CHAPTER ONE

1.0 INTRODUCTION
1.1 Background of the study

The two major functions of a commercial bank are the mobilization of deposits and the
extension of credits Adekanye, 1986). As financial intermediary, bank collect deposits and
paying interest on them, making loans and advances and charging the borrowers higher rates of
interest. In rending this service to borrowers and depositors, banks have an expectation of
achieving targeted rates of returns. Apart from granting loans, banks also generate profit from
investments. In a bid to maximise their earnings, every bank attempts to structure its assets and
liabilities in a way as to yield the highest returns, bearing in mind the risk involves and subject to
some constraints. The assets held by banks may be categorised into two broad classes; the
earning assets and the non-earning assets. The earning assets are loans and investment, while the
non-earning assets consist of fixed assets, total reserves of banks, vault cash and non-interest
earning deposit with the Central Bank. Profits are often generated by the earning assets. Most of
the banks’ liabilities are payable on demand, but it is known by banks that on the average,
customers will usually demand for a small proportion of the funds deposited at any given time.
Hence, provided adequate provision is made to cover such withdrawals, the balance of
the deposits can be given as loan to credit-worthy customers of the bank. The bulk of the profits
made by banks arise from the difference between the costs of funds deposited by customers and
the charges on Loans to borrowers. Generally, depositors receive lower rates of interest in
comparison to the rate charged on loans. Based on the foregoing, we can say that the more
money banks are able to lend the higher their profit. As financial intermediaries, banks play a
pivotal role in the economic activities of most nations. The efficiency of banks financial
intermediation roles play a significant role in economic growth. Profitable banks are in better
position to contribute positively to the Gross Domestic Product of a nation. Besides, Banks
liquidation usually provoke systemic economic crisis. Therefore, it is important to study the
determinants of Bank’s profitability. The Nigerian banking industry occupied an important
position in the country financial system, serving as mechanism to finance economic growth.
The banking sector in Nigeria has undergone various reforms, one of which led to the
establishment of Asset Management Corporation of Nigeria (AMCON). Before its establishment,

1
some banks were getting excellent ratings, while sitting on non-performing loans running into
over 40 per cent. The purchase of the non-performing Assets of the banks by AMCON has
returned most of the banks to the path of real profit making. Linkages between bank profitability
and failure and its external and internal determinants depend upon which factors in the micro and
macro economy are most strongly linked to the banking industry. As macroeconomic, social and
legal environment changes, determinants of banking sector profitability might also change.
Hence, this paper attempts to study the determinants of bank profitability in Nigeria from 1998 to
2012. The remainder of the study is organized as follows: section 2 discusses the existing
literature on the determinants of bank profitability. Section 3 describes the model specification,
estimation techniques. The results of the empirical analysis are presented in section 4, while
section 5 concludes the paper. The majority of studies on bank profitability, such as Short
(1979), Bourke(1989), Molyneux and Thornton (1992), Demirguc-Kunt and Huizinga (2000)
and Goddard et al. (2004), use linear models to estimate the impact of various factors that may
be important in explaining profits. Even though these studies show that it is possible to conduct a
meaningful analysis of bank profitability,1 some issues are not OLdealt with sufficiently. First,
the literature principally considers determinants of profitability at the bank and/or industry level,
with the selection of variables sometimes lacking internal consistency, while there is no thorough
investigation of the effect of the macroeconomic environment, owing partly to the small time
dimension of the panels used in the estimation. Second, in most of the literature, the econometric
methodology is not adequately described and/or does not account for some features of bank
profits (e.g. persistence), which implies that the estimates obtained may be biased and
inconsistent.
This paper investigates, in a single equation framework, the effect of bankspecific,
industry-specific and macroeconomic determinants on bank profitability. The group of the bank-
specific determinants of profitability involves operating efficiency and financial risk. Size is also
included to account for the effect of economies of scale. The second group of determinants
describes industry-structure factors that affect bank profits, which are not the direct result of
managerial decisions. These are industry concentration and the ownership status of banks.

