WSEAS Transactions on Business and Economics
Print ISSN: 1109-9526, E-ISSN: 2224-2899
Volume 19, 2022
Effect of Prudential Regulation on the Financial Performance of Quoted Deposit Money Banks in Nigeria
Authors: ,
Abstract: International and national financial authorities are constantly issuing new prudential policies, rules, and guidelines to ensure a safe and sound financial system. How well the deposit money banks (DMBs) have kept to these prudential thresholds is expected to reflect on their financial performance. However, there has been no consensus by previous studies on the effect of prudential regulation on financial performance of deposit money banks. As such, this study seeks to assess the effect of prudential regulation on the financial performance of deposit money banks in Nigeria from 2011 to 2020. The prudential regulation is proxied by - capital adequacy, liquidity, leverage, and asset quality as the independent variables while the financial performance is proxied by earnings per share (EPS) as dependent variable. The data was sourced from the annual reports of the thirteen (13) quoted deposit money banks and analysed using descriptive statistics and Panel Data Regression to determine the relationships between the variables. As a form of diagnostics test, Jarque-Bera test was engaged for checking for normality, Pearson Correlation was employed to evaluate the degree of relationship among variables and extent of linearity, Unit root test was used to test for stationarity and the Hausman test to determine whether to use fixed or random effect panel least square regression of which fixed effect model was favoured. Data were estimated with STATA 15. The significance level was set at 0.05. Findings from the study reflect that capital adequacy has a positive coefficient of 0.7166 and a non-significance level of 0.5250 on financial performance using the EPS. Liquidity has a positive coefficient of 0.1804 and non-significance level of 0.8720 on the EPS. Asset quality has a co-efficient of -0.2843 and non-significance level 0.8850 on the EPS. Leverage has a coefficient of -1.5006 and a non-statistical significance level of 0.3800 on the EPS. The study concludes that an increase in capital does not necessarily translate to higher EPS, higher liquidity lessens banks’ liquidity risk, asset quality in form of non-performing loans reduces the bank’s capacity to create further loans, hence less earnings for the bank and leverage negatively influences financial performance. It is also discovered that control variables - age and size of banks - are positive determining factors for financial performance of banks. The study recommends that the CBN as the Regulator needs to strengthen capital adequacy by moving it to thresholds that will be impactful enough on the financial performance, get the banks to improve on asset quality by bringing non-performing loans to the regulatory limit, be discretional in the use of regulatory forbearance and interventions to bail out the banks to prevent reckless lending conduct. Lastly, banks are required to pay attention to the capital mix (leverage) to reap its benefits and manage the associated risk.
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Pages: 1195-1205
DOI: 10.37394/23207.2022.19.105