SOURCE:

Faculty: Management Sciences
Department: Banking And Finance

CONTRIBUTORS:

Okaro, C. S. O.
Okafor, F.O.

ABSTRACT:

This research work assessed the Effects of Financial Structure on Profitability of Deposit Money Banks in Nigeria (1986-2013). The Specific objectives of the study were to:- determine the relationship between short-term obligations(STO), long-term obligations(LTO), total obligations(TO), Equity Capital and profitability of Nigerian DMBs;as well as the relationship between macro-economic variables (inflationary rate, exchange rate, interest rates, Gross Domestic Product and external debts) and profitability of Nigerian Deposit Money banks. Five research questions and hypotheses guided the study.Two analytical tools were used in this study, viz: descriptive statistics and multiple regression analytical models. Multiple analytical models were used to estimate the relationship (or otherwise) between DMBs profits and identified components of financial structure. The descriptive statistics were used to conduct economic analysis on the financial structure components. Ordinary least squares (OLS) approach was used to conduct the investigations and analysis. With our adapted model, a cross-sectional time series data covering 1986-2013 was used to determine the influence of financial structure variables(short-term, long-term, total debts) and macroeconomic variables (inflationary rates, GDP, exchange rate, external debt) on DMBs’ profitability variables (return on assets, return on equity, net interest margin.The analysis of data revealed that; profitability (ROA & ROE) hassignificant positive relationships with short-term obligations and long-term obligationsof DMBs. Net Interest Margin however, has no significant positive relationship with long term obligations of DMBs. There is no significant positive relationship between equity capital, ROE and ROA; while equity capital exhibits a significant relationship with NIM. Macroeconomic variables did not show any significant relationship with the profitability of deposit money banks. While some of the variables like inflation, exchange rate, interest rate show negative relationship with profitability of DMBs, Gross Domestic Product and External Debts show a positive relationship with the dependent variable. We recommend among others that: DMBs should employ optimal financial structure which should include the best mix of debt and equity that maximize shareholders wealth;DMBs should increase their use of long-term debts since it has greater percentage contribution to general profitability of the banks than other sources of funds;short term debt is profitable to DMBs in Nigeria, hence the banks should improve upon mobilization of savings and deposits which form the bulk of short term debt. This is important because in spite of the fact that the value of a business can be enhanced with long term obligations, it gets to a point that it becomes detrimental.The outcomes of the study reinforces and refines the body ofknowledge relating to financial structure and profitability of Nigerian DMBs, indicate consistency with prior empirical studies and provide evidence in support of Agency- cost theory.