CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Banks are among the most important financial institutions that contribute

efficiently to the growth of any economy. Trey are the principal financial bedrock

of the economy by sourcing funds from the surplus sector and transfer same to

develop the deficit sector of the same economy. Agbada and Osuji opined that in

every system, there exist major components that are important for the survival of

the system which the financial system represents [1]. The banking institutions

have contributed significantly to the effectiveness of the entire financial system as

they offer an efficient institutional mechanism through which resources can be

mobilized and directed from less essential uses to more productive investment.

Banks perform financial intermediation in the general banking business which

involves the mobilization of funds from excess or surplus units of the economy

and giving out to deficit units as loans and advances. The performance of these

functions by bank opens them to several risks; prominent among these is

liquidity risk. Liquidity risk is the risk of loss to a bank resulting from

its inability to meet its needs for cash. The liquidity of a commercial

bank is its ability to fund all contractual obligations as they fall due. The
liquidity risk in the banking industry stems from the nature of their risk

assets management. Tis was supported by Abang when he stated that

these may include lending and investment commitments and deposit

withdrawals and liability maturates, in the normal course of business

[2]. The introduction of banking into Nigeria economy in 1892 with

the establishment of African Banking Corporation which later became

Standard Bank of Nigeria (now First Bank PLC) came with high

expectation to break into the development of Nigeria economy through

the provision of the needed banking services to develop the economy.

Some indigenous banks were established to give financial support to

Nigeria economy, but were all liquidated due to lack of technical ability

to manage such institutions unlike their foreign competitors with

qualified and experienced managers.

Soludo explained the Central Bank of Nigeria recapitalization and

restructuring policy which brought the minimum capital base of each

bank to twenty five million.

To minimize risk in the management of risk assets in Nigeria banks,

the CBN issued a policy, which addresses risk asset management, corporate

governance, know your customer (KYC), anti-money laundering, counter

financing of terrorism, loan loss provisioning, peculiarities of different loan types

and financing sectors of the economy. The CBN in the new guidelines directed

banks to prepare comprehensive credit policy to be approved by the Board of

Directors.

According to CBN (2010) and Price Waterhouse PW (2017), nonperforming loans

are categorized into:

1. Substandard (overdue greater than 90days)

2. Doubtful (180-360days)

3. Lost (greater than 360days). Non-performing specialized loans are classified

into:

1. Watchful

2. Substandard,

3. Doubtful,

4. Very doubtful

5. Lost

The loss recognition criteria for specialized loans greater than 90 days, interest

must be suspended. If it is between 90-180 days, in addition to interest suspended,

the bank must make full provision for principal.

The banking system has an important role in the financial system so that is part of

the financial markets and working with each other to provide services where that

bank failures extends to the financial and economic system of the state failure

(Kumbirai & Webb, 2010). The banking system must keep up with technology

constantly so that can compete banks in the market and reduce the risk,

especially when the entry of foreign banks into the domestic market, or as noted

recently after a period of global financial crisis entry Islamic banks, which had a

clearly, the positive effect on performance, which became necessarily adopt the

ideas or

the Islamic methodology in the granting of credit as a safe way of thinking by

many foreign banks. Banks also always tried to think of how to exploit the

technology as a way to reduce the risk in terms of the introduction of electronic

cards and the internet as a quick service to customers, which achieves satisfactory

of customers, which is reflected in the financial performance and thus reflected

the risks (DeYoung, 2001). Owojori et. al. (2011) found the nature of the work of

banks which falls many risks, especially on the credit portfolio of loans and so-

called risk of default. Crouhy et. al. (2006) found is another risk rating of banks,

which

include market risk, credit, liquidity, operational risk, business risk, strategic risk
and reputational risk in the sense that there are internal and external risks

affecting the banking sector. This purpose of this study to demonstrate the impact

of the deposit structure on the risky assets based on capital adequacy (funding)

through total regulatory capital and risk of default ratio.

1.2 Statement of the Problem.

There have been several series of studies on the effect of deposit structure on risk

asset funding in banking industries. However, empirical studies on deposit

structure and its connection on risk asset funding in banking industries, especially

in Nigeria, are very scanty. Also, after the bank consolidation exercise in Nigeria,

there has not been any serious research on how the emerging deposit structure

has affected risk asset funding. Most banks in Nigerians have not been taken the

advantage of debt in their deposit structure mix as reflected in their financial

statements.

Also, most empirical studies that analyze the relationship between deposit

structure and risk asset funding have been done for individual countries, thus

limiting the generalizability of the results of such studies. The purpose of this

study is to fill the gap related to deposit structure and risk asset funding in banks.

Studies into the deposit structure and risk asset funding have ignored possible

endogeneity of deposit structure and risk asset funding. The deposit structure
may be correlated with risk asset funding. Ignoring possible endogeneity may lead

to inconsistent estimates (see Wooldridge, 2002 and Cameron and Trivedi, 2005).

Due to inadequacy in deposit structure, the banking sector affected. To

determined effectors such as tangibility, liquidity, interest rate, profitability, size

and growth rate that measure the performance of banks in Nigeria.

1.3 Purpose of the Study

The general objective of the study is to examine the impact of the deposit

structure on the risky assets based on capital adequacy (funding) through total

regulatory capital and risk of default ratio in the Nigeria banking industry. The

specific objectives are to:

 Explore the effect of deposit insurance fund on the total regulatory capital

ratio of deposit money banks

 Determine the impact of target reserve ratio on total regulatory capital

ratio in the Nigeria banking institutions

 investigate the effect of deposit insurance fund on the risk of default ratio

in the Nigeria banking institutions

 Examine the effect of target reserve ratio on the risk of default ratio in the

Nigeria banking institutions.

1.4 Research Questions

The following is aimed at finding answer to the questions

 What is the relationship between deposit insurance fund and total

regulatory capital ratio of Banks in Nigeria?

 To what extent does target reserve ratio influences total regulatory capital

ratio of Banks in Nigeria?

 How does the deposit insurance fund effect risk of default ratio of Banks in

Nigeria?

 What effect does target reserve ratio have on risk of default ratio of Banks

in Nigeria?

1.5 Research Hypotheses

The following null hypotheses shall be tested in this research work:

Ho1: There is no relationship between deposit insurance fund and total regulatory

capital ratio of Banks in Nigeria.

Ho2: There is no significant relationship between target reserve ratio and total

regulatory capital ratio of Banks in Nigeria.

Ho3: deposit insurance fund has no significant risk of default ratio of Banks in

Nigeria.

Ho4: There is no significant between target reserve ratio have and risk of default

ratio of Banks in Nigeria

1.6 Significance of the Study

 The Government: The study is beneficial to the government in its policy

formulation and review of existing laws, regulations and bye-laws for

achieving maximum efficiency and productivity.

 Future researchers: it will provide an objective view of the effectiveness of

deposit structure and risk asset funding of deposit money banks.

 The General Public: Details of the deposit structure and risk asset funding

of deposit banks are usually kept from the public and as such, this study will

inform the general public on what deposit structure have on banks risk

asset funding.

 Financial Analysts: The study will provide a financial basis and working

effectiveness upon which to examine the effects of deposit structures with

risk asset funding of deposit money banks.

In addition to the aforementioned, this study will also be used by investors and

students at any level who may have vested interest in issues of the Banking sector
integrations through its deposit structure and risk asset funding of deposit money

banks.

