EFFECT OF CAMELS RATING ON THE FINANCIAL PERFORMANCE OF SUSTAINABLE IMPORTANT BANK (SIBS) IN NIGERIA LISTED

Abstract

This study was on effect of CAMELS rating on the financial performance of sustainable important bank. Two objectives were raised which included: To ascertain the effect of CAMELS financial indicators on profitability of SIBs in Nigeria and to find out whether SIBs are playing leading role in financial performance and soundness in the bank. A total of 77 responses were received and validated from the enrolled participants where all respondents were drawn from selected listed bank. Hypothesis was tested using Chi-Square statistical tool (SPSS).

Chapter one

Introduction

1.1Background of the study

The banking sector is a fundamental part of the financial architecture of any economy. The sector makes critical contributions to a nation’s pursuit of economic growth and development, through the facilitation of the process of capital formation, monetary policy transmission and management, credit intermediation process, payment and settlement systems, amongst others (Said & Tumin, 2011, cited in Azizi & Sarkani, 2014; Scrinivasan & Saminathan, 2016; Chaudhuri, 2018). Their intermediation function serves as the backbone and catalyst for the growth of an economy (Funso, Kolade & Ojo, 2012; Jain and Jaiswal, 2016). As the financial health of an economy is intertwined with that of its banking system (Chaudhuri, 2018; Samuel, 2018), it is unimaginable to visualise a modern economy bereft of the services of a bank (Rahman& Islam, 2018).

By virtue of the services they render and their roles in the economy, banks tend to have many, yet diverse, stakeholders (such as depositors, borrowers, government, employees, auditors, to mention but a few) who affect and are affected by the activities of these banks, whose performances should be evaluated, as doing this provide the stakeholders with flow of information necessary to guide their decision-making process. When these banks are unsound, unstable and unhealthy, these stakeholders’ interests are jeopardised. The considerable sizes and increasing complexities in structures and operations of DMBs, precipitated by the effect of intensifying globalisation can only heighten the concerns of these stakeholders. Therefore, it becomes crucial to continually x-ray the performances of these banks with a view to determining their state of health in order to help the stakeholders differentiate good banks from bad ones (Rahman & Islam, 2018). The scores of performance evaluation frameworks that exist in literature and practice, and with which the financial conditions of banks can be determined has made the task very daunting. However, one of the evaluation paradigms that have gained global traction and over which there appears to be great consensus on its potency is “CAMELS rating model”

With the takeover of Skye Bank by the Central Bank of Nigeria (CBN) in 2018, due to the bank’s inability to “meet minimum thresholds in critical prudential and adequacy ratios, which culminated in the bank’s permanent presence at the CBN Lending Window” (Premium Times, 2018), it stands to reason that the advent of AMCON has not completely taken away, the risk of bank failure, as some Deposit Money Banks (DMBs) in Nigeria continue to show signs of financial frailties. The large size, complexity of structures and interconnectedness of the DMBs have only compounded this risk. According to Kumbirai and Webb (2010), as banks are interconnected with each other for the payment and other functions, the failure of a bank will not only affect its shareholders, depositors, amongst other stakeholders, it may also have effect on the stakeholders in other banks due to contagion effect. In any case, if twelve (12) of the listed DMBs had asset and deposit base of N27.55 trillion and N17.06 trillion, respectively (Annual Reports, 2017), one can only imagine the cataclysmic negative effect on the Nigerian economy, should these institutions fail

The preponderance of evidence on banking crises in Nigeria have shown that, not only do DMBs often take excessive risks but the risk differ across banks (Iheanyi & Sotonye, 2017), resulting in significant decline in stock market indices and deterioration of asset quality of most DMBs in Nigeria (Adeusi, Akeke, Adebisi & Oladunjoye, 2014). It is therefore imperative that the performances of the DMBs be kept under close surveillance at all times (Echekoba, Egbunike & Ezu, 2014). One of the ways this can be achieved is by obtaining information from regular evaluation of their financial health and soundness using tools such as CAMELS Rating Model, the application of which, Lucky and Akani (2017) have argued, is still at the rudimentary stage in empirical studies in Nigeria.

Statement of the problem

Nigeria banking sector and as part of measures geared at reforming the Nigerian financial system, enhance quality of banks and promote a healthy financial sector, the Central Bank of Nigeria reviewed and consequently phased out the Universal Banking Model in 2010. These reforms and initiatives have resulted in DMBs having certain characteristics based on operating license, operating structure and systemic importance. Based on operating licence, they are classified into regional, national and international categories. Based on operating structure, they are grouped into financial holding companies and non-financial holding companies, while based on systemic importance, they are classified as Domestic-Systemically Important Banks (D-SIB) and Domestic Non-Systemically Important Banks (D-NSIB). Despite the plethora of related studies, there still exists, very scanty literature and evidence on the use of CAMELS Rating Model in comparatively evaluating the financial health of listed Deposit Money Banks based on these characteristics, particularly in Nigeria. This has consequently created further research gap. It is in the light of the foregoing that this study evaluates the financial health of listed Deposit Money Banks in Nigeria using the CAMELS Rating Model based on three identified bank characteristics. In this regard, this study investigates whether there is a significant difference between the financial performance of International and National Licenced Deposit Money Banks in Nigeria; assess whether there is a significant difference between the financial performance of Holding and Non-Holding Company Structured Deposit Money Banks in Nigeria and examine whether there is a significant difference between the financial performance of Domestic-Systemically Important and Domestic-Non-Systemically Important Deposit Money Banks in Nigeria

Objective of the study

The objectives of the study are;

1. To ascertain the effect of CAMELS financial indicators on profitability of SIBs in Nigeria
2. To find out whether SIBs are playing leading role in financial performance and soundness in the bank

Research hypotheses

The following research hypotheses were formulated;

H0: there is no effect of CAMELS financial indicators on profitability of SIBs in Nigeria

H1: there is effect of CAMELS financial indicators on profitability of SIBs in Nigeria

H0: SIBs are not playing leading role in financial performance and soundness in the bank

H2: SIBs are playing leading role in financial performance and soundness in the bank

Significance of the study

The study will be very significant to students and banking sector. The study will give a clear insight on the effect of CAMELS rating on the financial performance of sustainable important bank. The study will also serve as a reference to other researcher that will embark on the related topic

Scope and limitation of the study

The scope of the study covers the effect of CAMELS rating on the financial performance of sustainable important bank. The study will be limited to selected listed bank in Nigeria

Financial constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint: The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

Related Project Topics :