Impact of Competition on the Financial Performance of Listed Deposit Money Banks in Nigeria

Abstract

The impact of bank competition on bank performance remains a widely debated issue. At present, scholars investigate either the competition-stability or the competition-fragility relationships. The traditional competition-fragility view equates bank competition with instability as competition reduces market power and profit margins which in turn encourages bank managers to take higher risks. In contrast, the competition-stability view stipulates that competition leads to lower loan interest rates and consequently lower moral hazard and adverse selection problems and less risky loan portfolios. This study examines both paradigms using panel data from deposit money banks in Nigeria over a period of ten years (2005-2014). Results show that the overall relationship between competition and financial performance of banks is negative. The study, therefore, concludes that competition has a negative effect on the financial performance of banks in Nigeria. The study suggests that regulators should promote healthy competition among deposit money banks so as to reduce the negative effect of competition on bank financial performance. Managers should take measures to enhance profit margin by reducing expenses. Current efforts of the government in terms of improved power generation may help to cut cost of power borne by the banks. Managers should also ensure healthy loan portfolio by ensuring that only customers with high credit scores get loans.

Keywords: Bank, competition, financial performance, loan, market share, Nigeria, profit margin, risk.