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THE IMPACT OF ASSET LIABILITY MANAGEMENT (ALM) ON NON-INTEREST INCOME STRUCTURE OF DEPOSIT MONEY BANKS (DMBs) IN NIGERIA

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CHAPTER ONE

INTRODUCTION

  • Background to the Study

Banks are very important organizations which help in the execution of socio-economic activities engaged by individuals, business organizations and even sovereign states. They serve primarily as a medium which bridges the gap between surplus and deficit units in an economy. This fundamental function of banks generate interest income which has over the years been the major source of revenue, since loans form a greater portion of the total assets of banks. These assets generate huge interest income for banks which determines their financial performance (Mabvure, Gwangwava, Faitira, Mutibvu & Kamoyo, 2012). In recent times, developments in information and communication technology, increased competition among banking companies as well as the complexity and diversity of businesses and their demands for financial services have compelled banks to consider other banking activities which offer numerous services to clients and boost revenue via fee income generation.

The term non-interest income refers to income earned from sources other than returns on advances or loans to bank clients. They are usually fee or commission generating activities which range from cash management to underwriting activities and custodial services as well as derivative arrangements. As part of total bank earnings, non-interest income is gaining prominence in recent times particularly in the US and Europe, as competition continues vigorously in the traditional banking business of deposit mobilization and loan making.

On the other hand, asset liability management (ALM) is a dynamic process of planning, organizing, coordinating and controlling assets and liabilities – their mixes, volumes, maturities, yields, and costs in order to achieve a specified business objective. The ALM system has different functions to manage risks such as market risk management, trading risk management, liquidity risk management, funding and capital planning, profit planning and growth projection (Kosmidou & Zopounidis, 2004).  It enables the banks to make symmetry business decisions in a more informed framework through risks.  It is an integrated approach that covers both types and amounts of financial assets and liabilities with the complexities of the financial market.

 

  • Statement of the Problem

The theoretical rationale of this study is strong competition among banks and its effect on asset-liability management. If a bank is not competitive at matching duration of assets and liabilities, it is exposed to more risk.  Does this make this bank more likely or less likely to focus on fee income generation?  If a bank is competitive at matching duration of assets and liabilities, it is also exposed to risk.  Does the bank leverage on this comparative advantage to focus even more on fee incomes, or do fee incomes become less important to the bank?  These are questions to which the literature to the best of knowledge has yet to proffer an answer.

Expansion into new fee-based products and services would reduce banks’ income volatility (Rogers & Sinkey, 1999). However, empirical findings indicate that expansion into fee-based products would reduce income volatility does not hold (DeYoung & Rice, 2004).  Also, Rogers and Sinkey (1999) posit that firm size will have a positive relationship with the level of non-traditional activities based on the position of Hunter and Timme (1986) who also found that larger banks are better equipped to use new technology and exploit the resulting cost savings and/or efficiency gains. However, outcome of findings of Damankah, Anku-Tsede and Amankwaa (2014) showed that negative relationship exists between Non-interest Income and bank size.  Merton and Bodie (1992) also argued that banks need “assurance capital” to enter non-traditional activities engagement in non-traditional activities while the outcome of the empirical study by Damankah et al., (2014) showed independence of bank capital adequacy.  Moreover, it was conventionally believed by Damankah et al., (2014) that expansion into new fee-based products and services are not comparable with the efficiency, returns on assets (ROA) which is a measure of an effective ALM.  However, empirical studies by DeYoung and Rice (2004) indicate that neither of these beliefs holds on average.  So, this research determines if non-interest income which includes fee-based products and services has a significant impact on aggregate bank performance of Deposit Money banks in Nigeria.

Despite the gradual reduction in Commission on Turnover (COT), Deposit Money banks in Nigeria have diversified their income earning activities towards non-interest income such as introduction of cash-lite charges, increase in online and mobile banking enrolments, income from ATM cards issuance, N65 ATM cards charges against third time usage, fees from Point of Sales (P.O.S), income from sales of JAMB forms, Western Union related transactions, Moneygram related transactions and so on.  This source of income (non-interest) can be used to offset default risks that are associated with interest incomes which are susceptible to economic recession. Therefore, has the decline in COT which play a major source of fee income reduced the non-interest income of DMBs?

  • Objective of the Study

The specific objectives are to:

  1. examine trends in non-interest income as a proportion of banks’ net interest income;
  2. ascertain if a decrease in Commission on Turnover (COT) has led to a decrease in non-interest income of Deposit Money banks in Nigeria;
  3. determine if non-interest income has a significant impact on aggregate bank performance i.e. return on assets and
  4. examine whether banks’ asset liability management have any significant impact on the extent to which non-interest income is a significant component of banks’ aggregate performance.

 

  • Research Questions

The following research questions are needed to give direction to the study in order to arrive at a reliable finding, conclusion and recommendations:

  1. What are the trends in non-interest income vis-à-vis net interest income?
  2. To what extent has decrease in Commission on Turnover (COT) led to decrease in non-interest income of Deposit Money banks in Nigeria?
  3. To what extent do non-interest income has a significant impact on aggregate bank performance i.e. return on assets?
  4. To what extent do banks’ asset liability management have impact on the extent to which non-interest income is a significant component of banks’ aggregate performance?

 

  • Hypotheses

The following are null hypotheses used in the study:

Ho1:     Decrease in COT has not led to decrease in non-interest income of Deposit Money banks in Nigeria

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