FINANCIAL STRUCTURE AND BANK PERFORMANCE IN NIGERIA

ABSTRACT

This study set out to investigate the empirical relationship between deposit money banks (DMBs) financial structure and their profitability. Three profitability measures were selected in the research namely, Return on Capital Employed (ROCE), Return on Equity (ROE) and Return on Asset (ROA). It is argued that the pattern of firm financing has a strong effect on its behaviour in terms of shareholders value and the intrinsic performance of the firm. Moreover, financial structure is measured by firm debt to equity ratio as well its tax obligations, size and stock market support. Also, other market performance factors were included in the analysis because it provides an alternative source of financing to firms in terms of commercial papers and other money market instruments. Six banks were selected from the Nigerian Stock Exchange to carry out the empirical analysis. Both statistical and econometric tools were employed in the analysis using data obtained from the Nigerian stock exchange for the period 2012 to 2017. Correlation analysis was used to summarize the initial characterization of the data in the study while Ordinary Least squares estimations were employed in the estimation of the models. Results from the empirical analysis show that a rather unclear relationship exists between firm financial structure and its performance. Specifically, the study finds that a bank's financial structure or leverage has a significant positive effect on its return on capital employed. This suggests that the efficiency of capital use of banks is improved by higher leverage in. the firms. Also banks leverage, which is a measure of financial structure, has a significant positive impact on its return on equity. Thus, higher debt equity ratio tends to dampen efficiency in manager's handling of shareholders' funds among others.