CHAPTER ONE

INTRODUCTION

1.0 BACKGROUND OF THE STUDY

A sizeable amount of literature, have been dedicated to the

issue of capital structure which we discovered is a post ad-

hoc financing decision.

The volume of capital (i.e. capital base) upon which capital

structure is premised has suffered literature draught. Before

the decision of optimal financing mix (capital structure) is

made, there must have been the decision to increase the

volume of capital to achieve a desired upward review of

volume of activity and an expected benefit thereof.

It is true that increasing the volume of capital of a firm so as

to make it stronger and bigger in a particular industry might

not bring about the expected performance if consideration is

not given to the capital structure, since capital structure

(Debt-Equity ratio) has to do with the most optimal mix of

Debt and Equity financing that make up capital (Size) to

attain the value maximization objectives of firm in the light

of risk-return-trade off.

According to Gang (2007) substituting debt for equity

beyond an appropriate capital structure brings about a

1
higher bankruptcy cost than the marginal tax-sheltering

benefits. The above will of course affect a firm’s value

negatively.

There are several other studies showing the relationship

between capital structure and firm’s value (see Gay B

Hartfield et al, 2004; Baxter, 1967; Stiglitz, 1972; Krans and

Litzenberger, 1973; and Kim, 1978.)

While Capital Structure is a necessary decision in a firm’s

value pursuit, the fact remains that it is still an offshoot of

volume of Capital (i.e Capital base) which is the totality of

Equity and Debt finance and a measure of the capacity of

the firm to engage in major investment projects that can

expand financial and non financial performance.

The volume of Capital plays a central role in the financing

decision of any firm. It is apparently the first financing

decision made before the start of a business (i.e.

consideration is given first and foremost to how much in

terms of capital size that is needed to start a business

before any other financing decision is made).

2
Also in the course of the business, the volume of capital can

be further manipulated to accommodate a desired increase

in the level of activity and to bring about the much expected

performance (value).

For Banks, volume of capital is known to give them the ‘To

Big to Fail’ Status as Regulatory bodies view Banks of

certain size as too big to liquidate. Earlier studies such as

Brewer et al. (2003) find evidence in favour of some “too-

big-to-fail” protection for large banks

Such Banks are not allowed to fail, because of the domino

effect in the financial sector and the attendant negative

impact on the overall economy such failure will bring.

Banks’ failure and eventual closure has a distabilizing effect

on economic growth as it leads to sudden halt of activities

that foster growth in an economy. This is especially

alarming in light of mounting evidence of the effect of

financial sector development on economic growth (see, for

instance, Levine and Renelt, 1992 and King and Levine,

1993).

It is argued that Banks’ voluntarily increase their capital

volume to take advantage of economies of scale which

3
result from the relationship between the average production

cost per unit of output and the production volume (Kwan,

2004). In his write up, Miranda (2005) argued that sound

banking structure could be attained through enhancing the

Capital base, since according to him, it is believed that

strong Capital base will allow Banks to assume higher risk-

taking capacity, improve information system technology,

and expand business scale as well as lending capacity.

However, it is important to note that economies of scale in

banking only prevail up to a certain size (Fiona, 2009).

It is also believed in some quarters that a large volume of

capital is less associated with inefficiencies all things being

equal. A major determinant of inefficiency/efficiency is Asset

Quality which is indicated by Non-performing loan (loan

quality) and loan loss reserve. In their work, Kwan and

Eisenbeis (1996) demonstrated sufficiently that well

capitalized banks are les inefficient. In essence, well

capitalized banks do not take on more and excessive risk

(i.e. invest in lower quality loans). This is further more

strengthened by the new risk-based capital standards which

have brought about increase in bank capital and reduction

in risk, even for banks that were not constrained capital-

4
wise. Thus, it is expected that the larger the volume of

capital, the better the Performance.

This study is informed by the important role of the volume

of capital (i.e capital base) in the financing decision of a firm

and the fact that it is receiving lot more attention than it

ever had, given its importance. The research shall attempt

to establish, if any, the effect of volume of capital on the

performance of Deposit money Banks in Nigeria.

1.1 STATEMENT OF PROBLEM

Firms are performance driven. They want to be able to

achieve better earnings, offer greater array of products,

increase sales, improve technology, expand business scale

etc. The above is desirable and obtainable if the volume of

capital is enhanced for the attainment of such goals.

For Banks the drive for better performance and to out

perform others in the same industry may translate into

welfare gains for the economy, to the extent that customers

pay lower prices for services rendered or are able to obtain

higher quality services or services that could not have been

offered before. Argument abound that enhancing the

volume of capital (i.e capital base) would enable a full

5
exploitation of potential economies of scale for improved

performance.

The implication of the above is that enhancing the volume of

capital, will allow a firm grow in all aspect of its business,

while making the firm more competitive. Thus given a good

management and all other things remaining same, Bank

with a larger volume of capital should perform better.

The question however is- Does larger volume of capital

translate into better performance?

The above question shall form the focal point of this study

for which I intend to proffer solution.

1.2 PURPOSE OF THE STUDY

This study, deals with the volume of capital and

Performance of Deposit Money Banks. The study shall

attempt to validate where possible the effect of volume of

capital on the Performance of deposit money Banks in

Nigeria. The study shall attempt to make argument for ‘the

larger the volume of capital, the better the expected

performance.

Specifically, the study shall aim at:

i. Examining the effect of capital volume on Bank patronage

6
ii. Ascertaining how the volume of capital affects risk-taking

capacity of Banks

iii. Verifying whether capital volume has any effect on the

capacity of Banks to deliver better customer service

iv. Finding out if better performance of Deposit Money Banks

will translate into welfare gains for the economy.

1.3 RESEARCH QUESTIONS

For the purpose of the study, the following research

questions are what the study shall strive to answer:

- To what extent will larger volume of capital enhance

the quality of Banks?

- To what extent will volume of capital influence lending

capacity?

- To what extent does larger volume of capital enhance

a bank’s customer reach?

1.4 HYPOTHESES

The following hypotheses shall be tested in the course of the

study.

1. H0: There is no significant relationship between the

Banks’ Asset quality and the volume of capital

7
2. H0: There is no significant relationship between lending

capacity and the volume of capital

3. H0: There is no significant relationship between market

power and the volume of capital

1.5 SIGNIFICANCE OF THE STUDY

The study is significant for a couple of reasons. First, it will

add to the existing body of knowledge by shedding more

light on the effect of Bank Capital volume as distinct from

Capital structure on the performance of Deposit Money

Banks. It will give insight to Bank Managers and Policy

makers on how the volume of capital (of Banks) can be

manipulated to improve performance.

The study shall also prove very useful and relevant to

educational institutions, students, professionals and

researchers that will be conducting research into the same

area of interest

1.6 LIMITATION OF THE STUDY

This study focuses on the volume of capital and

Performance of Deposit Money Banks. The study examines

the effect of capital volume on the performance of Nigeria

Banks (that sound and efficient banking structure is

8
enhanced by the volume of capital). The study is limited to

the banking sector of Nigeria Stock Exchange.

