Moderating Effect of Industry Concentration on the Effect of Camels Financial Indicators on Financial Performance of Deposit Money Banks in Nigeria

Abstract

In Nigeria, the banking industry has witnessed many upheavals over the years, which led to the collapse of quite a number of banks. Despite several effort by government to reposition the industry to improve its efficiency and achieve overall stability of the financial system in view of its strategic importance to the country’s economy, the financial performance of banks seems to be dwindling. This study assessed the moderating effect of industry concentration on the effect of CAMELS financial indicators on financial performance of Deposit Money Banks (DMBs) in Nigeria using secondary data extracted from the financial statements of 15 out of 22 licensed banks over the period of nine years (2010-2018). The study formulated thirteen hypotheses and applied multiple regression technique to assess the causal relationship between the dependent variable, Return on Assets (ROA) and the independent variables, CAMELS, which as a set of financial indicators stands for capital adequacy, assets quality, management efficiency, earnings ability, liquidity and sensitivity to market risk. The study also analyzed the moderating effect of the interaction between industry concentration and each of the CAMELS variables on financial performance of the banks. After subjecting the data to relevant tests of robustness, the result of the clustered robust random effects regression revealed that overall, the interaction between industry concentration and CAMELS financial indicators has significant effect on financial performance of DMBs in Nigeria. In terms of specific variables, asset quality, management efficiency, liquidity and sensitivity to market risk have significant effect on financial performance. With respect to the interaction variables, the interaction between industry concentration and each of asset quality, management efficiency and earnings ability have statistically significant effect on financial performance. The study therefore concluded that overall, CAMELS financial indicators have significant effect on financial performance of DMBs in Nigeria and its effect is significantly moderated by industry concentration. Based on the results, the study recommended among other things that CBN should continue to promote and encourage industry concentration strategy in the banking sector through policies that will make banks put more effort in deposit mobilization, costs cutting and providing better and efficient financial intermediation services in order to make high profit. The CBN should also carry out its risk-based and risk assets on-site examination function at least twice in a year as against the current practice of once in a year in order to increase its surveillance on banks and ensure that imprudent and unethical behavior that erode the quality of assets and capital adequacy are spotted not only in the beginning or end of a financial year but also in the middle of the year. Furthermore, management of DMBs should look into the quality of their assets by coming up with lending policies and applying loan recovery strategies that will help in increasing performing loans and decreasing non-performing loans.