asset (ROA), return on equity (ROE), return on investment (ROI), revenue growth, and return on sales (ROS), market shares, stock price, liquidity, sales growth and operational efficiency. ROE and ROA are usually useful key financial quantifiers in dictating the level of commercial’s banks financial performance (Maria et al., 2002).
1.1.3 Macro-economic Variables and Financial Performance
Project financing is highly discouraged by commercial banks high-lending rates trend and this leads to equally efficient equity financing taking a lead though they are relatively expensive. High-treasury bill rates encourage investments on additional tools of government. They (Treasury bill) contest with stocks, deposits, and bonds towards the investment by shareholders. As the need for demand deposits and stock market instruments reduces, it result to an ultimate decrease in their prices. Anticipated correlation resulting in Treasury bill rates and financial performance is therefore negatively influenced and also has a positive influence with respect to lending rates
(Maghyereh, 2002).
Financial reporters’ confirmation shows that shareholders mostly conclude that macroeconomic measures and fiscal policy have a big impact continuously leading to the change in financial performance (Muchiri, 2012).Pricing and financial performance is affected by Economic factors that have impact on changing investment opportunities; the pricing policies and factors which affect speculative dividends. As Muchiri (2012) concluded, earlier studies argue that consumer prices index is a particular element made up of a number of macroeconomic variables. This variables are discount rate, price increase and goods market as concluded by (Gan et al., 2006). A study got finding that concluded that negative impact was established among the variables. It is influenced by advanced peril of forthcoming profitability. For instance future productivity maybe reduced as a result of bills rise level which increases overhead production budget. On the other side other believes that positive stock prices may result as a result of increase in price levels because of equity use for confine inflation.
Sharma and Singh (2011) advocate that banks first acquire information about borrowers which is very costly before extending loans to current potential or existing customers, allocation of the available funds is highly affected by variability of economic conditions and the high probability that loan default would have clear positive or negative impacts on their lending behavior. A study by Kwon and Shin (1999) extrapolate that during recession banks reduce their lending rate unlike when the economy is on boom where banks make most loans during this period since the level of macroeconomic variability is greatly reduced. The economic environment is a routine risk component that has impact on economy all participant in a country. Economy Performance and progression is calculated in terms macroeconomic aggregates, which include the total amount of goods produced, generally rise in price levels, employment level, supply of money for trading and changes in the exchange rate and industrial capacity utilization.
1.1.4 Commercial Banks in Nigeria
In Nigeria currently we have 42 operating and licensed commercial banks .currently there is only one mortgage finance company. Only 3 commercial banks which the government of Nigeria has a controlling ownership, the rest commercial banks and the mortgage finance company are privately owned by individual private investors. Out of the total number 14 commercial banks are foreign owned while 25 are locally owned by the shareholders are citizens in Nigeria (CBN, 2015). Deposits in commercial banks mainly come from individual depositors. These banks then lend these funds in form of loans to other customers at higher interest rates thereby earning a profit.
A three phases review expound about financial sector growth and development in Nigeria (Athanasoglou et al., 2005). Between early 1970s and 1980s the first phase believed to have taken place by then. Banking sector by then have immensely taken dominance during this time as compared to the financial sector as this sector was characterized by financial repression. In applying unswerving tools of monetary policy the administration in governance has played a great role in allocating credit for investments and extensively brought a turn around on the sector. (Athanasoglou et al., 2005). Late years of 1980s and initial 1990s years there was structural adjustments programmes and liberalization which spearheaded the second phase. This period was characterized by moderation of the rates affecting general price increase and principal accounts controls which remained been observed. A sector initiating slight interest rates which are diverse, upturn obtainability of financial resources over amplified investments, improve impactiveness in credit apportionment hence growth in investments catering for an essence need of reforms in the financial sector.
Monetary policy formulation was also meant to be triggered by encouraging its use through liberalization as an indirect tool. The age of invention in financial sector incorporating developing fiscal instruments characterized its third phase in the late 1990s. Fresh products emerged in the sector comprising of Islamic banking, automatic teller machines (ATMs), plastic money and electronic-money (e-money) midst the rest come up and were witnessed in this sector (Athanasoglou et al., 2005). Nigeria’s banking industry operates under some Acts , this Acts are the Companies Act, the Banking Act, the Central
Bank of Nigeria Act and frequently additional provident procedures dispensed out by the regulator (Central Bank of Nigeria) when need arises. The Acts and the guidelines wholly have the rules and controls governing whole banking industry facilitating the controls thrilling in the direction of the administration and reasonable facilities (CBN, 2012).
Assets and financial performance growth has continually been experienced in past number of years in Nigeria banking sector. This been propelled by expansion strategies and computerization of a great quantity of services in meeting the entire complex needs of the customers. This has resulted to a great progression and expansion of the sector in Nigeria and entire East African region. The CBN annual supervision report of 2015 emphasizes that the need of banking institutions coping continuously to the dynamic business environment and a new continuous flood requirement through a strong ICT platform. Consumers though staying sufficiently agile will continue to demand individualized services, and the demand for them will be faster than prior periods. Hence banks will continuously determinely design new innovative products that leverage on ICT to remain competitive. CBN (2015) conclude that through deposit licensing of the microfinance institution there would be experienced a down streaming into retail market segment which is intended to grow gradually.