1.7 Scope of the Study

The research work at hand deals on the effects of deposit structure on risk asset

funding in Nigeria banking industry. This study will focus on integration practices

and variables with a key focus on deposit Structure, total regulatory capital ratio,

target reserve ratio and risk of default ratio which is a vital part of the integration

process. The period covered by the research is eleven (11) years period 2006-

2017. Based on the availability of uniform data on the variables informed the

researcher’s choice of the period of analysis. The scope of this research work is

also limited to the geographical boundary of the Nigerian economy and as such

will concentrate on the Bank varying annual performance which includes the

Return on Asset and Equity, over the eleven years’ time frame.

1.8 Limitations of the Study

Factors that affect the smooth execution of the project include inadequate

finance and time constraint affecting the collection and sourcing of relevant

materials and resources that will be needed to guide the research work analysis.

It will be quite tasking to fully analyze and explain the overall impact of monetary

policy as regards deposit structure because it will be difficult to cover all possible

variables and their effect on risk asset funding because of the time and non-

quantitative nature of some variables such as moral suasion.

Errors from data collected due to the state and nature of the banks may also add

to the limitations, the inability of the researcher to authenticate his data would be

a limitation. However, this will not limit this study.

1.9 Definition of Terms

Deposit Structure: The deposit structure is how a firm finances its overall

operations and growth by using different sources of funds.

Deposit insurance fund: The Deposit Insurance Fund (DIF) is a private insurance

provider devoted to ensuring the deposits of individuals covered by the Federal

Deposit Insurance Corporation (FDIC). The money in the Deposit Insurance Fund

(DIF) is set aside to pay back the money lost due to the failure of a financial

institution.
Risk Asset: A risk asset is any asset that carries a degree of risk. Risk asset

generally refers to assets that have a significant degree of price volatility, such as

equities, commodities, high-yield bonds, real estate, and currencies.

Banks: A bank is a financial intermediary that creates credit by lending money to a

borrower, thereby creating a corresponding deposit on the bank’s balance sheet.

Bank Deposit: Bank deposits are made to deposit accounts at a banking

institution, such as saving accounts, checking accounts and money market

accounts. The account holder has the right to withdraw any deposited funds, as

outlined in the terms and conditions of the account.

Bank Assets: The asset portion of a bank’s capital includes cash, government

securities and interest-earning loans like mortgages, latter’s of credit and inter-

banks loans.

Target Reserves Ratio: Target reserve means an amount equal to the greater of

(x) 50% of all scheduled Target Capital Expenditures that are not yet payable or (y)

100% of all Target Capital Expenditures that are payable but not yet paid.

Total regulatory capital ratio: The Total Capital Ratio (“TCR”) is defined as TCR =

Total Capital / Risk Weighted Assets: Total Capital is the total of the Bank's eligible
Capital and Reserves; Risk Weighted Assets are the credit institution's assets or

off-balance sheet exposures weighted according to risk.

Risk of default ratio: Default risk is the risk that a lender takes on in the chance

that a borrower won't be able to make required debt payments. A free cash flow

figure that is near zero or negative could indicate a higher default risk.

1.10 Organization of the study

This study comprises of five chapters. Chapter one concerns itself with the

introductory aspect of the study which gives an insight into the subject matter of

the study. This chapter provides the intended direction of the study and under it

are such issues as the overview, statement of the problem, objectives,

hypotheses, significance, scope, limitations, Organization and definition of terms.

Chapter two reviews related literature on deposit structure and risk asset funding

of deposit money banks in Nigeria. Chapter three describes the methodology;

chapter four forms the core part of the study which deals with the presentation

and analysis of data collected from the study. Chapter five is devoted to the

discussion of findings, conclusions, and recommendations of the research.

 CHAPTER TWO

LITERATURE REVIEW

2.1 Conceptual Framework

2.1.1 Concept of Deposit Structure

A bank’s deposit structure refers to the mix of its financial liabilities. As financial

capital is an uncertain but critical resource for all firms, suppliers of finance are

able to exert control over firms. There are two different ways of financing the

assets of an organization, through equity or debt. Deposit structure refers to the

way a

corporation finances its assets through some combination of equity and debt

(Tsai, 2010). However, there are several kinds of equity and debt according to Mc

Menain (1999) and Ross, et al (2005). These are common stock, preferred stock

and retained earnings (untaxed reserve) reserve as well as bank loans, bonds,

account

payable and line to credit. Deposit structure according to Song (2005) refers to

the mix of different types of securities (long term debt, & common stock) which

are issued by a company to finance its assets. Chou (2007) sees deposit structure

as a mixture of debt and equity financing of a firm. Deposit structure according to

Wikipedia (2010), refers to the way a corporation finances itself through some

combination of equity, debt or hybrid securities. From all the definitions above, it

is eminent that deposit structure in summary refers to the structure of a firm’s

liability. Hence, the deposit structure theory is highly relevant to the firm’s safety

and growth, as well as the debt holders safeguard for a sustainable economy.

How to plan financing decision using a particular means or mix of funding to

maintain a proper deposit structure is an important issue of concern demanding

urgent attention for financial managers if their sector is ever to play a major role

in economic development.

Leverage is defined as the sensitivity of the value of equity ownership with

respect to changes in the underlying value of the firm. Empirically, leverage ratios

are frequently independent variables (sometimes as part of a hypothesis, or

sometimes as a control). Leverage ratios are also the dependent variable in the

empirical deposit structure literature. This literature tries to explain variations in

corporate leverage, both in the cross section of deposit structure (i.e. why some

firms have high leverage) and in the time series (how deposit structures evolve).

Deposit structure refers to the firm’s financial framework which consists of the

debt and equity used in financing the firm. The ability of companies to carry out

their stakeholders need is tightly related to deposit structure. Therefore, this

derivation is an important fact that we cannot omit. Deposit structure in financial

term means the way a firm finances its assets through the combination of equity,

debt hybrid securities (Sa‟ad, 2010). In short, deposit structure is a mixture of a

company’s debts (long term and short term), common equity and preferred

equity.

Deposit structure is essential on how a firm finances its overall operations and

growth by using different sources of funds. Modigliani &Miller (MM) theorem is

the broadly accepted deposit structure theory because it is the origin of deposit

structure theory which had been used by many researchers. According to MM

theorem, these deposit structure theories operate under perfect market. Various

assumptions of perfect market such as no taxes, rational investors, perfect

competition, absence of bankruptcy costs and efficient market. MM theorem

states that deposit structure of finances of a firm is not related to its value in

perfect market. For this purpose, deposit structure can simply be defined as a

firm‟s financial framework, which comprises of a firm retain earnings, debt

financing and equity financing in order to maintain the business entity in financing

its assets.

2.1.2 Concept of Risk Asset Funding

Risk means the perceived uncertainty connected with some event. For example,

will the customer renew his or her loan? Will deposit liabilities grow next month?

Will the bank’s stock price and its earnings increase in the future? Are interest

rates going to rise or fall next week and will the bank lose income or value if they

do? Bankers maybe most interested in achieving high stock values and high

profitability, but none can fail to pay attentions

to the risks they are attached to these decisions. Bankers are concerned with

many types of risks such as credit risk, liquidity risk, market risk, interest rate risk,

earnings risk, foreign exchange risk and solvency risk (Chen, 2012; Kargi, 2011).

Kithinji, (2010) assessed the effect of credit risk management on the profitability

of commercial banks in Kenya. Data on the amount of credit, level of non-

performing loans and profits were collected for the period 2004 to 2008. The

findings revealed that the bulk of the profits of commercial banks are not

influenced by the

amount of credit and non-performing loans, therefore suggesting that other

variables other than credit and non-performing loans impact on profits. The study

did not examine the casual link between risk management and performance

of deposit money bank rather the casual link was established on sectoral level.