2
1.2 Statement of the problem
Performance of the banks is crucial for any country’s economic development because of
the critical role of banks in the economy. Empirical analysis of performance of banks is an
important requirement for further policy changes. As indicated in Central Bank of Nigeria
Banking Sector Report [5], the health of financial system depends to a larger extent on the
soundness of financial institutions, particularly the commercial banks. Accordingly, study in this
area is important for the following reasons. First, improvements in the performance of
commercial banks are vital for providing a more efficient system of asset allocation in the
financial services sector. Since, Nigeria has a bank-led financial services sector, performance of
banking industry is important for providing financial infrastructure for economic development
Secondly, some banks are still facing crisis that threatens their survival despite the continuous
reform process that kicked off during the Charles Soludo regime. However, the studies on
organizational performance of other sectors in Nigeria are broad but there are few works on
banking sector performance especially on the specific factors that determine financial
performance in commercial banks in Nigeria [7]. The study to the best of my knowledge is
sparse.
Therefore, this study aims to investigate the impact of bank-specific factors that
determine financial performance of commercial banks in Nigeria.

1.3 OBJECTIVES OF THE STUDY:

The main objective of the study is to examine the specific factors that determine financial
performance in the Nigerian banking industry. Specifically, the study is carried out ;

- To examine the impact of operating expenses on the financial performance of commercial

banks.
- To determine the extent to which credit risk and liquidity risk determines the financial
performance of Commercial banks.
- To evaluate if Capital strength of a bank determines it's financial performance. when
measured with return on equity model.(ROE)
- To measure the effect of firm size on financial performance of banks when measured with
return on

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 asset model (ROA).

1.4 Research Question:

- To what extent does operating expenses determine the financial performance of

commercial banks?
- Does the capital strength impact on the financial performance of commercial banks?
- What is the impact of the firm size in determining financial performance of commercial
banks?
- What is the extent at which liquidity and credit risk can determine the financial
performance of commercial banks

1.5 Research Hypothesis:

In order to provide empirical analysis that will achieve objective of the study and
probable solution to the problem of study, the following hypotheses are formulated for testing.

Ho1 : Operating Expenses have a negative impact on the financial performance of commercial
banks in Nigeria.

Ho2 : Liquidity Risk has a negative impact on the financial performance of commercial banks in
Nigeria.

Ho3 : Credit Risk has a negative impact on the financial performance of commercial banks in
Nigeria.

Ho4 : Capital Strength has a positive impact on the financial performance of commercial banks in
Nigeria.

Ho5 : Firm Size has a positive impact on the financial performance of commercial banks in
Nigeria.

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1.6 Significance of the study:
This study is expected to have the following impact as well as enable a clearer understanding
of the impact of the various banking reforms on banks and their profitability:
1. It will enhance the confidence and increase effort of the various regulators of the banking
industry as they see the fruits or the reforms.
2. Analysis and investors will have a better measure of accessing investing investment
activities in the banking industry.
3. The work will be a repository for reference and future research.
4. Insiders in the banking sector will also have areas to focus on in order to drive the
profitability and sustained expansion as well as survived of their banks both domestically
and internationally.

1.7 Scope of the study:

The study utilized panel data from 12 of the 22 deposit money banks and the study period
spanned 2009-2020. The reforms must have had traction on the economy, especially the bank
recapitalization policy by 2006 within this period. The study relies on annual data from banks in
Nigeria. The remaining part of the study is broken into (l2) the review of related literature,( 3)
Methodology, (4 )Data presentation, analysis and discussion of findings, (5) summary,
conclusion and recommendations.

