ABSTRACT

Only a successful and consistent banking sector can play the role of financial intermediary in the economy properly. As an intermediary in the modern economy, the bank must be profitable. This profitability is based on a variety of factors. The general aim of this study focuses on the analyzing the factors that influences the profitability of private and public commercial banks in Cameroon..

The research uses secondary data with a constructive a Quantitative approach methodology and a generalized moment process technique to calculate the effect of the determinants. The survey consists of five banks.

The results for bank-internal variables comprise of four statistically significant variables which are capital adequacy, Asset quality, Loan composition and Cost efficiency while the rest being insignificant. Likewise, the macro-economic determining factor consists of two non-significant variables (growth domestic product (GDP) and inflation rate).

Liquidity indicators used were networking capital current ratio and cash ratio, which measures the company’s ability to meet its short term obligations, while profitability is measured by the return on assete (ROA) and return on equity (ROE). Data were collected from the websites of Afriland First Bank, Ecobank and BICEC, with emphasis on their respective financial report for the period of 2019 to 2022.

In conclusion, the empirical results showed that profitability is more explained by internal bank-specific which are variables which bank specific factors are directly controlled by the Management as the variables that strongly and significant affect bank profit than the macroeconomic factor variables which are beyond reach of management control have not been significant to profitability.

CHAPTER ONE

INTRODUCTION

1.1 Introduction

The competitive environment of financial institutions was so tense that any commercial bank that aims to survive must be fully aware of the factors affecting profitability as this variable could make or destroy its future. Financial inter-mediation role of the commercial banks hence becomes the bed-rock of the two major functions of commercial banks namely deposit mobilization and credit extension. An adequate financial intermediation requires the purposeful attention of the bank management to profitability and liquidity, which are two conflicting goals of the commercial banks. These goals are parallel in the sense that an attempt for a bank to achieve higher profitability will certainly erode its liquidity and solvency positions and vice versa.

Practically, profitability and liquidity are effective indicators of the corporate health and performance of not only the commercial banks Eljelly (2004), but all profit oriented ventures. A bank is liquid when it is capable of meeting its own obligations -when they become dying, repay deposit and to make such payment on customer order Lartey and Al (2013), Bis (2009). These performance indicators are very important to the shareholders and depositors who are major publics of a bank. As the shareholders are interested in the profitability level, the depositors are concerned with liquidity position which determines a bank’s ability to respond to the withdrawal needs which are normally on demand or on a short notice as the case may be.

Financial organizations are structures for important economic development in each and every region, because they undertake a vital role in broadening the financial services in a country (Dawood, 2014) .Financial institutions include depository institutions, i.e. commercial banks, various saving institutions that offer statutory contributions to clients such as an (insurance companies, pension funds) as well as fund intermediaries (investment firms, mutual funds, account companies) (Mishkin & Eakins, 2012).The predominant portion of financial institutions in many nations are commercial banks.

Commercial banks are financial institutions or business firms that deal with money; they receive money from the public and provide loans and advances. Their main activities are profit- based including granting loans, accepting deposits, and other financial services, such as electronic money transfer, overdraft facilities and foreign exchange. They are key component of the financial system as they allocate funds in an efficient manner.

1.2 Background of the Study

The banking sector, as a proliferating financial institution, plays an active part in a country’s economic development (Babu, 2018; Iskandar et al., 2019). The 2008 global financial crises showed the effects of various macroeconomic actions on banking industry’s policy choices and the outcome of the decision (Ullah et al., 2020).    The profitability of banks is of the utmost importance in modern economies. Commercial banks are incurring liability costs and receiving revenue from their investments. Consequently, bank profitability is greatly affected by the management of its liabilities and assets. Moreover, numerous bank business and macroeconomic factors also affect the banks’ ability to make profits.

There are several dimensions of bank performance which can be assessed. This research concentrates on the profitability performance of commercial banks in Cameroon. As noted bank profitability provide important information about bank stability in its competitive financial environment (Tefera, 2014 January).The profits of financial institutions is not only vital to their stability, but also for the general productive growth of the economy that promotes the nation’s general development. On the other side, weak performance of financial institutions will cause financial catastrophe (San & Heng, 2013).

Banks play a very important role in promoting the growth of the economy by mobilizing savings and using the savings in financing the most productive sector of the economy (Alkhazaleh & Almsafir, 2014). As such commercial banks are important to the financial segment, particularly in developing economies where capital markets are not well developed and strong. In economies where the capital markets are still developing, banking institutions serve as a vital source of finance for enterprises (Ntow & Laryea, 2012). Therefore, good performance of the bank is measured as per its profitability and liquidity level, and has been essential to shareholders, customers as well as for banks’ continues survival and expansion (Nkegbe & Yazidu, 2015).

