Asset Structure And Profitability Nexus – Evidence From Commercial Banks In Nigeria

Abstract

This study examines the relationship between asset structure and profitability of commercial banks in Nigeria. It explains that the capacity of commercial banks to meet their objectives depends largely on how they structure their assets, such as loans and advances, treasury bills, shares and bonds. Drawing on asset and liability management and on portfolio theory, which holds that the optimum bank asset structure depends on the profitability of assets relative to their risk, the paper places the problem in the context of the 2007-08 global financial crisis, which triggered an economy-wide stress audit of Nigerian banks that many failed. Poor asset structure was among the causes of bank distress identified by the Central Bank of Nigeria and the Nigeria Deposit Insurance Corporation, yet the authors note that there is little empirical work establishing the causal link between asset structure and bank profitability in Nigeria, and the study responds to this need for empirical analysis. Its tables present the weighted average cost and reserve requirement of different classes of liabilities, computed from the Central Bank of Nigeria Statistical Bulletin, the optimal asset structure and the optimal liability and equity structure of Nigerian commercial banks for 2008-2017, and the parameters of a model based on the proportion of net interest income to assets.

Abstract prepared by the editorial office from the full text of the article; the authors did not supply one.