THE IMPACT OF ASSET LIABILITY MANAGEMENT (ALM) ON NON-INTEREST INCOME STRUCTURE OF DEPOSIT MONEY BANKS (DMBS) IN NIGERIA

ABSTRACT

The study aims at examining the impact of Asset Liability Management on non-interest income structure of Deposit Money banks in Nigeria for the period of Year 2011 to Year 2015. The study reviews the role of non-interest income in the present day Nigeria banking system.

The study adopts a trend analysis of non-interest income, non-interest income as a proportion of banks’ net interest income and the extent to which banks’ asset liability management have any significant impact on the extent to which non-interest income is a significant component of banks’ aggregate performance.  To achieve these, variables for asset liability management and non-interest income were obtained from Obrimah (2015) and DeYoung (2013) respectively.  The study makes use of ordinary least square (OLS) technique for analyzing the regression model.

Empirical findings show banks’ asset liability management have impact on the extent to which non-interest income is a significant component of banks’ aggregate performance.  Evaluations of non-interest income show that foreign exchange fees form the highest source of non-interest income followed by fees relating to lending.  Also, reduction in Commission on Turnover by Central Bank of Nigeria from 5 per mille to 1 per mille (now replaced with account maintenance) presently did not reduce non-interest income.

Conclusively, bank’s size do not have positive relationship with non-interest income. Non-interest income as a proportion of banks’ net interest income reveals that banks categorized as small such as Fidelity bank, Stanbic IBTC, Sterling and Diamond had higher value of proportion of Non-interest Income to Net Income than First bank, Zenith bank, GTbank and Access bank.  An important implication of our findings is that large Deposit Money banks large banks may be overlooking opportunity to generate non-interest income.  Hence, large DMBs should not under-utilize their assets so as to generate more non-interest income.

Keywords:     Deposit Money banks, Non-interest Income, Asset Liability Management (ALM), Commission on Turnover

CHAPTER ONE

INTRODUCTION

1. Background to the Study

Banks are very important organizations which help in the execution of socio-economic activities engaged by individuals, business organizations and even sovereign states. They serve primarily as a medium which bridges the gap between surplus and deficit units in an economy. This fundamental function of banks generate interest income which has over the years been the major source of revenue, since loans form a greater portion of the total assets of banks. These assets generate huge interest income for banks which determines their financial performance (Mabvure, Gwangwava, Faitira, Mutibvu &Kamoyo, 2012). In recent times, developments in information and communication technology, increased competition among banking companies as well as the complexity and diversity of businesses and their demands for financial services have compelled banks to consider other banking activities which offer numerous services to clients and boost revenue via fee income generation.

The term non-interest income refers to income earned from sources other than returns on advances or loans to bank clients. They are usually fee or commission generating activities which range from cash management to underwriting activities and custodial services as well as derivative arrangements. As part of total bank earnings, non-interest income is gaining prominence in recent times particularly in the US and Europe, as competition continues vigorously in the traditional banking business of deposit mobilization and loan making.

On the other hand, asset liability management (ALM) is a dynamic process of planning, organizing, coordinating and controlling assets and liabilities – their mixes, volumes, maturities, yields, and costs in order to achieve a specified business objective. The ALM system has different functions to manage risks such as market risk management, trading risk management, liquidity risk management, funding and capital planning, profit planning and growth projection (Kosmidou & Zopounidis, 2004).  It enables the banks to make symmetry business decisions in a more informed framework through risks.  It is an integrated approach that covers both types and amounts of financial assets and liabilities with the complexities of the financial market.