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 CHAPTER TWO
LITERATURE REVIEW
2.1 Conceptual Review
In the literature, 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 accounts) and therefore could be termed micro or bank-specific
determinants of profitability. The external determinants are variables that are not related to bank
management but reflect the economic and legal environment that affects the operation and
performance of financial institutions.
A number of explanatory variables have been proposed for both categories, according
to the nature and purpose of each study. The research undertaken has focused on profitability
analysis of either crosscountry or individual countries’ banking systems. The first group of
studies includes Haslem (1968), Short (1979), Bourke (1989), Molyneux and Thornton (1992)
and Demirguc-Kunt and Huizinga (2000). A more recent study in this group is Bikker and Hu
(2002), though it is different in scope; its emphasis is on the bank profitability business cycle
relationship. Studies in the second group mainly concern the banking system in the US (e.g.
Berger et al., 1987 and Neely and Wheelock, 1997) or the emerging market economies (e.g.
Barajas et al., 1999). All of the above studies examine combinations of internal and external
determinants of bank profitability. 2 The empirical results vary significantly, since both datasets
and environments differ. There exist, however, some common elements that allow a further
categorization of the determinants. Studies dealing with internal determinants employ variables
such as size, capital, risk management and expenses management. Size is introduced to account
for existing economies or diseconomies of scale in the market. Akhavein et al. (1997) and
Smirlock (1985) find a positive and significant relationship between size and bank profitability.
Demirguc-Kunt and Maksimovic (1998) suggest that the extent to which various
financial, legal and other factors (e.g. corruption) affect bank profitability is closely linked to
firm size. In addition, as Short (1979) argues, size is closely related to the capital adequacy of a
bank since relatively large banks tend to raise less expensive capital and, hence, appear more
profitable. Using similar arguments, Haslem (1968), Short (1979), Bourke (1989), Molyneux and
Thornton (1992) Bikker and Hu (2002) and Goddard et al. (2004), all link bank size to capital

6
ratios,3 which they claim to be positively related to size, meaning that as size increases –
especially in the case of small to medium-sized banks – profitability rises. However, many other
researchers suggest that little cost saving can be achieved by increasing the size of a banking
firm (Berger et al., 1987), which suggests that eventually very large banks could face scale
inefficiencies.
Bank expenses are also a very important determinant of profitability, closely related to
the notion of efficient management. There has been an extensive literature based on the idea that
an expenses-related variable should be included in the cost part of a standard microeconomic
profit function. For example, Bourke (1989) and Molyneux and Thornton (1992) find a positive
relationship between better-quality management and profitability.
Turning to the external determinants of bank profitability, it should be noted that we can
further distinguish between control variables that describe the macroeconomic environment, such
as inflation, interest rates and cyclical output, and variables that represent market characteristics.
The latter refer to market concentration, industry size and ownership status.

2.2 Theoretical Review and Empirical Review

Market Power Theory: This market hypothesis actually analyzes the bank or firm’s influence
on price of an item by controlling the forces of the market, that is, supply and demand.
Considering perfect market competition, it can be postulated all firms present in the market have
no grip on market power. Hence, every firm or bank would transact based on the prevailing
market price notwithstanding the potential strength to exert control on the market forces. The
underline idea of market power indicates that inclined exogenous market forces stimulate better
financial transaction and profit making capacity. The theory equally opines that it is only the
institution or company that boasts of largest market share and sufficiently distinguished products
can overcome their competitors and earn monopolistic return from the market (Berhe & Kaur,
2017, p28).

Efficiency Structure Theory: The Efficiency Structure hypothesis suggests that upgraded
managerial scale effectiveness prompts higher focus and afterward to higher benefit. This is an
obvious sign of advantageous financial positive contribution of firms particularly deposit money
banks (DMBs). Obamuyi (2013) attested that the fair portfolio hypothesis added an alternate

7
measurement to investigation of bank’s wellness in terms of profitability. Considering the
efficiency hypothesis which brings portfolio creation to limelight by pointing out it benefits and
current consideration by the investors assume as aftereffect of the decision taken by management
and the overall financial institutions set of choices. Thus, market speculations couple with bank
financial performance is affected by the endogenous and exogenous factors. As portrayed by
reviews, financial institutions explicit elements are categorized under the endogenous factors.
The financial institutions in Nigeria have been witnessing impressive performances in the last
decade. However, this does not mean that all banks enjoy financial boost, some are still
struggling to survive (Azizi and Sarkani, 2014).

