american finance & banking review; vol. 3, no. 1; 2018 issn 2576-1226 e-issn 2576-1234 impact factor: 4.1 published by centre for research on islamic banking & finance and business, usa 1 united states and the middle east after the cold war yusuf ibrahim gamawa 1 1 department of political science,bauchi state university gadau,bauchi state,nigeria correspondence: yusuf ibrahim gamawa, department of political science,bauchi state university gadau,bauchi state,nigeria.email: yusufgamawa@ymail.com to cite this article: gamawa, y. i. (2018).united states and the middle east after the cold war. american finance & banking review, 3(1), 1-4. retrieved from http://www.cribfb.com/journal/index.php/amfbr/article/view/135 received: september 1, 2018 accepted: september 5, 2018 online published: september 13, 2018 abstract the united states emerged as the most powerful country after world war ii and as such found itself in an influential position to be involved in the future and destinies of many countries across the globe. the u.s. played a major role in the post war economic reconstruction in europe and rendered assistance to many european states. american power at this time was seen to have extended to other parts of the globe, including the middle east, which has been a region of interest to outside powers. this short paper tries to look at u.s. ambitions in the region and how far the u.s. has gone in achieving these ambitions. the paper argues that u.s. policies in the middle east were in the long run, a failure, despite whatever successes achieved, following certain developments in the region, beginning with the 1979 revolution in iran. keywords: u.s., middle east, cold war, power, policies. the system of world order was established after world war i. at that time the united states was in a position of power without historical precedent. it had about fifty percent of the world’s wealth and a position of remarkable security, political and economic elites were aware of this facts, and not surprisingly, set about to organize a world system favorable to their interests. extensive plans were developed for what was called “grand area” a world system in which us interests would be expected to flourish. the plans extended to all major areas and issues, and were to a large extent implemented in the early post war years. plans for the middle east were developed within this context. the major concern is the incomparable energy reserves of the region; these were to be incorporated within the us dominated system. as in latin america, it was necessary to displace the french and british interests and establish us control over what the state department described as “stupendous source of strategic power and one of the greatest material prizes in world history”, probably the richest economic prize in the world in the field of foreign investment. president eisenhower described the middle east as the most strategically important area in the world” [chomsky, 1991]. the u.s. found its control or influence in the middle east extremely necessary, and was ready to practically follow up with its world order plan. initial concerns apart from oil, were israel, and containing soviet influence in the region. the united states at the beginning was skeptical about supporting a jewish state in the middle east, and that time considered supporting such a venture as futile, and tended to see israel as more of a political liability, kermit roosevelt was quoted in a famous article carried in the middle east journal as saying “all americans with diplomatic, education, missionary, or business experience in the middle east protest fervently protest that support of political zionism is directly contrary to our national interests, as well as to common justice” [hudson, 1996]. it was much after that israel began to appear as an asset to the united states, and as a result began to enjoy total political/ diplomatic as well economic support from the united states. it was a support which from the beginning, www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 3, no. 1; 2018 2 especially during the cold war days, was to make american policy in the region appear difficult to succeed, the support for the jewish state was constantly be exploited by the soviets, who also were interested in the oil resources in the region, and naturally became the rivals of the united states, and pursued a policy of promoting arab nationalism and support for the palestinian, which is diametrically opposed to the american stand in the region. at this time the americans had succeeded in replacing the british, and to an extent the french influence and control especially in the oil industry, but faced a challenge from the soviets. more than half of us oil imports came from the middle east, and the soviets influence on oil pricing was a major source of concern for the us, for this the us was determined to make sure that soviet expansion in the region is contained. the united states was heavily dependent on middle eastern oil for its domestic consumption, considering the level of industrial growth in the country, it was natural that demand of energy would be enormous, and the us was ready to take care of the future of its energy supplies at all cost. special attention was focused on countries such as saudi arabia, kuwait, iran and iraq in the region by the united states, and the us became involved in an operation that returned shah reza pahlavi to power in 1953 [hudson, 1996]. in the long run it succeeded in dealing with the soviet threat, after the soviets invaded afghanistan, and the us was involved in helping indigenous groups put the soviets out of their territory, all in an effort to ensure complete access and control over the middle east oil. however dramatic changes began to take place, which were to have a profound effect on the relations between the us and the middle east, and this was the iranian revolution of 1979, led by imam khomeini. the revolution overthrew the shah regime which had previously enjoyed american support and cooperation. prior to the revolution, american influence in the region was almost absolute, and it appeared to be in control of the entire middle east oil resources of all countries including saudi arabia, kuwait, qatar, iraq, oman, uae, bahrain and iran. the new iranian regime came up with anti imperialist policies that were hostile to the united states and its twin interests in the region, namely; oil and israel, and so this became a major source of concern and the united states was forced to review its policy in the region. the regime change in iran made iraq –us relations stronger in the region, and soon iraq became engaged in a war with iran that lasted for eight years, but which the iranians eventually won. this is despite open american support to iraq, as well as support from other arab nations, who expressed concerns about iran’s aggressive tendencies, and became worried about their security. at the end of the cold war in 1990, the united states continued to pursue it policy of containing iran, which it started since the 1979 revolution. it feared the iranian policy of exporting the revolution