Asset / Liability Management And Profitability Of Banks In Nigeria (A Case Study Of Diamond Bank And First Bank Of Nigeria)
Asset Liability Management is critical for sound management of the finances of any organization that invest to meet its future cash flow needs and capital requirements. Efforts are required to monitor and co-ordinate the activities of asset liability management. Lack of autonomy, weak supervision by Central Bank of Nigeria and non-compliance of the Money deposit banks leading to drop in profits, merging and collapsing of commercial banks.
This study is an evaluation on the influence of money deposit banks Asset/Liability management and profitability with specific interest in Diamond Bank and First Bank of Nigeria Plc.. The objectives of the study were; to determine the influence of customer deposits; loans advanced to customers; management of the loans advanced to customers and management of loans from other banks influence the Net Interest Income (NII) of Diamond Bank and First Bank .
The study adopted a case study design and made use of Secondary data which was obtained from the bank’s annual audited financial statements from 2010-2015.Based on the findings, the study recommended policies that would encourage revenue diversification, reduce operational costs, minimize credit risk and encourage banks to minimize their liquidity holdings. Further research on factors influencing the liquidity of commercials banks in the country could add value to the financial performance of banks and academic literature for further study.
This is the introductory chapter of the chapters. is briefly explains the background of the study, statement of the problem, objectives of the study, research questions, statement of hypothesis, significance of the study, scope of the study, limitations of the study and definition of terms.
1.1 Background Of The Study
The stability of commercial banks as whole in the economy depend on proper asset liability management structures. Better asset liability management have the tendency to absorb risks and shocks that commercial banks can face. Moreover, asset liability management is the perquisite condition for the efficiency and growth of commercial banks. Asset liability management in commercial banks is determined by the ability of the banks to retain capital, absorb loan losses, support future growth of assets and provide return to investors.
The largest source of income to the bank is interest income from lending activity less interest paid on deposits and debt. For a bank to attain the same objectives then it has to ensure proper asset liability management, including liquidity risk management, interest rate risk management and credit risk management (Francis, 2007).
The Central Bank of Nigeria (CBN) prudential guidelines on asset liability management stipulates that, in order to effectively monitor its liquidity risk, credit risk and interest rate risk an institution is supposed to establish an Asset Liability Committee (ALCO) with the following four key roles: First, management of the overall assets and liabilities of the commercial bank ; Second, ALCO must report directly to the Board and in the case of a foreign incorporated bank, report to the senior management of the institution in the country; Third, ALCO must facilitate, coordinate, communicate and control balance sheet planning with regards to risks inherent in managing liquidity, credit and convergences in interest rates; and; Fourth, ALCO is responsible for ensuring that a bank’s operations lies within the parameters set by its Board of Directors (Central Bank of Nigeria Report, 2010).
Financial distress has afflicted numerous commercial banks, many of which have been closed down by the regulatory authorities or have been restructured under their supervision. Some commercial banks were closed between 2003 and 2004 Further some commercial banks were taken over in that same period.
The recent rise in non-performing loans is widely spread across commercial banks in Nigeria and is evident in both public and private owned banks. The upward trend of non-performing loans started immediately with the outbreak of the financial crisis in 2008, but the sharp increase occurred two years later. In 2010 the non performing loan rate increased from 18.5% to 20.5%. The rate also increased to 22.5% in 2012 and 25.7% in 2013. The upward trend reflects in part the consequences of heightened unemployment in Nigeria which, together with depreciated currency and tight financial conditions, weakened the borrowers’ repayment capacity.
1.2 Statement Of The Problem
Weakness in Nigeria Banking system is becoming apparent and is manifesting in the relative controlled and fragmented financial system in Nigeria . This can be attributed to differences in regulations governing banking and non-banking financial intermediaries, lack of autonomy and weak supervisory capacities carried out by the central banks surveillance in enforcing banking regulations.
