Download UNIVERSITY OF NIGERIA, NSUKKA

PhD PROPOSAL
INTRODUCTION
The banking reforms introduced in Nigeria in 2005 was what triggered the unprecedented competition in
the banking industry in Nigeria. The consolidation reforms generally entailed the upward review of the
minimum capital requirement of banks from N2billion to N25billion (an increase of approximately,
1,150%), a decrease in the number of commercial banks operating in Nigeria from 89 to 25 (post
consolidation) and a dilution in the ownership structure of most of these banks as they subsequently became
publicly quoted companies on the Nigerian Stock Exchange (NSE). Generally, Competition in the banking
industry has been a subject of great scholarly inquiry and continues to occupy a large body of empirical
research. From public policy perspective, competitiveness of the banking sector represents a socially
optimal target, since it reduces the cost of financial intermediation and improves delivery of high quality
banking services, thereby enhancing social welfare. Banking competition also promotes economic growth
by increasing firms’ access to external financing, lowering the costs of banking products and services,
exerting corporate controls, managing and mitigating banking risks, mobilizing savings and investment
opportunities and adopting efficiency strategies for improving profitability. However, Petersen and Ranjan
(1995) show theoretically that Commercial banks wielding substantial market share are more beneficial to
developing economies as they can lend even to young firms whose credit records may be opaque, hence
leading to high loan volumes and substantial increase in both economic activities and economic growth. In
practice, Cetorelli and Gamberra (2001) argue that although, concentrated banking systems offer growth
opportunities for young firms, there is strong evidence of a generally depressing effect on economic growth
associated with banks’ exercising substantial market share and this impacts all sectors and firms in the
economy. Hence, competition in banking should be placed at the centre of any public policy agenda since it
has the mechanism to respond to the dynamic changes in economic conditions, especially those that affect
delivery of financial services.
According to Mugume (2010), there are 2 plausible theories to determining the market share of competing
banks towards measuring their profitability and it is crucial to determine which of these 2 theories more
accurately describes the behavior of Nigerian Commercial banks since the economic policy implications
derivable from these theories are radically diverse. The first theory postulates that an increase in banks’
profitability is directly related to the total efficiency improvement in its operations, termed the Efficiency
Structure Hypothesis (ESH) theory. The Efficiency hypothesis further expatiates that an increase in the total
revenue of banks as a result of improved efficiency will increase profitability. The other theory explains
that an increase in the profitability of commercial banks is caused by an increase in market share, otherwise
called the Structure-Conduct Performance (SCP) Hypothesis. Our major objective in this research is
therefore to resolve the dilemma between the conflicting theories of SCP and ESH, especially, for a
developing country like Nigeria. The other ancillary objectives are to determine the impact of profitability
on: (i) the market share of commercial banks (ii) banking efficiency for commercial banks and (iii) to
determine the impact of profitability on banking concentration for commercial banks in Nigeria.
METHODOLOGY
The study adopted the ex-post factoresearch design. Time series data for 9 years period: 2005 – 2013 were
collated from secondary sources which included thepublished financial statements of all the commercial
banks in Nigeria and the Central Bank of Nigeria Annual Report and Statements of Account. The Ordinary
Least Square (OLS) regression technique was used to estimate the three hypotheses formulated in line with
the objectives of the study. Banking financial performance, otherwise referred to as Profitability, was
adopted as the dependent variable, while the independent variables were Market Share, Efficiency and
Banking Concentration.
RESULTS
Market share had a positive but not very significant impact on the profitability of commercial banks in
Nigeria (Beta coefficient = 0.08, Standard Error = 0.02, t = 4.27, R-squared = 38.7%, Adjusted R-squared =
35.8%, p = 0.000 <0.05).Banking efficiency had a negative and significant impact on commercial banking
profitabilityin Nigeria (Beta coefficient = -0.47, Standard Error = 0.096, t = -4.96, R-squared = 38.7%,
Adjusted R-squared = 35.8%, p = 0.000 <0.05). Banking concentration also had a negative but not
significant relationship with profitability for commercial banks in Nigeria (Beta coefficient = -0.03,
Standard Error = 0.077, t = -0.38, R-squared = 38.7%, Adjusted R-squared = 35.8%, p = 0.70 >0.05)
CONCLUSION
Based on the results of our hypotheses testing and other findings, the research recommends that:

Commercial banks in Nigeria should be encourage to wield significant market share for obvious reasons
such as enhanced profitability, increase customer deposit base, ability to lend to a large number of
borrowers and increasing their total loan portfolio.

Efficient banks can have significant market shares which can enhance their profitability in the long run
but efficiency should not be the principal yard stick for measuring the impact of competition as
commercial banks tend to exhibit monopolistic competitive behaviors which are detrimental to
economic growth and national development.

Concentrated banking systems offer growth opportunities for a developing country such as Nigeria,
providing employment opportunities and bringing banking services closer to the people hence it is
recommended that Commercial banks in Nigeria should deepen their concentration of bank branches to
appreciable network of branches nationwide

Economic policy makers are also advised to recommend measures aimed at fueling banking
competition as that will generally promote the liberalization of financial markets and removing barriers
to banking competition.