to other arab islamic countries in the region. the us at this time had consolidated its power base in the region by establishing military bases in most of the friendly countries in the region that also felt threatened by the khomeini regime. the bases were to give the us a permanent presence in the region, as well as to confront iran [thayer, 2003]. but while the us was pursuing its policy towards iran, saddam hussein had grown powerful, and was to exploit relations with other arab nations to champion and arab cause and the region, and at the same time began to threaten other neighboring arab countries which were of lesser power to iraq. saddam’s aggressive behavior had been noted by the united states, and the us carefully adjusted to his style [ r.k. herrman, 1991]. but at this time saddam’s threats against israel served as deterrents to us, and generally the containment policy of iran continued to remain the focus of the united states, and as such saddam’s excesses were overlooked by american policy makers, as a matter of policy, the us could not possible do anything that could weaken iraq, because to do so was seen as indirectly helping iran. washington could not deter saddam from invading kuwait, even when it could, us officials visiting baghdad in 1990 spelled out american concerns over about iraq’s aggressive and hostile behavior. the us could not take a position on the exact terms of settlement on the territorial and economic disputes between iraq and kuwait. saddam may have believed that american interests were not sufficiently threatened to evoke massive military response, and concluded that kuwait could be taken without any war [ r.k. herrman, 1991]. but the invasion of kuwait by saddam hussein marked the beginning of the gulf war in 1991. it was only after several efforts have failed to convince saddam to withdraw from kuwait that the united nations issued a resolution for military action which was carried out the allied forces under the leadership of the united states, and saddam was forced to withdraw from kuwait. since the gulf war washington maintained a close watch on the middle east, mean while saddam retreated quietly. but the gulf war remain significant in the history of american relations with the middle east, in the sense that it was the first time the us led a direct military attack on country in the region. another significant event in the post cold war era that was to change the course of international relations in the middle east was the september 9/11 attacks on the twin towers of the united states i.e. the attack on the world trade centre, which was carried out by al-qaida, a terrorist organization headed by osama bin laden. al-qaida seemed www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 3, no. 1; 2018 3 to have inspired antiamerican militants’ worldwide and iraq served as a training ground for new jihadists [j. pressman, 2009]. in the aftermath of the attacks, the bush administration responded by crafting three major policies to advance us national security interests in the region; defeat terrorism, promotion of democracy, and stopping the development of weapons of mass destruction, these policies were delineated and defended in the administration’s 2002 national security strategy, major presidential addresses and other official speeches [j. pressman, 2009]. nine days after the 9/11 attacks the bush administration declared the war on terror and concluded that the war will not end until all terrorist groups of global reach have been found, stopped and defeated. the administration of bush was also worried about the alliance of terrorist organizations and the various countries in which they were based and as a consequence president bush pledged to pursue nations that provide aid or safe haven to terrorism [j. pressman, 2009]. and as a result afghanistan, al-qaida’s home became a potential target, the united states invaded afghanistan and toppled the taliban regime, took control of kabul and put a peace keeping force in place. the united states having succeeded in taking over afghanistan, now pursued its second policy of stopping the proliferation of weapons of mass destruction which will followed by the spread of democracy. earlier on, the bush administration had identified the countries of north korea, iran and iraq as belonging to the axis of evil, as countries arming to threaten the peace of world. bush was quoted in a speech as saying “by seeking weapons of mass destruction, these regimes pose a grave and growing danger” [j. pressman, 2009]. american concerns about terrorism and weapons of mass destruction became intertwined, and bush was quoted as saying “terror cells and outlaw regimes building weapons of mass destruction are different faces of the same evil, our security requires that we confront both”. thus the us under the pretext of wmd invaded iraq and toppled the regime of saddam hussein despite the disapproval of the united nations in 2003, and took over the affairs of the country, stationed a military force in baghdad. in post cold war america, the foreign policy establishment shifted, with no other threat like that of the soviet during the cold war, and so the 9/11 attacks became the dominant issue in us foreign policy overshadowing all other international issues. it led to a fundamental policy reorientation; significant spending increases; bureaucratic changes wars in afghanistan and iraq; and the deployment of u.s. military forces in many new places. in conclusion, fareed mohammedi and yahya sadowski, in their article titled “shaky foundations” maintained that “the bush team’s initiatives rest on a common vision of the u.s. position in the world and embody one style of diplomacy. they assume that the structure of international politics is now unipolar, with us occupying position of sole hyper power. there may be other powers in the world, but none of them can individually resist washington, much less actually threaten it. thus the bush white house thinks, it makes sense for the us to adopt a unilateral diplomatic style. washington should mobilize the world community when that is amenable to the national interest, and ignore or override world opinion when it is not. where the us leads, u.s. allies and rivals must follow. george w. and his team view this situation as benign: they believe that america not only has unique powers but that it possesses the wisdom and charity necessary to exercise them in the global interest.” [mohammed, sadowski, 2001] despite all that has been said the us policy in the middle east after the cold war has been described by many analysts as a failure. the bush administration’s policy did not make any significant progress on any of the three policies, the benefits were more limited than expected; the costs higher than anticipated; and the damage in terms of national security and international relationship was to both the united states and its allies [j. pressman, 2009]. references bahgat korany, the middle east since cold war: torn between geopolitics and geoeconomics. bradley a. thayer, the pax americana and the middle east: us grand strategic interests in the region after september 