The banking institutions had contributed significantly to the effectiveness of the entire financial system as they offer an efficient institutional mechanism through which resources can be mobilized and directed from less essential uses to more productive investments. The Financial Institutions that fall within the ambit of the 1985 ordinance relating to the formation of credit establishments and Presidential Decree No 9011496 of November 9, 1990 defining a ‘Credit Establishment’ were relatively few, especially when one takes into consideration the size of the banking sector in the Western World and even some Third World Countries with better regulated and more competitive banking sectors. However, the Republic of Cameroon had one of the highest numbers of institutions that carried out bank related business in the Central African Sub-Region. The Country as noted, hosts the headquarters of the Bank of Central African States. With the withdrawal in late 1984 of the business license of the International Bank of Africa Cameroon (IBAC) and the creation of the Highland Bank

Banks on request were been authorized by the Ministry of Finance and Economy to open branches and agencies in different parts of the country. As a matter of fact most of those banks have branches and periodic offices all over the National territory.  That same Ministry of Finance and Economy was the sole competent authority that grants authorizations. It is worth noting that there were a series of credit institutions whose activities did not really tie in with those of Commercial banks approved by the state, but which fall under the Presidential Decree of November 1990 defining Credit Institutions. The Banks and the said Credit Institutions did carry out routine banking transactions and operations to satisfy the needs of their respective clients.

Commercial bank activities like accepting deposits, allowing customers the use of cheques, granting credit and overdrafts, foreign exchange transactions and operations, acting as agents for customers, providing safe custody for valuables, etc were not peculiar concepts to the Cameroonian banking system although some of these are not well developed and the public not properly sensitized to the various services put at their disposal by those institutions. Recent trends in western banking had induced some banks in the country to introduce new products to the Cameroon banking system. Some of these include insurance and lodging schemes launched in conjunction with Insurance companies. Automatic teller machines and a valiant local traveler’s cheques the (flash cash) operated by Current Expected Credit Loss (C.E.C.L) banks were some of the innovations to speed up clientele service and improve customer satisfaction. Most banks had begun to understand that the development of a dynamic and personalized clientele department was very essential for their very survival. The serious lapses surrounding cheque clearance, whether within the city or up country, were alarming. It was expected that in the next few months this situation which is gradually improving would witness very great improvement with the adoption of modern and sophisticated communication networks by most of these banks in the country.

1.3 Statement of the problem

Liquidity was an instrumental factor affecting the profitability of banks during the recent financial crisis of the 1990s. The return on equity (ROE), net interest margin, capital ratio and the return on asset (ROA) also have a great impact on a bank’s profitability. Profitability in any company or organization, especially banks was influenced not only by the internal business environment, but by the external environment in a variety of ways (Jahan, 2020). This is because of the direct and indirect links between financial crisis and the world economies, there was an impact on every nation especially Cameroon.

As uncertainty led funding sources to evaporate, many banks quickly found themselves short of cash to cover their obligations as they fall due. In extreme cases, banks in some countries failed or were been forced into mergers. As a result, in the interest of broader financial stability, authorities in many countries, including Cameroon, provided substantial amounts of liquidity.

Cameroon like any other African Country had a number of regulatory bodies that regulated the banking system in the country. There is the BEAC (Bank of Central African States) which clearly defines the monetary policy of the sub-region. Within BEAC, there is the Central African Banking Commission or ‘Commission Bancaire de l’Afrique Central’ best known by its French acronym COBAC. As seen, COBAC though considered as an arm of BEAC was an institution vested with supra-national powers whose decision can abrogate national texts relating to Banking. This commission had a supervisory role over all the banks and financial institutions of the Central African Sub-Region and sees to it that these banks respect the texts governing banking at the national as well as the Sub-Regional level. This Commission which was created by a convention signed by the six BEAC member states in October 16, 1990 is also empowered to penalize banks that did not adhere to applicable texts governing them. By virtue of section 13 of the convention, the commission could even withdraw the business license of a bank and ask it to cease its activities immediately as was the case with the International Bank of Africa Cameroon (IBAC) recently and the First Investment Bank (F.I.B.) in May 1993.Section 29 of the 1985 ordinance stipulates that “Credit Institutions” in Cameroon were placed under the tutelage of the Ministry of Finance and the Economy.