As with most studies in Nigeria and indeed, developing

economies, this study is further constrained by the inherent

problem of data. In some instances, the exact data are not

available, and even where data exist, there are notable

differences in data collected from different sources on the

same item. However, since the Researcher worked with

publicly available data, they (data) can be seen as

authentic.

The issue of scanty literature on the topic of study also

served as a limitation to an extent. Also, time factor had a

considerable effect as the research was conducted within

the academic time frame given for the work. Therefore the

Researcher needed to meet this time limit, which he

considers a limitation.

However, the Researcher is optimistic that within the

enumerated constraints, efforts and care were taken to

ensure that the results will be valid and could be cautiously

generalized.

1.8 DEFINITION OF TERMS

9
It is common enough occurrence that in studies like this,

some terms have been used creating special meaning within

the context where they exist. To enhance easy

understanding, working definitions of these terms are giving

below:

DOMINO EFFECT A situation in which one event

brings about a series of

similar events to occur one

after the other.

POST AD-HOC DECISION a decision made after another

that comes first or a decision

that is consequent upon

another.

1.7 ORGANIZATION OF THE STUDY

The study is organized in the following manner:

Chapter 1 introduces the study. Chapter 2 reviews the

related and relevant literature. Chapter 3 describes the

methodology. Chapter 4 presents the empirical results and

finally, Chapter 5 presents the conclusion

10
 REFERENCES

Baxter, N. (1967), Leverage, risk of Ruin and the cost of

capital; journal of finance, pp. 395 – 403.

Brewer, E. III, Hensa, G., Willian, C.H and George, C.k (2003)
Does the Stock Market Price Bank Risk? Evidence from
Bank Failures; Journal of Money, Credit and Banking 35,
507- 543

Fiona, T (2009) The Fat Years: the Structure and Profitability

of the US Banking Sector in the Pre-Crisis Period;
Cambridge Journal of Economics 2009, 33(4): 609-639

Gay, B. H.; Louis, T. W. C and Wallance, N.D III (1994). The

determination of optimal capital structure: The effect
of firm and industry debt ratios on market value;
journal of financial and strategic decisions volume of
number 3, pg 1.

King, R.G and Levine, R. (1993) Financial Intermediation and

Economic Development in capiatl market and Financial
Intermediation, pp.156-89 (Cambridge University
Press)

Kwan, S. (2004) Banking Consolidation FRBSF Economiic

Letter No 2004 – Federal Reserve Bank of Francisco
(http://www.frbsf.org/publications/economic/letter/2004/el2004 -15.pdf)

11
Kim E.H., (1978) A Mean-Variance Theory of Optimal Capital
Structure and Corporate Debt Capacity; Journal of
Finance. Pp.45-63.

Krans, A. and Litzenberger, R. (1973). A state-preference

model of optimal financial leverage, Journal of Finance
28, 923-931.

Miranda S. Goetton (2005), Indonesia’s Banking Industry:

Progress to date: BIS Paper NO. 28 pg. 244.

Simon Kwan and Robert A. Eisenbeis (1996): Bank Risk,

Capitalization and inefficiency.

Stightz J. E. (1972), A Re-examination of the Modighani-

Miller Theorem, American Economic Review 59, pp.
784-793.

Tian, Gary Gang (2007), Capital structure and corporate

performance evidence form Jordan; Accounting
Business Finance Journal.

12
 CHAPTER TWO

LITERATURE REVIEW

2.0 INTRODUCTION

Literature review is a forum for examining related and

relevant works of notable scholars. Thus, this Chapter shall

be devoted to a review of past work in the subject matter.

Banks’ Capital volume (base) in recent times has been

drawing attention the world over. Much of these attentions

seem to come from the quarters of Regulatory bodies and

Government. The reason for the above may not be

farfetched as Regulators have come to understand that

large volume of capital is a viable strategy against financial

crisis.

A weak Capital volume (base) if not enhancd, will eventually

(in times of financial crisis) lead to a bank’s failure which

may have a negative influencing effect in the financial

sector and this will not bring about the much desired welfare

gain of any economy. Increasing the volume of capital of

Banks has been a most favoured strategy option by

regulators to mitigate the effect of any unforeseen crisis in

the financial sector.

13
Besides this involuntary increase in the volume of capital,

Banks can voluntarily increase their Capital volume (base)

to harness its benefits. For a strong position in the domestic

market and foreign presence and for improved services and

economy of scale etc, banks need to increase the volume of

their capital which will also boost the confidence of existing

and would-be-customers. This may lead to quantitative and

qualitative increase in customers along with their increased

loyalty to the bank as a return for better services they

receive

In his argument Miranda (2005) opined that sound banking

structure could be attained through enhancing the capital

base, since it is believed according to him that a strong

capital base will allow banks to assume higher risk taking

capacity, improve information system technology and

expand business scale as well as lending capacity. We

assume that higher risk taking as posited by Miranda (2005)

above does not mean excessive risk taking, as excessive

risk taking can result to failure that may cause Banks to lose

the rent they obtained from operating as financial

intermediaries and the capital that they already have

14
(Steven et al, 2002). These rent according to Steven et al

(2002), typically arise from institutional barriers to entry,

such as banking licenses, which are valuable assets that

established banks will seek to protect. They stated that if it

(Banking license) exceeds some threshold value, banks will

attempt to re-capitalize and this will reduce the probability

of failure and protect the license. But if the value of the

license lies below the threshold, banks will reduce their

capital base thereby attempting to extract the most from

the insurance mechanism. A strategy often referred to as

“gambling for resurrection” (Steven et al, 2002).

In addition to the value of the banking license, the value of

the threshold also depends on the initial capital base of the

institution (Steven et al, 2002). They further argued that the

stronger the capital base and larger is the value of the

banking license; the lower is the probability that banks will

gamble for resurrection and that faced with a common

negative shock, the population of banks will divide into two

groups. Banks with a strong capital base and/or a valuable

banking license may decide to strengthen their capital base

while others decide to gamble.

15
In their study, Kwan and Eisenbeis (1996) sufficiently

demonstrated that as Bank Capital requirement increases,

Banks become less inefficient (i.e. loan quality improves).

That is, well capitalized

Banks tend to be better run in terms of Asset quality/Asset

risks and this is reflected in the efficiency measures. They

were also able to demonstrate further that institutions with

greater inefficiencies are less well capitalized.

The above is not to say, that there are no fears that rather

than the benefits expected from an increase in the volume

of capital it may translate into inefficiencies. In fact

concerns have been expressed that increases in the volume

of capital (especially by regulators) may have the perverse

effect of inducing Banks to take on more risk to offset higher

capital requirement rather than to induce Banks to operate

in a more safe and sound manner. (see Koehn and

Santomero, 1980).

We believe that the concerns expressed about the negative

impact of increasing capital volume (base) borders around

unsound management. Steven et al (2002) opined that from

the point of view of the managers of a bank, risk taking

above normal prudent levels has two opposite

16
consequences. On the one hand, it enhances the expected

profits of the bank and its shareholders at the expense of

the implicit or explicit insurance mechanism. On the other

hand, it enhances the probability of losing the banking

licence. Walter (1999) argued that the way banks are run is

more important than their size and/or the selection of

banking products they offer.