11, the beginsadat center for strategic studies, bar-ilan university, middle east security and policy studies no 56, 2003. fareed mohamedi and yahya sadowski, shaky foundations: the decline (but not fall) of us hegemony in the middle east, middle east report, 2001. gawdat bahgat, american oil piplomacy in the persian gulf and the caspian sea, university press florida, 2010. jeremy pressman, power without influence, the bush administration’s failure in the middle east, international security vol 33, no 4, 2009. library of congress, country studies. www.countrystudies.us/persiangulfstates marissa allisson, us and iranian strategic competion: saudi arabia and the gulf states, centre for strategic and international studies, doha, 2010. michael hudson, to play the hegemon: fifty years of u.s. policy towards the middle east, middle east journal,vol50,no 3, 1996. www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 3, no. 1; 2018 4 noam chomsky, after the cold war: us policy in the middle east, cultural critique, vol 19, the economies of war, 1991. pirouz motjahed zadeh, security and territoriality in the persian gulf, london, 1999. richard herrmann, the middle east and the new world order: rethinking u.s political strategy after the gulf war, 1991. robert a. pape, soft balancing against the united states, research gate, 2005 stephen m. walt, the end of the american era, the national interest, 2011 copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). american finance & banking review; vol. 2, no. 2; 2018 issn 2576-1226 e-issn 2576-1234 impact factor: 4.1 published by centre for research on islamic banking & finance and business, usa 14 non performing assets in public sector banks: a cause analysis r.v. naveenan 1 , b. ravi kumar 2 & b. vijaya lakshmi 3 1 department of management studies,vivekananda institute of management, india 2 department of mba-amrita sai institute of science and technology, india 3 department of business management, sri pamavati mahila visvavidyalayam (women’s university)-tirupati,india correspondence: r.v. naveenan, department of management studies, vivekananda institute of management, india. email: naveenan.08mba@gmail.com received: july 19, 2018 accepted: august 25, 2018 online published: september 1, 2018 abstract lending funds is considered as the primary function of primary function which provides financial support to various sectors such as agriculture, industry, personal loans etc., but in recent times the banks as taken a cautious stand in lending. the main reason for such an initiative is the mounting issues of non-performing assets (npas).a loan asset is considered as non-performing asset when it ceases to generate income for the bank. from 31st march, 2004 npa was defined as a credit facility in respect of which the interest or installation of principal has remained past due for a specified period of time which was four quarters. npa in public sector banks is increasing year after year and thus this is becoming a debatable topic. so considering this anglete paper is undertaken to analyze the reasons for advances becoming npa in public sector banks and intends to give suitable suggestions to overcome npa. keywords: npas, npa classification, types of npa, causes of npa. 1. introduction npa is defined as an advance where payment of interest or repayment of instalment of principal (in case of term loans) or both remains unpaid for a certain period. in india, the definition of npas has changed over time. according to the narasimham committee report (1991), those assets (advances, bills discounted, overdrafts, cash credit etc.) for which the interest remains due for a period of four quarters (180 days) should be considered as npas. subsequently, this period was reduced, and from march 1995 onwards the assets for which the interest has remained unpaid for 90 days were considered as npas. an npa is defined as a loan asset, which has ceased to generate any income for a bank whether in the form of interest or principal repayment classification of npa npa have been classified into following four types: standard assets: a standard asset is a performing asset. standard assets generate continuous income and repayments as and when they fall due. sub-standard assets: all those assets (loans and advances) which are considered as non-performing for a period of 12 months. doubtful assets: all those assets which are considered as non-performing for period of more as 12 months. loss assets: all those assets which cannot be recovered. causes for non-performing assets external causes: natural calamities and climatic conditions, recession, changes in government policies changes in economic conditions, industry related problems, impact of liberalization on industries, technical problems. www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 2; 2018 15 internal causes: internal defaulters, faculty projects, most of the project reports are ground realities, proper linkages, product pricing etc. some approach for the “heck” of starting adventure, with poor knowledge of product risks, over depended on poorly paid killed workers and technicians, building up pressure for sanctions, inept handling by banker’s lack of professionalism and appraisal standards, non-observance of system, procedures and non-insistence of collaterals etc, lack of post sanction monitoring, unchecked diversions. 2. review of literature this section provides an overview of some of the existing literature with regard to the npa. this literature review helps me to better understanding of both research topics and of the existing gap: meeker larry g. and gray laura (1987) evaluate that information. a regression analysis comparing the nonperforming asset statistics with examiner classifications of assets suggests that the non-performing asset information can be a useful aid in analyzing the asset quality of banks, particularly when the information is timely. toor n.s. (1994) stated that recovery of non-performing as-sets through the process of compromise by direct talks rather than by the lengthy and costly procedure of litigation. he suggested that by constant monitoring, it is possible to detect, the sticky accounts, the incipient sickness of the early stages itself and an attempt could be made to review the unit and put it backon the road to recovery s.n. bidani (2002) argued that non-performing assets are the smoking gun threatening the very stability of indian banks. npas wreck a banks’ profitability both through a loss of interest income and write-off of the principal loan amount itself. this is definitive book which tackles the subject of managing bank npas in it‟s entirely, starling right from the stage of their identification till the recovery of dues in such ac-counts. paul purnendu, bose,swapan and dhalla, rizwan s.