The study examined the effect of financial performance banking sector on economic growth in Nigeria, a case study of three selected deposit money banks in Lagos State. The study employed the survey design and the purposive sampling technique to select 450 staff across management, senior and junior level. A well-constructed questionnaire, which was adjudged valid and reliable, was used for collection of data from the respondents. The data obtained through the administration of the questionnaires was analyzed using the Pearson correlation analysis.
The results of the correlation analysis showed that there is positive and significant relationship between banking liquidity and economic growth (r=0.772; p<0.05). Also, a positive and significant relationship exists between banking loan to deposit and economic growth (r=.896; p<0.05). Furthermore, a positive and significant relationship exists between return on assets and economic growth (r=0.772; p<0.05).
The study concluded that financial performance of banking sector has a significant effect on economic growth in Nigeria.
Based on the findings of the study, its hereby recommendations that Liquidity ratio, should be employed on both operational and financial by the management of every bank, to ensure that bank’s assets are safeguarded, cash inclusive; Internal audit, Accounting and Finance department should be established in every bank, which should be headed by a qualified accountant so the loan to deposit (LD) can be well monitored and recorded; Banks should arrange for cash, assets and investment in transit insurance cover in order to prevent the risk of loss of any cash in transit so the economy won’t be affected negatively; Return on Asset should be adequately seen as an indicator that should be mostly attractive to banking industry because this is compulsory indicator that can boost the financial performance of banks, and when the banks in Nigeria are doing well, it will sure have good effect on the Nigeria economy; Management of all banks should keep doing everything possible to keep increasing the financial level of the organization.
1.1 Background to the Study
Financial performance is the subjective measure of how well a firm can use assets from its primary mood of business and generate more revenue. It is also a general measure of a firm’s overall financial capability over a given period of time.
Economic growth is the increase in the inflation adjusted market value of the goods and services produced by an economy over time. According to IMF (2012),It is conventionally measured as the percentage rate of increase in real gross domestic product usually in per capita terms. Growth is usually calculated in real term to eliminate the distorting effect of inflation on the price of goods produced. Bork (1999) Measurement of economic growth uses national income accounting since economic growth is measured as the annual percent change of gross domestic product,it has all the advantages and drawbacks of that measure.The banking sector include a diverse group of financial service firm, including investment banks and brokerages, diversified commercial banks and custodial bank and asset managers.
Douglas and Philip (1983) opined that liquidity fraction of savers receive shocks after choosing between two investments: an illiquid, high- return project produce. Syed Muhammad Hamza,(2009),the banks provide social things to the people in the community like when you meet up to a targeted amount of savings you tend to in a price from them and this assist in providing thing to the people in the community and this increase the rate at which the economy grow which is measure with the use of the Gross Domestic Product).
Ekpenyong David B (2011) Economic growth seen from outer space; economists studying economic growth rely heavily on estimates of gross domestic produt, which are produce by national statistical offices as well as the various international agencies for building sustained economic growth of the economy vibrant system. The financial performance of the banking sector is affected by the regulation of the system. When we bring the rule of supply and demand with the interest every customer earn a lot of interest on the deposit made and here by encourage more of saving (ObademiOlalekan Emmanuel, 2014).
Thus, this study examined the effect of financial performance of banking sector on economic growth in Nigeria.
1.2 Statement of the problem
The Nigerian government having realized that adequate supply of credit to the economy is a crucial factor for growth process, have introduced several reforms to boost the growth of the banking sector thereby boosting the economic growth and reducing the rate of poverty and unemployment in the country. The fact that these various reform efforts have resulted in growth in the number of financial institutions and instruments, it is of paramount importance to note here that, this in itself cannot be taken as evidence of financial growth that is accompanied by growth in the real sector (Soludo, 2007).
Lack of access to income opportunities or skill-based training opportunities kept many people in Nigeria shackled to poverty. Unemployment is high, forcing many people to immigrate to other countries. Unless the poor people are brought into the mainstream for economic and social change, we will fail to bring change development (Akhavein, 1997).