Therefore given sound management and all other thing

being equal, We want to believe that a large capital volume

(base) is associated with less inefficiency.

Nigeria Banks are performance driven just like their

counterpart else where. As earlier said, they want to have

that competitive edge, achieve economies of scale, better

earnings, improved information technology etc. The volume

of capital can be manipulated to achieve better and

sustainable performance.

2.1 COMPOSITION OF BANK CAPITAL (BASE)

Tier 1 (core) capital

Tier 1 capital, the more important of the two, consists

largely of shareholders’ equity. This is the amount paid up

to originally purchase the stock (or shares) of the Bank (not

17
the amount those shares are currently trading for on the

stock exchange), retained profits and subtracting

accumulated losses.

Regulators have since allowed several other instruments,

other than common stock to count in tier one capital. These

are instruments that are unique to each national regulator,

but are always close in nature to common stock. These are

commonly referred to as upper tier one capital.

Tier 2 (Supplementary) capital

There are several classifications of tier 2 capital, which is

composed of supplementary capital. In the Basel II accord,

these are categorized as undisclosed reserves, revaluation

reserves, general provisions, hybrid instruments and

subordinated term debt.

Undisclosed Reserves

Undisclosed reserves are not common, but are accepted by

some regulators where a Bank has made a profit but this

has appeared in normal retained profits or in general

reserves. Most of the regulators do not allow this type of

reserve because it does reflect a true and fair picture of the

results.

18
Revaluation Reserves

A revaluation reserve is a created when a company has an

asset revaluated and an increase in value is brought to

account.

General Provisions

A general provision is created when a company is aware

that a loss may have occurred but is not sure of the exact

nature of that loss.

Hybrid Instruments

Hybrids are instruments that have some characteristics of

both debt and shareholders’ equity. Provided these are

close to equity in nature, in that they are able to take losses

on the face value without triggering a liquidation of the

Bank, they may be counted as capital.

Subordinated-Term Debt
Subordinated-term debt that is not redeemable (it cannot be

called upon to be repaid) for a set (usually long) term and

ranks lower than (it will only be paid out after) ordinary

depositors of the bank.

2.2 AVAILABLE OPTION OUT OF DEFICIENT/POOR

VOLUME OF CAPITAL

19
There are several options out of deficient capital volume

(bases). The first is to approach the capital market for funds,

the second options is to consolidate through a merger with

like-minded and synergy-producing banking. The third

option is to acquire another bank or be available for

acquisition.

Capital Market

The capital market is the market which exists for the

mobilization and intermediation of long-term funds between

surplus and deficit economic units. That is, it is the market

where both lenders and borrower of funds obtain financial

assets such as debt instruments (debentures and bonds)

and equities (common stock), issued by demands of funds in

exchange. The capital market has been categorized into

two, viz:

- Primary market and

- Secondary market

The primary market is the market for the buying and selling

of new issues of securities like shares, stocks and

debentures. The secondary market, on the other hand,

exists for the sale and purchase of existing or old securities.

20
Merger: Company and Allied Act (CAMA) 1990 defines a

merger as an amalgamation of the business undertaking or

part there of two or more companies into one of the

companies or a new company. A fusion of interests, assets

and management is implicit in this definition.

Acquisition: Company and Allied Act (CAMA) 1990 defines

an acquisition as the purchase of shares of one company by

another with the ultimate intention of acquiring a controlling

interest in the company so targeted. There are specific laws

that govern Merger, Acquisitions, Takeovers and other forms

of business combinations. These laws are spelt out in

specific sections and parts in CAMA and BOFIA 1991

(Banking and other Financial institution Act) respectively.

2.3 MEASURES OF PERFORMANCE

Besides the fact that the concept of performance is a

controversial issue in finance due largely to its

multidimensional meanings (Gang, 2007) and the difficulties

in bank performance measurement because of the

conflicting nature of bank objectives (Ojo, 1992 cited in

Aluko M. et al, 2004), there is need to measure how a firm is

doing in relation to invested funds. This is to say that no

matter the argument about meaning of the concept of

21
performance and the difficulties in the measurement, there

is a general agreement that a firms performance needs to

be measured. The reason for performance measurement is

so that institutions and investors alike would be aware of

how they are doing in term of financial and non financial

goals. Sharma (2001), cited in Viverita (2006), noted that, in

general, there are three main reasons for performance

measurements: a concern for value of money in all

evaluation process; a concentration upon economy,

efficiency and effectiveness; and a focus on management

rather than administration staff.

Performance measures are either financial or non financial

(organizational). Profit maximization, maximizing profit on

asset, and maximizing core of the firm’s effectiveness

(Chakravarthy, 1986).

On the other hand growth in sales and growth in market

share which depict operational performance, provide a

broad definition of performance as they focus on factors

that eventually lead to financial performance (Hofer and

Sandberg, 1987).

The most commonly used performance measure proxies are

Return on Assets (ROA) and Return on Equity or Investment

22
(ROE or ROI). These accounting measures representing the

financial ratios from balance sheet and income statements

have been used by many researchers (see, Gorton and

Rosen, 1995; Mehran, 1995; Ang. Cole and Line, 2000 and

Gang, 2007).

There are other measures of performance, such as price per

share to the earning per share (P/E) and market value of

equity to book value of equity (MBVR) which are referred to

as Market Performance Measures.

The most widely used among the above mentioned

measures of performance is Return on Assets (ROA), and it

is the most useful measure to test firm performance (Reese

and Cool, 1978; Long and Ravenscraft, 1984; Abdel Shahid,

2003).

However, for the purpose of this work, the performance

indicators or measures (financial and non financial) that will

be adopt are Asset quality, lending capacity and market

power.

2.3.iASSET QUALITY

Asset quality which is primarily affected by the quality of

loan portfolio is one of the most critical areas in determining

23
the overall condition/performance of a bank. Since loans

comprise a majority of assets in most banks, the risk of loan

losses which is the single greatest risk in banking has direct

bearing on the asset quality, thus the efficiency of a bank. A

decrease in asset quality will have a negative effect on a

bank and vice versa. That is, the safety of banks is to large

extent dependent on asset/loan quality. Given the spillover

effect asset quality could have on earnings, liquidity or bank

insolvency etc, it is an important measure in banking. Since

loan quality is the main determinant of asset quality, non

performing loans and advances will be used as proxy for

asset quality in this study.

2.3.ii LENDING

Lending is a major banking operation involving the granting

of credit (monetary resources) to needy economic units with

the hope that repayment will be made at specific or

determinable date. It has become an important aspect of

banking operation owing not only to its direct correlation

with economic growth desires of any country, but also

profitability and growth of every bank, as it is one of the key

sources of income. Lending comprises of Loans and

Advances which are primary sources of banks’ earnings.

24
Lending tends to bring about growth by adding and/or

improving on the services of the Bank. An increase in

lending capacity can be argued to increase the customer

base of any Bank as such a Bank will not only be able to

service the credit needs of existing customers, but new

customers would be attracted. In fact an increase in lending

ability will enable a Bank to offer a new product (Jumbo

loans) to existing customers, which will attract new

customers.

