ABSTRACT
The study aims at examining the impact of Asset Liability Management on non-interest income structure of Deposit Money banks in Nigeria for the period of Year 2011 to Year 2015. The study reviews the role of non-interest income in the present day Nigeria banking system.
The study adopts a trend analysis of non-interest income, non-interest income as a proportion of banks’ net interest income and the extent to which banks’ asset liability management have any significant impact on the extent to which non-interest income is a significant component of banks’ aggregate performance. To achieve these, variables for asset liability management and non-interest income were obtained from Obrimah (2015) and DeYoung (2013) respectively. The study makes use of ordinary least square (OLS) technique for analyzing the regression model.
Empirical findings show banks’ asset liability management have impact on the extent to which non-interest income is a significant component of banks’ aggregate performance. Evaluations of non-interest income show that foreign exchange fees form the highest source of non-interest income followed by fees relating to lending. Also, reduction in Commission on Turnover by Central Bank of Nigeria from 5 per mille to 1 per mille (now replaced with account maintenance) presently did not reduce non-interest income.
Conclusively, bank’s size do not have positive relationship with non-interest income. Non-interest income as a proportion of banks’ net interest income reveals that banks categorized as small such as Fidelity bank, Stanbic IBTC, Sterling and Diamond had higher value of proportion of Non-interest Income to Net Income than First bank, Zenith bank, GTbank and Access bank. An important implication of our findings is that large Deposit Money banks large banks may be overlooking opportunity to generate non-interest income. Hence, large DMBs should not under-utilize their assets so as to generate more non-interest income.
Keywords: Deposit Money banks, Non-interest Income, Asset Liability Management (ALM), Commission on Turnover
Word Count: 295
TABLE OF CONTENTS
Content Page
Title page i
Certification ii
Dedication iii
Acknowledgments iv
Abstract v
Table of Contents vi
List of Tables ix
List of Figures x
CHAPTER ONE: INTRODUCTION
- Background to the Study 1
- Statement of the Problem 2
- Objective of the Study 3
- Research Questions 3
- Hypotheses 3
- Scope and Limitation of the Study 4
- Significance of the Study 4
- Operational Definition of Terms 5
CHAPTER TWO: REVIEW OF LITERATURE
2.1 Conceptual Framework 6
2.1.1 Asset Liability Management (ALM) 6
2.1.2 Key Components of Asset Liability Management 8
2.1.3 Measuring Risk in Alm 8
2.1.4 Concept of Asset Liability Management 9
2.1.5 Implications of Basel III on Operational Risk 11
2.1.6 Components of Non-Interest Income 14
Content Page
2.2 Theoretical Framework 16
2.2.1 Non-Interest Income and Financial Performance 17
2.2.2. Productivity and Non-Interest Income of Deposit Money Banks 19
2.3 Factors Determining Non-Interest Income 20
2.3.1 Market Conditions 21
2.3.2. Deregulation 21
2.3.3 Technological Advancement 22
2.3.4 Bank size 22
2.3.5 Interest income 23
2.3.6 Customer deposits 23
2.3.7 Prevailing (low) deposit interest rates, high lending rate and risk of
non-performing loans (NPLs) 24
2.3.8 Exposure to Risk 24
2.3.9 Bank Liquidity 24
2.3.10 Inflation 25
2.3.11 Prime Rate 25
2.4 Empirical Review of Related Studies 26
2.5 Gaps in the Literature 32
CHAPTER THREE: METHODOLOGY
3.1 Research Design 33
3.2 Population 33
3.3 Sample size and sampling Technique 33
3.4 Types and Sources of Data 34
3.5 Method of Data Analysis 34
3.6 Ethical Considerations 36
3.7 Limitation of Methodology 36
CHAPTER FOUR: DATA ANALYSIS, RESULTS AND
DISCUSSIONS OF FINDINGS
4.1 Descriptive Statistics for Variables Employed 38
Graphical representation of results of the study variables 40
4.2.1 Test of Hypothesis One 47
4.2 Empirical Analysis 49
Regression Model 49
4.2.3 Test of Hypothesis Two 51
4.2.4 Test of Hypothesis Three 51
4.2.4.1 NONIIRATIO2 (with COT) 51
4.2.4.2 NONIIRATIO2 (without COT) 53
4.3 Summary of Findings 53
CHAPTER FIVE: SUMMARY, CONCLUSION
AND RECOMMENDATIONS
5.1 Summary 55
5.1.1 Summary of Findings 56
5.2 Conclusion 57
5.3 Recommendations 58
5.4 Contribution to Knowledge 58
5.5 Suggestion for Further Studies 59
ReferenceS 60
Appendix 64
LIST OF TABLES
Table Page
2.1.1: Implications of Basel III 13
2.1.2: CBN Revised Guide to Bank Charges 15
4.1: Descriptive Statistics 40
4.2: Impact of ALM on Non-interest Income 52
LIST OF FIGURES
Figure Page
2.1.1: The make-up of Interest Rate Risk 8
2.1.2: Relationship between Interest rate risk and Non-Interest Income 9
2.1.3: The New Basel III Framework: Navigating Changes in Bank
Capital Management 13
4.1: Commission on Turnover 43
4.2: Credit Related Fees 43
4.3: Foreign Exchange Fees (Fx Fees) 44
4.4: Asset Liability Management Ratio (ALM Ratio) 45
4.5: Total assets (bsize) 45
4.6: Exposure to Risk 46
4.7: Non-interest Income 47
4.8:Return on Assets (RoA) 47
4.9: Trends in Non-interest Income (Selected banks) 48
4.10: Non-Interest Income / Net Income 50
CHAPTER ONE
INTRODUCTION
- Background to the Study