Buffer Theory of Capital Adequacy: Buffer hypothesis of capital sufficiency is positively

founded on the unpredictability of capital ampleness proportion just as unwavering quality and
constancy on capital for long haul arranging. Besides, a bank might encounter genuine capital
base disintegration should it not be able to mobilize sufficient deposit. This is a terrible danger of
capital adequacy proportion instability. Hence, to prepare for this, the hypothesis proposes that
banks might like to hold overabundance capital with perspective on lessening the chance of
missing the mark legitimate capital base prerequisite which might influence profit maximisation
and other financial activity (Ikpefan, 2013; Michael et al., 2018).

Deposit Insurance Theory: The deposit insurance theory hypothesizes banks as a mix of risky
securities. It expresses that there is a normal worth exchange of abundance from government
deposit Insurance Corporation to bank proprietors as insured banks expanded their risk of
disappointment limitlessly. Banks regulatory specialists are keen on the wellbeing of investors'
assets and certainty of the general population in the deposit money banks (DMBs).
Consequently, they will do their best to guarantee that depositors' assets are protected and
guaranteed. The hypothesis projects at the method of protections measure set up to secure
Pdepositors' assets by deposit money banks.

Portfolio Regulatory Theory: To properly situate banks to meet its liabilities with no issue,
hypothesis clarifies that regulatory specialists need to keep up with wellbeing and sufficiency of
banking framework. This is accomplished through the regulatory specialists by guaranteeing
solvency and liquidity on individual banks than making it open-ended decision. The hypothesis

8
measures liquidity position of banks as fluid resource deposit (FRD) proportion. The higher the
proportion, the better the liquidity and solvency of the singular banks.

Expense Theory: The expense hypothesis as proposed by Williamson (1963) and referred to in
Ikpefan (2012), Tochukwu (2016) and Michael et al., (2018), managers have the choice in
seeking after approaches which augment their own utility as opposed to profit maximisation for
investors. This is most popular as the hypothesis of managerial attentiveness. The general target
is the fulfillment managers get from specific kinds of expenditure like eminence, power, status
related with lavish structure/workplaces, organization vehicles among others. Each hypothesis
clarified in this review is appropriate to bank peculiar or specific factors.

The Liquid Asset Theory: This theory posits that banks ought to maintain large pool of short
term asset. According to Anyanwu (1993), the proponents of this theory pre-suppose the
existence of efficient primary and secondary (money) markets. The theory emphasizes the need
to have short term (liquid) assets that will enable the bank meet its short term obligations as they
mature.

Commercial Loan Theory or Real Bill Doctrine: This theory proposes that lending should be
on short term since most deposits are also in the short term form. It is the oldest theory of
liquidity management and seeks to make short term profit motive with short term obligation of
making depositors’ funds available to them on demand. This doctrine is supported by Onoh
(2002). Onoh opines that for management and application of funds (liquidity) to be effective the
tenor of funds (sourced from depositors and other sources) must be matched with the tenor of
assets (i.e. loans and advances to customers, etc.).

Anticipated Loan Theory This theory: was propounded in the 1940s. It focuses on the earning
power and credit worthiness of the borrower as a major source of bank liquidity. It urges banks
to examine the reputation of the borrower and his ability and willingness to pay. Those who
originated this theory agree on granting long term and non-business loans by banks since they
will be repaid out of the future earnings of the borrower. Beck et al., (2005) investigated the
effect of privatization on the performance of Nigerian banks for the period 1990-2001. The
results indicate some evidence of improvement in the performance of nine banks that were
privatized. The results also suggest negative effects of the continuing minority government