The desirability of an increase in lending capacity and its

attendant advantages to a Bank does not go without saying

that lending if not properly administered will have a

negative affect on the financial performance of a Bank.

Essentially, Banks’ loan proposals are numerous and

increasing, but care must be taking to select the best out of

the whole lot. To achieve this, a good lending principle must

be in place. However, it is not in the place of this work to

discuss this principle, but to demonstrate that lending

capacity is a good measure of performance of Bank and that

an increase in lending capacity is premised on large (strong)

volume of capital.

25
2.3.iii MARKET POWER (SHARE)

Market power can be defined as the ability of a transactor

(in this case, a Bank) to influence market price owing to the

very large share of the demand or supply controlled by the

transaction. Otherwise, it is the influencing ability brought

about by the control of a larger market share.

Market share is the percentage measure of the share by an

individual institution from the total available market. A bank

with significant market power can use its market position in

two ways. First, it can manipulate prices on the assets side

of its operation. By lowering prices of its products such as

loans it attempts to squeeze out of market other less

competitive and less strong rivals and discourage new entry.

Alternatively, when market conditions allow it, a bank can

increase prices and enhance its revenues. Secondly, on the

liabilities side of its business, it is likely to secure more

favourable funding conditions because of its larger size (a

bank with a larger volume of capital is less vulnerable to

economic shocks), enhanced reputation and the

diversification effect. Two distinct approaches can be

distinguished within the Market Power paradigm: the

Structure–Conduct Performance (SCP) hypothesis, and the

26
Relative Market Power (RMP) hypothesis (Fiona, 2009).

Whereas the SCP hypothesis would predict generic benefits

to banks arising from higher concentration, the RMP

hypothesis sees any benefits as accruing to individual banks

based on their own market share. According to the latter

approach, only large banks can influence prices and increase

profits (Fiona, 2009).

There are arguments as to whether market power gives

firms the ability to engage in unilateral anti competitive

behaviour. Substantial amounts of literature have been

dedicated to addressing that issue for which the arguments

are not one sided. However, it is important to note that

Competition in the banking Sector is vital. Banking sector

competition is important for the following reasons: the

stability of the financial sector (see Allen and Gale, 2004);

economic growth (see Claessens and Laeven, 2005, and

Cetorelli and Gamberra, 2001); the access of firms to

external financing (see Beck et al, 2004); and the efficient

management of Banks (See Berger and Hannan, 1998}. Be

that as it may, this present research work is not about the

above argument, but to find out if an increase in the volume

of capital does bring about market power. Having said that,

27
suffice me to say that the measure for market power in this

study shall be borrowed from some of these literature.

In Angelini and Cetorelli (1998) cited in Cetorelli (2008),

deposit and loans alike were used as measures for market

power as it assumed that Banks compete for these two

services. Freixas and Rochet, 1997 also used the volume of

deposit to measure market power.

Going by the two examples above, I believe the volume of

deposit is appropriate to measure market power for this

study.

2.4 ASSET QUALITY, LENDING CAPACITY AND

MARKET POWER – THE NIGERIA EXPERIENCE.

Asset Quality

Asset quality which is majorly determined by loan risk can

be said to have improved over the last few years in the

banking system in Nigeria. This is portrayed as true when

non performing loans and advances over the last few years

are compared with total credit (i.e. in ratio).

However, it is pertinent to note that with the fall out of the

banking distress in the 1990’s, banks were left with large

volume of debt abandoned by companies and individuals

28
who were victims of the poor microeconomic conditions

experienced during the period.

Another cause of high level of impaired loans carried over

from the 1990’s, was banks’ failure to maintain strict risk

management measures during the period. This culminated

into high non-performing assets in the industry in the 1990’s

which affected asset quality negatively.

However, between 2000 and 2008, asset quality had

improved tremendously. This enhancement in the asset

quality can be said to be largely due to banking reforms

which included enhancement in banks’ volume of capital

and a stringent regulatory regime by the central bank of

Nigeria (CBN) in the period. Also the introduction of the

credit bureau during this period by the CBN has been of

great assistance in risk management by banks.

Consequently, it is expected that asset quality shall

continue to improve over the next few years.

Lending Capacity

Lending capacity of deposit money banks in Nigeria has

been increasing over the years. Total credit in recent past

grew significantly for reasons such as enhanced volume of

29
capital (i.e. shareholder’s fund), significant deposit growth

through extended branch network.

The Nigeria economy witnessed a significant growth in

2008, just like in the preceding years. A cursory look at the

total loans and advances between 1990 and 2008 in the

CBN statistical bulletin and NDIC annual report, show a

steady percentage increase within this period.

It’s noteworthy to state that the introduction of universal

banking in the system has also contributed significantly in

the growth of credit granted. It is hoped that this growth will

be sustained and that it will benefit the real sector and the

Nigeria economy at large.

Market Power

The levels of deposit which proxies market power in this

study usually constitute the largest component of a banking

system’s liabilities. The types and quantum of deposits

mobilized by banking institutions have implications for

asset/liability management. The level of deposit of a

banking institution is an indication of the competitive edge

(market power) of such a banking institution in deposit

mobilization.

30
Deposit liabilities of banking institutions in Nigeria grew

significantly in the last few years. Several reasons could

account for the significant increase, of which the size and

strength of banks occasioned by the consolidation program

in 2005 is a major reason.

Banks innovative and aggressive deposit mobilization

initiatives and the improved performance in the economy in

the recent past are also reasons. However, it is pertinent to

note that a major chunk of the deposit liabilities of the

banking industry were from the stronger and bigger banks

in terms of their capital size. As at December 2004, ten

banks held 56.73 percent of total deposits of the banking

industry. By December 2005 and 2006, total share of ten

banks had grown to 66.21 and 70.76 percent respectively,

giving the indication of the competitive edge (in terms of

market power) of the large banks in deposit mobilization

(NDIC annual reports, 2004, 2005 and 2006)

2.5 VOLUME OF CAPITAL VS ASSET QUALITY

Asset quality as earlier said is one of the most critical areas

in determining the overall condition/performance of a bank.

Study shows that asset quality can be influenced by volume

31
of capital. Kwan and Eisenbeis (1996) demonstrated that

well capitalized banks are less inefficient and take on less

asset risks. Their findings show that well capitalized banks

are induced by the enhanced capital to operate in a more

safe and sound manner, and this affects efficiency. The

above finding is consistent with Onaolapo (2008), who

concluded that capital enhancement influences bank asset

risk and reduce the proportion of distress within the system.

This is further more strengthened by the new risk-based

capital standards which have brought about increase in

bank capital and reduction in risk. As a result, a bank with

enhanced volume of capital is expected to have enhanced

asset quality, operate less inefficiently and be less prone to

distress, all other things being equal.

2.6 VOLUME OF CAPITAL VS LENDING CAPACITY

Nzotta (1990) sited in Okereke. (2003) identified capital

base of a firm as an impediment to lending ability.