Also the Nigeria economy in specific and the world in general were partially
explained by Felix and Claudine, (2008), the writers centered their work on

impacts causes, natures of risk management. A bank exist not only to accept

deposit but also

to grant credit facilities and therefore is inevitably exposed to credit risk. In other

words, the intermediation function of a bank naturally exposes them to credit risk:

Credit risk is by far the most significant risk faced by banks and the success of their

business depends on accurate measurement and efficient management of

credit risk more than any other risks (Gieseche, 2004). Chen and Pan (2012) argue

that credit risk is the degree of value fluctuations in debt instruments

and counterparties. Coyle (2000) defines credit risk as losses from the refusal or

inability of credit customers to pay what is owed in full and on time. Credit risk is

the exposure faced by banks when a borrower (customer) defaults in

honouring debt obligations on due date or at maturity. The risk interchangeably

called “counterparty risk‟ is capable of putting the bank in distress if not

adequately managed. The credit risk policies are measures employed by banks

management and is crucial to banks so as to enhance profitability and guarantee

its

survival. The main sources of credit risk include, limited institutional capacity,

inappropriate credit policies, volatile interest rates, poor management,

inappropriate laws, low capital and liquidity levels, direct lending, massive

licensing of banks, poor loan underwriting, laxity in credit assessment, poor

lending practices, government interferences and inadequate supervision by the

regulators (Kithinji, 2010). An increase in bank credit gradually leads to liquidity

and solvency problems. Credit risk may increase if the bank lends to borrowers, it

does not have adequate knowledge about. Credit risk management maximizes

bank’s risk adjusted rate of return by maintaining credit risk exposure within

acceptable limits in order to provide framework for understanding the impact of

credit risk

management on banks‟ profitability (Kargi, 2011). Types of Risk in providing

Banking Services Nnanna (2003) observed that the risks associated with banking

sector can be grouped into the following types: Credit risk, Liquidity Risk, Interest

rate risk, Market risk, Currency risk, Balance sheet structure, income structure

and capital adequacy country and transfer risk, legal risk. He further restated that

the above types of risk, capture almost all the risk arising from the

normal day-to-day activities of banks and are applicable to bank that operate

both

internationally and locally. The Basel Accord Committee, however, noted

that the fundamental requirements for a good management of the above risks are
for the banks to identify and measure the risk accurately. (Basel Accord

Committee Report 2009) The risks associated with the provision of banking service

differ by the types of services rendered. For the sector as a whole, however the

risk can be broken into five generic types: systematic/market risk, credit risk,

counterpart

risk, liquidity risk, and legal risks.

2.1.2.1 Systematic Risk

This type of risk is referred as the risk arising from asset value change associated

with systematic factors. It is sometimes referred to as market risk, which is

somewhat an imprecise term. (Nnanna, 2003) observed that a market

risk is the risk arising from capital loss resulting from adverse market price

movement. By its nature, this risk cannot be diversified complete

away. In fact, systematic risk can be thought of an undiversifiable risk. All

investors assume this type of risks, whenever assets owned or claims can change

in value as a result of broad economic factors. Because the banks are dependent
on these systematic factors, they must try to estimate the impact of these

particular risks on performance.

2.1.2.2 Credit Risk

Credit risk refers to delinquency and default by borrowers, that is failure to make

payment as at when due or make payment by those owing the firm. The need to

include delinquency derives from the importance usually attached to the time

value of money in financial analysis: one naira received today is worth more than

one naira received in the future. While delinquencies indicate delay in payment,

default, denotes nonpayment and if the former is unchecked, leads to the latter.

The exposure to credit risk is particularly large for financial institutions such as

commercial and merchant banks. When firms borrow money, they are in turn,

exposes to credit risk. However, credit risk arises from nonperformance by a

borrower. It may arise from either an inability or unwillingness to perform in

the contacted transactions. This can affect the entity holding the loan contract as

well as other lenders to the creditors. As a consequence, borrowing exposes the

firm’s owners to the risk that the firm generally will have to pay more to

borrow money because of credit risk.

 It reduces the business value of the bank that granted the loan and destabilized

the credit system.

 Cost of administration of overdue loan tends to increase and defaults push up

lending costs without any corresponding increase in loan turnover.

 Default reduces the resources base for further lending, weaken staff morale, and

affect the borrower’s confidence. The identification of credit risks and exposure to

loss is perhaps the most important element of the credit risk management

process. Unless the sources of possible losses delinquencies and defaults are

recognized. It is impossible to consciously choose appropriate, efficient methods

for dealing with these losses when they occur. The credit risk management unit of

the bank will need to draw a checklist of causes of delinquencies and default in

their operations.

2.1.2.3 Counterpart Risk

Nnanna (2003) referred this type of risk arising from the economic, social and

political environment in the borrower’s home country (country risk) and the risk

present in loans that are denominated in the borrower’s local currency (Transfer

risk).Moreover, counterparty risk comes from non-performance of a trading

partner. The non-performance may arise from counterpart refusal to perform due
to an adverse price movement caused by systematic factor or form some other

political or legal constraint that was not anticipated by the principal.

Diversification is the major tool for controlling non-systematic counterpart risk.

Counterpart is like credit risk, but generally viewed as a more transient financial

risk associated with trading that standard creditor default risk.

2.1.2.4 Liquidity Risk

Nnanna (2003) defined liquidity risk as the risk from bank having insufficient funds

on hand to meet its current obligation. Santomero (1984) described liquidity risk

as the risk of finding crisis. While some would include the need to plan for growth

and unexpected expansion of credit, the credit here is seen more correctly as

the potential for a funding crisis. Such a situation would inevitably be associated

with an unexpected event, such as a large charges off, loss of confidence or crisis

of national proportion such as a currency crisis. One of management‟s

fundamental responsibilities is to maintain sufficient resources to meet liquidity

requirements, as when cheque are presented for payment, deposits mature and

loan request are

funded. Managing liquidity risk forces a bank to estimate potential deposit losses

and renew loan demanded.

2.1.2.5 Legal Risk

Legal risks are endemic in financial contracting and are separate from the legal

ramification of credit, counter party and operational risk. Risk that a bank‟s

contract or claims will be enforceable or that court will impose judgment

against them. It covers the risk of legal uncertainty due to the lack of clarity of

laws in localities in which the bank does business (Nnanna, 2003); examples of

legal risk are fraud violation of regulation or laws and other actions that can lead

to catastrophic loss.

Classification of Risks

Generally, banking can be classified broadly into four categories: These are

financial risks, operational and event risk, business risk and event risk

Financial Risks: Financial risks are further disaggregated into pure and speculative

risks. Pure risks which include liquidity, credit and solvency risks can result in a loss

for bank, if they are not properly managed. Speculative risks, based on financial

arbitrage, can result in a profit if the arbitrage is positive or loss, if it is negative.

The main categories of speculative risks are interest rate, currency and market
price

(or position) risks.

2.1.2.6 Operational Risks: Operational risks are related to a bank’s overall

organization and functioning of internal systems, including: computer related and

other technologies, compliance with bank policies and procedure and measure

against management and fraud.

2.1.2.7 Business Risks: Business risk are associated with a bank business

environment including: macroeconomic and policy concern, legal and regulatory

factors and the overall financial sector infrastructure and payment system.

2.1.2.8 Event Risks: Event risks include all type of exogenous risk which, if they

are to materialize could jeopardize a bank’s operations or undermine its financial

condition and capital adequacy.

