e-sRC

CHAPTER ONE
INTRODUCTION
1.1 Background to the study
Performance of a corporation whether profit or non-profit making is of great importance as it
serves as an indicator of a healthy economy of a nation (Almajali, Alamro & Al-Soub, 2012).
According to Iswatia and Anshoria (2007), performance is the function of the ability of an
organisation to gain and manage its resources in several ways to develop competitive
advantage. The performance of Primary Mortgage Banks (PMBs) in the economy is usually
of major concern to most governments, because PMBs play a significant role in the mortgage
sector by serving as the primary lenders in the sector. The sector’s contribution to Gross
Domestic Product (GDP) stood at 0.5 percent (Kumo, 2014). Furthermore, stakeholders in the
housing finance sector are of the view that the sector can contribute up to 10 percent of GDP
if more attention is given to mortgage market (Azuh, 2013).
Primary Mortgage Banks (PMBs) are licensed by Central Bank of Nigeria (CBN) and
Federal Mortgage Bank of Nigeria (FMBN) to operate as a mortgage outfit that will
collect deposit and support individuals and corporations in meeting their housing needs
(CBN, 2007). In addition, it serves as financial intermediaries in housing finance sector.
These banks operate under the coffers of the National Housing Fund (NHF). NHF (now
National Housing Trust Fund) was promulgated by Decree No.3 of 1992, and conferred
with the responsibility of facilitating the constant flow of low cost funds for long term
investment on housing, to nurture and maintain a stable base for affordable housing
finance and to provide incentives for the capital market to invest in property development
(Latinwo, 2002 and Sanusi, 2003). According to Adedokun, Akinradewo, Adegoke and
Abiola-Falemu (2011), it is in recognition of finance in housing delivery that warrants the
setting of PMBs to facilitate the delivery, being the sole intermediary between the FMBN
(apex lending institution in housing matters) and the mortgagors in disbursing the
proceeds of NHTF.
Housing plays a pivotal role in growth and national development as it directly affects not
only the well-being of the citizenry, but also the performance of other sectors of the economy
(Adedeji, 2005). Housing has been universally accepted as the second most important
essential human need; as it impacts positively on productivity because a decent house
significantly increases workers health, and consequently growth (Adedokun et al., 2011). The
provision of this amenity is the primary responsibility of the government of any nation at any
given period of time. This is done by putting in place the necessary machinery that will
facilitate the availability of this amenities to individuals.
On the other hand, Ajanleko (2001) posited that the enormous public sector efforts have not
effectively addressed an expanding housing deficit and escalating construction costs and that
such effort must be substantially collaborative with the private sector. Hence, government
decided to establish a framework within which such collaboration can effectively address the
housing problem.
In light of the above, PMBs were established to facilitate housing delivery in Nigeria through
the institution of a private – sector arrangement to supplant the public sector which had
proved ineffective over the years in that respect. They were modeled after the building
societies in England but their primary purpose was to be NHTF distribution network. At the
inception, the regulation and supervision of the PMBs devolved on the FMBN. The
supervision/regulation of the sub-sector was however assigned to the CBN by Federal
Government (FG) budget pronouncement in 1997 after it had witnessed years of serious
instability and distress. The CBN Act No. 24 of 1991 and the BOFIA No. 25 of 1991 were
amended to give legal backing to the new supervisory arrangement. In line with the
development, the CBN issued revised guidelines for PMBs in 2000 to define mortgage
business to include a number of activities such as granting loans and advances to individuals
for the purchase or construction of a dwelling house, improvement or extension of an existing
dwelling house, and to accept savings and deposits from members of the public.
In addition, PMBs offer a wide range of mortgage, financial and other banking services
towards the realization of housing and business needs of various customers (corporate and
individual). The banks also address various housing needs in line with the National Housing
Programme (NHP) anchored on the NHF scheme. Furthermore, PMBs have provision for
other commercial loans in respect to building houses, renovation of building, overdraft,
among others. The banks also render financial advisory services at no cost to their existing
and prospective customers in the area of revenue generation, projects financing, cash flow
management, international transactions and raising of capital funds.
However, Soludo (2015) observed that the Nigerian housing sector today faces some
challenges that must be tackled to make the system provide the required services that would
accelerate economic development witnessed in other emerging economies. According to the
study, the impact of the operations of PMBs in Nigeria has been below expectation as the
banks lacked the wherewithal to mobilise requisite resources for commitment towards the
fulfillment of their objectives.