(2011) attempted to measure the relative efficiency of indian psu banks on overall financial performances. since, the financial industry in a developing country like india is undergoing through a very dynamic paceof restructuring, it is imperative for a bank to continuously monitor their efficiency on non-performing assets, capital risk-weighted asset ratio, business per employee, return on assetsand profit per employee. here, non-performing assets is a negative financial indicator. to prove empirically, we propose a framework to measure efficiency of indian public sector banks. khedekar pooja s. (2012) recommends that a strong banking sector is essential for a flourishing economy. indian banking sector emerged stronger during 2010-11 in the aftermath of global financial meltdown of 2008-10 under the watchful eye of its regulator. the level of npas acts as an indicator showing the credit risks & efficiency of allocation of resource. npa involves the necessity of provisions, any increase in which bring down the overall profitability of banks. an excessive rise in interest rates over the past 18 months has led to a sharp increase in nonperforming assets. this not only affects the banks but also the economy as a whole. pooja also deals with understanding the concept of npa, the causes and overview of different sectors in india. selvarajan b. and vadivalagan, g. (2012) state that non-performing assets is not a dilemma facing exclusively the bankers; itis in fact an all pervasive national scourge swaying the entire indian economy. non-performing asset is a sore throat of the indian economy as a whole. non-performing assets have affected the profitability, liquidity and competitive functioning of banks and developmental of financial institutions and finally the psychology of the bankers in respect of their disposition towards credit delivery and credit expansion. npas do not generate any income for the banks, but at the same time banks are required to make provisions for such npas from their current profits. apart from internal and external complexities, increases in npas directly affects banks' profitability sometimes even their existence. veerakumar, k. (2012) mentions that the indian banking sector has been facing serious problems of raising nonperforming assets (npas). like a canker worm, npas have been eating the banking industries from within, since nationalization of banks in 1969. npas have choked off quantum of credit, restriction the recycling of funds and leads to asset-liability mismatches. it also affected profitability, liquidity and solvency position of the indian banking sector. one of the major reasons for npas in the banking sector is the 'direct lending system' by the rbi under social banking motto of the government, under which scheduled commercial banks are required to lend40% of their total credit to priority sector. the banks who have advanced to the priority sector and reached the target suffocated on account of raising npas, since long. the priority sector npas have registered higher growth both in percentage and in absolute terms year after year. the present paper is an attempt to study the priority sector advances by the public, private and foreign bank group-wise, target achieved by them and a comparative study on priority and non-priority sector npas over the period of 10 years between 2001-02 and 2010-11.the author also aims to find out the categories of priority sector advances which contribute to the growth of total priority sector npas during the period under study. murthy, k. v. bhanu gupta, lovleen. (2012) studied the impact of liberalization on the non-performing assets of the four banking segments, namely, public sector, old private sector, new private sector and foreign banks by www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 2; 2018 16 studying the overall trends in npas. we have used the structureconductperformance (s-c-p) approach that shows the relationship between competition and conduct, concentration and growth in npas. our results show that on an average across the banking industry segments, average non-performing assets in the past 11 years have been declining at the rate of 13% p.a. compounded growth rate. the old private sector banks' nonperforming assets have reduced at the rate of 11.98% and that of public sector banks have declined at the rate of 18% and foreign bank sat 11.4%. though new private sector banks and the foreign banks seem to be more efficient but their conduct does not show consistency and stability. joseph, mabvure tendai edson, gwangwava (2012) attempted to find out the causes of non-performing loans in zimbabwe. loans form a greater portion of the total assets in banks. these assets generate huge interest income for banks which to a large extent determines the financial performance of banks. however, some of these loans usually fall in ton on-performing status and adversely affect the performance of banks. in view of the critical role banks play in an economy, it is essential to identify problems that affect the performance of these institutions. this is because non-performing loans can affect the ability of banks to play their role in the development of the economy. a case study research design of cbz bank limited was employed. interviews and questionnaires were used to collect data for the study. their study revealed that external factors are more prevalent in causing non-performing loans in cbz bank limited. the major factors causing nonperforming loans were natural disasters, government policy and the integrity of the borrower. debarsh and sukanya goyal (2012) emphasized on management of non-performing assets in the perspective of the public sector banks in india under strict asset classification norms, use of latest technological platform based on core banking solution, recovery procedures and other bank specific indicators in the context of stringent regulatory framework of the rbi. non-performing asset is an important parameter in the analysis of financial performance of a bank asit results in decreasing margin and higher provisioning requirements for doubtful debts. the reduction of non-per-forming asset is necessary to improve profitability of banks and comply with the capital adequacy norms as per the basel accord.3 kavitha. n (2012), tried to have an assessment of non-performing assets on profitability its magnitude and impact. credit of total advances was in the form of doubtful assets in the past and has an adverse impact on profitability of all public sector banks affected at very large extent when non-performing assets work with other banking and also affect productivity and efficiency of the banking groups. the study observed that there is increase in advances over the period of the study. 3. objectives of the study  to study the concept on nonperforming assets and its relevance in the banking sector  to identify the loan/bank based components that contribute to npa. 4. formulation of hypothesis hypothesis i: “there is a significant difference between the importances of bank based internal components that contribute to npa. hypothesis ii: “there is a significant difference between the importances of bank based external components that contribute to npa”. 