Financial Derivatives and Profitability of Selected Deposit Money Banks in Nigeria
Keywords:
Financial Derivative Liabilities, Financial Derivative Assets, Loan and advances, Profit After TaxAbstract
Risk has been an attention in the banking industry as it causes deviation from the expectation of profit maximization which brings the need for the development of financial derivative instruments for managing those systematic risks and thereby improve bank profitability. The study therefore examines the effect of financial derivatives on the profitability of selected deposit money banks in Nigeria. Panel regression model was used by collecting data from the annual financial report of all the eight (8) banks with international authorization status in Nigeria and covers a period of five (5) years between 2012 and 2017. The independent variable, financial derivative was proxies using financial derivative liabilities (FDL) and financial derivative assets (FDA) with loan and advances to customers (LTC) as a controlling variable. The pooled Ordinary Least Square (OLS), fixed effects and random effects tests were conducted on the variables and were also subjected to the Hausman test to choose the preferred estimator. The result indicates that the model is positive and significant. FDA and LTC has positive and significant effect on the profitability of deposit money banks in Nigeria while FDL is negative and insignificant. The study therefore concludes that financial derivative has positive and significant effect on the profitability of deposit money banks in Nigeria. Based on the findings, the study recommends that deposit money banks should increase their loan asset to better improve their profit. Limit their financial derivative liabilities and ensure that financial derivative assets are better utilized.
References
Bakshi, G. S., Cao, C. & Chen, Z. (2000). Pricing and hedging, long term options. The Journal of Finance, 52, 2003-2049.
Bendob, A., Bentouir, N., & Bellaouar, S. (2015). The Effect of financial derivative use on the performance of commercial banks: Empirical study in GCC countries during 2000- 2013. Research Journal of Finance and Accounting, 6 (18), 87-93.
CBN (2011). Guidelines for FX derivatives in the Nigerian financial markets. Retrieved December 9, 2018 from https://www.cbn.gov.ng/OUT/2011/CIRCULARS/FMD/ GUIDELINES %20FOR%20 %FOREIGN%20EXCHANGE%20DERIVA TIVES%20IN% 20 THE%20NIGER IAN%20FINANCIAL%20MARKETS.PDF
Chanzu, L. N., & Gekara, M. (2014). Effects of use of derivatives on financial performance of companies listed in the Nairobi Security Exchange. International Journal of Academic Research in Accounting, Finance and Management Sciences, 4(4), 27–43.
Edwin, J. E., & Martin, J. G. (1997). Modern portfolio theory, 1950 to date. Journal of Banking and Finance, 21, 1743- 1759
Eliana, A. (2012). Credit Default Swaps (CDS) and their role in the credit risk market. International Journal of Academic Research in Business and Social, 2(1), 584-593.
Fadun, O. S. (2013). Financial services sector risks management: The derivatives option. International Journal of Humanities and Social Science Invention, 2(1), 22-31.
International Financial Reporting Standard (IFRS) 9 (2014). Financial Instruments. Retrieved December, 27, 2018 from https://www.iasplus.com/en/standards/ifrs/ifrs9
Kurfi, A. K. (2003). Principles of Financial Management. Kano. Benchmark Publishers Limited.
Lenee, T. L., & Oki, J. (2017). Financial derivatives and firm performance: empirical evidence from financial and non-financial firm. British Journal of Economics, Management & Trade, 16(4): 1-36.
Olowe, R. A. (2011). Financial management: concepts, financial system and business finance (3rd ed). Lagos. Brierly Jones Nigeria Limited.
Osayi, V. I., Kasimu, A., & Nkwonta, H. C. (2018). Financial market derivatives and the performance of deposit money banks in Nigeria. International Journal of Economics, Commerce and Management United Kingdom, 6 (11), 382-396.
Osuoha, J. I., Martin, S., & Osuoha, E. O. (2015). The impact of corporate governance on derivatives usage: Empirical evidence from African non-financial firms. British Journal of Economics, Management & Trade, 8(1), 19-31.
Rivas, A. (2006). Does the use of derivatives increase bank efficiency? Evidence from Latin American Bank. International Business & Economics Research Journal, 5(11), 47-56.
Sinha, P., & Sharma, S. (2016). Derivative use and its impact on systematic risk of Indian ranks : Evidence using tobit mode. MPRA Paper No. 72251. Retrieved January 17, 2019 from https://mpra.ub.uni-muenchen.de/72251/
Torres-Reyna, O. (2010). Getting started in fixed/random effects models using ‘R’. Princeton University. Retrieved February 23, 2019 from https://dss.princeton.edu/training/Panel101 R.pdf
Zakaria, S. (2017). The use of financial derivatives in measuring bank risk management efficiency: A data envelopment analysis approach. Asian Academy of Management Journal, 22(2), 209–244.
Published
How to Cite
Issue
Section
License
The author fully assumes the content originality and the holograph signature makes him responsible in case of trial.
