Credit Risk, Market Power and Exchange Rate as Determinants of Banks Performance in Nigeria.

Abstract

Performance of banks is mostly measured by profitability (ROA &ROE). Profitability is determined by bank-specific and industrial/macroeconomic variables. The former is controllable variables and the latter is uncontrollable variables. The objectives of the study were to examine the effects credit risk, market power, exchange rate on the profitability of banks in Nigeria. The population of study is fifteen (15) quoted Deposit Money Banks in the Nigerian Stock Exchange (NSE). Data are collected from secondary source of the quoted banks' annual reports (2006-2011). Linear regression is used as tool of the analysis of the study. The empirical results of model one show that market power has significant positive effect on profitability (ROA) while exchange rate has insignificant positive effect on profitability (ROA). Besides, credit risk has insignificant negative effect on profitability. The model two results also reveal that market power has significant positive effect on profitability (ROE). Exchange rate has significant negative effect on profitability (ROE) while credit risk has insignificant negative effect on profitability. The study recommends that banks managements should continue to: increase and maintain their market share known as market power. The reason is that, the significant rise in market power has positive relationship with the profitability of banks. Secondly, adequately anticipate exchange rates fluctuations they transact on, despite exchange rate has significant negative effect on profitability of banks measured by ROE. This is because stable exchange rates add value to the profitability of banks in Nigeria. Lastly, ensure that they continue to maintain low level of credit risk in order to increase the profitability. This is because the insignificant decline in credit risk has negative effect on the profitability of banks.