Abstract
This study examines the effect of financial deepening on financial performance of Nigerian Deposit Money Banks using time-series data spanning 1990Q1-2017Q4. The financial performance is expressed by return on assets (ROA) and return on equity (ROE) with total bank liability, private sector credit and market capitalization as measure of financial deepening. The technique of analysis deployed is autoregressive distributed lag (ARDL) to co integration. The findings show that the effect of total bank liability is positive and significant. Market capitalization and private sector credit on the other hand exert negative and significant effect. The study concludes that financial deepening affect financial performance of Deposit Money Banks in Nigeria. It then recommends effective loan recovery strategy to mitigate the negative influence of private sector credit due to non-performing loans.
Highlights
The growth of any nation is fully linked to that nation’s financial sector of which commercial banks are essential component
Cointegration Test Results Having established that the series contains both I (0) and I (1), bounds test approach to cointegration was used to find out whether or not long run co-movement exists among the variables
The plots of the cumulative of the recursive residuals (CUSUM) and cumulative sum of squares of recursive residuals (CUSUMQ) in figures 1 to 4 lie within the boundaries confirming that the long run coefficients of return on assets (ROA) and return on equity (ROE) with respect to the financial deepening indicators in the autoregressive distributed lag (ARDL) models are stable
Summary
The growth of any nation is fully linked to that nation’s financial sector of which commercial banks are essential component. Commercial banks (known as Deposit Money Banks in Nigeria) are financial intermediator that connect the sectors of the economy with idle funds to the sectors that are in dear need of funds for investment thereby expediting capital formation and trade. One of the reforms that involved the banking sub-sector is the policy of consolidation. Prior to the implementation of the policy, the banking sub-sector were characterized by large number of small banks, low capital base, declining asset quality and weak corporate governance. The essence is to financially deepen the banking sector to enhance its competitiveness and capability for effective discharging of the intermediation role in development and finance of investment opportunities in all sectors of the economy (Olawumi, Lateef & Oladeji, 2017)
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