Non-Interest Income and Financial Performance of Selected Deposit Money Banks in Nigeria

Non-Interest Income and Financial Performance of Selected Deposit Money Banks in Nigeria

Emmanuel Uniamikogbo (Rhema University, Aba, Nigeria), Emma I. Okoye (Nnamdi Azikiwe University, Awka, Nigeria) and Akonye Chinazu (Nnamdi Azikiwe University, Awka, Nigeria)
Copyright: © 2020 |Pages: 15
DOI: 10.4018/IJBSA.2020070105

Abstract

This study examined the effect of e-banking income, fee income, and firm size on market value added of Deposit Money Banks in Nigeria. The eight banks categorised by Central Bank of Nigeria in 2014 to be Domestic Systematically Important banks were selected using the purposive sampling technique. Data collected from the annual reports and accounts and the Nigerian Stock Exchange website respectively for a period of 11 years (2008-2018) was used. The descriptive statistics and econometric analysis were employed using the Panel Data Analysis method. Findings from the study revealed that e-banking income and fee income each has a significant positive effect on market value added of DMBs in Nigeria. The study recommends that banks in Nigeria should further develop its internet and other electronic platforms that can improve its income from e-banking operations since e-banking income is shown to be a strong and emerging component that boosts banks' performance. Larger and investment-oriented banks should focus on increasing their share of interest income to become more stable.
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1. Introduction

Banks are very important organisations which aid in the execution of socio-economic activities undertaken by individuals, business organisations and the government. They serve primarily as a media which bridge the gap between surplus and deficit units in an economy (Damankah, Anku-Tsede, & Amankwaa, 2014). This fundamental function of banks generates interest income which has over the years been the major source of revenue, since loans form a greater portion of the total revenue-generating assets of banks prior to evolution of digital banking. These assets generate huge interest income for banks which to a large extent determines their financial performance (Mabvure, Gwangwava, Faitira, Mutibvu, & Kamoyo, 2012).

Basically, financial flows of Deposit Money Banks (DMBs) are from the intermediation process (for example, interest paid on deposits (interest expense), interest received from loans and securities (interest income), and the resulting net interest margins. Banks promote economic growth primarily by mediating between surplus economic units and deficit economic units. In the process, they facilitate capital formation and lubricate the process of production. This intermediation function is important because, in the absence of banks, savings would have been fragmented in small pockets, but by pooling together such savings banks are able to attain economies of scale with beneficial effects for their credit customers (Nzotta, 2004).

Banks exist because they mitigate a lot of problems that otherwise would have prevented liquidity from flowing directly from agents with excess liquidity (depositors) to agents in need of liquidity (borrowers). These problems arise because of information asymmetries, contracting costs, and scale mismatches between liquidity suppliers and liquidity demanders. Deposit Money Banks’ therefore, are seen as solution to these problems by virtue of their intermediating role because they have a comparative advantage at gathering information on borrowers’ creditworthiness; better able to monitor borrowers than individual lenders; provide increased liquidity by pooling funds from many households, businesses and by issuing demandable deposits in exchange for these funds; and also diversify away idiosyncratic credit risk by holding portfolios of multiple loans (DeYoung & Rice, 2004). The relevance of the banking sector is justified by the fact that they not only provide the intermediation used in pooling funds from savers but at the same time redirects them to investors. It also provides the payment system that facilitates trade and exchange as well as a platform for the working out of the monetary policies which provides macroeconomic stability for all economic agents (Saunders & Walter, 2005).

For banks to perform efficiently and discharge the said core functions, it is imperative that the banks are viable and healthy and that the entire industry is stable and sound. It is against this background that the industry globally is heavily regulated, and most times either proactively or in response to certain industry inefficiencies, embarks on reforms to reposition the industry in order to meet desired objectives (Ebong, 2006). Also, in view of enhancing the overwhelming role of the financial sector and save the banking industry from imminent collapse, the Central Bank of Nigeria (CBN) continually reviews the CBN’s prudential guidelines which must be complied with by DMBs in their operations to avoid failures and enhance maximum profitability, liquidity and solvency in the banks’ lending activities (Olokoyo, 2011).

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