Effects of Economic Openness and Inflation on Commercial Banks’ Profitability: Panel Data Evidence from Nigeria, Post-Banking Sector Consolidation (2005-2012).

Abstract

The paper employs panel data estimation techniques to investigate the effects of economic openness (trade and financial openness) and inflation on commercial banks’ profitability in Nigeria. Using panel data for the period 2005 to 2012 on a sample of 14 commercial banks in the country, the empirical analysis based on the random effect model selected on the basis of Hausman test result indicates that the impact of financial openness on commercial banks’ profitability was positive and significant while the impact of trade openness was also positive, but statistically insignificant. Inflation and bank size were also observed to have had insignificant impact on banks’ profitability in the study period. Further evidence from the analysis is that financial openness and inflation adversely affected commercial banks’ profitability in the heat of the global financial crisis (2007-2010), marked by the downward trends in return on asset of most of the banks within the period. These findings suggest inter alia that economic openness could enhance the profitability of commercial banks if the banks could take advantage of the opportunities it offers. The paper therefore recommends greater integration of the country’s economy with the global market, active participation of Nigerian banks in trade finance and merchant banking, establishment of foreign branches of the commercial banks in other countries particularly in countries with fast growing economies, quality asset management, some restriction in cross-border capital flows and lowering the rate of inflation particular in periods of global financial crisis, etc. to enhance the profitability of the commercial banks.

Keywords: Financial Openness, Trade Openness, Inflation, Commercial Banks’ Profitability, Panel Data Estimation, Nigeria.