2.2 Theoretical Framework

This section discusses theories as well as prior works in which relevant theories to

this research topic are used. Theories are analytical tools for understanding,

explaining and making predictions about a given subject matter. Thus, theories

relevant to this study include cash cycle theory and financial theory All modern
researches have issues with the Modigliani and miller (1958) proposition which

states that in a world of perfect capital market and no taxes, a firm’s financial

structure will not influence Effect of Deposit Structure on the Risk Asset Funding in

Nigeria Banking Industry. This proposition submitted that firms in a given risk

class would be unaffected by financial gearing (Weston and Copeland 1998).

Borigham and Gapenski (1996) argued that an optimal deposit structure can be

attained if there exist a tax sheltering benefits provided an increase in debt level

is equal to the bankruptcy costs. They suggest that managers of a firm should be

able to identify when the optimal deposit structure is attained and try to maintain

it at that level. This is the point at which the financing costs and cost of capital are

minimized thereby increasing firms‟ value and performance. The traditional view

advocated that the value of the firm can be increased or the cost of capital can be

reduced by the judicious mix of debt and equity capital. This theory very clearly

implies that the cost of capital decreases within the reasonable limit of debt and

then increases with leverage (Solomon 1963). Thus, an optimum deposit structure

exists and occur when the cost of capital is minimum or the value of the firm is

maximum. The cost of capital declines with leverage because debt capital is

cheaper than

equity capital within reasonable or acceptable limit of debt. The statement that
debt funds are cheaper than equity funds carried the clear implication that the

cost of debt plus the increase cost of equity together on a weighted basis will be

less than the cost of equity which existed on equity before debt financing (Barges

1963).

The study built on Modigliani and Miller theory which state that financial

structure is invariant with market value of the firm.

2.2.1 The Trade-Off Theory

The trade-off theory of Deposit structure states that a firm’s choice of its debt –

equity ratio is a trade-off between its interest tax shields and the costs of financial

distress. The theory further suggests that firms in the same industry should have

similar or identical debt ratios in order to maximize tax savings. The tax benefit

among other factors makes the after-tax cost of debt lower and hence the

weighted average cost of capital will also be lower. This theory allows bankruptcy

cost to exist. It states that there is an advantage to financing with debt (the tax

benefits of debt) and that there is a cost of financing with debt (the bankruptcy

costs

and the financial distress costs of debt). The marginal benefit of further increases

in debt declines as debt increases, while the marginal cost increases, so that a
firm that is optimizing its overall value will focus on this trade -off when choosing

how much debt and equity to use for financing (Modigliani and Miller

(1963).Furthermore Brigham and Gapenski (1996) argue that an optimal deposit

structure can be obtained if there exist tax benefit which is equal to the

bankruptcy cost. It can be concluded that, there is an optimal deposit structure

where the weighted average cost of capital is at its minimum. However, as a firm

leverage ratio rises, tax benefits will eventually be offset by increases bankruptcy

cost. The

trade-off theory sought to establish an optimal deposit structure where the

weighted average cost of capital will be minimized and the firm value maximized.

At the optimal level of deposit structure, tax benefit will be equal to bankruptcy

costs. Despite the theoretical appeal of debt financing, researchers of deposit

structure have not found the optimal deposit structure (Simerly& Li, 2002).

2.2.2 Agency Theory of Deposit Structure

The agency cost theory of deposit structure emanates from the principal-agent

relationship (Jensen and Meckling, 1976). In order to moderate managerial

behavior, debt financing can be used to mediate the conflict of interest which

exists between shareholders and managers one hand and also between
shareholder

and bondholders on the other hand. The conflict of interest is mediated because

managers get debt discipline which will cause them to align their goals to

shareholder’s goals. Jensen and Meckling (1976) and Jensen and Ruback (1983)

argue that, managers do not always pursue shareholders interest. To mitigate this

problem, the leverage ratio should increase (Pinegar Effect of Deposit Structure

on the Risk Asset Funding in Nigeria Banking Industry and Wilbricht, 1989). This

will force the managers to invest in profitable ventures that will be of benefit to

the shareholders. If they decide to invest in non-profit tax businesses or

investment and are not able to pay interest on debt, then the bondholders will

file for bankruptcy and they will lose their jobs. The contribution of the Agency

cost theory is that, leverage firms are better for shareholders as debt can be used

to monitor managerial behavior (Boodhoo, 2009). Thus, higher leverage is

expected to lower agency cost, reduce managerial inefficiency and thereby

enhancing firm and managerial performance (Jensen 1986, Koehhar 1996, Aghion,

Dewatnipont and Rey, 1999).

2.2.3 Pecking Order Theory of Deposit Structure

The pecking order theory is geared towards the signaling effect of the use of debt

financing. According to the pecking order theory firms prefer financing their

operations from internally generated funds, because the use of such funds does

not send any negative signal that may lower the stock price of the firm. If internal

finance is required, firms prefer to issue debt first before considering the issue of

equity. The theory tries to capture the costs of asymmetric information. It states

that companies prioritize their sources of financing (from internal financing to

issuing shares of equity) according to least resistance, preferring to raise equity

for financing as a last resort. Internal financing is used first. When that is

depleted, debt is issued. When it is no longer sensible to issue any more debt,

equity is issued. This theory maintains that businesses adhere to a hierarchy of

financing sources and prefer internal financing when available, while debt is

preferred over equity if external financing is required. Thus, the form of debt a

firm chooses can act as a signal of its need for external finance. This pecking order

occurs because issuing debt is less likely to send a negative signal to investors. If a

firm should issue equity, it sends a negative signal to investors that the firm’s

share prices are overvalued that is why the managers are issuing equity. This will

cause investor to sell their shares leading to a fall in the stock price of the firm. A

share issue is thus interpreted by the market as a bad omen but debt is less likely
to be interpreted this way. Firms therefore prefer to issue debt rather than equity

if internal finance is insufficient. The pecking order theory is therefore a

competing theory of deposit structure that says firms prefer internal financing.

2.3 Review of Empirical Studies

The available written literatures provide abundance of research which intends to

look at the relationship between deposit structure and Deposit Money Banks

performance. Empirical results and arguments have gone both ways.

Some researchers document that there is positive relationship between deposit

structure and firm performance, whereas others oppose by arguing that there is a

negative effect on firm performance. Yet, there are some of the

empirical evidences that yield contradictory and inconsistent findings.

The extant literature abounds with empirical studies on deposit insurance, asset

quality, banks performance and risk assets with findings either mixed or

inconclusive. Demirgüç-Kunt and Detragiache (2002) studied the behaviour of

banks cutting across 61 countries and discovered that the adoption of DIS had the

tendency to considerably increase the probability of systemic banking crises. In

the same vein studies like those of Wheelok (1992) and Thies and Gerlowski

(1989) revealed that a significant and positive correlation exists between

excessive risk taking by DMBs and the implementation of DIS. Karabulut and Bilgin

