Fundamental Risk Factors and Profitability of Commercial Banks in Nigeria
Akims, Malgit Amos
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Commercial banks undertake significant roles in the economic resource allocation of countries. The financial intermediation roles performed by banks are however largely dependent on profitability. The fluctuating profitability trend of commercial banks in Nigeria is bringing about high concerns among various stakeholders. The study sought to assess the effect fundamental risk factors on profitability of commercial banks in Nigeria. The specific objectives were to establish the effect of price level fluctuation, exchange rate fluctuation and interest rate fluctuation on profitability of commercial banks in Nigeria. The study further sought to assess the moderating effect of bank competitiveness on the relationship between fundamental risk factors and profitability of commercial banks in Nigeria. The study was anchored on Agency Theory, Deflation Theory, Expectations Theory of Exchange Rates, Liquidity Theory of Interest Rates, Market Power theory, Agency Theory and Financial Intermediation Theory. The study adopted positivism research philosophy and causal research design. The target population of the study comprised of the twenty one commercial banks in Nigeria with the sample comprising of the seventeen commercial banks which were fully operational within the study period. The study therefore was based on purposive sampling design. The study applied annual panel data for the period 2010 to 2017 which was sourced from the published audited financial statements of commercial banks and the Nigeria National Bureau of Statistics. Data was analyzed based on descriptive, correlation and panel regression analyses. Hypotheses of the study were tested at 0.05 significance level. Correlation analysis indicates that fundamental risk factors and bank competitiveness had significant correlation with profitability of commercial banks in Nigeria. Based on the panel regression analysis, the study found that price level fluctuation had a significant effect on profitability of commercial banks in Nigeria based on return on assets (β=0.003, p=0.0170) and net interest margin (β=0.0028, p=0.0380) and no significant effect based on return on equity (β=0.0027, p=0.0660). The study findings indicate that exchange rate fluctuation had a significant effect on return on assets (β=-0.0002, p=0.0440) and insignificant effect on return on equity (β=-0.0002, p=0.0560) and net interest margin (β=-0.0002, p=0.0510). Interest rate fluctuation had a significant effect on return on assets (β=0.0136, p=0.0090), return on equity (β=0.0139, p=0.0110) and net interest margin (β=0.0155, p=0.0010) of commercial banks in Nigeria. Bank competitiveness had a significant moderating effect on the relationship between price level fluctuation and return on assets (β=0.0414, p=0.0400), return on equity (β=0.0484, p=0.0130) and net interest margin (β=0.0415, p=0.0390). Bank competitiveness had no significant moderating effect on the relationship between exchange rate fluctuation and profitability. Bank competitiveness had no significant moderating effect on the relationship between interest rate fluctuation and profitability of commercial banks in Nigeria. The study recommends that managers of commercial banks should fully anticipate price level fluctuation in the country and that of other countries which they also operate in. In periods of severe exchange rate fluctuation, bank management should hedge against this by increasing their divestment options and switching trading options to less volatile currencies. Bank managers can take advantage of periods of high loan demand and moderately charge higher loan rates accordingly. Price discrimination can also be employed by the managers of commercial banks by attaching different interest rates on loans for different customers which can be guided by their credit history.