In their paper, Cheryl and Bruce argued that larger capital

base (size) Banks (resulting from merger) are able to service

loans to companies that was previously not possible due to

capital base lending regulatory restrictions.

32
They were able to relate the volume of capital to lending

capacity, when they wrote that as Banks merge and their

capital base enlarges, their combine lending ability increase

and they are able to offer larger loans without soliciting

additional participation from another bank partner. Steven

et al (2002) examined whether loan growth is positively or

negatively associated with the capital base of banks. They

found a statistically significant and positive association

between loan growth and bank capitalization (in the high-

reform state, but no such relationship in the low-reform

state) (Steven et al, 2002).

From the above, it is obvious that the volume of capital has

a relationship with lending capability of Banks. It goes to

imply that banks with larger volume of capital will enjoy

better performance in terms of improved lending ability. An

institution with a larger volume of capital would not only be

able to service the credit needs of its existing customers,

but new customers would be attracted as greater array of

product is provided also. Thus a Bank with a larger volume

of capital is able to possibly increase market share and

revenue, while increasing in competitiveness.

33
2.7 VOLUME OF CAPITAL VS MARKET POWER

In David and Vlad (2006), their results suggested that well-

capitalised banks are ranked higher in terms of their ability

to collect deposits than their poorly capitalised counterparts.

Joaquin and Amparo (2005) also stated that highly

capitalized banks have higher market power, which may

reflect the fact that such banks pay less for deposits as

depositors consider these banks to be more secure. This is

in line with the fact that, Capital according to conventional

wisdom plays a role of implicit deposit insurance, which in

turn encourages more deposits.

Also as earlier said, large volume of capital will allow Banks

to fully exploit potential economics of scale which could lead

to Banks’ customers paying lower prices for Banks’ services

or obtain high quality services or services that could not

have been offered before.

Not only will existing customers benefits from this improved

service, but new customers would be gained in the process

as such a bank will have competitive edge over and above

others in the market. This will obviously translate into higher

deposit market share, thereby increasing market power.

34
 REFERENCES

Abdel Shahid, S. (2003, “Does Ownership Structure Affect

Firm Value? Evidence from the Egyptian Stock Market”,
Working Paper, (Online), (www.ssrn. com)

Allen, F. and Gale, D. (2004) Competition and Financial,

Journal of Money, Credit and Banking 86, 453-481.

Aluko, M., Olugbesan, O., Gbadamosi, G. and Osuago, L

(2004) Business Policy and Strategy. Published by
Longman Nig. Plc, Lagos State.

Ang, J. S., R. A. Cole, and Lin, J. W. (2000), “Agency Costs

and Ownership Structure”, Journal of Finance 55, 81 –
106.

Banking and Other Financial Institution Act 1991

Berger, A.N. (1994) Relationship between capital and

earnings in banking.

Berger, A.N and Hannan, T.H (1995) The Effeciency Cost of

Market Power in the Banking Industry: A Test of the
Quiet Life and related Hypothesis. Review of
Economics and Statistic 8 (3), 454 – 465

Berger, A.N and mester, L.J (1997) Efficiency and

Productivity change in the US Commercial Banking
Industry: A Comparism of the 1980s and 1990s.

35
 Federal Reserve Bank of Philadelphia working Paper
No. 97-5 (Philadelphia)

Cetorreli, N. (2006) Comparative analysis in banking:

Appraisal of the Methodologies.

Cetorelli, N. and Gamberra, M (2001) Banking Market

structure, Financial Dependence and Growth:
International Evidence from Industry date, Journal of
Finance 56, 617-648.

Chakravarthy, B. S., (1986), “Measuring Strategic

Performance”, Strategic Management Journal 7, 437 –
58.

Cheryl, F and Bruce, C. K ( ) An Examination of Bank

Merger Activity: A Strategic framework Content
Analysis

Claessens, S. and Laeven, L. (2005) Financial Dependence,

Banking Sector Competition and Economic Growth.
World Bank Policy Paper 3481, January.

Company and Allied Matters Act 1990: Government Printers

David, A.G and Vlad, M (2002) Determinants of Commercial

Bank Performance in Transition: An Application of Data
Envelopment Analysis; IMF Working Paper No. 146
World Bank

Fiona, T (2009) The Fat Years: the Structure and Profitability

of the US Banking Sector in the Pre-Crisis Period;
Cambridge Journal of Economics 2009, 33(4): 609-639

Freixas, X and Rochet, J (1997) Micro Economics of Banking,

Cambridge, Massechusetts. MIT Press.

36
Joaquin, M and Amparo, N (2005) Explaining Market Power
Differences in Banking: A Cross-Country Study WP-EC
2005-10

Mehran, H., (1995), “Executive Compensation Structure,

Ownership, and Firm Performance”, Journal of Financial
Economics 38, 163 – 184.

Miranda S. Goetton (2005), Indonesia’s Banking Industry:

Progress to date: BIS Paper NO. 28 pg. 244.

Onaolapo A. A (2008) Implications of capital regulation on

bank financial health and Nigeria economic growth
1990-2006, Journal of Economic Theory 2(3): 112-117,
2008

Reese, J. S. and Cool W. R., (1978), “Measuring Investment

Centre Performance”, Harvard Business Review 56, 28
- 46.

Rodrigo Luis Rosa Couto (2002) Framework for the

Assessment of Bank Earnings, Financial Stability
Institute 2002.

Simon Kwan and Robert A. Eisenbeis (1996): Bank Risk,

Capitalization and inefficiency.

Steven, F, Damien, N and Paul, S (2002) Bank Performance

in Transition Economies. William Davidson Working
paper number 505, September.

Tian, Gary Gang (2007), Capital structure and corporate

performance evidence form Jordan; Accounting
Business Finance Journal.

37
Viverita (2006) The Effect of Mergers on bank Performance:
Evidence from Bank Consolidation Policy in Indonesia.

CHAPTER THREE

METHODOLOGY

3.0 INTRODUCTION

Research methodology provides framework from which the

answers to the research question will emerge. Emphasis was

placed on designing the appropriate research technique and

study, which shows the study plan, the research design,

sampling procedure, sampling size, data collection method,

operational measures of the variable and tools of statistical

analysis. This chapter will be focused on discussions

centered on the important areas in the order below:

(a) Research design

(b) Sampling procedure/sample size determination

(c) Data collection method

(d) Operational measurement of the variable

(e) Model specification

38
(f) Data analysis techniques

(g) Validity and Reliability of Instrument

3.1 RESEARCH DESIGN

Baridam (1995:49) stated that research design does not

mean the specified method for collecting data, but how the

study subject will be brought into the scope of the research

and how they will be employed within the research setting

to yield the required data. In order to achieve this, a sample

of observations on measurements of the subject matter is

studied and the results obtained were used for making

inferences in the entire population. Research design is made

up of experimental and quasi-experimental design.

The choice of the quasi-experimental design that was

adopted, as distinct from experimental approach is based on

the absence of a control group. This makes the chosen

approach preferable in behavioural studies since the

subjects are not under the researcher’s control unlike in

pure experimental research.