(2007) estimated the relationship between instituted deposit insurance and risk

assets’ quality in the context of the Turkish banking industry. Their study provides

empirical evidence that despite the fact that deposit insurance significantly

reduced incidences of bank runs, DMBs had resorted to excessive acquisition of

risk assets beyond reasonable limits; thus, increasing the volume of non-

performing loans among Turkish banks. Davis and Obasi (2009) examined data

from 914 banks

cutting across 64 countries and discovered that there was no correlation between

increase in risk assets acquisition by banks and adjusted collateral requests; hence

they concluded that DIS can only thrive in countries with stable institutional

environment. Towing the same line of arguments of extant studies, Forssbæck

(2011), in his study posit that the implementation of DIS to a large extent,

incentivised banks to acquire more risks assets rather than acting as a financial

safety net. Chernykh and Cole (2011) conducted an exhaustive study of 800

banking institutions in Russia and observed marked decline in the quality of bank

assets arising from the implementation of DIS. Equally, an increase in the ratio of

loans to total assets coupled with a corresponding decrease in the ratio of equity

to total assets was observed. The study therefore concluded that deposit
insurance

negatively impacted on bank deposits and assets. However, despite the above

research outcomes, some theorists still disagree with the generally held notion

that the implementation of deposit insurance is inimical to the health of a

country’s banking industry. For instance, Gueyie and Lai (2003) in their study

found no empirical evidence that deposit insurance predisposed banks to

increased risks and thus advocated risk based deposit insurance. Similarly, Gropp

and Vesala (2001, 2004) in their study of 73 area banks in Europe discovered a

significantly positive relationship between bank profitability and deposit

insurance and concluded that the risk appetite of DMBs actually reduces with the

adoption of deposit insurance. These findings corroborate the result of an earlier

study by Karels and McClatchey’s (1999) who examined data relating to credit

unions in the United States. Additionally, Enkhbold & Otgonshar (2013) in their

research cutting across 31 Asian countries obtained and analysed data from a

sample of 401 banks. Findings from the study revealed that banks exhibited

increased market discipline arising from the implementation of DIS. Conclusively,

Demirgüç-Kunt and Huizinga (1999, 2013) posits that the well-being of a nation’s

banking sector is principally driven by the design and faithful implementation of

its DIS. But no doubt, it is believed that the effectiveness of such scheme largely
depends on stable institutional environment vis a vis other economic factors like

bank capitalization, interest rates management, and effective regulatory oversight

which enhances financial systems stability and simultaneously facilitate seamless

financial intermediation.
 CHAPTER THREE

RESEARCH METHODOLOGY

3.0 Introduction

Research methodology defines what the activity of research is, how to proceed,

measure progress and what constitutes success. It forms the framework which

specifies the type of information to be collected and the source of data and data

collection.

According to Baridam (2001), research methodology is operationally defined as an

activity of investigating the phenomenon experience which leads to new

knowledge, using methods of enquiring, which are currently accepted as adequate

by scholars in the field.

The various areas that were examined in this chapter are as follows:

 Research design

 Population of the study

 Sample size

 Operational Measures of the Variables

 Model specification

 Data analysis technique

3.1 Research Design

The research design is the method and plan used to collect data and test

relationship between the variable hypothesized (Baridam, 2001). In other words, it

has been considered as a “blue print” for research, daring with at list four

problems: what question to study, what data are relevant, what data to collect and

how to analyze the result.

For the purpose of this study, the study employed ex-post facto and survey

designs respectively. Survey research design was used to obtain opinions from

sampled population. Ex post facto research design was adopted to obtain

secondary data from the sampled population to effectively understand the impact

of deposit structure on risk asset funding of deposit money banks. The researcher

employed an ex-post facto research design which implies that it will utilize

secondary data listed on Nigerian Stock Exchange. Information for evaluating such

influences on profitability can best be obtained from the historical data

documented in the annual reports and accounts of the quoted banking industry.

Impliedly the phenomenon observed (the impact of deposit structure on risk

asset funding of deposit money banks).

3.2 Population of the Study

A population is the summation or totality of elements in a given location of

interest. According to Okafor (2002), research population is a complete set of

items, that is of interest to a researcher or investigator.

Basically, The population of this research work encompasses all the banks listed
on the Nigerian Stock Exchange (NSE) as at 31 December, 2022.
Table1 Presents the Population of the Study
S/N Name of The Bank
1 Access Bank
2 Diamond Bank Plc
3 Eco bank Transnational Incorporated
4 Fidelity Bank Nigeria
5 First Bank of Nigeria
6 First City Monument Bank
7 Guaranty Trust Bank
8 Skye Bank
9 Stanbic IBTC Bank Nigeria Limited
10 Sterling Bank
11 Union Bank of Nigeria
12 United Bank for Africa
13 Unity Bank Plc.
14 Zenith Bank
15 Heritage Bank Plc
Source: NSE Fact book, 2017
3.3 Sampling Technique and sample size

A sample is a representative part of the population under observation. For the

purpose of this study, a sample size of one-third i.e. four banks from the
population was picked using judgmental sampling method is the sampling
techniques adopted in this research because it is the fundamental method of
probability sampling. This method uses the principles of randomization, which is a
procedure of giving every subject in the population an equal opportunity of being
selected. The selected banks are:
Table 2 Quoted Banks
S/N Quoted Banks
1 Access Bank
2 First Bank
3 Sterling Bank
4 United Bank for Africa
Source: NSE Fact-book, 2022

3.4 Operational Measures of the Variables

A variable is a measurable characteristic of a person, object, place or events.

According to Joe (2005), variables are conditions or characteristics that a

researcher observes, manipulates, control and measure in order to obtain relevant

data that will address his research question and research variables.

The major variables for the study are deposit structure measured by Deposit

Insurance Fund and Target Reserved ratio. While risk Asset Funding is measured

by Total Regulatory Capital Ratio and Risk of Default Ratio.

3.5 Model of Specification

The main aim of this study is to examine the Impact of Deposit structure on Risk

Asset Funding in Banking Industry. The model is specified of the functional form:

RAit = α0 + b1 DIFit + b2 TRRit +εit

Where dependent variable is RAit = Risk asset and measured by (TRCR) and

(RODR). But the two independent groups are (DIF + TRR) and the researcher

classified this general model to test two hypotheses of the study as the following:

TRCRit = α0 + b1 DIFit + b2 TRRit +εit (1)

RODRit = α0 + b1 DIFit + b2 TRRit +εit (2)

Where;

RA = Risk Asset

TRCR = Total Regulatory Capital Ratio

RODR = Risk of Default Ratio

DIF = Deposit Insurance Fund

TRR = Target Reserved Ratio

εit = error term

3.6 Data Analysis Technique

The techniques of data analysis used are purely quantitative method of data
analysis. In this method, the researcher uses correlation/regression analysis
techniques. This method(s) of data is chosen because it establishes the impact of
relationship between Deposit Structure and Risk Asset Funding in the banking
industry.
The formula in mathematically calculated thus:
r= N∑ xy – (∑ x ¿( ∑ y)
[N∑x2 – (∑x)2][N∑y2 – (∑y)2]
Where

N = number of pairs of scores

∑ xy = Sum of the products of paired scores

∑ x = Sum of x scores

∑y = Sum of y scores

∑x2 = sum of squared x scores

∑y2 = sum of squared y scores

The methodology also adopted in this study is Co-integration analysis using the

Augmented Dickey Fuller (ADF) unit root test, Johansen co-integration and Vector

Error Correction techniques of estimation which provides coefficient estimates of

the Time series data used in analysis. Also, a test for causality between Deposit

Structure and Risk Asset Funding using Granger Causality Test is carried out.

Time series data covering a period of 11 years will be estimated using Co

integration technique of analysis which is an improvement on the classical ordinary

least square technique (OLS). This technique was chosen as it depicts long-run

economic growth.

The following techniques of estimation are employed in carrying out the co-

integration analysis:

1.8.1 Unit Root Test

This is the pre-Co-integration test. It is used to determine the order of integration

of a variable that is how many times it has to be differenced or not to become

stationary. It is to check for the presence of a unit root in the variable i.e whether

the variable is stationary or not. The null hypothesis is that there is no unit root.

