The Effect of Portfolio Management on Banks: A Case Study of Selected Banks in Nigeria

Banks like many other economic organizations are expected to generate profitable incomes through effective and efficient utilization of portfolio of resources (inputs) to ensure continuity and meeting the investment returns expected by the shareholders. Banks core function to a large extent is financial intermediation that is taking money from the surplus units in terms of different kinds of deposit accounts to service the deficit units through loans and advances at different prices. Banks in performingtheirfunctions are on line in the wheels of economic and social development in the country. Bankingsystem plays fundamental roles in the growth and development of an economy as deposited money in banks acts as channels through which financial resources are allocated in efficient and effective manner to the deficit units of the economy. The financial sector engages in the creation of different types of assets that both the banking and non-banking public wish to hold, from the kind of liabilities that debtors are willing to incur. It can therefore transform the size, maturity and risk characteristics of assets, thus enhancing the willingness of savers with short term perspective to buy long term assets. Retail banks mainly raise short term deposits, but can still make these deposits behave as if they are of long term structure through continuous flow of deposits from depositors.

 

Financial intermediation is perhaps the basic and most important functions of the banks, especially in developing countries like Nigeria where available resources are generally inadequate or insufficient to meet the capital and developmental needs of the economy, (Nnanna, 2005).

The building block of capital formation is expected to come from efficient operation of the retail banks which energize the deepening of the capital market. In Nigeria, there were a total of 89 banks operating in the banking industry in 2005 grouped together under universal banking- functions from hitherto 81 commercial banks and 8 merchant banks. The recent consolidation process has reduced the number of the banks from 89 to 25 through mergers and acquisition with 13 banks liquidated for their inability to raise the mandatory 25 billion capital base or merge with/be acquired by another bank (CBN, 2006). This situation forced a merger-acquisition scenario.

 

Table of Contents

APPROVAL PAGE.. 2

DEDICATION.. 3

CERTIFICATION.. 4

ACKNOWLEDGEMENT.. 5

CHAPTER ONE.. 9

INTRODUCTION.. 9

1.1      Background to the Study. 9

1.2      Statement of the Problem.. 12

1.3      Research Questions. 15

1.4      Objectives of the Study. 16

1.5      Research Hypotheses. 16

1.6      Significance of the Study. 17

1.7      Scope of the Study. 17

1.8      Definition of Key Terms. 18

CHAPTER TWO.. 19

LITERATURE REVIEW... 19

2.1      Introduction. 19

2.2      Concept of Profitability of Bank. 19

2.2.1       Measures of Profitability. 21

2.4      Concept of Portfolio Management Strategies. 25

2.4      Effects of Portfolio Management Strategies on Financial Performance. 27

2.4.1       Active Portfolio Management Strategy. 29

2.4.2       Passive Portfolio Management Strategy. 29

2.5      Portfolio Management Approaches. 30

2.6      Portfolio Management Control Mechanisms in banking Industry. 32

2.7      Investment Securities. 36

2.8      Loan and Advances. 38

2.9      Cash and Cash Equivalent40

2.10    Property and Equipment42

2.11    Empirical Review.. 43

2.12    Thoretical Framework of the Study. 48

2.12.1     Risk Aversion Theory. 48

2.12.2     Markowitz Portfolio Theory. 49

2.12.3     Two Mutual Fund Theorem.. 50

2.12.4     Modern Portfolio Theory. 50

CHAPTER THREE.. 51

RESEARCH METHODOLOGY.. 51

3.1      Introduction. 51

3.2      Research Design. 52

3.3      Sources and Method of Data Collection. 52

3.4      Population of the Study. 52

3.5      Sample Size and Sampling Technique. 53

3.6      Variables and their Measurement54

3.7      Techniques of Data Analysis. 54

3.7.1       Descriptive Statistics. 54

3.7.2       Correlation. 55

3.7.3       Regression. 55

CHAPTER FOUR.. 57

DATA PESENTATION AND ANALYSIS. 57

4.1      Introduction. 57

4.2      Secondary Data Presentation. 57

4.3      Descriptive Statistics. 59

4.3      Data Analysis. 60

4.4      Hypothesis Testing. 64

4.5      Discussion of Findings. 66

CHAPTER FIVE.. 68

SUMMARY, CONCLUSION, AND RECOMMENDATION.. 68

5.1      Introduction. 68

5.2      Summary. 68

5.3      Discussion of Findings. 68

5.3      Conclusion. 69

5.4 Recommendations. 70

REFERENCES. 71

Appendix I. 74

Appendix II. 74

Table4.1    Data representing the profitability indicator (ROCE) and the portfolio of Asses held by the selected banks.74