ANALYSIS OF FINANCIAL RATIOS FOR IMPROVING BANK PERFORMANCE IN NIGERIA
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ANALYSIS OF FINANCIAL RATIOS FOR IMPROVING BANK PERFORMANCE IN NIGERIA
ABSTRACT
This seminar report focuses on financial ratio analysis for enhancing bank performance in Nigeria. The study used an example to demonstrate the performance of the Nigerian banking sector from 2005 to 2009. Financial ratios are used to assess a bank’s profitability, liquidity, and credit quality performance.
The study discovered that overall bank performance improved significantly throughout the first two years of the analysis. A substantial shift in trend is observed during the start of the global financial crisis in 2007,
peaking in 2008-2009. As a result, the Nigerian banking sector’s profitability, liquidity, and loan quality have all declined.
INTRODUCTION
1.1 AN OVERVIEW OF FINANCIAL RATIOS AND BANK PERFORMANCE
The banking sector is an integral part of any country’s financial system. The function of banks in the development of an economy is one of the reasons behind this. Banks, for example, serve the following responsibilities in an economy.
They operate as a bridge between an economy’s deficit and surplus units, mobilising cash and allocating them to conflicting goals. Second, they make the employment of suitable monetary policy instruments easier, as well as the transmission mechanism more dependable and policies more effective.
Third, the financial sector plays an important role in the implementation of stabilisation measures and structural transformation. Deposits are the primary source of funds for banks, and loan and investment are the primary uses of funds.
Despite the banking and financial institutions’ development and triumphs, there are still problems that will necessitate additional significant efforts on their behalf. Such to improve the quality and diversity of its products and services, as well as to stay up with the world’s rapid advances in this industry.
Globalisation, competitiveness, and volatile market dynamic forces have all targeted banks (Casu et al, 2010). As a result, banks are looking for innovative ways to improve their services.
Managers and policymakers remarked that the main question to comprehend and strive for higher performance is “What drives performance?” To answer this topic, academics have concentrated on operational aspects (Soteriou and Zenios, 2012).
To address this question, financial ratios that can be used to measure success are an important necessity. Return on total assets (ROA) and return on total equity (ROE) are two often used metrics for assessing bank performance. According to Gilbert and Wheelock (2013), experts and bank regulators have utilised these measures in;
a) Evaluating industry performance
(b) Predicting market structure trends (used to forecast bank failures and mergers) and
(c) Other applications requiring a profitability metric.
Performance analysis has garnered significant attention from financial institutions (especially commercial banks) in recent years. As a result, the research focuses on financial ratio analysis to improve bank performance in Nigeria.
Accounting and financial ratios can provide important and relevant information about a bank’s financial performance, but assessing the relationship between many factors related to bank performance such as assets,
revenue, profit, market value, number of employees, investments, and customer satisfaction can help improve bank productivity.
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