Case Study No 4 Raising standards of the most able through Latin

This study applied the granger causality analysis to ascertain the effect of banking sector reforms variables on banking industry performance indices:

return on assets, return on equity, profit before tax, yield on earning assets and

84 net interest income. The choice of the granger causality test is on the notion that two variables may relate with each other without one causing changes in the other, hence the weakness of the Ordinary Least Square (OLS) in estimating the effect of one variable on another. The granger causality result in Table 29 reveals that there is unidirectional relationship between bank capitalization and return on assets as causality flows from bank capitalization to return on assets at 5% level of significance. This implies that it bank capitalization has significant effect on return on assets of the Nigerian banking industry, whereas other banking sector reform variables via liquidity ratio, spread of interest rate and exchange rate has no significant effect on banking industry return on assets in Nigeria.

Table 29: Granger Causality Result for ROA and Banking Sector Reforms

Null Hypothesis: Obs F-Statistic Prob. Remarks

BCP does not Granger Cause ROA ROA does not Granger Cause BCP

26 7.64114 0.36646

0.0083 0.7013

Causality No Causality LQR does not Granger Cause ROA

ROA does not Granger Cause LQR

26 1.94394 0.41774

0.1893 0.6688

No Causality No Causality SPINT does not Granger Cause ROA

ROA does not Granger Cause SPINT

26 0.38197 0.29325

0.6912 0.7515

No Causality No Causality EXR does not Granger Cause ROA

ROA does not Granger Cause EXR

26 0.44471 2.84697

0.6520 0.1008

No Causality No Causality Source: Data output via E-views 9.0

On the return on equity and banking sector reforms analysis, Table 30 depicts that just an in return on assets, it is only bank capitalization that has significant effect on return on equity of the banking industry as causality runs from bank capitalization to return on equity at 5% level of significance. Other indices of banking sector reforms: liquidity ratio, spread of interest rate and exchange rate were found to have no significant effect on return on equity.

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Table 30: Granger Causality Result for ROE and Banking Sector Reforms

Null Hypothesis: Obs F-Statistic Prob. Remarks

BCP does not Granger Cause ROE ROE does not Granger Cause BCP

17 8.04980 0.00649

0.0132 0.9369

Causality No Causality LQR does not Granger Cause ROE

ROE does not Granger Cause LQR

17 2.06093 1.02437

0.1731 0.3287

No Causality No Causality SPINT does not Granger Cause ROE

ROE does not Granger Cause SPINT

17 0.92431 0.52814

0.3527 0.4794

No Causality No Causality EXR does not Granger Cause ROE

ROE does not Granger Cause EXR

17 0.74424 0.75460

0.4028 0.3997

No Causality No Causality Source: Data output via E-views 9.0

From the regression output in Table 31, there is a one way causal relationship between bank capitalization and profit before tax of the banking industry owing to the evidence of causality from bank capitalization to profit before tax at 5% significance level. Similarly, a unidirectional exits between exchange rate and profit before tax. This implies that it is the profit of the banking industry that exert influence on exchange determination. Liquidity ratio and spread of interest rate have no significant influence of profit before tax of the Nigerian banking industry.

Table 31: Granger Causality Result for PBT and Banking Sector Reforms

Null Hypothesis: Obs F-Statistic Prob. Remarks

BCP does not Granger Cause PBT PBT does not Granger Cause BCP

16 4.57551 1.13570

0.0358 0.3561

Causality No Causality LQR does not Granger Cause PBT

PBT does not Granger Cause LQR

16 0.03710 0.77847

0.9637 0.4828

No Causality No Causality SPINT does not Granger Cause PBT

PBT does not Granger Cause SPINT

16 0.10056 0.41458

0.9051 0.6705

No Causality No Causality EXR does not Granger Cause PBT

PBT does not Granger Cause EXR

16 2.32872 10.4509

0.1434 0.0029

No Causality Causality Source: Data output via E-views 9.0

With the result in Table 32, banking sector reforms measurements have no significant effect on yield on earning assets of the banking industry as there no revelation of either unidirectional or bidirectional relationship between yield on earning assets and banking sector reforms variables. Nevertheless, it is surprising to observe that it is yield on earning assets that has significant effect on liquidity ratio of the banking industry.

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Table 32: Granger Causality Result for YEA and Banking Sector Reforms

Null Hypothesis: Obs F-Statistic Prob. Remarks

BCP does not Granger Cause YEA YEA does not Granger Cause BCP

26 0.71397 0.25754

0.4123 0.6197

No Causality No Causality LQR does not Granger Cause YEA

YEA does not Granger Cause LQR

26 0.00127 8.65857

0.9721 0.0107

No Causality Causality SPINT does not Granger Cause YEA

YEA does not Granger Cause SPINT

26 1.01179 0.04141

0.3315 0.8417

No Causality No Causality EXR does not Granger Cause YEA

YEA does not Granger Cause EXR

26 0.17100 0.09839

0.6855 0.7584

No Causality No Causality Source: Data output via E-views 9.0