1.1 AN OVERVIEW OF FINANCIAL RATIOS AND BANK PERFORMANCE
In any country, the banking sector occupies an important place in the financial system. The reasons for this are the role banks play in the development of an economy. Banks among others play the following roles in an economy. They act as intermediary between the deficit and surplus units in an economy, that is, they mobilize funds and allocate them among competing ends. Secondly, they facilitate the use of appropriate monetary policy instruments as well as make the transmission mechanism reliable and policies effective. Thirdly, the banking sector is instrumental in the pursuit of stabilization policies and in structural transformation. The main source of funds for Banks is deposits and the main application of funds is loan and investment.
In spite of this progress and successes achieved by the banking and financial institutions, it still have challenges which will require further intensive efforts on the part of these institutions. Such to enhance the quality of its products and services and diversity, and to keep pace with the rapid developments taking place in the world in this field. Banks have been attacked by the globalization, competition and volatile market dynamic pressures, (Casu et al, 2010). So banks attempt to find new method to improve their services. To understand the superior performance and struggle for it, managers and policy makers stated the major question is “What drives performance?” To address this question, researchers have focused their efforts on the operational details (Soteriou and Zenios, 2012). An important requirement, to answer this question, is the financial ratios which can be used for measuring performance. The widely used measures to assess banks’ performance are return on total assets (ROA) and return on total equity (ROE). According to Gilbert and Wheelock, (2013) these measures have been used by analysts and bank regulators in;
(a) Assessing industry performance
(b) Forecasting market structure trends (used to predict bank failures and mergers) and
(c) Other purposes where a profitability measure is wanted.
Over the past several years, an increased attention has been received by financial institutions (particularly commercial banks) on performance analysis. As a result, the research focuses on analysis of financial ratios for improving bank performance in Nigeria.
Even though an important and relevant information about bank’s financial performance can be provided by accounting and financial ratios, assessing the relationship among many factors that are related to bank performance such as assets, revenue, profit, market value, number of employees, investments, and customer satisfaction can assist in improving bank productivity.
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