9
ownership on the performance of some Nigerian banks. Adegbaja & Olokoyo (2008) examined
the impact of previous recapitalization in the banking system on the performance of the banks in
Nigeria. They intended to find out if recapitalization is of any benefit. Secondary data obtained
from NDIC annual reports were employed by the study. The results show that the mean of
prominent profitability ratios like Yield on Earning Asset, Return on Equity and Return on Asset
were significant. This means that there is statistical difference between the mean of the banks
before 2001 recapitalization and after 2001 capitalization Uremadu (2009) used an economic
model of the Nigerian financial system in order to determine its liquidity profile using a group of
money market instruments comprising treasury bills, treasury certificates eligible development
stocks, certificate of deposits, commercial papers and bankers’ acceptance. The model estimates
were based on a time series data of financial system aggregates stretching from 1980 to 2005.
The estimates were used to evaluate the impact multipliers and the liquidity rating of the
Nigerian financial system using those money market instruments

2.3 Empirical Review

Malakolunthu and Rengasamy (2012) examined the impacts of factors affecting banks
using capital sufficiency, asset quality, management efficiency, enough earnings and liquidity -
CAMEL strategy on bank’s profit maximisation in China. 13 Chinese banks which were listed
on Shanghai Stock Exchange with data spanning between 2008 to 2011, the result obtained from
employing the fixed effect method of regression analysis, showed that virtually the CAMEL
representing independent variables had positive effect on profit maximisation by deploying the
total assets of banks to generate the profit.

Azizi and Sarkani (2014) investigated financial wellness and soundness of Mellat Bank
which is a private bank in Iran by adopting CAMEL criteria symbolizing capital, asset,
management, earning and liquidity. They used two linear and multiple regression technique, the
result indicated that style of board of directors had positive effect on profit maximisation of
bank. Also, the study showed that asset quality and capital adequacy were negatively related to
bank performance in Iran.

Kasmidou (2008) delved into bank-specific factors and bank performance of various
commercial banks in Nepal. The review acknowledged determinant of financial institutions to be

10
CAMEL. Using 18 listed banks which were segregated into public and private banks with data
spanning from 2005 up to 2010, the multivariate method of analysis showed that public banks
could not compete favourably as private banks as their services are less satisfactory when
compared to private-owned banks. The homegrown private banks put up sufficient and
satisfactory services.

2.4 Research Gap

This study would be conducted using return on asset (ROA) as the sole dependent variable
because it actually enjoys supremacy for measuring profitability in that it gives a whole
reflection of how management has efficiently deployed assets to maximize profit. (Haimiro,
2021; Ajao & Ogierikhi, 2018; Ajao & Akinuli, 2021; Epps & Cereola, 2008; Berteji &
Hammami, 2016; Alomari & Azzam, 2017; Berhe & Kaur, 2017; Mazviona, Dube &
Sakahuhwa, 2017 and so on). As a departure from what other researchers had done, combination
of dependent variables that could be adopted as proxies for banks’ performance along ROA
include: return on equity (ROE), profit after tax (PAT), profit before tax (PBT), profit margin
and TOBIN-Q which is qualitative in nature and is based on market assessment.

11
 CHAPTER THREE
METHODOLOGY
3.1 Research Design
This study seeks to investigate the effect of bank’s peculiar variables on profit
maximisation of deposit money banks in Nigeria. The study will rely on ex-post facto research
design because the data to be used in evaluating the effect of bank’s peculiar variables on banks’
profit maximisation in Nigeria cannot be manipulated or influenced in any way. Ex-post facto
research design is suitable where research data are historical and non-manipulative.
3.2 Sources of Data
The data for this study shall be sourced from the Central Bank of Nigeria statistical
bulletin, National Bureau of Statistics and Nigeria Stock Exchange Fact Book of various issues
from 2010 up to 2020.
3.3 Population and Sources of Data
In order to achieve the objectives of this study, the population of this study comprises 13
deposit money banks that are licensed by the apex bank in Nigeria and listed on the Nigeria
Stock Exchange (NSE) constitute the population of the study. Nonetheless, since this study is
based on annual aggregate data, hence, a census sampling technique where population equals
sample size is adopted. Thus, all the quoted and licensed deposit money banks from 2010 to
2020 constitute the sample size of this study.
3.4 Theoretical Underpinning
This study would adopt buffer theory of capital adequacy as the theory on which study
would hang on. This is because buffer hypothesis of capital sufficiency is directly stabilized on
the unpredictability of capital ampleness proportion. It equally emphasizes that financial
institutions should have enough capital so as to avoid liquidity problem and possibility of going
under in case of economic shocks and depression (Michael et al., 2018).
3.5 Model Specification
The model for this study is specified in implicit form as thus below:
ROA = f(AQ, BS, BL, ME, NPL, CAR) ………….(i)
In explicit form/or mathematical form, the model is stated as follows:

