DETERMINANTS OF CORPORATE PROFITABILITY IN NIGERIA
This study is motivated by a desire to examine the determinant of corporate profitability. In light of the empirical review and other discussions, a number of questions arose as to whether there is a positive relationship between bank total asset, bank deposit, total, inflation rate and profitability. Using the Ordinary Least Square (OLS) regression technique with the aid of a computer software E-view 7.0, the empirical findings revealed among other things that, there is a positive relationship between total assets, bank deposit and bank profitability. Recommendations were however made by the researcher.
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
Background of the Study
Statement of Research Problems
Objective of the Study
Statement of Hypothesis
Significance of the Study
Scope of the Study
Limitation of the Study
CHAPTER TWO: LITERATURE REVIEW
Review of Literature Relating to Strategic Planning
and Bank Performance for Sustainability and
Growth in Nigeria Banking Industry
The Concept of Investment
The Concept of Profitability
Profit and Growth as Commercial Banks Goals
Determinants of Corporate Performance
Capital Budgeting and Sustainable Performance Growth
Economic Profit and Performance Measurement in
Theory of the Firm
CHAPTER THREE: METHODOLOGY
Population and Sample Size of the Study
Data Requirement and Source
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.2 Presentation and Analysis of Results
Test of Hypotheses
CHAPTER FIVE: SUMMARY, RECOMMENDATIONS AND CONCLUSION
Summary of findings
BACKGROUND OF THE STUDY
Over the years there has been an increasing interest on analysis of banks intellectual and need to ascertain the determinants of profitability in the Nigerian banking sector.
As financial intermediaries, banks play an important role in the operation of an economy. Banks are the role providers of funds and their stability is paramount importance to the financial system. As such an understanding of determinants of their profitability is essential and crucial to the stability of the economy (Bashi, 2000).
The banking sector is any economy serves as a catalyst for growth and development. Banks are able to perform this role through their crucial functions of financial intermediation, provision of an efficient payment system and facilitating the implementation of monetary policies (Abreu, 2002).
During the last decades the banking sector has experienced worldwide major transformation in its operating environment. Both external and domestic factors have affected its structure and performance.
Despite the increased trend toward bank disintermediation observed in many countries, the role of banks remains central in financing economic activity in general and different segments of the market in particular (Brock & Franken, 2002). Disintermediation, it means that after the introduction of the tax, the number of borrowers goes down. As a result, the amount of funds intermediated by the banks goes down.
However, at higher rate or over an extended period of time, these taxes may lead to significant welfare losses due to financial disintermediation.
The determinants of profitability are empirically well explored although the definition of profitability varies among studies. Disregarding the profitability measures most of the banking studies have noticed that the capital ratio, loan-loss provisions and expense control are important factors in achieving high profitability. Bank profitability is usually expressed as a function of internal and external determinants. The internal determinants originate from bank accounts (balance sheets and/or profit and loss account) and therefore could be termed micro or bank-specific determinants of profitability. Bank operate mainly to maximize profit and in the process they act as agent in the transmission of financial policy (banking monetary credit etc) because of this bank trend to be regulated more than other firms, objective of the economic policy and secondly to maximize the incidence of fraud and mismanagement (Udica, 1995).
This course is arrived at identifying the core factors that determines profitability in the banking sector. Hence we assume that banks judiciously, efficiently and effectively utilize their short and long term funds to maximize profit. To achieve profitability, a bank requires a good understanding of the clients industry and operating environment meaning that a bank should be versatile in several business and this entrails a high standard of ethics insurgency, professionalism and prudence.
A firm cannot ignore the problem of the environment in which it operates. Therefore, there is a need to examine the impact of corporate social responsibility on firms profitability in Nigeria. Corporate profitability if fully customizable to reflect the specific terminology and drivers of value within your own organization and is suitable for manager at every level.
The study of profits tends to be important only because of the information it provides about the health of the economy in any given year, but also because profits are a key determinant of growth and employment in the medium term. Changes in profitability are an important contributor to economic progress through the influence profits have on the investment and savings decision of companies. This is because a rise in profit improves the cash-flow position of companies, offers greater flexibility in the source of finance. The liquidity position or solvency of banks, cost of funds deposits and finally diversification of portfolio in which investment is made thus all these factors if not properly evaluated will increase the risk of the bank failure.
Measures of performance of banking institution have been restricted to the quantifiable. This has been so because measure are theoretically easier to produce result base on unique strategies and innovation profitability, solvency and liquidity are the three most important goal of any business, profitability is the most important one. As a goal, profit is not always understood well, sometimes it is confused with cashflow. Sometimes it is confused with the highest income or the lowest cost.
In rough terms, profitability is income minus expense.
STATEMENT OF RESEARCH PROBLEMS
The profit performance of commercial banks in Nigeria is limited by factors as government regulatory controls institutional and corporate constraints and microeconomic policy constraints.