3.2 SAMPLING PROCEDURE / SAMPLE SIZE

DETERMINATION

Sampling involves selecting a representative number from a

given population where it is believed that a common feature

39
exists among the element of a given population. It is

important to point out that there is no “best” method of

drawing a sample from the population of interest. The

nature and purpose of the study dictate the sampling

method to be used (Baridam 2001:94).

The population of the study shall consists of all

measurements on the variables of the study. However, a

sample size of 15 observations of the study variables

corresponding to the study direction, that is, 1991 to 2005

shall be used for the research. This size is considered

adequate for the study since it is consistent with the

determinants of sample size, which Bailley (1982:62)

identified as follows:

(i) Purpose of the study

(ii) Nature of the population

(iii) Type of statistical tool employed in data analysis

It should however be noted that the bulk of the data shall be

collected from secondary sources - CBN and SEC statistical

bulletins etc.

3.3 DATA COLLECTION METHOD

The research data for this empirical investigation is time

series data, which refers to information on the variables of

40
the study over different periods of time (Nwabuokei,

1986:40). As the data is obtained from already existing

publications such as Central Bank of Nigeria “Statistical

Bulletin” and “Annual Report and Statement of Accounts”

which constitute secondary sources of information. It is

described as secondary data. Consequently, questionnaire

administration which performs best with eliciting

information not already in published records was not

employed.

The data is measured on interval scale of measurement,

which Mason et al (1999:70) refers to data, which makes it

possible to obtain the difference between two quantities of a

variable. Since this quality corresponds with quantitative

data, parametric statistical techniques which are statistical

procedures in which assumptions are made about

population parameters (Spiegel, 1992:40) is adopted.

In Yeoman (1973:53) parametric statistical techniques are

used for quantitative data measured on interval or ratio

scale, while non-parametric statistical methods are used for

qualitative data measured on nominal or ordinal scale.

3.4 OPERATIONAL MEASUREMENT OF THE VARIABLES

41
The measures of variable used in the research were

dependent and independent variables.

Dependent Variable
Performance
Independent Variable
Volume of capital

3.5 MODEL SPECIFICATION

In conducting a study which seeks to determine the causal

relationship among variables as contained in the objective

of this study, the initial steps is to specify the model in

correspondence with the objective of the study. Model

specification, therefore, entails

1. Stating the dependent and independent variables of

the study.

2. Stipulating the theoretical or apriori expectations about

the sign and size of the coefficients of the model which

will provide a basis for judging the results obtained.

3. Stating the number of equations, linear or non-linear,

to be included in the model.

In order to satisfy the objective of the study, which involves

evaluating relationship among variables of the study, a

42
regression model is considered most appropriate since

regression involves determination of the nature of causal

relationships. The regression model provides the following

advantages:

(a) Forecasting the value of the dependent variable from

knowledge of the values of the independent variable.

(b) It is used for planning and policy formulation.

(c) It is used to test economic theories and relative

important of the independent variable(s).

As earlier said, for this study, the variables used fall into

two main categories: dependent and independent

variables. The variables are as described below.

3.5.i Dependent variable – Performance

Financial measures of banks performance were

employed in this study. Performance was measured along

three dimensions: asset quality, lending capacity and

market power.

Three proxies were used to operationalized these

demensions and they also served as dependent variables

in the regression analysis. The proxies are as follows:

43
AQUA (asset quality), LCAP (lending capacity) and MPOW

(market power)

3.5.ii Independent variable – Volume of capital

The independent variable measures the aggregate volume

of capital of the banking sector, which is gotten from the

Central bank of nigeria statistical bulletin. The proxy used

to operationalize the volume of capital which also served

as the independent variable in the regression analysis is

VCAP.

Having stated the variables for the study above, the basic

econometric relationship may be specified as follows:

DVp = f ( VCAP, .... )

{1}

Where VCAP stands for volume of capital. DVp (dependent

variable) denotes the performance variebles that will be

replaced in turn by each of the three performance variable

proxy. Hence, there are three linear equations for this

study as stated below.

AQUA = bo + b1VCAP + 

{2}

44
 LCAP = bo + b1VCAP +  {3}

MPOW = bo + b1VCAP +  {4}

Where AQUA represents asset quality, LCAP is lending

capacity and MPOW is market power. bo is the constant, b1

is the coefficient and  is the error (chance, stochastic or

disturbance) term representing the model but which

influences the dependent variable. Its inclusion makes the

model stochastic.

3.6 TOOL OF STATISTICAL ANALYSIS

The statistical tool employed in analyzing the data of this

study are provided below:

3.6.1 SIMPLE REGRESSION

This is used for the determination of the nature of causal

relationship between a dependent variable and independent

variable thereby making it a useful tool for predicting the

value of independent variable given value of the

independent variable. In this study it is used to ascertain the

effect of volume of capital on the Performance (ie

earnings/profitability, lending capacity and market power) of

deposit money banks in the Nigeria environment.

45
3.6.2 COEFFICIENT OF DETERMINATION (R2)

This provides the percentage of total variation in the

dependent variables explained by variation in the

independent variable. It is a measure of goodness of fit of

the regression line and is used to judge the explanatory

power of the independent variables.

3.6.3 STANDARD ERROR OF THE REGRESSION (y-x)

This provides a measure of divergence of forecast values

from actual values of the dependent variable

3.6.4 STANDARD ERROR OF THE REGRESSION

COEFFICIENT (β)

This provides a measure of precision or reliability of the

regression coefficients.

3.6.5 CONFIDENCE INTERVAL OF THE REGRESSION

COEFFICIENTS

This provides the range within which the true value of the

regression coefficients will lie at a given level of probability

it serves as a mutually complementary approach in

hypotheses testing.

3.6.6 t-TEST

46
This is used to test significance of the correlation coefficient

hence its use in the study for testing of hypothesis (1), (2),

(3). This tool is used in hypothesis testing.

The formular for t-test statistic is as follows:

r n–2
T =
1 – r2
With n – 2 degree of freedom

r = correlation coefficient

n = no of sample

All computations using the above statistical tool shall be

facilitated by access to the computers statistical software

package. “Statistical package for the social science (spss)

10” and all the result presented in the statistical output of

the appendix of this research.

3.7 VALIDITY AND RELIABILITY OF INSTRUMENT

The validity and reliability of instrument was derived

through supervisor's approval, other scholars' work and

student surrogates.

47
 REFERENCES

Bailey, K. D. (1982), Methods of social research. London:

Collier Macmillan Ltd.

Baridam, D. M. (2001), Research methods in Administrative

Sciences, Port Harcourt: Paragraphics.

48
Mason, R.D., Lind, D.A and Marchal, W.G. (1999): Statistical
Techniques in Business and Economics (10th Ed). New
York: Irwin/McGraw-Hill.

Nwabuokei, P. O. (1986), Fundamentals of Statistics. Enugu:

Koruna Books.

Nwaibere, B. M. (2000), The Effectiveness of Conflict

Management Techniques in selected manufacturing
organization, Port Harcourt.

Spiegel, M. R. (1992), Theory and problems of statistics.

London: McGraw-Hill Schaum’s Outline Series.