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ROAit = β0 + β1AQit + β2BSit+ β3BLit +β4MEit+ β5NPLit
+ β6CARit + ɛit ………..(ii)
Where:
ROA = Return on Asset
AQ = Asset Quality
BS= Bank Size
BL = Bank Liquidity
ME = Management Efficiency
NPL = Non-performing Loan
CAR= Capital Adequacy
β0 = Constant term
β1, β2, β3, β4, β5and β6, denote parameters to be estimated.
ɛ = The Error Term
i = cross-sectional variable (13 listed banks)
t = time series variable (Annual time series)
APRIORI EXPECTATION
β1, β2, β3, β4, β5, β6> 0

3.6 Materials and Methods

The aim of this study is to explore the bank specific factors that influence the liquidity of
Nigerian commercial banks. It uses the ex post facto research design. The bankspecific factors
whose relationship with bank liquidity is investigated include loan to deposit ratio, total capital
ratio, ratio of impaired loans to total loans, ratio of interest expenses to total deposits, return on
assets, return on equity and ratio of banking assets to total banking sector assets. Data and
Sample The study investigates the secondary data of seven commercial banks listed on the
Nigerian Stock Exchange pertaining to the period 2001-2015. The banks include Access Bank
Plc, United Bank for Africa Plc, First Bank of Nigeria Plc, GT Bank Plc, and Union Bank of
Nigeria Plc, Zenith Bank Plc and Wema Bank Plc. They are selected to represent twenty-four
licensed commercial banks operating in Nigeria based on judgmental sampling technique.
Coincidentally, five of the sampled banks were among the ten largest banks in Nigeria according
to the report of Financial Times Group of London, (Sherif, 2016). The banks are considered to be

13
adequately representing the commercial banking sector for the purpose of this study. The data
have been extracted from various audited annual reports of the sampled banks as well as the
relevant CBN statistical bulletins. Based on literature, some significance variables expected to
have major impact on bank liquidity have been selected for the study. These bank- specific
factors are used for the study since they can be influenced through the business strategy
employed by the banks. Unlike the macroeconomic factors, these variables are under the direct
control of the management team of their respective banks. In this way, the researchers are in a
position to comprehend and underline how business decisions influence the overall liquidity of a
Nigerian commercial bank. The summary of the variables has been provided in Table 1. The
details of proxy of measurement, notation and expected relationships with liquidity are also
exhibited in this table. The dependent variable considered in this work is liquidity (total loans
over total banking assets). Independent variables investigated here include bank specific-
variables, namely total capital ratio, total impaired loans over total loans, interest expenses over
deposits, return on equity, return on assets, and total banking assets over total banking sector
assets. The Ordinary Least Squares statistical technique is used to run the regression after
confirming the normality and stationarity of the time-series data through the unit root,
cointegration and other relevant diagnostic tests.
Table 1: Summary of variables and expected relationship of independent variables with
dependent variable

Variables Measurements Notation Expected effect

Dependent Variables

Liquidity Total loans/Total asset Liquid -

Independent variables
total capital ratio Equity capital over total assets TCR Positive
Impaired loan over total loans Total impaired loan over total loans of bank ILTL Negative
Interest expenses over deposits Total interest expenses over total deposits of bank IED Positive
Return on equity Total return over total equity capital of bank ROE Positive
Return on assets Total return over total assets of bank ROA Negative/Positive
Total banking assets on total sector assets Total assets over total sector Assets TATSA Negative

Variables Description

These variables are described based on the past literature on bank liquidity.

