A Nexus of Capital Base, Profit Generating Capacity and Operational Efficiency of Commercial Banks in Nigeria

Abstract

The study analyzed the main determinants and the relationship between capital base, profit-generating capacity and operational efficiency of Nigerian commercial banks. This was with a view to providing empirical information on the relationship between capital base requirements and profit-generating capacity and efficiency in the Nigerian commercial banking sector.Secondary data covering 16years on key performance indicator of the banks such as total income, interest rates, total credits, and branch networks were sourced from the “fact books” published by the Nigerian Stock Exchange (NSE) and official publications of the selected banks. The data were subjected to the two-stage least square(TSLS) technique for the purpose of estimating the model. The results showed that capital base requirement was ineffective in reducing distress in the banking industry. The results further showed that the main determinants of bank capital base were lagged capital (t = -2.60, p<0.05), risk (t =2.30, p<0.05), size(t= -3.27, p<0.05), profit before tax (t =6.23, p<0.05), regulatory pressure (t=3.97, p<0.05) and profit generating capacity (t =2.54, p<0.05). It was also found that bank capital base significantly influenced bank efficiency (t= 2.14, p<0.05) and that changes in the bank capital determined the degree of efficiency of the banks (t =2.14, p<0.05). Furthermore, the capital base of the banks significantly influenced their profit generating capacity (t=10.2, p<0.05). This revealed that the Central Bank of Nigeria could use the regulatory power of raising the capital base of banks to stimulate greater profitability and efficiency in the banking sector.

Keywords: Financial Deepening, Commercial Banks, Capital Base, Efficiency, Profit Generation, Nigeria.