The number of Non -Performing Loans is increasing overtime from 22% to 27.3% of the Total Loans. This can be attributed to non-compliance by the banks as per the Central Bank of Nigeria regulations. Further, the level of credit risk is increasing overtime.. It is not clear the extent to which asset liability management relates to financial performance. This study seeks to assess influences of financial performance of commercial banks in Nigeria with specific interest of Diamond Bank and First Bank of Nigeria.
1.3 Objectives Of The Study
The general objective of this study is to determine the influence of asset liability management on financial performance of Commercial banks in Nigeria with reference to Diamond Bank and First bank. Study has following specific objectives-
- To determine the influence of customer deposits on the profitability performance of Diamond Bank and First Bank of Nigeria.
- To determine the influence of loans to customers on the financial performance of Diamond Bank and First Bank of Nigeria.
- To establish the influence of managing non-performing loans on the profitability performance of Money deposit banks in Nigeria
- To establish the influence of management of loans from other banks on the profitability performance of Money deposit Banks in Nigeria.
1.4 Research Question
- Does customers’ deposits have any influence on the financial performance of Diamond Bank and First bank of Nigeria
- Does Loans to customers have any influence on the profitability performance of Diamond Bank and First Bank of Nigeria.
- Does customers’ deposits have any influence on the profitability performance of Money deposit banks in Nigeria.
- Do you agree that management of loans from other banks has no influence on profitability performance of Money deposit banks in Nigeria.
1.5 Research Hypotheses
- H0: customers’ deposits have no influence on the financial performance of Diamond Bank and First Bank .
H1: customers’ deposits has influence on the profitability performance of Diamond Bank and First Bank.
- H0: customers’ deposits have no influence on the profitability performance of Money deposit banks in Nigeria.
H1: customers’ deposits has influence on the profitability performance of Money deposit banks in Nigeria.
1.6 Significance Of The Study
This research study was significant because it dealt with issues in Nigeria Money Deposit banks are facing and will continue to confront in the future. In the present scenario, asset liability management is important for the banking industry due to increased importance of managing the asset liability mix.
It will help to assess the risks and manage the risks by taking appropriate actions. So, to understand the asset liability management process and various strategies that are helpful for the banks to manage the risks, this topic was selected. Therefore, it was beneficial for me to develop my knowledge regarding the asset liability management process, functions and its effect in the financial performance of commercial banks. The research study might contribute and form the basis for further research into the
Application of innovative asset liability management strategies in liquidity risks by similar industry players. This can go a long way in coming up with even better and more efficient strategies that are specific to different bank sizes, markets in which they operate and balancing of the different risk appetites that may be present within the different banks.
1.7 Scope Of The Study
This study is concerned with Money deposit banks Assets/Liability management and profitability, its Actual contributions to the banking industry and problems faced by bank that do not manage their Assets/Liabilities effectively. A case study of Diamond bank and First bank of Nigeria are within this scope between the year 2010-2015.
1.8 Limitation Of The Study
In the course of writing this research there were a lot of limitation s , problems that tends to put an end towards the success of this research work . the following are the problems encounterd on the course of carrying these research work.
The time for this work to be complete and submittedwas limited
Other Academic work such as writing some term papers attending lectures and preparing for my on coming examination.
This is another factor that hinders the success of the research work. Inadequate finance made me not to get information from various places like internet browsing as well as going to different banks in search of information.
5.0 Summary , Conclusion And Recommendations
In the previous chapter data collection from respondents were presented and analyssed using the percentage and chi-square methods.
However , the present chapter summarizes the findings from the study, with recommendation and conclusion.
Chi square analysis has shown that asset liability management is not only related to the financial performance of banks, but they also influence the financial performance of commercial banks in Kenya significantly with a correlation of 0.756. The analysis revealed that operational efficiency is the most robust and important factor influencing financial performance in the sector. The results showed that a 1% increase in operational inefficiency could result in 3.656% decrease in financial performance. This was statistically significant at 5% (3.656) confidence level. Flamini et al (2009) and Neceur (2003) also found the same results for SSA and Tunisian banks respectively. The descriptive analysis showed that total expenses are as high as 69.65% of total income. It is therefore obvious that a lot needs to be done to expenses in the banking sector to improve financial performance. The strong negative impact of operational efficiency indicates that banks are not able to pass all their operating cost to customers which may be an indicator of the competitiveness.