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Dependent Variable

Liquidity

Some researchers like Delechat et al, (2012) and Vodora (2012) calculate bank liquidity
as the ratio of liquid assets over total assets. Vodora (2012) considers this ratio as the most
popular indicator for bank liquidity. However, to calculate the liquidity of banks analyzed, this
study employs a very common liquidity indicator earlier used in the study by Roman and Sargu
(2013), namely total loans over total banking assets. The advantage of the ratio of loans to total
assets is that it is easy to calculate. Liquidity is required by all commercial banks for carrying out
their daily operations. It ensures the availability of funds when there is expected or unexpected
demand for cash by customers. In this study, liquidity was treated as the dependent variable.

Independent Variables

Total Capital Ratio

According to Anamika & Sharma (2016), capital ratio is the ratio of the capital which a
bank must maintain for the purpose of absorbing the loss which arises from statutory capital
requirements. It is considered by Munteanu (2012) as a buffer against losses which arise in
business. It assists banks to stabilize and recover from uncertain shocks. A bank with high capital
ratio is considered to be less risky when compared with others with low capital ratios. Capital
adequacy ratio (Tier 1) has a positive relationship with bank liquidity. On the contrary,
researchers like Roman and Sargu observed a negative link between bank liquidity indicator and
total capital ratio. For the purpose of this study, capital ratio was proxied by the ratio of owners’
equity capital to total assets.

Ratio of Impaired Loans to Total Loans (ILTL)

An increase of impaired loans to total loans is expected to have a negative link with bank
liquidity because when bank loan becomes impaired, liquid assets turn illiquid. Hence, an
increase in the total impaired loans to total loans will tend to translate to a decrease in bank
liquidity. A bank whose impaired loans are on the increase will be inclined to reducing its
lending operations until it is able to reverse the negative trend.

15
Return on Equity (ROE)

A positive relationship is expected to exist between a bank’s return on equity and its
liquidity indicator. The explanation for this is that, as bank shareholders contribute more capital
as a result of new prudential requirements, they would also expect an increase in their returns.
ROE is calculated as Profit after tax divided by total owners’ equity.

Return on Assets (ROA)

When a bank becomes increasingly profitable, the liquidity requirements become less
stringent. Consequently, there emanates a negative connection between return on assets and a
bank’s liquidity (Bonfim and Kim, 2012). On the other hand, there are situations when
profitability, proxied by return on assets, can have a positive relationship with bank liquidity
(Anamike and Sharma, 2013). ROA is calculated as Profit after tax divided by Total assets.

Ratio of Total Banking Assets to Total Banking Sector Assets (TATSA)

This ratio refers to a bank’s share of the total banking sector assets. It has to do with a
bank’s size as compared with the size of the entire banking sector. The size of a bank may have
some specific risks. According to Dele chat et al (2012), size affects bank liquidity negatively.
Large sized banks are capable of arranging for funds from external sources while small banks
would require maintaining adequate liquidity each moment. The implication is that an increase in
bank size (assets) brings about a decrease in its liquidity buffer.

Interest Expenses over Deposits

As banks attract additional deposits in order to comply with new regulatory guidelines
regarding liquidity, they may be faced with paying higher interest charges for the extra deposits
compulsorily. The implication is that there is a positive effect of interest expenses to deposit ratio
on bank liquidity.

16
Techniques of Analysis

This study analyzed the cross sectional and time series data of the sampled Nigerian
deposit money banks for the period 2001 to 2015. The summary statistics of the bank specific
variables employed are presented in Table 2. After carrying out the necessary diagnostic tests,
unit root and cointegration tests, we observed that the data were stationary. With stationarity
being in place, any possible shocks were expected to have died down over the period of the time
series. Consequently, we were enabled to employ the Ordinary Least Squares (OLS) technique to
analyze the time-series data so as to estimate the impact of the explanatory variables on the
dependent variable. The OLS technique was adopted to run the regression because it is generally
considered as the best linear unbiased estimator (Koutsoyian is, 1973).

17