By virtue of that section, it was clear that the Cameroon Government through its Ministry of Finance and Economy regulate banking activities in Cameroon.
There was also the National Credit Council, the national commission for the control of banks and Financial Institutions and the National Professional Bankers Associations all bodies created by the presidential Decree of February 8, 1978. These organisations were placed under the Ministry of Finance and played a statistical role in the Banking sector of the economy. The minimum statutory capital requirement for a commercial bank is fixed at F.CFA 1 billion in accordance with Article 1 of Decree No 9011470 of 9 November 1990. Article 2 of that same Decree stipulated that proof of the 1billion F.FCA paid up share capital must be available before depositing a request to obtain an operating license. The paid up capital would serves as a basis for a number of ratios defined by COBAC in determining the ‘health’ of the banks. It was however more prudent to use the concept of net worth rather than capital per say in evaluating banks. In Cameroon, a commercial bank was authorized to lend up to twenty times its net worth. It might however not lend more than 15% of its net worth to shareholders, Board members, management and staff put together. If an engagement to any particular client is above 15% of the net worth of the bank, then total lending to all such clients grouped together should not exceed 8 times the net worth of that establishment. The COBAC requirement also stated that no bank should lend more than 45% of its net worth to any single client. This directive though welcomed, placed some limitations on banks with a broad-based popular capital structure wherein shareholders were discouraged from conducting their business affairs with a particular bank they invested in. The banks had always had their interest rates fixed and adjusted by the National Monetary Authority, usually in collaboration with the Central Bank (BEAC).

Within the last few years, at that same time as the restructuring of the Banking system and the implementation of the financial programs backed by the I M.F. and the World Bank, there had been an impressive tendency to simplify the structure and liberalize interest rates. However, the Central Bank, by a decision of its board of Directors, was authorized to revise its interest rate for operations initiated by the Banking system whenever the monetary situation of that zone so warrants. Banks were authorized to freely negotiate deposit interest rates with their clients while remaining within the guidelines fixed by the monetary authorities. This at times meant Commercial banks attracted huge sums of money from the public in the form of deposits. The impacts of the 2008/2009 credit crunch are being felt again with a lack of liquidity in the banking sector and renewed economic uncertainty keeping the cost of finance high.

 In the aftermath of the crisis, there was a general sense that banks had not fully appreciated the importance of liquidity risk management and the implications of such risk for the bank itself, as well as the wider financial system. As such, policymakers (COBAC) had suggested that banks should hold more liquid assets than in the past, to help self‐insure against potential liquidity or funding difficulties. This had led to an international desire for common measures and standards for liquidity risk, culminating in ongoing work by the Basel Committee on Banking Supervision (BCBS 2010).

 Base on the credit creation principle, commercial banks ensures that the idle funds borrowed from depositors, were reinvested in different classes of portfolio. Since the main objective of commercial banks was to safeguard the idle funds collected from depositors, there arose problems because there might be a point where, these commercial banks find it difficult to meet its financial and contractual obligation, both in the short and in long run. This was in situations where depositors seek for their funds. That could cause a reputation risk due to loss of confidence in banks hence discredited these banks.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  In addition, more problems arose as increase competition especially with micro finance institutions has pooled most customers to these micro finance houses especially in the 21^st century.

 Notwithstanding, many banks have been created since the last decade, which further widens the competition gap within the banking sector. Due to that, commercial banks should operate on the motive of profit maximization, instituting at all level a risk management department and insuring that there exists enough liquidity to finance their clients demand for cash. Assets and most especially liquid cash was the most valuable and risky assets of commercial banks. The problem thus arises on what optimum level to identify, select and maintain assets. The problem was wider since, most micro finance institutions and some commercial banks were more profit oriented relater than being asset management oriented and liquidity management oriented. The problem in the banking system become even more severe as a result of declining gross domestic product (GDP) and rising inflation (Gazi et al.,2022).

This research seeks to investigate other problems such as, why many individuals within this region, prefer lending their funds to micro finance houses with little credibility, than commercial banks (2011-2012 security finance company ltd) which have branches all over Africa and the world. As well, it looks at the problem of identifying that proportion of liquid cash to keep as idle balances at a given time. In addition, it would also examine the problem of banks using their working capital to carry out long term investments, which could lead to shortage of liquid cash to meet their current financial obligation. Furthermore, the research seeks to examine whether the observations gotten from previous researches and studies on profitability in other jurisdictions maybe applicable in Cameroon. 

1.4 RESEARCH QUESTIONS

1.4.1 Main Research Question

What are the factors that affect the profitability of commercial banks in Cameroon?

1.4.2 Specific Questions

1. What is the relationship between liquidity and profitability in commercial banks in Cameroon?
2. What are the problems associated with bank profitability?

1.5  Objectives of the Study

1.5.1 Main Objective

The main objective is to investigate the factors that influence the profitability of private and public commercial banks in Cameroon.

1.5.2 Specific Objective

1. To examine the effects of liquidity on profitability.
2. To analyze the influence of inflation and GDP levels in the banking sector on profitability of commercial banks.

• To examine the factors that affect bank profitability.