5. methodology in order to achieve the objective of the study an appropriate methodology has been adopted. research done is descriptive in nature. source of data the present study is mainly based on secondary data. the data is taken from the ph.d thesis titled “a study on handling non-performing assets with special reference to public sector banks in kanyakumari district”. statistical tools used friedman test: the friedman test is a non-parametric test. it is used to test for differences between groups when the dependent variable being measured is ordinal. www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 2; 2018 17 6. data analysis & interpretation mean and sd of bank based internal components that contribute to npa table 1. mean and sd of bank based internal components that contribute to npa sl. no. importance to the bank based internal components that contribute to npa mean std. deviation 1 improper selection of borrowers 2.18 0.872 2 deficiency in processing 2.00 0.886 3 improper appraisal of assets 2.10 0.834 4 lack of monitoring pre and post sanction of loan 2.57 0.680 5 terms and conditions of credit 1.59 0.494 6 unsecured loans 2.42 0.665 source: primary data inference: from the above table, lack of monitoring pre and post sanction of loan has the highest mean followed by unsecured loans, improper selection of borrowers, improper appraisal of assets, deficiency in processing and terms and conditions of credit. highest standard deviation of deficiency in processing shows low focus on the particular internal components that contribute to npa. mean and sd of bank based external components that contribute to npa table 2. mean and sd of bank based external components that contribute to npa sl. no. importance to the bank based external components that contribute to npa mean std. deviation 1 selection of unsuitable and unviable scheme 2.12 0.832 2 mis-utilization of fund 2.59 0.678 3 insolvency or death of borrower 1.32 0.645 4 low income from project 2.01 0.649 5 lack of infrastructure, modern technology and marketing facilities 1.33 0.493 6 political interference and labor unrest 2.40 0.662 7 willful default due to liberal government policy and expectation of debt relief 2.42 0.799 8 sluggish legal system 1.62 0.673 9 price escalation of inputs 1.81 0.755 10 power failures 1.99 0.891 source: questionnaire inference: from the above table, mis-utilization of fund has the highest mean followed by willful default due to liberal government policy,political interference and labor unrest,selection of unsuitable and unviable scheme,low income from project,power failures,price escalation of inputs,sluggish legal system,lack of infrastructure, modern technology and marketing facilities,insolvency or death of borrower . highest standard deviation of power failures shows low focus on the particular external components that contribute to npa. hypothesis i null hypothesis: there is no significant difference between mean ranks towards importance to the bank based internal components that contribute to npa. table 3. friedman test for significant difference between mean ranks towards importance to the bank based internal www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 2; 2018 18 components that contribute to npa sl. no. importance to the bank based internal components that contribute to npa mean rank chisquare p value 1 improper selection of borrowers 3.62 280.580 0.000** 2 deficiency in processing 3.10 3 improper appraisal of assets 3.36 4 lack of monitoring pre and post sanction of loan 4.71 5 terms and conditions of credit 1.89 6 unsecured loans 4.32 source: primary data ** denotes significance at 1% level inference: since p value is less than 0.01, the null hypothesis is rejected at 1 per cent level of significance. hence it is concluded that there is significant difference between mean ranks towards importance to the bank based internal components that contribute to npa. from the table, based on mean rank, lack of monitoring pre and post sanction of loan (4.71) is the best internal component that contribute to npa, followed by unsecured loans (4.32), improper selection of borrowers (3.62), improper appraisal of assets (3.36), deficiency in processing (3.10) and terms and conditions of credit (1.89). hypothesis ii null hypothesis: there is no significant difference between mean ranks towards importance to the bank based external components that contribute to npa. table 4. friedman test for significant difference between mean ranks towards importance to the bank based external components that contribute to npa sl.no. importance to the external components that contribute to npa mean rank chisquare p value 1 selection of unsuitable and unviable scheme 6.15 547.007 0.000** 2 mis-utilization of fund 8.04 3 insolvency or death of borrower 3.04 4 low income from project 5.75 5 lack of infrastructure, modern technology and marketing facilities 2.85 6 political interference and labour unrest 7.47 7 willful default due to liberal government policy and expectation of debt relief 7.39 8 sluggish legal system 3.95 9 price escalation of inputs 4.78 10 power failures 5.59 source: primary data ** denotes significance at 1% level inference: since p value is less than 0.01, the null hypothesis is rejected at 1 per cent level of significance. hence it is concluded that there is a significant difference between mean ranks towards importance to the bank based external components that contribute to npa from the table, based on mean rank, mis-utilization of fund (8.04), political interference and labour unrest(7.47),willful default due to liberal government policy and expectation of debt relief(7.39),selection of unsuitable and unviable scheme(6.15),power failures(5.59),low income from project(5.75),price escalation of inputs(4.78),sluggish legal system(3.95),insolvency or death of borrower(3.04),lack of infrastructure, modern technology and marketing facilities(2.85). www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 2; 2018 19 7. findings of the study  from table 7.1 bank based internal components that contribute to npa are ranked on the basis of the response and mean score calculated. lack of monitoring pre and post sanction of loan has the highest mean followed by unsecured loans, improper selection of borrowers, improper appraisal of assets, deficiency in processing and terms and conditions of credit.  from table 7.2, bank based external components that contribute to npaare ranked on the basis of the response and mean score calculated.mis-utilization of fund has the highest mean followed by willful default due to liberal government policy, political interference and labor unrest, selection of unsuitable and unviable scheme, low income from project, power failures, price escalation of inputs, sluggish legal system, lack of infrastructure, modern technology and marketing facilities, insolvency or death of borrower .  