The International Monetary Fund as well as the Central Bank of Nigeria have all agreed that Nigeria economy has plunged into recession. This will lead us to the causes of Nigeria recession and the possible solutions. One of the most prevalent causes for recession is high inflation, a general rise in price of goods and services. Another cause of recession is poor planning as it relate to the budget delay and also exchange rate policy. Economic recession is measured on the basis of Gross Domestic Product and some other economic performance indicators, through is part of the cause. The fact is that there are some solutions to all the causes of economic recession which are: invest in the energy sector, avoid double taxation, borrowings from both domestic and foreign should be invested more infrastructure (Emmanuel, 2017).
1.3Objective of the study
The main objective of this study is to find the effect of financial performance of banking sector on economic growth in Nigeria.
The specific objectives are:
1) To determine the effect of liquidity on economic growth.
2) To determine the impact of loan to deposit on economic growth.
3) To determine the impact return on asset on economic growth
1.4 Research Questions
1) What is the effect of economic growth on liquidity of Nigerian banks?
2) What is the effect of economic growth on loan to deposit of Nigerian banks?
3) What is the effect of economic growth on returns on assets of Nigerian banks?
The hypotheses were formulated in line with the objectives of the study as follows:
1) Ho: Economic growth has no significant effect on liquidity of Nigerian banks.
H1: Economic growth has a significant effect on liquidity of Nigerian banks
2) Ho: Economic growth has no significant effect on loan to deposit of Nigerian banks.
H1: Economic growth has a significant effect on loan to deposit of Nigerian banks.
3) H0: Economic growth has no significant effect on Returns on assets of Nigerian banks
H1: Economic growth has a significant effect on Returns on assets of Nigerian banks
1.6Operationalization of variables
The focus of the study is on the effect of financial performance of banking sector on economic growth in Nigeria. Thus, two variables are identified in this study, namely dependent and independent variables. The dependent variable is economic growth while independent variable is financial performance of banking sector which is measured with Liquidity ratio (LR), Loan to deposit (LR), Return on asset (RA).
The functional relationship is
Y= Economic growth (EG)
X= Bank Financial Performance (BFP)
X =x1, x2.x3
x1 = Liquidity ratio (LR)
x2= Loan to deposit (LD)
x3= Return on asset (RA)
EG =f (LR)
EG =f (LD)
EG =f (RA)
1.7 Significance of Study
The significant of the study is premised on the effect of financial performance of banking sector on economic growthin Nigeria. Since the banking sector of any country forms one of the main determinations of economic growth, to neglect such study as the banking sector would be as serious as neglecting the economy itself. The gross domestic product as proxy for standard of living in any economy has been very volatile. The justification of the study is the 2009 financial crisis witnessed in the Nigeria Banking sector in which eight of its bank was declared distressed (CBN, 2009).
This work will not only empirical contribute to knowledge, but as well serve as evidence to policy makers, operators and regulations in the banking sector on how transform the Nigerian Banking Sector into one of the safest and fastest growing banking sector among the emerging economies.
1.8 Scope of the Study
The scope of the study is to focus on the effect of financial performance banking sector on economy growth in Nigeria. The study covers a period of 5years (2012-2016) and will use primary data from questionnaire administration.
1.9 Operational definition of terms
Deposit: – A sum of money paid into a bank or building society account. Bank Deposit consists of money placed into institutions for safe keeping.
The account holder has the right to withdraw deposited funds, as set forth in the terms and conditions governing the account agreement.
Redraw: – Redraw is the term used to describe the ability to withdraw money (from additional payments you have made) when you need from your variable rate Home Loan. Redraw is the difference between your current balance and what the balance would have been of if you hadn’t made any additional repayment.
Credit Facilities: – is a type of loan made in a business or corporate finance context, including revolving credit, term loans committed faculties’ letters of credit and most retail credit account.
Lending Rate: – The amount a bank charges on money that it lends.
Interest Rate Spread: – This can be calculated by subtracting lending rates from Deposit rate. Interest rate spread is the interest rate charged by Banks on loans to prime customers minus the interest rate paid by commercial or similar banks for demand, time or saving deposit.
Liquidity Ratio: a company’s ability to repay short-term creditors out of its total cash. It is the result of dividing the total cash by short-term borrowings. It shows the number of times short-term liabilities are covered by cash. If the value is greater than 1.00, it means fully covered.
Return on assets (ROA): the percentage of how profitable a company’s assets are in generating revenue.
Human Development Index (HDI): is a composite statistic of life expectancy, education and per capita income indicators, which are used to rank countries into four tiers of human development.