ABSTRACT

The study analyzed the impact of interest rate spread on profitability of commercial banks in Nigeria. To achieve the broad objective, the study specifically investigated the effect of interest rate spread, gross domestic product, broad money supply, cash reserve ratio, non-performing loans, inflation rate and bank size on profit after tax and return on assets of commercial banks in Nigeria. Thus, profit after tax and return on assets were adopted as measures of profitability in the study. The scope for the study covered the period 2003 to 2017 (15 years) and ten (10) commercial banks listed on the Nigerian Stock Exchange were used as sample size for the study. Panel unit root test using the Levin, Lin and Chu unit root test was carried out to determine the stationarity of the variables. Kao residual panel cointegration test was carried out to determine whether or not the variables had long run equilibrium relationship amongst them. The researcher employed panel data analytical technique using pooled-effect, fixed-effect and random-effect approaches to determine how each of the explanatory variable influenced profitability and performance of commercial banks in Nigeria. Findings in the pooled-effect, fixed-effect and random-effect regression analyses were similar. To determine the most suitable of the regression results, the Hausman test was employed and it was discovered that the cross-section test variance was invalid and that the Hausman statistic was set to zero. The researcher accepted neither the fixed effect nor the random effect regression result as being consistent; rather the pooled effect (Ordinary Least Squares) regression result was accepted as most consistent. Findings revealed that interest rate spread had negative and insignificant impact on both profit after tax and return on assets of commercial banks in Nigeria. Broad money supply had insignificant impact on profit after tax and return on assets of commercial banks in Nigeria while non-performing loans had negative and significant impact on profit after tax and return on assets of commercial banks in Nigeria. Inflation rate and bank size had positive and significant impact on profit after tax but exhibited positive and insignificant impact on return on assets of commercial banks in Nigeria. The study recommended, amongst others, that Central Bank of Nigeria should lower the monetary policy rate in order to drive down the lending rate. As the lending rate falls, high interest rate spread in Nigeria would be reduced and the negative effect of interest rate spread on profitability of commercial banks would be reversed. More so, it was recommended that management of commercial banks in Nigeria should adopt stricter client profiling model to enable them take better decisions in granting loans to their customers. Information obtained from customers’ financial assets and financial consumption behaviours would help the banks to reduce rising non-performing loans syndrome within the banking sector. This would help in reducing the adverse effect on Non Performing Loans on commercial banks’ profitability and performance in Nigeria.