ABSTRACT
The study aims at examining the
impact of Asset Liability Management on non-interest income structure of
Deposit Money banks in Nigeria for the period of Year 2011 to Year 2015. The
study reviews the role of non-interest income in the present day Nigeria
banking system.
The study adopts a trend analysis
of non-interest income, non-interest income as a proportion of banks' net
interest income and the extent to which banks' asset liability management have
any significant impact on the extent to which non-interest income is a
significant component of banks' aggregate performance. To achieve these, variables for asset
liability management and non-interest income were obtained from Obrimah (2015)
and DeYoung (2013) respectively. The
study makes use of ordinary least square (OLS) technique for analyzing the
regression model.
Empirical findings show banks'
asset liability management have impact on the extent to which non-interest
income is a significant component of banks' aggregate performance. Evaluations of non-interest income show that
foreign exchange fees form the highest source of non-interest income followed
by fees relating to lending. Also,
reduction in Commission on Turnover by Central Bank of Nigeria from 5 per mille
to 1 per mille (now replaced with account maintenance) presently did not reduce
non-interest income.
Conclusively, bank’s size do not
have positive relationship with non-interest income. Non-interest income as a
proportion of banks' net interest income reveals that banks categorized as
small such as Fidelity bank, Stanbic IBTC, Sterling and Diamond had higher
value of proportion of Non-interest Income to Net Income than First bank,
Zenith bank, GTbank and Access bank. An
important implication of our findings is that large Deposit Money banks large
banks may be overlooking opportunity to generate non-interest income. Hence, large DMBs should not under-utilize
their assets so as to generate more non-interest income.
CHAPTER
ONE
INTRODUCTION
1.1
Background
to the Study
Banks
are very important organizations which help in the execution of socio-economic activities
engaged by individuals, business organizations and even sovereign states. They
serve primarily as a medium which bridges the gap between surplus and deficit
units in an economy. This fundamental function of banks generate interest
income which has over the years been the major source of revenue, since loans
form a greater portion of the total assets of banks. These assets generate huge
interest income for banks which determines their financial performance (Mabvure, Gwangwava, Faitira, Mutibvu &Kamoyo, 2012). In recent times, developments in
information and communication technology, increased competition among banking
companies as well as the complexity and diversity of businesses and their
demands for financial services have compelled banks to consider other banking
activities which offer numerous services to clients and boost revenue via fee
income generation.
The
term non-interest income refers to income earned from sources other than
returns on advances or loans to bank clients. They are usually fee or
commission generating activities which range from cash management to
underwriting activities and custodial services as well as derivative
arrangements. As part of total bank earnings, non-interest income is gaining
prominence in recent times particularly in the US and Europe, as competition
continues vigorously in the traditional banking business of deposit
mobilization and loan making.
On
the other hand, asset liability management (ALM) is a dynamic process of
planning, organizing, coordinating and controlling assets and liabilities –
their mixes, volumes, maturities, yields, and costs in order to achieve a
specified business objective. The ALM system has different functions to manage
risks such as market risk management, trading risk management, liquidity risk
management, funding and capital planning, profit planning and growth projection
(Kosmidou & Zopounidis, 2004). It
enables the banks to make symmetry business decisions in a more informed
framework through risks. It is an
integrated approach that covers both types and amounts of financial assets and
liabilities with the complexities of the financial market.
1.2
Statement
of the Problem
The
theoretical rationale of this study is strong competition among banks and its
effect on asset-liability management. If a bank is not competitive at matching
duration of assets and liabilities, it is exposed to more risk. Does this make this bank more likely or less
likely to focus on fee income generation?
If a bank is competitive at matching duration of assets and liabilities,
it is also exposed to risk. Does the
bank leverage on this comparative advantage to focus even more on fee incomes,
or do fee incomes become less important to the bank? These are questions to which the literature
to the best of knowledge has yet to proffer an answer.
Expansion
into new fee-based products and services would reduce banks’ income volatility
(Rogers & Sinkey, 1999). However, empirical findings indicate that
expansion into fee-based products would reduce income volatility does not hold
(DeYoung & Rice, 2004). Also, Rogers
and Sinkey (1999) posit that firm size will have a positive relationship with
the level of non-traditional activities based on the position of Hunter and
Timme (1986) who also found that larger banks are better equipped to use new
technology and exploit the resulting cost savings and/or efficiency gains.
However, outcome of findings of Damankah, Anku-Tsede and Amankwaa (2014) showed
that negative relationship exists between Non-interest Income and bank
size. Merton and Bodie (1992) also
argued that banks need “assurance capital” to enter non-traditional activities
engagement in non-traditional activities while the outcome of the empirical
study by Damankah et al.,(2014)
showed independence of bank capital adequacy.
Moreover, it was conventionally believed by Damankah et al.,(2014) that expansion into new
fee-based products and services are not comparable with the efficiency, returns
on assets (ROA) which is a measure of an effective ALM. However, empirical studies by DeYoung and
Rice (2004) indicate that neither of these beliefs holds on average. So, this research determines if non-interest
income which includes fee-based products and services has a significant impact
on aggregate bank performance of Deposit Money banks in Nigeria.
Despite
the gradual reduction in Commission on Turnover (COT), Deposit Money banks in
Nigeria have diversified their income earning activities towards non-interest
income such as introduction of cash-lite charges, increase in online and mobile
banking enrolments, income from ATM cards issuance, N65 ATM cards charges against third time usage, fees from Point of
Sales (P.O.S), income from sales of JAMB forms, Western Union related
transactions, Moneygram related transactions and so on. This source of income (non-interest) can be
used to offset default risks that are associated with interest incomes which
are susceptible to economic recession. Therefore, has the decline in COT which
play a major source of fee income reduced the non-interest income of DMBs?
