Determinants of Bank Profitability: Macroeconomic Evidence from Nigeria

Abstract

A recent set of banking sector reforms have been introduced in Nigeria to ensure inter alia a strong and reliable banking sector. However, if the historical antecedents of financial sector reforms in Nigeria are anything to go by, the recent reforms may not help to improve bank profitability and stability. Hence, to contribute to the existing knowledge of bank profitability in Nigeria, this study sought to econometrically identify significant macroeconomic determinants of bank profitability. Using a panel data set comprising 1255 observations of 154 banks over the 1980-2006 period and macroeconomic indices over the same period, regression results reveal that real interest rates, inflation, monetary policy, and exchange rate regime are significant macroeconomic determinants of bank profitability in Nigeria. Banking sector development, stock market development, and financial structure are insignificant; and the relationship between corporate tax policy and bank profitability in Nigeria is inconclusive.

Keywords: Interest Rates, Inflation, Policy, Exchange Rate, Development

JEL Classification: C32, G21, O55