from table 7.3, by friedman test it is concluded that there is significant difference between mean ranks towards importance to the bank based internal components that contribute to npa.this shows the validity of ranking based on mean.  from table 7.4, by friedman test it is concluded that there is significant difference between mean ranks towards importance to the bank based external components that contribute to npa. this shows the validity of ranking based on mean. 8. conclusion this paper reveals the npa and its scenario in all the scheduled commercial banks during the decade. it even depicts the various reasons for the growth of npa. npas reflect the overall performance of the banks. a high level of npa is a poor indicator of bank performance. the npa growth involves the necessity of provisions, which reduces the overall profits and shareholders’ value. careful steps by the bankers like selection of right borrowers, viable economic activity correct end use of funds and timely recovery of loans are absolutely necessary pre conditions for preventing or reducing the incidence of new npas which will enhance the credibility of the banks and attain the objective of the sound financial system. references ammannaya, k.k. (2004), “indian banking: 2010”, iba bulletin,156. baiju, s. and tharril, g.s. (2000), “performance banks with non-performing assets: an analysis of npas, yojna, 5-9. chaitanya v krishna (2004). causes of non-performing assets in public sector banks. economic research, 17(1): 16-30. dash, mk., &kabra, g. (2010). the determinants of non-performing assets in indian commercial banks: an econometric study, middle eastern finance and economics,7. kaviths n (2012), “npas of scheduled commercial banks in indiaa case analysis”,global journal of arts and management. naveenan,rv&vijayakumar,t(2014):”npa -a humangous burdenon bank’s shoulders”,asia pacific journal of marketing & management review,3(5),7-16. rajaraman, i &vashistha, g (2002): “non-performing loans of indian public sector banks -some panel results‟, economic & political weekly satpathy and patnaik, (2012), “portfolio of npaby classification of banks”. bvmir management edge. naveenan,rv,”warning signals a tool to control npa in banks”, international journal of advance research in computer science and management studies,4(7), 280-288. naveenan,r.v.2016.a study on handling non-performing assets with special reference to public sector banks in kanyakumari district(phd thesis).manonmaniam sundaranar university, tirunelveli,tamil nadu, india. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). contents american finance & banking review vol. 1, no. 1; 2017 published by centre for research on islamic banking & finance and business 24 the mediating role of opportunity of participation impact in determining training effectiveness among potential entrepreneurs in business organisations muhammad adamu1 1department of business administration, faculty of social and management sciences, bauchi state university, nigeria correspondence:department of business administration, faculty of social and management sciences, bauchi state university, nigeria, tel: (+234) 08035558385,e-mail: majalamm@gmail.com received: september 25, 2017 accepted: september 28, 2017 online published: september 30, 2017 abstract the main objective of this study is to evaluate the training effectiveness on potential entrepreneurs through opportunity of participation given on a task in an organisation. the methodology used in this study is a survey research design through a quantitative approach. questionnaires are used in collecting data in a cross-sectional survey. the data was analysed using the special package for social sciences (spps). pearson’s correlation co-efficient and regression analysis were conducted. sobel test was also conducted to confirm the mediating effect of opportunity of participation. the findings revealed that there is a positive relationship between training effectiveness (kirkpatrick four levels) and potential entrepreneur’s performance. the regression analysis indicates opportunity of participation has been a dominant factor in the relationship between training effectiveness and potential entrepreneur’s performance. the integration of a mediator in the frame contributes to kirkpatrick model in the extant training and development as well as entrepreneurship literature. furthermore, policy makers and hr departments of business organizations will have more appreciation of how training can be appropriately evaluated more particularly, the on-the-job training for an improved performance. keywords: training effectiveness, kirkpatrick, opportunity of participation (work environment), potential entrepreneurs, business organisations. 1. introduction present scenario of business world is characterized by a growing desire to have a very decent climate for the potential entrepreneurs to perform well as employees of an organisation for competitiveness, market globalization, and technological advances in organizations. (bramley and kitson, 2007). many researchers have conducted a lot of studies in order to evaluate the training programmes, from the point of views of multiple factors and dimensions (bramley and kitson, 2007; baldwin, 2008; burke, 2006; haslinda et al., 2009; ibrahim et al., 2008; richard et al., 2010, wright, 2006). this is done for the purpose of ensuring that the skills learned during trainings are equally utilised by potential entrepreneurs in their new business start-up. this becomes imperative because the essence of acquiring training is to transfer it, or to apply it to the tasks by potential entrepreneurs. this, if properly conducted, would result in both the attainment of the business purposes as well as capability by potential entrepreneurs in their new business start-up. the mediating role of opportunity of participation impact in determining training effectiveness among potential entrepreneurs in business organisations muhammad adamu 25 following the completion of a training programme, and its subsequent application on the job, then it is worthy to be followed by evaluation to ascertain the effect of the training received by the potential entrepreneurs on the task they performed. the evaluation of a training programme in a business organisation is an ongoing process. richard et al. (2010) are of the opinion that training evaluation can be done by considering learning process and job satisfaction. this shows that the gap between evaluation theory and practice is a serious problem for training in organisations and businesses. studies on potential entrepreneurs performance has remained a multi-factorial exercise, taking different dimensions and views by many researchers. in his work, baldwin (2008) found that the knowledge and skills of an individuals has become increasingly important to performance, competitiveness, and advancement, and as such, the knowledge, skills, and attitudes gained by the potential entrepreneurs through training has to be periodically evaluated over time so that their capability will match with the existing gaps and bridge the skills requirement needs on current and future task requirements. clarke (2012) believed that work environment is man’s immediate surrounding which he manipulates for his existence. the productivity rate of the potential entrepreneurs in their business organization as well as their new business start-up is challenged by wrongful manipulation that brings hazards and makes the environments unfavourable. therefore, in this direction, the workplace entails an environment in which the potential entrepreneurs tasks in their new business start-up. also, clarke (2012) found that work environment affect how potential entrepreneurs perform tasks in the organisation. this is so because the opportunity to participate in work has consequences regarding productivity level. because today’s business challenges is different, diverse, and constantly changing, the business environment is the most critical factor in keeping potential entrepreneurs satisfied in today’s business world. therefore, the effectiveness of training can be ascertained and understood through training evaluation, and which is the intention of the researcher to evaluate training effectiveness, using the four levels of kirkpatrick model of training evaluation, and understanding the relationship between training effectiveness, and potential entrepreneur’s performance, and the mediating role of opportunity of participation. 