1.3
Objective
of the Study
The specific objectives
are to:
1.
examine trends in non-interest income as
a proportion of banks' net interest income;
2.
ascertain if a decrease in Commission on
Turnover (COT) has led to a decrease in non-interest income of Deposit Money
banks in Nigeria;
3.
determine if non-interest income has a
significant impact on aggregate bank performance i.e. return on assets and
4.
examine whether banks' asset liability
management have any significant impact on the extent to which non-interest
income is a significant component of banks' aggregate performance.
1.4
Research
Questions
The
following research questions are needed to give direction to the study in order
to arrive at a reliable finding, conclusion and recommendations:
1.
What are the trends in non-interest
income vis-Ã -vis net interest income?
2.
To what extent has decrease in
Commission on Turnover (COT) led to decrease in non-interest income of Deposit
Money banks in Nigeria?
3.
To what extent do non-interest income
has a significant impact on aggregate bank performance i.e. return on assets?
4.
To what extent do banks' asset liability
management have impact on the extent to which non-interest income is a
significant component of banks' aggregate performance?
1.5
Hypotheses
The following are null
hypotheses used in the study:
Ho1: Decrease in COT has not led to decrease in
non-interest income of Deposit Money banks in Nigeria
Ho2: Non-interest income does not have a
significant impact on aggregate bank performance i.e. return on assets
Ho3: Banks' asset liability management does not
have impact on the extent to which non-interest income is a significant
component of banks' aggregate performance
1.6 Scope of the Study
This
study was not without limitations. In attaining its objective, the study was
limited to a 5 year period starting form year 2011 to year 2015. Data
availability was a major constraint of the study and hence, the reason for the
selected period. Secondary data was
collected from the annual audited report of twelve (12) Deposit Money Banks in
Nigeria. Data was sourced from Annual
audited financial statements of selected banks and CBN statistical bulletin.
The
study was also limited to the degree of precision of the data obtained from the
secondary source. Lack of sufficient published materials such as books and
journals in the library relevant to the research topic. This forced the
researcher to rely on e-books which are time consuming in terms of ease of
access. Also, time constraint might be another major limitation to the study
given that the researcher is restricted to carry out the study within a short
period of time.
The study
focused on variables attached to asset liability management and non-interest
income such as Commission on Turnover, Fees relating to lending, foreign
exchange fees, asset liability ratio, bank size, exposure to risk and return on
assets. These variables form the area of
interest of this research work although we have other variables that affect ALM
in Nigeria.
1.7 Significance
of the Study
This
study sheds light on the effects of comparative advantages in ALM on
non-interest income generation within banks. The interaction of the mix in
assets and liabilities of banks was reviewed vis-a-vis non-interest income. The
study determined if bank’s size measured with total asset, liability measured
with customers’ deposit, exposure to risk measured with Non-performing Loan and
bank liquidity would significantly increase non-interest incomes.
Despite
the gradual reduction in Commission on Turnover (COT), Deposit Money banks in
Nigeria have diversified their income earning activities towards non-interest
income such as introduction of cash-lite charges, increase in online and mobile
banking enrolments, income from ATM cards issuance, N65 ATM cards charges against third time usage (against other
banks). This source of income (non-interest) can be used to offset default
risks that are associated with interest incomes which are susceptible to economic
recession. It is also imperative to exploit other sources of income and what
determines these sources so as to ensure stability in incomes.
This
study is to assist policy makers to draw policies that would create a conducive
environment for banks to diversify their incomes and reduce pressure on lending
rates as well as not discriminatorily over-charging customers in the
non-traditional services provided by them.
1.8
Operational
Definition of Terms
Asset Liability
Management (ALM): Thisis
a dynamic process of planning, organizing, coordinating and controlling assets
and liabilities – their mixes, volumes, maturities, yields, and costs in order
to achieve a specified business objective.
Non-interest Income: This
refers to banks’ earnings from non-traditional banking activities such as fees,
licensing, commissions among others. These enter into the composition of
interest margins for banks.
Net Interest income: This
is the difference between revenues generated by interest-bearing assets and the
cost of servicing (interest-burdened) liabilities.
Return on Assets
(RoA): This
is a financial ratio that shows the percentage of profit a bank earns in
relation to its overall resources. It is
commonly defined as net income divided by total assets. It is also a proxy to
the size of the bank.
Commission on Turnover
(COT): This
is a fee that is charged to the customer based on the amount of withdrawals the
customer effected. It is usually set by the bank. COT in Nigeria prior to March, 2013 was 5 per
mille i.e. (N5 charge on N1000 withdrawal); from April, 2013 to December 2013,
it was reduced to 3 per mille i.e. (N3 on withdrawal of N1,000), it was further
reduced to 2 per mille in year 2014; 2015, 1 per mille and was scrapped in 2016
but was replaced by maintenance fee.
CBN Banker’s
tariff: This
is the CBN issued guide to bank charges.
The charges of Deposit Money banks (commercial banks) should strictly be
in accordance with CBN provisions. The current one in use was issued on 27th
March, 2013 and took effect from 1st April, 2013.
Deposit Money
Banks: These
are resident depository institutions, corporations and quasi-corporations which
have any liabilities in the form of deposits payable on demand, transferrable
by cheque or otherwise usable for making payments. It was initial called
Commercial banks.
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