This test is carried out using the Augmented Dickey Fuller (ADF) technique of

estimation. The rule is that if the ADF test statistic is greater than the 5 percent

critical value we accept the null hypothesis i.e the variable is stationary but if the

ADF test statistic is less than the 5 percent critical value i.e the variable is non-

stationary we reject the null hypothesis and go ahead to difference once. If the

variable does not become stationary at first difference, we difference twice.

However, it is expected that the variable becomes stationary at first difference.

1.8.2 Co-integration

After the test for the order of integration, the next step is to test for co-integration.

This test is used to check if long run relationship exists among the variables in the

model (Ogundipe and Alege, 2013). This will be carried out using the Johansen

technique.

1.8.3 Vector Error Correction Model (VECM)

The Vector Error Correction Model (VECM) shows the speed of adjustment from

short-run to long run equilibrium. The a priori expectation is that the VECM

coefficient must be negative and significant for errors to be corrected in the long

run. The higher the VECM, the more the speed of adjustment.

1.8.4 Causality Test

This is used to check for causality between two variables. In this case our aim is to

test for a causal relationship between external debt and economic growth. The rule

states that if the probability value is between 0 and 0.05 there is a causal

relationship.

However, for the research, all calculations are done via the computer using

relevant regression packages

 CHAPTER FOUR

DATA ANALYSIS & INTERPRETATION

4.1 Introduction

This section focuses on the presentation, analysis and interpretation of data

collected through the secondary sources. This analysis of data is necessary to
bring out the result of the research work done and be able to comment on data
results and draw conclusion based on it.

This chapter therefore comprises of the data presentation, estimation and results

of the empirical investigation carried out. It also addresses the impact of

relationship between Deposit Structure and Risk Asset Funding in the banking

industry in the long run. This chapter is further divided into descriptive analysis

which contains the measures of central tendency which include mean, mode,

median as well as measures of variation and other statistical characteristics of the

variables and econometric analysis which focuses on test for unit root, Johansen

test for Co-integration and the Vector Error Correction Model.

4.2 Descriptive Analysis

Various description statistics are calculated from the variables under study in
order to describe the basic characteristics of these variables.

Table4.1 Descriptive Statistics

TRCR RODR DIF TRR

Mean 529.6319 402.7062 63.88115 23.51962

Median 543.2500 401.4250 64.93000 21.50000

Maximum 684.5600 478.2200 85.66000 45.40000

Minimum 410.0200 326.2900 36.25000 3.000000

Std. Dev. 69.06888 36.57816 12.81796 13.98437

Skewness 0.087669 0.173143 0.475953 -0.045553

Kurtosis 2.663357 2.825027 2.497870 1.7755412

Jarque-Bera 0.156078 0.163073 1.254782 1.633575

Probability 0.924928 0.921699 0.533983 0.441849

Sum 13770.43 10470.36 1660.910 611.5100

Sum Sq. Dev 119262.7 33449.05 4107.505 4889.066

Observation 20 20 20 20

Source: Authors compilation from Eviews 10 Software

As can be seen from table 4.1, all the variables are asymmetrical. More precisely,
skewness is positive for all the variables except the target reserved ratio. Kurtosis
values of all the variable also shows data is not normally distributed as the values
of Kurtosis are deviated from 3. The JarqueBera statistics and p-values accept the
normality assumption at 5% level of significant for all the variables.
4.3 Test of Hypotheses
A positive correlation means that as one variables increase in value the second
variable also increase in value. Similarity, as one variable decrease in value the
second variable also decrease in value. Likewise, a negative correlation means
that as one variable increase in value the second decrease in value.
Decision Rule: Reject the null and accept the alternative hypothesis if p-value <
0.05, if otherwise, we accept the null.
Table4.3. Correlation Matrix
TRCR RODR DIF TRR

TRCR 1
RODR 0.7557 1
DIF -0.3257 0.3332 1
TRR -0.6555 0.6073 0.2147 1
Source: Authors compilation from Eviews 10 Software

Table 4.2 above shows that variables are Total Regulatory Capital Ratio (TRCR),
Risk of Default Ratio (RODR), Deposit Insurance Fund (DIF), Target Reserved ratio
(TRR),

From Table 4.2 above, it shows that the variables Total Regulatory Capital Ratio
(TRCR) and Risk of Default Ratio (RODR) are positively related with a significant
value of 0.7557.

Table 4.2 also indicates that the variables Total Regulatory Capital Ratio (TRCR)
Deposit Insurance Fund (DIF) are negatively related with a significant value of -
0.3257.
Table 4.2 above also implies that the variables Total Regulatory Capital Ratio
(TRCR) and Target Reserved ratio (TRR) are negatively related with a significant
value of -0.6555.

4.4 Econometric Analysis

4.4.1 Unit Root Test

This test tries to examine the property of the variables. It is used to check for the

presence of a unit root i.e. no stationarity of the variables. This test is carried out

using the Augmented Dickey Fuller (ADF) test. This is the first test carried out in

the Co-integration analysis and is known as the pre-Co-integration test. The ADF

is carried out using E-Views software package and the results from the test are

tabulated. below:

Table 4.2 Test for Stationarity

AT At 1st

LEVELS DIFFERENCE

Critical Critical
ADF Test Rem ADF Test Remark Order of
Variables Value at Lag Value at Lag
statistic arks Statistic s Integration
5% 5%

TRCR -1.972 -2.960 0 NS -4.544 -2.960 0 S I(1)

RODR -1.950 -2.960 1 NS -3.890 -2.960 0 S I(1)

DIF -1.642 -2.960 0 NS -4.851 -2.960 1 S I(1)

TRR -3.304 -2.960 0 S I(1)

The apriori expectation when using the ADF test is that a variable is stationary

when the value of the ADF test statistic is greater than the critical value at 5%.

The result shows that all the Variables are stationary at first difference except

target reserved ratio which is stationary at level. This indicates that the regression

is no more spurious but real. That is to say, all the variables are individually

stationary and stable.

4.4.2 Johansen Co-integration test

The co-integration test is used to check for long run relationship between the

dependent and independent variables (Ogundipe and Amaghionyeodiwe, 2013).

The co-integration test was carried out using the Johansen technique also using E-

Views software package and it produced the following results:

Table 4.3 Test for Johansen Co-integration Using Trace Statistic

Hypothesized 0.05 Critical

Trace Value Prob.** Trace Statistic
No. of CE(s) Value

None* 0.808381 63.87610 0.0002 86.82273

At most 1 0.466610 42.91525 0.2211 35.60317

At most 2 0.306475 25.87211 0.4830 16.11962

At most 3 0.142745 12.51798 0.6290 4.774616

From the above table the trace indicates one co-integrating equation at 5 percent

level.

Table 4.4 Test for Johansen Co-integration Using Max-Eigen Value

Hypothesized 0.05 Critical Max-Eigen

Eigen Value Prob.**
No. of CE(s) Value Statistic

None* 0.808381 32.11832 0.001 51.21956

At most 1 0.466610 25.82321 0.2740 19.48355

At most 2 0.306475 19.38704 0.4784 11.34501

At most 3 0.142745 12.51798 0.6290 4.774616

From the above table the Max-Eigen value indicates one co-integrating equation at

5 percent level. Based on the above tables we reject the null hypothesis of no co-

integrating equations.
4.4.3 Error Correction Estimates Using Vector Error Correction Model

Table 4.6 Table Showing Vector Error Correction Estimates

Error
D(TRCR) D(RODR) D(DIF) D(TRR)
Correction

CointEq1 -0.292245 -0.221313 0.999894 -16.97928

(0.10918) (0.37499) (0.80216) (25.6926)

[-2.67664] [-0.59018] [1.24649] [-0.66086]

The above table contains the vector error coefficient estimates and standard and

statistics are in parentheses. The apriori for the vector error correction coefficient

(alpha) is that it must be negative. The alpha meets this expectation and this

implies that 29.2245 percent of the errors are corrected in the long run.