2. problem statement studies on potential entrepreneur’s effectiveness have remained a multi-factorial exercise, taking different dimensions and views by many researchers. in his work, baldwin (2008) found that the skills and knowledge of business organizations employees has become increasingly important to advancement, competitiveness and performance. therefore, the knowledge, skills, and attitudes gained by the potential entrepreneurs through training has to be periodically evaluated over time so that their capability will match with the existing gaps and bridge the skills requirement needs on potential entrepreneurs in their new business start-up. a research by kraiger and ford (2008) shows that though many business organizations are concerned with the contribution of training to the potential entrepreneurs in their new business start-up. however, the feasibility of such validation and evaluation was not consistently ascertained. in a research, govindarajulu (2014) found that training evaluation does not exists at all in many business organizations or is carried out in a very casual way, and lack of this information makes it impossible to prove the value of training. also kirkpatrick (1998) found that organizations are not adept in utilizing the models to evaluate training programmes, and which has impact on performance. a gap of training evaluation and performance exists here, since without evaluating training, no value of training can be seen, and which is in a direct link with potential entrepreneur’s performance. if a training program is proven to be effective, it will definitely yield positive results. kraiger (2008) concludes that measuring training is one of the key components on how an organization will succeed. and the mediating role of opportunity of participation impact in determining training effectiveness among potential entrepreneurs in business organisations muhammad adamu 26 perhaps may yield more than what is expected by the organization. govindarajulu (2014) argued for a significant relationship between training effectiveness and work environment on ensuring effectiveness and outcome achievement of training programme. the work environment has great influence on the training effectiveness. many literatures provide the evidence of significant relationship between environmental characteristics and training effectiveness, which is reflected directly in training outcomes (elangovan and karakowsky, 2010; facteau et al., 2006; goldstein, 2012). other studies also emphasized different degrees of relationship between environmental characteristics and training effectiveness (kraiger, 2008). in their findings ibrahim et al. (2014) stated that the perception about the work environment in terms of participation will affect the potential entrepreneur’s performance, which means that the provision of a conducives opportunity to participate by an organization will be able to improve potential entrepreneur’s performance. after reviewing these relevant studies as well as some verbal and written information received by the researcher, the researcher found it necessary to conduct this research for that there has been not so many researches conducted with regards to the impact of training on potential entrepreneurs performance of the sample organizations with similar variables of this study. most of the researches reviewed were conducted based on qualitative approach (burke and baldwin, 2008). therefore, there is the need to study it on quantitative method. moreover, training evaluation has not been in practice by many business organizations to evaluate the level of potential entrepreneur’s performance, and there is a conflicting view on the influence of work environment on training effectiveness. moreover, the work environment factors are too many to be addressed on a single research, which might reduces the effectiveness of a research, and as such, the researcher explore on some of the relevant work environment factors. the work environment factors are relative upon business organizations, and the researcher chooses the ones that affect potential entrepreneur’s performance relevant to the organisation of current study, hence potential entrepreneurs performance depends on training evaluation and some relevant work environment factors of a business organisation. therefore, for these purposes, the researcher will conduct a study on the relationship between training effectiveness (as an independent variable), and potential entrepreneurs performance (as a dependent variable) as well as determining the mediating role of work environment (as a mediating variable), and the use of kirkpatrick model of training evaluation to specifically measure the training received by potential entrepreneurs in business organizations. 3. conceptual framework the evaluation of this study is based on kirkpatrick model of training evaluation, in which employees are evaluated at the four levels of reaction, learning, behaviour, and results. source: kirkpatrick, d. l. (1959).techniques for evaluating training programs. journal of the american society of training and development, 13, 3–9. training effectiveness kirkpatrick four levels:  reaction  learning  behaviour  esuts opportunity of participation performance (potential entrepreneur) the mediating role of opportunity of participation impact in determining training effectiveness among potential entrepreneurs in business organisations muhammad adamu 27 3.1 specific hypotheses ha1: there is a significant relationship between training effectiveness and potential entrepreneur’s performance. ha2: there is a significant influence of work environment (construct) on potential entrepreneur’s performance. ha3: opportunity of participation mediates the relationship between training effectiveness and potential entrepreneur’s performance. 