Determinants of Bank Profitability and Basel Capital Regulation: Empirical Evidence from Nigeria

Abstract

This study, empirically, investigates the determinants of bank profitability. The debate on whether Basel capital regulation affects bank profitability continues to attract research interest among academics and policy makers, globally. I contribute to this debate by providing a country-specific study. Overall, I find that Basel capital regime had no significant effect on bank profitability. The result is significant because it lends support to the view that Basel capital regulation in different countries is modified to meet other prudential objectives relative to its intended objective - to reduce excessive risk-taking in banks. Second, after employing NIM and ROA profitability metrics, I find that the determinants of bank profitability, and its significance, depends on the profitability metric employed. Third, I find that loan quality significantly influences bank interest margin while bank size and cost efficiency significantly influences return on asset (ROA). Finally, bank capital adequacy ratio is observed to be a significant determinant of bank profitability.

Keywords: Bank Profitability, Performance, Basel, Return on Asset, Net Interest Margin, Bank Regulation.