Financial Derivatives and Profitability of Selected Deposit Money Banks in Nigeria
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.
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