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Bank Capital Structure, Liquidity and Profitability Evidence from the Nigerian Banking System

  • Sebastian Ofumbia Uremadu


    (College of Agribusiness and Financial Management MOUAU)

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    This study presents empirical evidence of the effect of bank capital structure and liquidity on profitability using Nigerian data for the period 1980-2006 studied. The data were analyzed using descriptive statistics and the auto-regressive distributed lag (ADL) model. Specifically, the study applied data on an OLS methodology that incorporated unit root tests for stationarity and co- integration. We find a positive influence of cash reserve ratio, liquidity ratio and corporate income tax; and a negative influence of bank credits to the domestic economy, savings deposit rate, gross national savings (proxy for deposits with the central bank), balances with the central bank, inflation rate and foreign private investments, on banking system profits. We equally observe that liquidity ratio leads banks’ profits in Nigeria, closely followed by balances with the central bank and then, gross national savings and foreign private investments, followed suit in that order. We therefore recommend a drastic reduction in balances with central bank, liquidity ratio and cash reserve ratio profiles by the monetary authorities to enable banks create adequate credits and release more money into circulation for effective financial intermediation to occur; ensure effective and efficient management of bank liquidity by banks to moderate levels so as to optimize profitability, and curb perennial unethical banking practices such as directly engaging in trading, importation and exportation of goods, and other speculative deals, instead of lending to the domestic economy.

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    Article provided by Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences in its journal International Journal of Academic Research in Accounting, Finance and Management Sciences.

    Volume (Year): 2 (2012)
    Issue (Month): 1 (January)
    Pages: 98-113

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    Handle: RePEc:hur:ijaraf:v:2:y:2012:i:1:p:98-113
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    1. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
    2. Laurence Booth, 2001. "Capital Structures in Developing Countries," Journal of Finance, American Finance Association, vol. 56(1), pages 87-130, 02.
    3. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    4. Rajan, Raghuram G & Zingales, Luigi, 1995. " What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-60, December.
    5. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-92, July.
    6. Charles J. Hadlock & Christopher M. James, 2002. "Do Banks Provide Financial Slack?," Journal of Finance, American Finance Association, vol. 57(3), pages 1383-1419, 06.
    7. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    8. Frank, Murray Z. & Goyal, Vidhan K., 2003. "Testing the pecking order theory of capital structure," Journal of Financial Economics, Elsevier, vol. 67(2), pages 217-248, February.
    9. Titman, Sheridan & Wessels, Roberto, 1988. " The Determinants of Capital Structure Choice," Journal of Finance, American Finance Association, vol. 43(1), pages 1-19, March.
    10. Harris, Milton & Raviv, Artur, 1991. " The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
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