Yeomans, K.A. (1973). Statistics for the social scientist 2:

Applied Statistic. England: Penguin Book Ltd.

49
 CHAPTER FOUR
DATA PRESENTATION, ANALYSIS AND
INTERPRETATION

Data procedures concerning the presentation of data,

analysis of data, including tests of significance conducted on

the various research hypotheses in this study and the

results obtained as well as interpretations are contained in

this chapter. These processes are provided in the following

sub-sections of the chapter:

4.1 Data Presentation

4.2 Analysis and Production of Results

4.3 Results Interpretation

4.4 Decisions and Conclusions

4.1 DATA PRESENTATION

Presentation of data is concerned with the display of data in

an ordinary and logical form. Its organization is expected to

conform to the type of statistical analysis to be adopted.

Accordingly, the research data in this study is organized in a

tabular form, comprising the independent variable (VCAP)

and the dependent variables (AQUA, LCAP and MPOW) as

indicated in the data set of table 4.1 below in order to

correspond with the regression analysis. The table is

50
composed of a summarization of observations on

measurement of the variables of the study obtained from

time series data of existing publications constituting

secondary sources of information.

The Information in the table would be utilized in performing

statistical least square regression analysis and the

associated techniques shown under model specification of

this study.

51
 AQUA LCAP MPOW VCAP

Period Asset quality Lending Market Volume of

( non capacity power capital
In
performing ( loans & ( deposit)
yea
loans ) advances )
rs
N’M N’M N’M N’M
1992 18,818.00 42,802.00 76,073.00 26,627.00

1993 32,858.00 49,972.00 112,407.00 27,296.00

1994 46,933.00 94,074.00 142,094.00 30,729.00

1995 57,800.00 144,060.00 182,386.00 41,951.00

1996 72,400.00 175,130.00 220,332.00 51,111.00

1997 75,000.00 240,698.00 280,029.00 74,112.00

1998 63,300.00 272,566.00 326,965.00 101,198.00

1999 94,787.00 352,854.00 516,773.00 141,803.00

2000 111,586.00 488,302.00 775,932.00 196,607.00

2001 135,737.00 849,699.00 975,525.00 364,455.00

2002 199,623.00 954,304.00 1,009,747.00 439,620.00

2003 260,190.00 1,209,574.00 141,696.00 539,742.00

2004 260,190.00 1,522,891.00 1,778,713.00 689,109.00

2005 350,820.00 2,008,899.00 2,155,159.00 954,568.00

2006 368,760.00 2,629,980.00 3,379,276.00 1,392,604.00

2007 225,080.00 4,822,768.00 5,255,940.00 2,305,174.00

TABLE 4.1 DATA SET

SOURCES: CBN Statistical bulletin . Vol 18, December,

2007 and NDIC Annual Report and Accounts.

52
4.2 ANALYSIS AND PRODUCTION OF RESULTS

The computations involving the data analysis techniques in

this study using the emperical data of table 4.1 above were

facilitated by access to a computer statistical software

package “ E Views”. This requires fitting the adopted

regression model in the study to the historical data on the

variables in order to realize the study’s objectives. However,

it note worthy to address the fact that, to ensure that the

data was stationary (an assumption in least squares), unit

root test was performed. At 5% significant level, they were

all stationary. In unit root test, if the ADF test statistics is

greater than the critical value, then it is stationary.

Extracts from the regression results presented in the

statistical output section of this study,s appendix are

provided in the schedule of results of table 4.2

TABLE 4.2.1 SCHEDULE OF RESULTS

DESCRIPTIVE STATISTICS

53
 REGRESSION RESULT

Variabl Coefficient S.E “t” test

e value R2 = 0.160
R2 = 0.084
AQUA bo 8537.291 24807.60
Syx =
0.344140 72617.82
VCAP b1 -0119871 0.082784
-1.448002 R2 = 0.961
R2 = 0.958
LCAP bo -19983.23 34739.98 Syx =

-0.575224 112853.0

0.124526 R = 0.555
2
VCAP b1 2.229366
17.90277 R2 = 0.521
Syx =

MPOW bo 15913.52 150312.6 488219.3

0.105870
VCAP b1 2.168559 0.538799
4.024800

4.3 INTERPRETATION OF RESULTS

Explanations to the results obtained from the statistical data

analysis as contained in the schedule of results of table 4.2

above is provided below to assist in conveying meaning to

the information supplied in the results for easy and better

understanding.

The regression functions are as follows:

AQUA = (8537.291) + (-0119871) VCAP + 

54
LCAP = (-19983.28) + (2.229366) VCAP + 

MPOW = (15913.52) + (2.168559) VCAP + 

The above functions show that, the average level of

performance (dependent variable, DVp) in terms of asset

quality, lending capacity and market power when volume of

capital (independent variable, VCAP) is zero are N8537.291,

N-19983.280 and 15913.520 respectively. Also, it indicates

that the average increase in the level of performance of

deposit money banks (DVp) in terms of asset quality,

lending capacity and market power when volume of capital

(VCAP) rises by one unit are N-0119871, N2.229366 and

N2.168559 respectively.

This effect on the level of performance, are theoretically and

practically plausible results as they correspond with the

theoretical or apriori expectations on the signs and size of

the coefficient of the regression model.

The approximate percentage of variations in the dependent

variables - level of performance of the deposit money banks

(DVp) in terms of asset quality, lending capacity and market

power, explained by the variation in the independent

variable - volume of capital (VCAP) of 0.16 (16%), 0.96

55
(96%) and 0.55 (55%) as measured by the coefficient of

determination (R2) gives a highly impressive result of the

overall relationship in the model and provides the

explanatory power of the independent variable (VCAP) in

exerting influence on the dependent variables (DVp).

However, the influencing power of the independent variable

(VCAP) on the dependent variable - asset quality (AQUA)

depicts a weak relationship.

4.4 DECISION AND INFERENCES

In order to reach reasonable conclusion required for decision

making and inferences as well as answer the research

questions in this study, a test of significance approach in

hypotheses testing will be adopted using the following

decision criterion (rule).

Decision Rule

Reject the null hypotheses (H0) and accept the alternative

hypotheses (H1) if the computed test statistic exceeds the

critical value of the same test statistic. Otherwise, reverse

the decision.

56
The decisions arrived at in respect of the research

hypotheses and questions are discussed in the subsection

below.

4.4.1 Hypotheses (1)

There is no significant relationship between banks’ asset

quality and the volume of capital

b1 = 0

b1 ≠ 0

α = level of significance = 0.05 {using a 2 tailed (sided) test

α /2=0.025}
df = n – k = 16 – 2 = 14

Test statistic: ‘t’ Test

Critical Value: t(α /2: df = n – k) = t(0.05/2: df = 16 – 2 = 14) = 2.15

The computed value of the‘t’ test statistic (i.e. -1.45) as

shown in the schedule of results of table 4.2 above did not

exceed the critical value of same test statistic (2.15). As a

result, we accept the null hypotheses that there is no

57
relationship between the volume of capital and banks’ asset

quality.

