Banking and Finance

A profitable banking sector is better able to withstand negative shocks and contribute to the
stability of the financial system. The importance of bank profitability can be appraised at the
micro and macro levels of the economy. At the micro level, profit is determined by bank’s
management decisions and policy objectives, while the macroeconomic determinants look at
variables that reflect the economic and legal environment where the credit institution
operates. Bank profitability, typically measured by the return on assets (ROA) and/or the
return on equity (ROE), and/or net interest margin (NIM) is usually expressed as a function
of internal and external determinants. These issues engaged the minds of the authors in this
paper. Industry related dataset that covers a 10year period of time was used. The regression
results indicate that bank-specific characteristics and macroeconomic variables explain up to
97.4% variations in bank profitability when NIM was used as a dependent variable.
Summarily, profitability was found to be associated with well-capitalised banks as capital
ratio has a positive significant relationship with NIM; bank size has a negative but
significant relationship with NIM; Asset composition has a positive but an insignificant
relationship with NIM; Liquidity has a negative and insignificant relationship with NIM; all
the macroeconomic variables apart from inflation have a negative and insignificant
relationship with NIM. Therefore, the study recommends that regulatory authorities should
promote policies that will bring about low inflation and stable economic output growth,
whereas, bank managements should concentrate more on cost and non-performing loans
reduction and asset composition diversification.

Bank consolidation has been the major policy instrument adopted in correcting deficiencies in the financial sector in the world all over; and hence the 2005 concluded bank consolidation exercise in Nigeria. This study therefore, x-rayed the effect of bank consolidation on cost savings for
consolidated banks in Nigeria. The research design is ex-post facto studying two periods before and after the 2005 concluded bank consolidation exercise in Nigeria. The Cost Income Ratio (CIR) was used as a proxy to measure cost savings for six banks quoted on the Nigerian Stock Exchange
for a 10-year period (2000-2009). Descriptive statistics was used to analyze the operational variable (CIR). The sampled banks five years performance before the consolidation exercise was compared to the banks five years performance after the consolidation exercise. The paired sample t-test statistics was used to test the formulated hypothesis for a significant difference between the means of the two
sample periods (pre and post consolidation) observed at two points in time. The findings revealed that the sampled banks recorded decreases and increases in the operating variable at various intervals of the pre and post consolidation periods. However, two banks had significant differences on costs saving. Accordingly, the study revealed that the 2005 concluded bank consolidation exercise in Nigeria has not achieved costs saving for all the consolidated banks in Nigeria. Therefore, forced consolidation is not the best option for reducing banks’ operational cost.

This paper examined the impact of financial deepening on economic growth in Nigeria. Adopting the supply-leading hypothesis using variables such as broad money velocity, money stock diversification, economic volatility, market capitalization and market liquidity as proxies for financial deepening and gross domestic product growth rate for economic growth, we found that broad money velocity and market liquidity promote economic growth in Nigeria while money stock diversification, economic volatility and market capitalization did not within the period studied (1992-2008). Government policy should therefore be geared towards strategically increasing money supply and promoting efficient capital market that will enhance overall economic efficiency, create and expand liquidity, mobilize savings, enhance capital accumulation, transfer resources from traditional sectors to growth inducing sectors (such as manufacturing and industry, agriculture and the services sectors) and also promote competent entrepreneurial response in various sectors of the economy. 1.0 Introduction The search for ways of bettering the standard of living of citizens has opened the corridors for alternative view points on paradigms of economic growth and development. Financial deepening has been identified as one of those strategies whose implementation can quicken the pace of development. However, the effect of this strategy needs to be determined and examined from time to time especially for developing economies. A study of existing literature reveals two main conflicting theories on the effect of financial deepening. These are the supply-leading hypothesis and the demand-following hypothesis. The supply-leading hypothesis states that the presence of efficient financial markets increases the supply of financial services in advance of the demand for them in the real sector of the economy. It is the contention of this hypothesis that well functioning financial institutions can promote overall economic efficiency, create and expand liquidity, mobilize savings, enhance capital accumulation, transfer resources from traditional sectors, to growth inducing sectors, such as manufacturing and industrial, agricultural and the services sectors and also promote competent entrepreneurial response in these sectors of the economy (McKinnon, 1973; Shaw, 1973; Fry, 1978; Diaz-Alejandro, 1985; Moore, 1986). The argument therefore, is for policy makers to focus on government policies aimed at promoting financial deepening in countries which must be persistent and sustainable in order to foster economic development (Darrat, 1999). The main alternative view to the supply-leading hypothesis is the demand-following hypothesis which posits that financial markets develop and progress following the increased demand for their services from the growing real economy. Evolution in financial markets is simply seen as a passive response to a growing economy. As the real sector expands and grows, the growing real sector will generate increased new demands for financial services which in turn will exert and intensify pressures to establish larger and more sophisticated financial institutions to satisfy the new demand for these services and in this way, financial deepening is merely a by-product or an outcome of growth in the real sector The two paradigms appear to be in conflict with each other, revealing opposing patterns of the causal relationship between financial deepening and economic growth, each having different implications for policy makers. Thus, while the supply-leading hypothesis holds that financial deepening promotes economic growth, the demand