Banks are very important organizations which help in the execution of socio-economic activities engaged by individuals, business organizations and even sovereign states. They serve primarily as a medium which bridges the gap between surplus and deficit units in an economy. This fundamental function of banks generate interest income which has over the years been the major source of revenue, since loans form a greater portion of the total assets of banks. These assets generate huge interest income for banks which determines their financial performance (Mabvure, Gwangwava, Faitira, Mutibvu &Kamoyo, 2012). In recent times, developments in information and communication technology, increased competition among banking companies as well as the complexity and diversity of businesses and their demands for financial services have compelled banks to consider other banking activities which offer numerous services to clients and boost revenue via fee income generation.
The term non-interest income refers to income earned from sources other than returns on advances or loans to bank clients. They are usually fee or commission generating activities which range from cash management to underwriting activities and custodial services as well as derivative arrangements. As part of total bank earnings, non-interest income is gaining prominence in recent times particularly in the US and Europe, as competition continues vigorously in the traditional banking business of deposit mobilization and loan making.
On the other hand, asset liability management (ALM) is a dynamic process of planning, organizing, coordinating and controlling assets and liabilities – their mixes, volumes, maturities, yields, and costs in order to achieve a specified business objective. The ALM system has different functions to manage risks such as market risk management, trading risk management, liquidity risk management, funding and capital planning, profit planning and growth projection (Kosmidou & Zopounidis, 2004). It enables the banks to make symmetry business decisions in a more informed framework through risks. It is an integrated approach that covers both types and amounts of financial assets and liabilities with the complexities of the financial market.
- Statement of the Problem
The theoretical rationale of this study is strong competition among banks and its effect on asset-liability management. If a bank is not competitive at matching duration of assets and liabilities, it is exposed to more risk. Does this make this bank more likely or less likely to focus on fee income generation? If a bank is competitive at matching duration of assets and liabilities, it is also exposed to risk. Does the bank leverage on this comparative advantage to focus even more on fee incomes, or do fee incomes become less important to the bank? These are questions to which the literature to the best of knowledge has yet to proffer an answer.
Expansion into new fee-based products and services would reduce banks’ income volatility (Rogers & Sinkey, 1999). However, empirical findings indicate that expansion into fee-based products would reduce income volatility does not hold (DeYoung & Rice, 2004). Also, Rogers and Sinkey (1999) posit that firm size will have a positive relationship with the level of non-traditional activities based on the position of Hunter and Timme (1986) who also found that larger banks are better equipped to use new technology and exploit the resulting cost savings and/or efficiency gains. However, outcome of findings of Damankah, Anku-Tsede and Amankwaa (2014) showed that negative relationship exists between Non-interest Income and bank size. Merton and Bodie (1992) also argued that banks need “assurance capital” to enter non-traditional activities engagement in non-traditional activities while the outcome of the empirical study by Damankah et al.,(2014) showed independence of bank capital adequacy. Moreover, it was conventionally believed by Damankah et al.,(2014) that expansion into new fee-based products and services are not comparable with the efficiency, returns on assets (ROA) which is a measure of an effective ALM. However, empirical studies by DeYoung and Rice (2004) indicate that neither of these beliefs holds on average. So, this research determines if non-interest income which includes fee-based products and services has a significant impact on aggregate bank performance of Deposit Money banks in Nigeria.
Despite the gradual reduction in Commission on Turnover (COT), Deposit Money banks in Nigeria have diversified their income earning activities towards non-interest income such as introduction of cash-lite charges, increase in online and mobile banking enrolments, income from ATM cards issuance, N65 ATM cards charges against third time usage, fees from Point of Sales (P.O.S), income from sales of JAMB forms, Western Union related transactions, Moneygram related transactions and so on. This source of income (non-interest) can be used to offset default risks that are associated with interest incomes which are susceptible to economic recession. Therefore, has the decline in COT which play a major source of fee income reduced the non-interest income of DMBs?