4.4.2 Hypotheses (2)

There is no relationship significant between lending capacity

and the volume of capital

b2 = 0

b2 ≠ 0

α = level of significance = 0.05 {using a 2 tailed (sided) test

α /2=0.025}
df = n – k = 16 – 2 = 14

Test statistic: ‘t’ Test

Critical Value: t(α /2: df = n – k) = t(0.05/2: df = 16 – 2 = 14) = 2.15

The computed value of the‘t’ test statistic (i.e. 17.903) as

shown in the schedule of results of table 4.2 above

exceeded the critical value of same test statistic (2.15).we

therefore reject the null hypotheses and accept the

alternative hypotheses that there is a relationship between

the volume of capital and lending capacity in banking.

4.4.3 Hypotheses (3)

There is no significant relationship between market power

and the volume of capital

58
b3 = 0

b3 ≠ 0

α = level of significance = 0.05 {using a 2 tailed (sided) test

α /2=0.025}
df = n – k = 16 – 2 = 14

Test statistic: ‘t’ Test

Critical Value: t(α /2: df = n – k) = t(0.05/2: df = 16 – 2 = 14) = 2.15

The computed value of the‘t’ test statistic (i.e. 4.025) as

shown in the schedule of results of table 4.2 above

exceeded the critical value of same test statistic (2.15).we

therefore reject the null hypotheses and accept the

alternative hypotheses that there is a relationship between

the volume of capital and market power in banking.

59
 CHAPTER 5

DISCUSSION, CONCLUSION AND RECOMMENDATTION

5.0 INTRODUCTION

This chapter presents the discussion of finding of the test

results of this study; the conclusion based on the results as

well as recommendation based on the conclusion.

5.1 Discussion of findings

In order to provide empirically based findings in this study,

the results of the hypotheses tested in the previous chapter

are discussed within the existing body of knowledge as

provided in the literature.

5.1.1 Volume of capital does not enhance bank’s

asset quality.

The study attempted to find out among other things, the

effect of volume of capital on bank’s asset quality using non

60
performing loans as proxy for asset quality since it is

majorly determined by the quality of loans. The study

revealed that volume of capital does not enhance asset

quality. This finding is against the researcher’s apriori

expectation because all things being equal, enhancing the

volume of capital would not only lead management to

engage better hands who will ensure effective credit risk

management, but will also lead to such banks being picky

and choosy over credit granted which will enhance asset

quality. Earlier studies such as Onaolapo (2008) find

evidence in favour of capital enhancing asset quality. In

discussing this test result, consideration of one or several

factors within the Nigeria financial sector will shed more

light on the finding.

First and foremost, it is important to state that qualified

credit risk management personnel in the earlier years in

banking was taken for granted and this culminated into high

non performing loans. Also, the high interest rate being

operated by Nigeria banks makes it increasingly difficult for

repayment of loans and as such repayment is abandoned

half way or out rightly neglected. Furthermore, the

economic down turn in the 1990s made it difficult for

61
borrowers to repay loans collected. Again corporate

governance was ignored and banks reported doctored

information showing adequate capital volume which

apparently was inadequate (even in recent times) with the

attendant high non performing loans. These factors are

possible explanation for the high non performing loans of

deposit money banks in Nigeria majorly in the 1990s, thus

the test result. Its note worthy to say however, that over the

last few years, non performing loans have reduced in the

banking system in Nigeria. This becomes obvious when non-

performing loans is compared to total loans and advances in

term of ratio. This may be due to the banking reforms and

stringent regulatory regime being maintained by the central

bank of Nigeria. Also the risk based capital standards (i.e.

minimum capital requirement) introduced by the central

bank of Nigeria is largely a contributory factor. However,

this study established that asset quality is not affected by

increasing the volume of capital.

5.1.2 Volume of capital is positively related to

lending capacity

The study revealed that volume of capital of deposit money

banks in Nigeria is associated with lending ability. This

62
implies that as volume of capital is enhanced, banks’

lending capacity is also enhanced, that is loans and

advances which is the proxy for lending capacity in this

study increases as volume of capital increases. This

disposition finds relevance in the fact that there will no

longer be capital base regulatory restriction which hitherto

was a hindrance to lending ability of banks. This finding is

consistent with Steven et al (2002) who found a statistically

significant and positive association between loan growth

and bank capitalization. It goes to imply that banks with

larger volume of capital will enjoy better performance in

terms of improved lending ability. By enhancing the volume

of capital a bank will be able to offer larger loans without

soliciting additional participation from another bank partner

thereby increasing its competitive edge. However, its note

worthy to state that this should be done within the ambit of

safety, that is excessive risk should be avoided as it could

lead to failure and also affect capital negatively.

Be that as it may, this study found that lending capacity of

deposit money banks in Nigeria in terms of loans and

advances, is largely influenced by enhanced volume of

capital

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 5.1.3 Volume of capital is positively associated to

market power

The study revealed a linear relationship between volume of

capital and market power. That is volume of capital

enhancement, influences the level of deposit which is the

proxy for market power in this study. This finding is in line

with conventional wisdom which views capital as playing the

role of implicit deposit insurance and as such encourages

deposit.It is also consistent with David and Vlad (2006), who

in their results suggested that well-capitalized banks are

ranked higher in terms of their ability to collect deposits

than their poorly capitalized counterparts. Joaquin and

Amparo (2005) also stated that highly capitalized banks

have higher market power in terms of the level of deposit as

depositors consider these banks to be more secure.

Depositors need some kind of insurance or security that

guarantees the safety of their money and the volume of

capital can be manipulated to play that role perfectly well.

It is obvious that a bank with an enhanced volume of capital

will earn the confidence of depositors and as such will have

market power over and above others in the industry. From

the foregoing, the study found that enhancing or

64
manipulating the volume of capital positively is

advantageous to deposit money banks generally as it will

give such a bank competitive edge in the industry in terms

of deposit.

5.3 CONCLUSIONS

Based on the discussion of findings, the following

conclusions are drawn:

1. The more the volume of capital is enhanced the

greater the lending capacity of deposit money banks.

I.e. enhancing the volume of capital enables banks to

grant larger loans that hitherto they have not being

able to because of capital base regulatory restrictions.

2. Enhancing the volume of capital of a bank will earn the

confidence of depositors as depositors will see such a

bank as secure because of the implicit insurance role of

capital which will in turn encourage more deposits.

3. Bank’s credit risk management should be stepped up

by engaging qualified credit risk management

personnel and also consideration should be given to

economic conditions and/or interest rate in granting of

65
 loans in order to avoid non performing loans which

affect asset quality negatively.

4. Since this study has made it amply clear that

enhancing the volume of capital of banks influences

banks performance, Nigeria deposit money banks

should not wait for involuntary enhancement of the

volume of their capital by regulatory authorities, but

they should voluntarily enhance the volume of capital

for enhanced performance over and above others in

the same industry.

5.4 RECOMMENDATIONS FOR FURTHER STUDIES

The following suggestions are made for further studies.

1. Volume of capital and customer loyalty.

2. Volume of capital and geographical expansion

3. Volume of capital and banking product

4. Where possible, this study should be replicated by

deposit money banks.

66
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