4.4.4 Granger Causality Test

Table 4.7 Test for Causality

Null Hypothesis Observations F-Statistic Prob

DIF does not Granger cause TRCR 19 5.65990 0.0242

TRCR does not Granger cause DIF 6.91967 0.0135

TRR does not Granger cause TRCR 19 0.04306 0.8371

TRCR does not Granger cause TRR 5.75002 0.0231

DIF does not Granger cause RODR 19 13.5768 0.0009

 RODR does not Granger cause DIF 0.7892
0.07278

TRR does not Granger cause RODR 19 7.11542 0.0124

RODR does not Granger cause TRR 13.9911 0.0008

TRCR does not Granger cause RODR 19 4.93139 0.0343

RODR does not Granger cause TRCR 0.22009 0.6425

TRR does not Granger cause DIF 19 1.89008 0.1797

DIF does not Granger cause TRR 1.68736 0.2042

Source: Authors compilation from Eviews 10 Software

The Granger causality test results presented in Table 4.7 reveals the direction of

causality the various variables representing Risk Asset Funding (TRCR and RODR)

and Deposit Structure variables (DIF and TRR). The results above indicate that

there is a unidirectional granger causality relationship running from TRCR to DIF

and also from RODR to TRR respectively.

4.5 Conclusion

This chapter focused on the data analysis and interpretation It begin with the

descriptive analysis which contained a summary of data statistics. Next was the

empirical analysis where unit root, co-integration and vector error correction tests

were carried out. The Augmented Dickey Fuller (ADF) test was used to check for
stationarity (presence of a unit root) and to what degree. The test revealed that all

the variables were stationary at first difference except target reserved ratio which

is stationary at level. The Johansen Co-integration test showed long run

relationship among the variables and as such the normalized coefficients were

interpreted. The t-statistic revealed a significant relationship between Total

Regulatory Capital Ratio and Deposit Insurance Fund, Target Reserved Ratio. The

Vector Error Coefficient of concern showed that about 29.2245 percent of the

errors will be corrected in the long run and as such there is a convergence.

This study shows that there is a significant relationship between deposit structure

and asset risk funding. Total Regulatory Capital Ratio and Risk of Default Ratio are

major variables in determining risk asset quality of a bank. These risky items are

important in determining the profitability of banks in Nigeria. Where a bank does

not effectively manage its risk, its profit will dwindle. This means that the profit

after tax has been responsive to the credit policy of Nigerian banks.

Banks become more concerned because loans are usually among the resident of

all assets and therefore may threatened their liquidity position and lead to

distress. Better credit risk management results in better bank performance. Thus,

it is of crucial importance for banks to practice prudent risk management to

safeguard

their assets and protest the investors‟ interest

CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSION & RECOMMENDATIONS

5.1 Introduction

This section highlights the summary of findings, conclusion and the necessary
recommendations based on the data or findings from the research works.
SUMMARY OF FINDING

Based on the test carried out it was discovered that:

 Deposits Structure have a significant positive impact on risk asset funding.

 risk asset management have a significant positive impact on profitability of bank

CONCLUSION

This work is an analysis of the impact of deposit structure on asset risk funding in

the banking industry. In summary, the findings demonstrate succinctly, that the

selected asset risk management funding indicators under study significantly affect

the performance of deposit money banks in Nigeria. But the measure of

relationship differs according to the different performance indicators in line with

Moti, Masinde, and Mugenda, (2012) who observed that bad debts or credit risks,
liquidity risk and capital risk are the major factors that affect bank performance

when profitability is measured by risk of default ratio while the only risk that

affects

profitability when measured by total regulatory capital ratio is liquidity risk.

Therefore, the result of our econometric tests leads us to conclude that there is a

significant relationship between the various risk management indicators

employed in this study and the deposit structure money banks in Nigeria and is in

line with the findings of Kargi, (2011), Chen and Pan (2012), and Boland (2012)

RECOMMENDATIONS

The following strategies are recommended in other to improve banks

performance and profitability in Nigeria.

 Management need to be cautions in setting up a deposit structure and credit

policy that will not negatively affect the operations of their banks in order to

ensure judicious utilization of deposits and maximization of profit.

 CBN for policy making purpose should regularly assess the lending attitudes of

deposit money banks and their effective cash management policies to avoid

insolvency in the financial system.

 Determining the credit worthiness of a customer whether individual or

corporate

organization must be carefully planned.

 A rush into the approval of loan without sourcing adequate and relevant

information on the prospective borrowers must be avoided if the bank wishes to

circumvent delays in the recovery of debt.

 To increase credit volume, the interest rate policy must be considered within

the frame of economic circumstances of the time for low interest rate does

facilities quick repayment and drastically minimize debt failure.

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 APPENDICES

Appendix 1: Table of Data

Year TRCR RODR DIF TRR

2006 5.92 17.36 7.92 22.50

2007 4.29 36.83 8.30 22.66
2008 -9.28 34.11 6.25 16.62
2009 3.91 -64.72 32.80 135.70
2010 -0.04 16.00 15.04 250.85
2011 2.62 -0.28 4.95 17.13
2012 2.89 22.20 3.51 14.34
2013 2.47 23.21 4.12 20.54
2014 3.6 13.89 17.59 32.51
2015 2.7 21.65 10.46 12.34
2016 2.65 4.81 20.13 57.18
2017 6.73 18.67 8.6 10.05
Sources: Central Bank of Nigeria Annual Reports Various Issues.
 Appendix 2: Estimated Results
Augmented Dickey Fuller Test for Stationarity
Null Hypothesis: TRR has a unit root
Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, max lag=2)
t-Statistic Prob.*
Augmented Dickey-Fuller
test -1.642663 0.4498
statistic
Test critical 1%
-3.653730
values: level
5%
-2.957110
level
10%
-2.617434
level
*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(TRR)
Method: Least Squares
Sample (adjusted): 2006 -2017
Included observations: 20 after adjustments
Variable Coefficient Std. Error t-Statistic Prob.
LOGDSP (-1) -0.223450 0.136029 -1.642663 0.1109
C 4.708881 2.893783 1.627241 0.1141
R-squared 0.082522 Mean dependent var -0.041736
Adjusted R
0.051940 S.D. dependent var 0.586516
squared
S.E. of
0.571081 Akaike info criterion 1.777892
regression
Sum squared
9.784019 Schwarz criterion 1.869500
resid
Log likelihood -26.44626 Hannan-Quinn criterion. 1.808257
F-statistic 2.698343 Durbin-Watson stat 1.484370
Prob (F-
0.110895
statistics)
Null Hypothesis: TRR has a unit root
Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, max lag=2)
t-Statistic Prob.*
Augmented Dickey-Fuller
test -4.851131 0.0005
statistic
Test critical 1%
-3.670170
values: level
5%
-2.963972
level
10%
-2.621007
level
*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(TRR,2)
Method: Least Squares
Sample (adjusted): 2006 -2017
Included observations: 30 after adjustments
Variable Coefficient Std. Error t-Statistic Prob.
LOGDSP (-1) -1.145888 0.236210 -4.851131 0.0000
LOGDSP (-1),2) 0.329338 0.179967 1.829989 0.0783
C -0.069045 0.106385 -0.649009 0.5218
Mean dependent
R-squared 0.495724 -0.012138
variance
Adjusted R
0.458370 S.D. dependent variance 0.787232
squared
S.E. of
0.579367 Akaike info criterion 1.840880
regression
Sum squared
9.062997 Schwarz criterion 1.980999
resid
Log likelihood -24.61319 Hannan-Quinn criterion. 1.885705
F-statistic 13.27103 Durbin-Watson stat 2.127873
Prob (F-
0.000097
statistics)
Johansen Test for Co-integration
Sample (adjusted): 2006 -2017
Included observations: 20 after adjustments
Trend assumption: Linear deterministic trend (restricted)
Lags interval (in first differences): 1 to 1

