Commercial Banks: Catalysts for Economic Growth and Development

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Commercial banks are the most important savings, mobilization and financial resource allocation institutions. Consequently, these roles make them an important phenomenon in economic growth and development. In performing this role, it must be realized that banks have the potential, scope and prospects for mobilizing financial resources and allocating them to productive investments (Olokoyo , 2011). The importance of efficient financial system is mostly felt in developing countries since their financial markets are underdeveloped and not strong thus banks plays a crucial role of integrating the whole economic sector of a country by serving as a vital source of finance for the enterprises (Ntow–Gyamfi

It is of noteworthy that bank managers should understand the key factors that affect bank profitability and these factors could be internal and external determinants. The internal determinants originate from bank accounts (balance sheets and/or profit and loss accounts) and therefore could be termed micro or bank-specific determinants of profitability while the external determinants are variables that are not related to bank management but reflect the economic and legal environment that affects the operation and performance of financial institutions (Athanasoglou, Brissimis, & Delis,

Previous studies suggest that capital size, size of deposit liabilities, size and composition of bank’s credit portfolio, interest rate policy, exposure to risk, management quality, labour productivity, bank size, bank age, ownership, ownership concentration, and structural affiliation among others influences bank profitability. Level of profitability attained would depend on the variation of its determinants over time. The determinants of profitability are empirically well-explored, although the definition of profitability varies among studies. Disregarding the profitability measures, most of the banking studies have noticed that the capital ratio, loan-loss provisions and expense control are important factors in achieving high profitability (Adeusi, Kolapo, & Aluko,