Returns on Investment of Deposit Money Banks (DMBs) in Nigeria

This paper provides an in-depth study on the history and evolution of Commercial Bank characteristic factors and other Macroeconomic variables on the financial industry performance indices in Nigeria from 1977 to 2010. The work employed a 3-stage procedure in the assessment of Commercial Bank characteristic factors and other Macroeconomic variables on Total Credit, Investment, and Commercial Bank Lending and Deposit Rate. The essence is to assess the impact of environmental factors on efficiency of commercial banks in Nigeria within the period of study. While investigating relationships between bank efficiency and bank specific factors such as lending rate, deposit rate, Liquidity, Cash Reserve, and Inflation and also the impact of bank efficiency on those bank level factors as well as financial deepening. The study using econometrics approach revealed that apart from credit risk, Lending, Deposit rates, and Investments are associated with large bank size as evident in the network of branches. The results  indicated that Returns and Profitability of Commercial Banks are significantly affected by Macroeconomic variables and other characteristic factors. As such macroeconomic policies is likely to promote low inflation while stable output growth may boost credit expansion to the benefit of the Nigerian economy.

The history of the Nigeria banking system connects with growth and burst cycles in the number of operating banks and their branches. Signs of growth are usually experienced when the policy environment presents questionable business opportunities within the banking sector. In other words, there seems a sudden policy shift that makes it easy for ordinary business people to initiate processes  that creates access to public funds in the name of bank deposits. The banking industry as  regulated by the Central Bank of Nigeria is made up of Deposit Money Banks usually referred to as Commercial Banks and other Financial Institutions which includes Micro-Finance Banks, Finance Companies, Bureau De Change, Discount Houses and Primary Mortgage Institutions. 

The statement of research problem in this study stems from the fact that banks appear very profitable in Nigeria, whether returns on assets are assessed on  country by country, income group or by individual banks. The Nigerian economy observed in the present dispensation has been characterized by worsening economic fortunes in terms of reduced growth, increased unemployment, galloping inflation, high incidence of poverty, worsening balance of payment conditions, high debt burden and increasing unsustainable fiscal deficit. There are management challenges confronting Nigeria banks since the advent of indigenous banks. Aside losses  experienced by depositors, shareholders, employees and other stakeholders, the level of  confidence in the financial system has been negatively affected

In the light of the above, some research questions become feasible as follows: Are banks really profitable in Nigeria? Does Bank profitability reflect bank-specific risk? Does weak economic performance exposes banks to risk? Are there management challenges confronting Nigeria banks? 

The objective of this study is to assess the determinants of profitability in terms of their returns on investment in the Nigerian banking sector. In essence, bank profits as an important source for equity is imperative. If bank profits are reinvested, it is expected that it should lead to safer banks  and consequently high level of profits. This could promote financial stability and economic development. The scope of this study covers the period between 1977 and 2010. The theoretical base of this study is based on the anticipated income theory.