The analysis revealed that capital adequacy is also an important factor influencing financial performance in banks. The results showed that a 1% increase in capital adequacy could result in 0.259% increase in financial performance. This was statistically significant at 5% confidence level with a t-statistic of 1.717. This result means banks should focus on improving their capital levels in order to improve their financial performance. This will enable the banks, not only to be cushioned against exogenous shocks, but also to take full advantage of business opportunities as they come and increase their financial performance in the process. Asset quality showed a negative effect of -0.809, statistically significant 5% level, meaning a 1% increase in the asset quality ratio (indicating deteriorating asset quality), could lead to 0.809 % reduction in financial performance.
These results are consistent with previous findings by Kosmidou (2008) and Flemini et al (2009). Thus banks need to improve their processes of screening credit customers and monitoring of credit risk .This is an important indicator because banks have had serious problem with non-performing loans in the past which led to collapse of many banks. Another important finding after assets quality is income diversification. This variable had a positive effect of 0.213 with a t-statistic of 2.433 and statistically significant at 5% confidence level.
Investigating the relative importance of asset liability management on the financial performance of banks and also found that income diversification leads to increased financial performance. This means banks that diversify their source of revenue between, interest income, fees and commissions, foreign exchange activities and other, are more profitable than those that largely depend on a single source of income. Finally the effect of liquidity was 0.370 and a t-statistic of 1.830 statistically significant at 5% significance level, indicating that liquidity positively influences profitability. The implication of this finding is that investing in short-term, less risky securities like government bonds leads to increased profitability.
The main objective of this study was to determinate and evaluate the effects of asset liability management on the financial performance of commercial banks in Nigeria within the CAMEL framework. Data from 2004 to 2013 of 43 commercial banks was analyzed using Chi square method. From the discussion of the findings above, it was concluded that the asset liability management is the most significant factor influencing the financial performance of commercial banks in Kenya. The analysis showed that all the ALM had a statistically significant impact on financial performance. Operational efficiency being the most robust and important factor influencing profitability performance. A slight decrease in operational efficiency could lead to very high reduction in profits. This is unproprtional as compared to the other factors. Income diversification leads to increased financial performance. Capital adequacy was also a significant factor influencing performance.
However, not as significant as operational inefficiencies in terms of the impact on financial performance. Banks which had I diversified their income sources tend to perform better than those which had limited or fewer income streams in their portfolios. However, in terms of overall impact on financial performance of banks in the industry as a whole, this factor was not as strong as compared to operational inefficiency and capital adequacy. Banks which were more liquid had better financial performance as compared to less liquid banks. Although all banks in the industry had maintained the minimum level of liquidity, some were barely beyond the threshold and so there was negative impact on their financial performance
On the basis of the findings of the study the researcher recommends that superior financial performance in commercial banks can be achieved by; improving their capital bases, reducing operational costs, improving assets quality by reducing the rate of nonperforming loans, employing revenue diversification strategies as opposed to focused strategies and keep the right amount of liquid assets. Thus it can be concluded that profitability performance in the Nigeria money deposit banks is largely driven by asset liability management.
In terms of operational efficiency, it is obvious that a lot needs to be done to expenses in the banking sector to improve financial performance. The strong negative impact of operational efficiency indicates that banks are not able to pass all their operating cost to customers which may be an indicator of the competitiveness. More ways of reducing inefficiencies should be adopted but not at the expense of service delivery. For asset quality banks need to improve their processes of screening credit customers and monitoring of credit risk .This is an important indicator because banks have had serious problem with non-performing loans in the past which led to collapse of many banks.
On the other hand banks should focus on improving their capital levels in order to improve their financial performance. This will enable the banks, not only to be cushioned against exogenous shocks, but also to take full advantage of business opportunities as they come and increase their financial performance in the process. Income diversification can be achieved by increasing interest income, fees and commissions and foreign exchange activities.
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