International Journal of Economics, Commerce and Management United Kingdom Vol. IV, Issue 9, September 2016 Licensed under Creative Common Page 740 http://ijecm.co.uk/ ISSN 2348 0386 BANKS’ PROFITABILITY, ULTIMATE LENDING BEHAVIOR, DIVIDEND PAYOUT RATIOS, AND SHARE PRICE MOVEMENT: DOES BASEL II MATTER? EMPIRICAL EVIDENCE FROM SELECTED BANKS IN NIGERIA Eniola Sam Agbi Department of Accounting, Faculty of Management Sciences Federal University, Dutsin-Ma, Nigeria [email protected]Oyindamola Olusegun Ekundayo Department of Accounting, Faculty of Management Sciences Federal University, Dutsin-Ma, Nigeria [email protected]Abstract The Basel Accords are some of the most influential and misinterpreted covenants in modern global finance. The debates on whether Basel capital regulations influence various banks’ behaviors continue to attract research interest among academics and policymakers. In assessing the influence of Basel II on banks’ profitability in Nigeria, empirical results indicated that Basel II requirements did not impact banks’ profitability negatively; however, some banks’ net incomes did become more sensitive to capitalization requirements during the period. Exploring influence of Basel II on ultimate lending and dividend payout behaviors, results revealed that while loans to customers increased significantly, the introduction of the Basel Accord was followed by decrease in dividend payout ratios for some banks. Nigerian Banks’ reactions to hitting regulatory constraints on their capital ratios are likely to vary according to the bank’s financial situation and stage of business cycle; finally, empirical analysis shows that Basel II capital requirements did influence banks’ share price behavior negatively for relatively less well-capitalized banks. Overall, the research finds that the determinants of various banks’ behaviors, and its implication, depend on the sustainability metric employed. The results are
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International Journal of Economics, Commerce and Management United Kingdom Vol. IV, Issue 9, September 2016
Licensed under Creative Common Page 740
http://ijecm.co.uk/ ISSN 2348 0386
BANKS’ PROFITABILITY, ULTIMATE LENDING
BEHAVIOR, DIVIDEND PAYOUT RATIOS, AND SHARE
PRICE MOVEMENT: DOES BASEL II MATTER?
EMPIRICAL EVIDENCE FROM SELECTED BANKS IN NIGERIA
Eniola Sam Agbi
Department of Accounting, Faculty of Management Sciences
In addition, it is universally known that, Pillar 3 seeks to enforce market discipline through
stricter disclosure requirement. Whilst admitting that such disclosure may be useful for CBN and
rating agencies; the expertise and ability of the general public to comprehend and interpret
disclosed information should be enriched to remove information overload which and may even
damage banks financial position.
The Basel II capital accord allows regulatory bodies the freedom to adopt supplementary
measure of capital adequacy for banks. Therefore, the absolute rules on minimum shareholder‟s
funds and paid-up capital should serve as supplement to the risk based capital standards of
Basel II in Nigeria. However, the rule must be realistic and banks should be given enough time
to comply through adequate phased-in program.
Implementation of Basel II in Nigeria should focus on increased risks confronting
Nigerian banks. Consequently, the CBN should recognize the relationship that exists between
the amounts of capital held by a bank against its risk and the strength and effectiveness of the
bank‟s risk management and internal control process. There are several means of addressing
risks confronting banks. This includes: increased capital, strengthening the level of provision
and reserves and improving internal controls.
To effectively adopt Basel II norms, both banks and CBN should enhance their IT
systems, data models and business models. This will creates quite significant additional cost
burden on the banks. Instead of traditional data models, the banks need to maintain
comprehensive database of operational loss incidents, credit losses, financial instructions, and
general ledger data. Additionally, adoption of Basel II may not be a first priority for Nigeria in
terms of what is required to strengthen its supervision, as adequate preparation is necessary
prior to full implementation date.
Additionally, prudential regulations should be directed at reducing pro-cyclicality in the
financial system capital requirements and loss provisioning is closely related. In the design of
Basel II, subject to certain restrictions, loss provisions must be included in regulatory capital
requirements up to specified limits. Like capital, loss provisioning is capable of contributing to
pro-cyclicality. Evidence for the United States indicates that loss provisions fall as a percentage
of loan volume during periods of rapid economic growth and rise during downturns (FSF 2009a).
The increases in provisions during downturns are capable of lowering retained earnings, capital
and lending, while the decreases during expansions are capable of having converse effects
(Brunnermeier et al., 2009; Carney, 2009).
According to FSF, recommendations concerning countercyclical buffers should be
directed at capital, provisioning, and leveraging (FSF, 2009b). Countercyclical capital buffers
and an overall leverage ratio as part of Basel II, was mentioned under the agenda of the Basel
International Journal of Economics, Commerce and Management, United Kingdom
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Committee (in section V.1). Other closely related recommendations of the FSF for mitigating
pro-cyclicality concern revision of the framework for market risk of Basel II to reduce reliance on
cyclical Value-at-Risk (VaR)-based estimates of regulatory capital, stress testing and monitoring
of Basel II‟s rules to ensure that they dampen rather than amplify pro-cyclicality.
WAY FORWARD
Going by the conclusions stated above, there is an important area of future study to be pursued.
There are other measures of operating performance apart from those used in this study.
Consequently, for example, future research could replicate this study using return on equity
(ROE) profitability metric since ROE was not examined here. However, caution should be taken
because return on equity is significantly influenced by capital market considerations not bank-
specific factors unaccompanied.
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