PORTFOLIO MANAGEMENT AND ITS IMPACT ON PROFITABILITY LEVELS OF BANKS IN NIGERIA

Abstract

The banking sector in any economy serves as a catalyst for growth and development. Banks are able to perform this role through their crucial functions of financial intermediation, provision of an efficient payment system and facilitating the implementation of monetary policies. Bank profitability is usually expressed as a function of internal and external determinants. The overall performance and profitability of the banking sector in Nigeria has improved tremendously over the last 10 years. The aim of this study was to close the gap in knowledge by investigating profitability determinants within commercial banks in Nigeria. The determinants studied were loan portfolio, interest expense, and administration costs and assets value.

 

 

 

 

 

TABLE OF CONTENT

Title page

Approval page

Dedication

Acknowledgment

Abstract

Table of content

CHAPETR ONE

1.0   INTRODUCTION 

1.1        Background of the study

1.2        Statement of problem

1.3        Objective of the study

1.4        Research Hypotheses

1.5        Significance of the study

1.6        Scope and limitation of the study

1.7       Definition of terms

1.8       Organization of the study

CHAPETR TWO

2.0   LITERATURE REVIEW

CHAPETR THREE

3.0        Research methodology

3.1    sources of data collection

3.3        Population of the study

3.4        Sampling and sampling distribution

3.5        Validation of research instrument

3.6        Method of data analysis

CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS AND INTERPRETATION

4.1 Introductions

4.2 Data analysis

CHAPTER FIVE

5.1 Introduction

5.2 Summary

5.3 Conclusion

5.4 Recommendation

Appendix

 

 

 

 

 

 

 

 

 

CHAPTER ONE

INTRODUCTION     

• Background of the study

The concept of profit maximization has been a dominant theme in the practices of business from time immemorial. As business enterprises, insurance companies have not been an exemption. Through their various investment activities, they have attempted to enhance their profitability and thus perpetrate their existence.

From a broader perspective, insurance companies have been identified as the oldest of non-bank financial institution. Operating on the world’s financial landscape. They constitute a very important segment of the non-bank financial sub-system. In terms of funds mobilized, loans granted and investment made. They finance industries and channel funds to the government for development Coffiong, 2005. In order words, these roles insurance companies assemble various securities and asset that address investor and then manage theme. This therefore leads us to the concept of portfolio management.

Portfolio management consist of three major activities, asset allocation, shift in weighing across major assets classes and security selection within assets classes. Assets allocation can best be characterized as the blending together of major asset classes to obtain the higher long-return at the lowest risk. Managers can make opportunistic shift in assets class weighing in order to improve returns prospects over the long term objectives (farrel, 1993). It would be instructive to note that although insurance companies are predominantly involved in under writing, this is not their major income earner. As already pointed out, their income also comes from their investment activities. Furthermore, a large proportion of profit of insurance   companies in not the result of technical insurance underwriting, but that of return on investment and return on assets. As a result, it is thus positive to observe that the ability of insurance companies to manage effectively and efficiently their investment portfolio should have an effect on their profitability.

Essentially, the investment portfolio of insurance companies is composed of investment classified into those of either short term maturity. The short term investment are those falling due to after one year 9union assurance annual report and accounts, 2005).

Thus, portfolio management entails the management of these component in a way that leads to the actualization of the objectives of profit maximization. The major indicators of profitability are stock price and financial ratios (return on investment, return on assets and return on equity). The discourse therefore, shall attempt to establish the effect that portfolio management has on the profitability of selected insurance companies in Nigeria.

1.2     STATEMENT OF THE PROBLEM

In recent times the global insurance land scope has been shown to witness tremendous growth and development. In particular, global insurance premium grew by 9.7 percent in 2004 to reach 3.3 trillion. This follows 117 percent growth in the previous year. Life insurance premium grew by 9.8 percent during the year, thanks to arising demands for annuity and pension producers. Non-life insurance premium grew by 9.4 percent as premium rate increased.

Advanced economic account for the bulk of global insurance with premium income of %1.2 billion in 2004, North America was the most important region followed by the EU (at $1,198 billion) and Japan (at $492 billion). The top four counties accounted for two thirds of the premiums of 2004. Emerging markets accounted for over 85 percent of the world’s population but generated only 10 percent of premium (Wikipedia, 2007)

Using the United Kingdom as a basis of analysis writing shows that two sticking factors may explain why these western countries seem to do far better. The first is that the portfolio are widely diversified and secondly, the apparently great stability in portfolio proportion. Although government securities retain a prominent part in the portfolios, holdings of private sector assets (securities, Lonas and Mortgages and property and grounds rents) dominate the portfolio (Dolls, 1979).