- Objective of the Study
The specific objectives are to:
- examine trends in non-interest income as a proportion of banks’ net interest income;
- ascertain if a decrease in Commission on Turnover (COT) has led to a decrease in non-interest income of Deposit Money banks in Nigeria;
- determine if non-interest income has a significant impact on aggregate bank performance i.e. return on assets and
- examine whether banks’ asset liability management have any significant impact on the extent to which non-interest income is a significant component of banks’ aggregate performance.
- Research Questions
The following research questions are needed to give direction to the study in order to arrive at a reliable finding, conclusion and recommendations:
- What are the trends in non-interest income vis-à-vis net interest income?
- To what extent has decrease in Commission on Turnover (COT) led to decrease in non-interest income of Deposit Money banks in Nigeria?
- To what extent do non-interest income has a significant impact on aggregate bank performance i.e. return on assets?
- To what extent do banks’ asset liability management have impact on the extent to which non-interest income is a significant component of banks’ aggregate performance?
- Hypotheses
The following are null hypotheses used in the study:
Ho1: Decrease in COT has not led to decrease in non-interest income of Deposit Money banks in Nigeria
Ho2: Non-interest income does not have a significant impact on aggregate bank performance i.e. return on assets
Ho3: Banks’ asset liability management does not have impact on the extent to which non-interest income is a significant component of banks’ aggregate performance
1.6 Scope of the Study
This study was not without limitations. In attaining its objective, the study was limited to a 5 year period starting form year 2011 to year 2015. Data availability was a major constraint of the study and hence, the reason for the selected period. Secondary data was collected from the annual audited report of twelve (12) Deposit Money Banks in Nigeria. Data was sourced from Annual audited financial statements of selected banks and CBN statistical bulletin.
The study was also limited to the degree of precision of the data obtained from the secondary source. Lack of sufficient published materials such as books and journals in the library relevant to the research topic. This forced the researcher to rely on e-books which are time consuming in terms of ease of access. Also, time constraint might be another major limitation to the study given that the researcher is restricted to carry out the study within a short period of time.
The study focused on variables attached to asset liability management and non-interest income such as Commission on Turnover, Fees relating to lending, foreign exchange fees, asset liability ratio, bank size, exposure to risk and return on assets. These variables form the area of interest of this research work although we have other variables that affect ALM in Nigeria.
1.7 Significance of the Study
This study sheds light on the effects of comparative advantages in ALM on non-interest income generation within banks. The interaction of the mix in assets and liabilities of banks was reviewed vis-a-vis non-interest income. The study determined if bank’s size measured with total asset, liability measured with customers’ deposit, exposure to risk measured with Non-performing Loan and bank liquidity would significantly increase non-interest incomes.
Despite the gradual reduction in Commission on Turnover (COT), Deposit Money banks in Nigeria have diversified their income earning activities towards non-interest income such as introduction of cash-lite charges, increase in online and mobile banking enrolments, income from ATM cards issuance, N65 ATM cards charges against third time usage (against other banks). This source of income (non-interest) can be used to offset default risks that are associated with interest incomes which are susceptible to economic recession. It is also imperative to exploit other sources of income and what determines these sources so as to ensure stability in incomes.
This study is to assist policy makers to draw policies that would create a conducive environment for banks to diversify their incomes and reduce pressure on lending rates as well as not discriminatorily over-charging customers in the non-traditional services provided by them.
- Operational Definition of Terms
Asset Liability Management (ALM): Thisis a dynamic process of planning, organizing, coordinating and controlling assets and liabilities – their mixes, volumes, maturities, yields, and costs in order to achieve a specified business objective.
Non-interest Income: This refers to banks’ earnings from non-traditional banking activities such as fees, licensing, commissions among others. These enter into the composition of interest margins for banks.
Net Interest income: This is the difference between revenues generated by interest-bearing assets and the cost of servicing (interest-burdened) liabilities.
Return on Assets (RoA): This is a financial ratio that shows the percentage of profit a bank earns in relation to its overall resources. It is commonly defined as net income divided by total assets. It is also a proxy to the size of the bank.
Commission on Turnover (COT): This is a fee that is charged to the customer based on the amount of withdrawals the customer effected. It is usually set by the bank. COT in Nigeria prior to March, 2013 was 5 per mille i.e. (N5 charge on N1000 withdrawal); from April, 2013 to December 2013, it was reduced to 3 per mille i.e. (N3 on withdrawal of N1,000), it was further reduced to 2 per mille in year 2014; 2015, 1 per mille and was scrapped in 2016 but was replaced by maintenance fee.
CBN Banker’s tariff: This is the CBN issued guide to bank charges. The charges of Deposit Money banks (commercial banks) should strictly be in accordance with CBN provisions. The current one in use was issued on 27th March, 2013 and took effect from 1st April, 2013.
Deposit Money Banks: These are resident depository institutions, corporations and quasi-corporations which have any liabilities in the form of deposits payable on demand, transferrable by cheque or otherwise usable for making payments. It was initial called Commercial banks.
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