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Impact of Competition on the Profitability of Commercial Banks in Nigeria

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Impact of Competition on the Profitability of Commercial Banks in Nigeria.

ABSTRACT  

That the Banking Industry in Nigeria has always been profitable has never been in doubt. Again, that the Nigeria banking industry has been a very competitive one is also not a matter for contention as the result of several researchers measuring the competition in the banking industry have sufficient empirical evidence to substantiate this theory, however, what has recently become a contentious issue is to determine what really drives banking profitability in the face of this cut-throat competition in Nigeria.

Not even the banking consolidation reforms introduced in Nigeria by the erstwhile Governor of the Central Bank of Nigeria, Professor Charles C. Soludo, in 2005 which highlighted the unprecedented competition in the Nigerian banking industrycan be agreed to the major determinate of banking profitability in Nigeria. Generally, the impact of competition on the profitability of commercial banks in Nigeria has been a subject of great scholarly inquiry and continues to occupy a large body of empirical research.

Competition in the banking industry is necessary as it promotes economic growth by increasing firms’ access to external financing, lowering the costs of providing banking products and services, managing and mitigating banking risks, mobilizing savings and investment opportunities and adopting efficiency strategies for improving profitability. Petersen and Ranjan (1995) show theoretically that Commercial banks that wield substantial market share are more profitable in developed economies as they can lend even to young firms whose credit records may be opaque, hence leading to high loan volumes and substantial increase in both economic activities and economic growth.

INTRODUCTION  

Competition in the banking industry has been a subject of great scholarly inquiry and continues to occupy a large body of empirical research. That the Banking Industry in Nigeria has always been profitable since the early 1990s has never been in doubt. That the Nigeria banking industry has been a very competitive one is also not a matter for contention as the results of several researchers measuring the competition in the banking industry have sufficient empirical evidence to substantiate this theory, however, what has recently become a contentious issue is to determine what really drives banking profitability in the face of this cut-throat competition.

Not even the banking reforms introduced in 2005 which triggered unprecedented competition in the banking industry in Nigeria can be agreed to the major determinate of banking profitability in Nigeria. The reforms generally entailed the upward review of the minimum capital requirement of banks from N2billion to N25billion (an increase of approximately, 1,150%), a decrease in the number of commercial banks operating in Nigeria from 120 in 1993 to about 24 commercial banks post consolidation in 2010 and a dilution in the ownership structure of most commercial banks as they subsequently became publicly quoted companies on the Nigerian Stock Exchange (NSE).

Generally, the impact of competition on the profitability of commercial banks in Nigeria has been a subject of great scholarly inquiry. Banking competition promotes economic growth by increasing firms’ access to external financing, lowering the costs of providing banking products and services, managing and mitigating banking risks, mobilizing savings and investment opportunities and adopting efficiency strategies for improving profitability. Petersen and Ranjan (1995) show theoretically that Commercial banks that wield substantial market share are more profitable.

 REFERENCES

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Bain, J. S. (1951): “The relation of profit rate to industry concentration: American
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Barth, James R., Gerard Caprio Jr., and Ross Levine (2004), “Bank regulation and
supervision: What Works Best?” Journal of Financial Intermediation,

Beck, T., A. Demirguc-Kunt, and R. Levine (2003), “Bankconcentrationandcrises”,
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Beck, Thorsten, Asli Demirgiic-Kunt, and Ross Levine (2000), “A new database on
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Berger, A., and D. Humphrey (1997), “Efficiency of financial institutions:
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Berger, Allen N. (1995), “The profit-structurerelationship in banking-tests of market
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CSN Team.

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