IMPACT OF COMPETITION ON THE PROFITABILITY OF COMMERCIAL BANKS IN NIGERIA

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 industry can 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. However, Cetorelli and Gamberra (2001) argue that, there is compelling evidence to suggest that the profitability of commercial banks in most developing economies (for which Nigeria is one) is a direct function of its banking efficiency and other ancillary variables and has no direct relationship with the market share of firms.Hence, the profitability of commercial banks in Nigeria can only be placed at the center of any developmental economic agenda, if it combines optimally the determinates of banking profitability such as market share, efficiency and concentration of commercial bank branches to respond to the dynamic changes in economic conditions, especially, those that affect delivery of financial services.  Our major objective in this research is therefore, to resolve the dilemma between the conflicting theories highlighted in the Structure Conduct Performance Hypothesis – SCP (which propagates the ideals of significant market share) and the theories of Efficiency Structure Hypothesis -ESH, (which gives credence to the significance of banking efficiency) in assessing the impact of competition on profitability of commercial banks in a developing country like Nigeria.