Intermediation Efficiency and Profitability Performance: Quantitative Evidence from Nigerian Banking Sector

Abstract

The study was a conscious effort at analyzing the relationship between intermediation efficiency and profitability performance within the Nigerian banking industry from 1990 to 2009 with a view to identifying the determinants of efficiency and profitability.The study utilized a combination of descriptive statistics such as  graphical illustrations and pooled ordinary least squares regression techniques.  An in-depth analysis of the trends of key profitability and efficiency indices revealed that Nigerian banks rank among the most profitable globally, while it exhibits a generally poor rating in terms of efficiency of financial intermediation.  Tests of the relationship between intermediation efficiency and profitability exert significant causal effects on the efficiency of intermediation.Findings from the pooled ordinary least square (ols) regression results indicated that factors that positively determine the level of bank profitability performance include bank capital (bcp) (β = 0.53, t=2.04); Market Share (ms) (β = 0.31, t=1.81): bank concentration (bco) (β=0.74, t=1.72); white asset quality (ac) (β=0.52, t=2.15) negatively influenced it.  Conversely, factors that stimulate intermediation efficiency include overhead costs (ovh) (β=0.42, t=2.21); equity (eq) (β=0.60, t=1.95); bank concentration (bco) (β=0.49, t=2.02); bank’s profitability (roa) (β=111.23, t=5-21); while those that detract include loan intermediation (loan) (β=0.31, t= -1.81) and inflation (inf) (β= -0.92, t= -1.92).  The results therefore established that individual bank characteristics, industry structure and the overall macroeconomic environment are significant determinant of bank profitability and efficiency performance in Nigeria banks.

Keywords: profitability, intermediation, efficiency performance, banking industry structure , macre-economic environment.