1.2 Statement of the Problem
The profitability of the banking sector is inevitable in order to encourage economic activities. Large organizational factors made up of gross domestic product, interest rate, exchange rate, inflation and money supply affects the monetary performance of commercial banks in a number of ways. As Levine (1996) revealed, economic growth is affected by intermediation in financial sector and its efficiency. Economies betterment to endure destructive shocks is the profitability due to their stability in the financial systems (Bashir, 2003). For long run survival, it is very critical for a bank to Identify issues increasing or decreasing banks’ returns thus enabling its long term survival and this increases initiatives by increasing its profitability by managing the controlling determinants (Athanasoglou et al., 2005).
Despite a challenging macroeconomic environment the Nigeria banking sector has remained resilient. It has been faced by problems negatively affecting it from increasing levels of prices, unpredictability of interest rates and exchange rate. The Nigeria Shilling has greatly depreciated against most traded world currencies in the world has been experienced over the last few years in addition to a widening current account deficit. These unfavorable macroeconomic developments may result to great problems in banking industry when the management deeds are far-off reflecting the recurring nature of the economy in its decisions. The probability of mounting stress within the banking system is experienced sometimes extremely unexpectedly due to cyclical fluctuations nevertheless the macroeconomic variables might well deliver good indicators but it’s not always the case.
Demirgüç-Kunt and Detragiache (1998) states that analysis of 65 banks in developing countries and already developed one was carried out. Findings indicated that external factors played a significant contribution towards the banking sector crisis, Logit model was applied for the study period 1980-94. Naceur (2003) conducted a sample of 10 major banks using balanced panel data looking for Tunisian banking sector profitability.
Outcome indicated there was no significant impact on inflation annual growth rate and also inflation rate annually. In eight Asian countries fourteen Islamic banks data were evaluated that break in five years period starting year 1993 (Bashir 2003).Variables involved had a very strong positive impact hence proving linear estimation.. Athanasoglou, Delis, and Staikouras (2006) assessed fours year starting from 1998 using uneven board of up to 132 European banks by linear regression which were located in the South-Eastern region. The outcome displayed positive returns in high inflation phases without evident outcome on GDP. Wong et al., (2006) dispatched his research by relaying on feasible generalized least square (FGLS) method to predict and proving there is a significant impact on asset returns which affects GDP and inflation rate.
Locally, studies done and are available concerning the impact of macroeconomic dynamics on bank financial performance lack consensus. Ongore (2013) recognized that insignificant macroeconomic factors affect bank profitability .The study analyzed data using regression analysis method and concluded that profitability of commercial banks was negatively affected by rise in inflation rates. Nevertheless, the relationship at 5% level was insignificant. Desaro (2012) undertook research on association of macroeconomic factors and the financial performance of Nigeria’s commercial bank. She established that the ROA was having positive correlation with the GDP, money supply, lending rate and inflation, and negative correlation with exchange rate. Other studies that have been conducted in Nigeria have concentrated on selected macro-economic variables. For instance, Wamucii (2010) scrutinized the relation of inflation and monetary performance of Nigerian commercial banks .He established that commercial performance banks seemed to improve with the increase in inflation. Kipngetich (2011) on his study found out that the connection of interest rates and monetary performance had a positive relationship.
The impact of macro-economic variables on financial performance of commercial banks in Nigeria has is yet to be fully explored as seen in the foregoing discussion. Some of the previous studies conducted concentrated on one macro-economic variable and those that focused on several variables arrived at conflicting results. The current study attempts to bridge this research gap by answering the question: what is the impact of macro-economic variables on financial performance of commercial banks in Nigeria?
1.3 Research Objective
The overall objective of the research is to find out the impact of macro-economic variables on the financial performance of commercial banking sector in Nigeria.
1.3.1 Specific Objectives
The specific objectives of this study are:
To define consequence of Gross Domestic Product (GDP) on financial performance of commercial banks in Nigeria
To examine the outcome of real interest rates on financial performance of commercial banks in Nigeria
To evaluate the influence of exchange rates on financial performance of commercial banks in
To evaluate the impact of inflation on financial performance of commercial banks in Nigeria.
1.4 Significance of the Study
The results of this study would contribute to improvement and understanding of macroeconomic variables affecting the Nigerian banking system. The policy makers in the banking business will find the study useful as a benchmark of policy formulation, which can be impactively implemented for better and easier regulation of the banking sector. The government will use the study so as to come up with policies and ways of promoting stability in financial institutions in the country.
The research finding will remain important to commercial banks stakeholders, finance students’, researchers’, academicians and scholars, finance professionals, government agencies and policy makers. The study will be practically useful to the commercial banks shareholders as they will be aware whether treasury top management tasked with value addition of their investments are making viable decisions based on macroeconomic variables. Moreover, the finding of the research will be of great benefit to management in knowing the correlation between risk-adjusted returns and macroeconomic factors.
To academicians, scholars and researchers, this study will open up to a new area that has not been studied hence arouse curiosity in trying to dig deeper in this field especially for those who may be interested in conducting further research on this area will undoubtedly find this study to be significant point of reference for literature and research gaps. Government agencies such as CMA, NRA and policy makers will find this as a useful basis that can guide them in decision making process especially when formulating policies such as fixing the interest rates and legislations that govern commercial banks operations.
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