Effect of Price Levels, Exchange Rates and Interest Rates on Return on Assets of Commercial Banks in Nigeria

Abstract

The profitability of commercial banks in Nigeria has been characterized by fluctuating trend over the years. Due to the significant roles carried out by commercial banks, this scenario has brought about concerns in the financial sector of Nigeria. The study sought to establish the effect of price levels, exchange rates and interest rates on return on assets of commercial banks in Nigeria. The period 2010 to 2017 was the time scope of the study. The study was based on descriptive, correlation and panel regression analyses which focused on the period 2010 to 2017. The study established that price levels had a significant effect (β=0.003, p=0.0170) on return on assets of commercial banks in Nigeria. The study findings indicate that exchange rates had a significant effect on return on assets (β=-0.0002, p=0.0440). Interest rates had a significant effect on return on assets (β=0.0136, p=0.0090) of commercial banks in Nigeria. The study recommends that the managers of commercial banks in Nigeria should always be in the know of the prevailing economic conditions of the country and that of other countries which they have operational branches. Commercial banks can engage in foreign exchange hedging practices where the fixed forward exchange rates can be used. This will cushion against the potential adverse effect of exchange rates on the assets of commercial banks. The study further recommends that policy makers and regulators (government) should implement policies that will lower the exchange rates which in turn will enhance the value of the local currency. This can be done by upholding restriction policies by government on importation of similar goods which are already manufactured locally in Nigeria. The study further recommends that in periods of high demand for loans, bank managers can take advantage of such periods by charging higher interest rates on loans, however moderately. Price discrimination can also come into play so as to apply different interest rates on loans to different customers which can be guided by their credit history.

Keywords: Price levels, Exchange Rates, Interest Rates, Return on Assets and Commercial Banks

DOI: 10.7176/EJBM/12-15-12

Publication date:May 31^st 2020