Unrestricted Cointegration Rank Test (Trace)

Hypothesized Trace 0.05
No. of
Eigenvalue Statistic Critical Value Prob.**
CE(s)
None* 0.808381 86.82273 63.87610 0.0002
At most 1 0.466610 35.60317 42.91525 0.2211
At most 2 0.306475 16.11962 25.87211 0.4830
At most 3 0.142745 4.774616 12.51798 0.6290

Trace test indicates 1 cointegrating eq(s) at the 0.05 level

* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values

Unrestricted Cointegration Rank Test (Maximum Eigenvalue)

Hypothesized Max-Eigen 0.05
No. of
Eigenvalue Statistic Critical Value Prob.**
CE(s)
None* 0.808381 51.21956 32.11832 0.0001
At most 1 0.466610 19.48355 25.82321 0.2740
At most 2 0.306475 11.34501 19.38704 0.4784
At most 3 0.142745 4.774616 12.51798 0.6290

Max-Eigenvalue test indicates 1 cointegratingeq(s) at the 0.05 level

* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values
Unrestricted Cointegrating Coefficients (normalized by b'*S11*b=I):
LOGGDP LOGEDS LOGDSP EXR @TREND (81)
3.798522 0.228911 2.746372 -0.023870 0.221044
11.47492 2.558987 0.747160 -0.009929 -0.376778
3.719173 2.928376 -0.874929 0.035181 -0.269757
-3.172945 -1.436166 0.660012 0.039337 -0.116559

Vector Error Correction Model

Vector Error Correction Estimates
Sample (adjusted): 2006 -2017
Included observations: 18 after adjustments
Standard errors in ( ) & t-statistics in [ ]

CointegratingEq: CointEq1
TRCR(-1) 1.000000
RODR(-1) 0.197084
(0.07846)
[ 2.51198]
DIF(-1) -0.135526
(0.16222)
[-0.83545]
TRR(-1) -0.001197
(0.00193)
[-0.61973]
@TREND(80) -0.054900
(0.01970)
[-2.78657]
C -25.75918
Error
D(TRCR) D(RODR) D(DIF) D(TRR)
Correction:
CointEq1 -0.292245 -0.221313 0.999894 -16.97928
 (0.10918) (0.37499) (0.80216) (25.6926)
[-2.67664] [-0.59018] [ 1.24649] [-0.66086]
D(TRCR(-1)) 0.101752 0.157345 2.577302 -12.75172
(0.18878) (0.64838) (1.38698) (44.4238)
[ 0.53899] [ 0.24268] [ 1.85821] [-0.28705]
D(RODR(-2)) -0.205454 -2.415750 0.867593 -7.408905
(0.19452) (0.66807) (1.42910) (45.7728)

[-1.05623] [-3.61604] [ 0.60709] [-0.16186]

D(DIF(-1)) 0.075571 0.191064 0.337744 0.056062
(0.06806) (0.23375) (0.50003) (16.0153)
[ 1.11038] [ 0.81739] [ 0.67545] [ 0.00350]
D(TRR(-2)) 0.046275 0.300252 0.489148 9.508239
(0.05375) (0.18461) (0.39491) (12.6485)
[ 0.86092] [ 1.62643] [ 1.23865] [ 0.75173]
C 0.051615 0.049920 -0.291481 6.117177
(0.01887) (0.06482) (0.13866) (4.44112)
[ 2.73486] [ 0.77013] [-2.10214] [ 1.37740]
R-squared 0.404515 0.722176 0.556529 0.159784
Adj. R-squared 0.136546 0.597156 0.356967 -0.218313
Sum sq. resids 0.085246 1.005546 4.601391 4720.394
S.E. equation 0.065286 0.224226 0.479656 15.36293
F-statistic 1.509561 5.776460 2.788756 0.422600
Log likelihood 45.38299 8.366844 -14.44558 -118.4449
E Akaike AIC -2.358866 0.108877 1.629705 8.562994
Schwarz SC -1.891800 0.575943 2.096771 9.030060
Mean
0.040768 -0.005802 -0.064415 5.204541
dependent
S.D. dependent 0.070259 0.353279 0.598154 13.91857
Determinant
0.004820
resid
covariance (dof adj.)
Determinant resid covariance 0.000952
Log likelihood -65.91975
Akaike information criterion 7.394650
Schwarz Criterion 9.496446
Granger Causality Test
Pairwise Granger Causality Tests
Sample: 2006 -2017
Lags: 1
Null Hypothesis Observations F-Statistic Prob

DIF does not Granger cause TRCR 19 5.65990 0.0242

TRCR does not Granger cause DIF 6.91967 0.0135

TRR does not Granger cause TRCR 19 0.04306 0.8371

TRCR does not Granger cause TRR 5.75002 0.0231

DIF does not Granger cause RODR 19 13.5768 0.0009

RODR does not Granger cause DIF 0.07278 0.7892

TRR does not Granger cause RODR 19 7.11542 0.0124

RODR does not Granger cause TRR 13.9911 0.0008

TRCR does not Granger cause RODR 19 4.93139 0.0343

RODR does not Granger cause TRCR 0.22009 0.6425

TRR does not Granger cause DIF 19 1.89008 0.1797

DIF does not Granger cause TRR 1.68736 0.2042

 ABSTRACT

This study examines the deposit structure implications on the risk asset funding of deposit

money banks in Nigeria. Risk asset management is a core of lending function in the banking

industry. Many Nigerian banks had failed in the past due to inadequate risk exposure. In

modeling, risk asset funding was used as the dependent variable represented by total

regulatory capital ratio (TRCR) and risk of default ratio (RODR), While for the influence of

Deposit Structure, Deposit Insurance Fund (DIF) and Target Reserved Ratio (TRR) are used as the

independent variables. The data were obtained from the Financial Statements and Reports of

the sampled banks for the period 2006-2017, various issues of Central Bank of Nigeria Annual

Report and the National Economic statistics from the National Bureau of Statistics. The analysis

used time series data on capital market indicators for the period 2006-2017. The availability of

sufficiently long time series data on the aforementioned variables served as an additional

criterion for their selection. Annual data spanning 2006-2017, a total of 20 observations, were

employed; all variables were transformed logarithmically to homogenize the data and

smoothen the fluctuations. The procedure adopted involved the use of multivariate regression

analysis. Autoregressive Conditional Heteroscedasticity models and its extension were used. The

result of the econometric tests leads us to conclude that there is a significant relationship

between the various deposit structure indicators employed in this study and the asset risk

funding of deposit money banks in Nigeria Hence, we recommend to the Central Bank of

Nigeria, for policy making purpose should regularly assess the lending attitudes of deposit
money banks and their effective cash management policies to avoid insolvency in the financial

system.