Performance is seen as the result of an activity which has been achieved by an individual or a
group of individuals in an organisation related to its authority and responsibility in achieving
the goal legally, not against the law, and conforming to the morale and ethic (Almajali et al.,
2012). The appropriate measure selected to assess corporate performance is dependent on the
type of organisation to be evaluated, and the objectives to be achieved through that
evaluation. Financialperformance is a general measure of a firm’s overall financial health
over a given period of time. Profitability measures such as Net Interest Margin (NIM), Return
on Assets (ROA) and Return on Equity (ROE) are used in measuring the financial
performance of banks. The need to assess the financial performance of PMBs is due to the
fact that these banks are registered companies operating as financial intermediaries in housing
finance sector.They are the direct lenders of the money that the potential homeowners use to
purchase a house or other property, paying the mortgage back in monthly installments to the
issuing institution, FMBN. They make a large portion of the bank’s profit by charging
interest on the money loaned to property purchasers. However, a limit exists to the amount of
loans the banks can grant. To grant more loans, the bank needs to maintain money in its
reserve. Therefore, to increase profit, it needs to obtain more capital.
Determinants of bank performance can be classified into bank specific (internal) and
macroeconomic (external) factors (Al-Tamimi, 2010; Aburime, 2005). Internal factors are
those factors influenced by the bank management decisions and policy objectives. These
factors are basically influenced by internal decisions of management and the board which
include bank size, age, capital adequacy, leverage, and asset quality. The external factors are
the characteristics of the economy of the country where the bank operates, which are beyond
the control of the bank and affect bank performance which include inflation, Gross Domestic
Product (GDP) and interest rate.
On the basis of the above backdrop, the study attempts to evaluate the determinants of
financial performance of listed Primary Mortgage Banks in Nigeria with a view to
ascertaining the factors that affect the financial performance of the banks.
1.2 Statement of the Problem
Primary Mortgage Banks (PMBs) are expected to play a significant role in the mortgage
sector. It is on the basis of this recognition that a decree was promulgated clearly defining
how they are to execute their activities of mobilizing savings for housing provision and at the
same time creating blocks of mortgages to Federal Mortgage Bank of Nigeria (FMBN). The
banks which performed at expected level are estimated to contribute up to 10 percent to
Gross Domestic Products (GDP) of Nigeria. Contrary to the expectation, the contribution of
mortgage sector to GDP of Nigeria is nothing to write home about as its contributions is not
up to even one percent as at the year 2005 and it continues to rise sluggishly from 0.12
percent in 2005 to 0.5 percent as at the year 2014 (Kumo, 2014). That is, the contributions
within the last ten years (2005 – 2014) improved from 0.12 percent in 2005 to 0.5 percent as
at the year 2014. This situation triggers the need to investigate the performance of the PMBs
with the hope of ascertaining the specific factors that are inhibiting their performance at the
expected level of 10 percent of the GDP. This is because the PMBs are the key players in the
mortgage sector.
There are two basic factors argued in the literature that affect banks performance and are
sometimes described as determinants; internal and external. The internal factors are under the
control of management while the external factors are beyond the control of management.
Although, regulatory authorities in the sector take corrective measures in controlling the
external factors, the internal factors are left at the discretion of banks’ management and as a
result inadequate control seems to exist in managing them. This may be due to lack of
thorough empirical investigation of their effect on the banks’ performance.
There have been a number of empirical studies conducted on the factors that affect the
performance of deposit money banks (Abdullahi, 2013; Ayele, 2012; Omondi & Muturi,
2013; Osuka & Osadume, 2013). However, with the low contribution of mortgage sector to
Nigeria’s GDP, little has been done on the key players in the sector (primary mortgage
banks). Most of the empirical studies conducted on PMBs performance in Nigeria were on
the challenges confronting the operations of PMBs in housing financing (Adebamowo,
Oduwaye & Oduwaye, 2012), the contributions of primary mortgage institutions to real estate
development in Nigeria (Ubom & Ubom, 2014) among others. To the best of the researcher’s
knowledge, there is a dearth in the literature on the determinants of the financial performance
of listed primary mortgage banks in Nigeria.
Against the above backdrop, there is a need to evaluate empirical factors that determine
PMBs performance in Nigeria with the hope of ascertaining whether they play significant
role in overcoming problems affecting the banks. The determining factors in the context of
this work are capital adequacy, bank size and liquidity of the banks under study while
performance of the banks is viewed from the perspective of return on equity. In view of the
above, the following research questions are raised to help the researcher to focus on critical
factors that can determine the success or failure of mortgage banks: To what extent does
capital adequacy affect the financial performance of listed PMBs in Nigeria? To what extent
does bank size affect the financial performance of listed PMBs in Nigeria?What is the effect
of liquidity on the financial performance of listed PMBs in Nigeria?