It is thus not surprising why the United Kingdom and other western countries hold a dominant share of the world insurance market. In contrast. Nigeria insurance firms seems to adopt the opposite portfolio composition. In particular, government regulations give specifications of the proportion of the proportion of insurance firm funds to be invested in government securities. The problem though is that such securities may not have high yields, no wonder therefore why the insurance industry is yet to make much impact on the global insurance funds. According to the Swiss Re Global Insurance report to 2004, Nigeria was ranked 62 out of 88 countries in terms of annual premium volume. The industry is also believed to have 0.02% of the total world insurance market presently, it has been slumped to 0.01% (Intercontinental bank, 2006).

Coupled with this are the defects within the Nigeria financial environment. Major identified problem include man power problems, defective regulatory framework, capitalization problems, poor investment climate, and lack of professionalism (NZOTTA 2005). In view of these issues, this study therefore aims to examine the effect of portfolio management of selected insurance companies on their profitability.

1.3     OBJECTIVES OF THE STUDY

The primary objectives of this study are to analyze the effects of portfolio management on the profitability of selected insurance companies in Nigeria. The specific objectives include:

1. To examine the determinants’ of profitability of commercial banks investment
2. To determine the relation between commercial banks short term investment and their gross profit.
3. To examine the significance of insurance companies long term investment on their gross premium.

1.4     RESEARCH QUESTIONS

The researcher will bear the following questions in mind in he drive to carry out this research thoroughly.

1. Do you think that portfolio management has some effects on the overall performance of the company?
2. Are there any relationship between the level of portfolio maintained and profitability?

iii.           What do you think is the relationship between the level of portfolio maintained and profitability?

1.5     RESEARCH HYPOTHESIS

In line with the specific objectives of this study, the variables of this study shall be incorporated into mathematical models and the following are the hypothesis derived from the models.

H₀: There is no significant relationship between the portfolio investment of commercial banks and their gross profit.

H₁:   There is a significant relationship between the portfolio investment of commercial banks and their gross profit

H₀: there are no factors that determine profitability of commercial banks investment

H₂: there are factors that determine profitability of commercial banks investment

1.6     SIGNIFICANCE OF THE STUDY

The significance of this study can be viewed from two major stand points.

1. Practical significance
2. Academic significance

Under practical

This kind study will assist in broadening understanding of the following or the scope of knowledge of the following:

1. It will be of benefit to the community since this study contributes an important input to the pool of research resources on this subject area.
2. It is perceived that a myriad of groups stand to benefit from the result of this study.
3. Insurance companies will not be left out as this study touch on issues relevant to the investment activities of insurance companies.

Under academic significance

In the academic arena, this study will prove to be significant in the following ways.

1. It will be of immense help to students who may wish to carry out further research on this topic.
2. For government, it will help them for tax purposes.
3. To shareholders and investor, it will help the shareholders to kwon the performance of the organization.

1.7     SCOPE AND LIMITATION OF THE STUDY  

The scope of the study covers portfolio management and its impact on profitability level of banks in Nigeria; but in the cause of the study, there are some factors that limit the scope of the study;

• Availability of research material: The research material available to the researcher is insufficient, thereby limiting the study.
• Time: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.
• Organizational privacy: most of the top management of the selected companies was un-corporative in responding to the questionnaire administered by the researcher.
  • OPERATIONAL DEFINITION OF TERMS

Portfolio

A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly tradable securities, like real estate, art, and private investments.

Banks

A bank is a financial institution that accepts deposits from the public and creates credit. Lending activities can be performed either directly or indirectly through capital markets. Due to their importance in the financial stability of a country, banks are highly regulated in most countries.

 

 

Portfolio management

A Portfolio Manager is a professional who is responsible for making investment decisions and carrying out investment activities on behalf of individuals or institutions.

• ORGANIZATION OF THE STUDY

This research work is organized in five chapters for easy understanding as follows Chapter one is concern with the introduction which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, research methodology, definition of terms and historical background of the study. Chapter two highlights the theoretical framework on which the study it’s based thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding.  Chapter five gives summary, conclusion and recommendations made of the study.

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