FINANCIAL LEVERAGE AND PROFITABILITY PERFORMANCE OF FINANCIAL INSTITUTIONS IN NIGERIA

Gregory Onuora Okoye

Abstract


In recent times, the financial institutions in Nigeria have been experiencing failures and liquidation and this has been implicitly attributed to improper management decision on capital structure. The study therefore sets out to examine the nexus between financial leverage and financial performance of financial institutions in Nigeria with specific reference to chosen Deposit Money Banks in Nigeria, spanning for the period 2005 to 2017, using debt- equity ratio (DER), debt ratio (DR) as indicators for financial leverage and return on equity (ROE) as proxy for profitability performance, and size of the institution (proxies by total assets) are used as control variable Data is sourced from annual financial statement of accounts of the chosen banks, The result from the correlation analysis and OLS regression reveal that there is significant negative relationship between ROE and debt- equity ratio.. The findings also indicate that the relationship between ROE and debt ratio, is also negative but insignificant while that of size, proxies by total assets of the chosen banks, is significantly positive. . Furthermore, findings from the descriptive analysis show that about 84% of total assets of deposit money banks in Nigeria are financed by debt. Overall, the findings confirm that DMB in Nigeria are highly levered.. The study recommends among others that an appropriate debt- equity mix should be adopted by DMBs in addition to increasing their asset position to enable them improve their financial performance, survive failures and remain competitive within the industry.


Keywords


Financial Leverage, Financial Performance, Debt equity ratio, Debt ratio, Return on equity and Deposit Money Banks

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