Required Minimum Shareholders' Fund and Bank Performance: A Substantiation from the Nigerian Banking Sector

Abstract

The performance of the banking sector is very critical for the survival of the financial system, especially in a developing country like Nigeria where productive economic activities rely more on the banking system compared to the stock market for finance. In this regard, the effect of required minimum shareholders’ fund on banks’ performance in Nigeria was ascertained over a period of seventeen years, that is, from 1999 to 2015 by distinctively assessing the effect of minimum capital requirement on profit before tax and net interest income of the banking sector. Controlling banks’ specific factors: total assets plus off balance sheet engagements and ratio of non-performing loans to total credit proficient to debilitating performance, the Johansen cointegration depicts that minimum capital requirement and banking sector performance are co-integrated. The short run relationship between minimum capital requirement and profit before tax was negative and statistically insignificant while net interest income and minimum capital requirement was positive and significantly correlated. The result also reveals that minimum capital requirement has no significant effect on profit before tax but significantly affects the net interest income of the Nigerian banking sector. The findings of this study show that, for the period reviewed, banking reform has significant effect on financial performance reflected by net interest income but such is not the case for profit before tax of the banking sector. This portrays that increases in indexes of banking reforms has the potential on improving banking sector performance which ultimately results in economic growth and development. There is need for banks’ to improve their assets quality and off balance sheet engagements by advancing loans to productive sectors of the economy rather than seeing oil and gas sector as the only fertile and profitable sector for large loans and advances. Banks’ management should try as much as possible to reducing the ratio of non-performing loan to total credit as this negatively affects performance and increases credit risk associated bad debts.