A bank is perhaps the most regulated business in the world. The government in respect ensure there is a reasonable speed in loan portfolio of bank and this prevent making bank exposure vulnerable through the concentration of credit in a law hands in Nigeria speculated a policy legal limit that not more than two percent of paid up capital and stationary reserves of a bank can be lent to any borrower (Banking Ordinance of 1959).
It is important to note that management of companies in Nigeria lack sufficient technique to make them manage well. Some of these tools are not used and when used are not properly utilized. Corporate profit are not only means of measuring the total income that result from production and distribution of income across the sectors (UN Committee Report 1963), but act as a major component of nations overall income.
According to Jessup (1980), making sound asset management decision for profitability requires development of the knowledge and essential skills to make prudent and financial rewarding the nature of the explained that knowledge is needed regarding the nature of the myriads investment alternatives available in today’s complex economic environment. He said skills are needed to evaluate the potential risk and returns associated with investment decision.
Additionally its crucial for investor/banker to what result of profit to earn.
Is there any positive relationship between bank total asset and profitability?
Is there any significant relationship between bank deposit and bank profitability?
What is the relationship between equity/total assets and bank profitability?
Is there any positive relationship between total inflation rate and bank profitability?
OBJECTIVE OF THE STUDY
The study seeks
To investigate the relationship between bank total asset and profitability.
To find out the relationship between bank deposit and bank profitability.
To determine the relationship between equity/total assets and bank profitability.
To verify the relationship between total inflation rate and bank profitability.
STATEMENT OF HYPOTHESIS
The following hypotheses are to be tested in this study.
Ho: There is no significant relationship between bank total assets and bank profitability.
H1: There is a significant relationship between bank total assets and bank profitability.
Ho: There is no significant relationship between bank deposit and bank profitability.
H1: There is a significant relationship between bank deposit and bank profitability.
Ho: There is no significant relationship between total inflation rate and bank profitability.
H1: There is a significant relationship between total inflation rate and bank profitability.
SIGNIFICANCE OF THE STUDY
According to Uchendu (1995), profit is regarded as a residual income where he defined the most common methods of profitability measure (Return on Asset and Return on Investment) as the ratio of the banks management efficiency and effectiveness in developing assets.
A profitable banking sector is prerequisite for financial stability under a bank-based financial system like Nigeria. this study will thus be of immense benefit to the Nigerian investors, banker, shareholders, Government and foreign investors.
The study contributes to the existing literature in valuation and strategy by improving the understanding and quantifying the importance of factors that determines corporate profitability in Nigeria.
It also contribute to the managerial compensation literature by quantifying how much manager can influence profitability measure and thereby influence shareholder value.
The study is also aimed at financial analyst, investors and mangers. Financial analyst, investors could use it in relation to valuation strategy choices, such as determining if the company should enter new or leave old industries and what effect a major employee log off have on profitability.
In view of what the banking industry has witnessed before independence and post independence in the area of economic recession, distress in the industry, collapse of banks and the inability of Nigerian bank to integrate into the global economy (Soludo, 2004:48).
The present economic reforms of the federal republic of Nigeria have affected the banking industry very greatly. With the efforts of the federal government for favourable and good environment for all banking operators and various investors in the economy and for the bank to play active developmental roles in Nigerian economy and be competent and competitive players in the African and global financial system, there was the need for this research work. True financial distress which has become a feature must be eradicated and become history.
The profit was designed to benefit the following operators of the economy:
It will form a theoretical focus as a basis sector of the economy. The various financial strategies will become concepts for sustainable performance growth in the economy.
Potential investors and existing investors will benefits, as it will help them in their planning and the execution of various plans concerning social responsibility on firms profitability.
The government will benefit most especially in the areas of corporate governance, which has been a major problem in the public sector, and tax planning, as many operating companies in the economy are known to be evading and avoiding taxes, according to Chartered Institute of Taxation of Nigeria (CITN, 2005). It will assist them in the proper planning of their tax system to avoid leakage.
SCOPE OF THE STUDY
This research work is an empirical study on the determinant of corporate profitability in Nigeria.
The population of the study is the entire 260 companies quoted in the Nigeria Stock Exchange, while the sample size is two (2) quoted banks in Nigeria.
The time frame of this study is ten (10) years (i.e. 2001 – 2011).
Geographically, the study will be specifically restricted to quoted companies in Nigeria.
LIMITATION OF THE STUDY
The study will be limited to the Nigeria economy. In carrying out this research, the researcher encountered very many constraint, time factor, financial problem, hoarding of relevant information by firms, scarcity of materials etc.
The investment and asset growth factors or determinants will be discussed for Union Bank and ECO Bank respectively. Thus would make the effect and result more prevailing to use.
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