3.2 training effectiveness training effectiveness focuses on the characteristics of individuals, trainings, and organizational factors that affect training, before, during and after training. it pay more attention on the learning process as a whole, thus providing a macro view of training outcomes. conducting a lot of training does not means that the training programmes were effective if there were no improvements in potential entrepreneurs performance and productivity. to ascertain the effectiveness of training, an evaluation is required. from the results of training evaluation, the business organizations will be able to ascertain more accurately whether the training received by potential entrepreneurs has been effective in the business organization, and subsequently in their new business start-up. 3.3 opportunity of participation according to ford et al. (2013), opportunity of participation is the extent to which an individual obtains work experiences relevant to the tasks is provided or through an activity for which he or she was trained. potential entrepreneurs are supposed to get different opportunities to apply their training as these opportunities can affect the training outcomes. low organizational performance would be manifest if the potential entrepreneurs do not have job opportunities to perform and transfer the new knowledge, skills and attitude on a given task in the business organization. similarly, clarke (2012) affirmed that training effectiveness can be undermined when heavy workload and time pressure are the main constraint against the opportunity to perform. the potential entrepreneur must have the opportunity to perform in order to ensure the training effectiveness. this will also help them to refine their knowledge, otherwise the knowledge and skills from the training will be forgotten. learning opportunities in the job improve the employability of individual workers. 3.4 potential entrepreneurs and performance potential entrepreneur’s performance is a set of behavior which person show in relation to his task, or otherwise, amount of efficiency gained due to the person's type of job. it is efficiency in his role according to his legal tasks and the degree of efforts and successfulness of a person. it can be defined as the skills of potential entrepreneurs in doing a given task (desimeone and werner, 2012). to improve business performance, it is usually a good idea to be on the lookout for new ways. both at a managerial and employee level, improving business performance should be a concern of many business organisations. productivity, reputation, employee morale and customer service may all improve greatly if a business organization is efficient and well-run. to get day to day work done, most organizations rely heavily on their employees. the janitor, the office worker, the floor supervisor, and even the cafeteria employees can all be a major factor in how good the company is and how efficiently it runs. it is important to listen carefully to employee feedback to improve business performance since many entry level and junior workers are on the ground floor of the company, they may be in the clearest position to be honest about possible improvement. management and employees can go a long way toward improving business performance through creating an open dialogue about improvements by allowing a level of participation on task among the potential entrepreneurs within the organization which may later form their own business. the mediating role of opportunity of participation impact in determining training effectiveness among potential entrepreneurs in business organisations muhammad adamu 28 4. research methododlogy the research design for the conduct of this study is a survey research. it is one of the traditional and oldest research techniques (babbie, 2014). survey research is most often used to access about respondent’s beliefs, attitudes, perceptions, and self reported behaviors (kapoor 2008). the survey research was used test the hypotheses for this study, and to ascertain whether a possible relationship exists between training effectiveness, work environment, and potential entrepreneurs. the methodology used in this study based on quantitative research. quantitative research was used to explore the relationship between training effectiveness, and potential entrepreneurs as well as determining the mediating role of work environment. the method used in this survey is the questionnaire method as a means of data collection from the respondents, and which is the easiest and quickest instrument to gather the respondent’s views. the research design involves a sample of employees whom questionnaires were sent and filled, with regards to their opinions, feelings and perceptions. the training effectiveness is the independent variables; the work environment is the mediating variable, while potential entrepreneurs are the dependent. 5. findings of the research 5.1 relationship between the kirkpatrick levels of training evaluation and potential entrepreneurs’ performance according to kirkpatrick (1996), the reaction, learning, behaviour and the results level of training evaluation influence a potential entrepreneur. from the findings of kirkpatrick (1996), the construct of training evaluation is found to influence a potential entrepreneur. this supported the following hypothesis: ha1: there is a significant relationship between training effectiveness and potential entrepreneur’s performance. table 1: pearson correlation on the relationship between reaction level and potential entrepreneur’s performance reaction performance reaction pearson correlation sig. (2-tailed) n 1 .800** .000 107 performance pearson correlation sig. (2-tailed) n .800** .000 107 1 table 1 above indicates that reaction level of training evaluation has a significant relationship with potential entrepreneurs at significant value, p=0.000, which is less than p=0.01. the results from the “r” value r=0.800 translate a strong positive relationship between reaction level and potential entrepreneurs. therefore, the first alternative hypothesis is accepted. (p=0.000, which is less than p=0.01, r=0.800).this findings is in line with the work of baldwin (2008) who found that the knowledge and skills of an organizations employees has become increasingly important to performance, competitiveness, and advancement, as such, the knowledge, skills, and attitudes gained by the employees through training has to be periodically evaluated over time so that their capability will match with the existing gaps and bridge the skills requirement needs on current and future jobs requirements. the mediating role of opportunity of participation impact in determining training effectiveness among potential entrepreneurs in business organisations muhammad adamu 29 table 2: pearson correlation on the relationship between learning level and employee performance learning performance learning pearson correlation sig. (2-tailed) n 1 .770 ** .000 107 performance pearson correlation sig. (2-tailed) n .770** .000 107 1 table 2 above indicates that learning level of training evaluation has a significant relationship with potential entrepreneurs at significant value, p=0.000 which is less than p=0.01. the results from the “r” value r=0.770 translate a strong positive relationship between learning level and potential entrepreneurs. therefore, the first alternative hypothesis is accepted. (p=0.000, which is less than p=0.01, r=0.770). table 3: pearson correlation on the relationship between behaviour level and potential entrepreneurs performance behaviour performance behaviour pearson correlation sig. (2-tailed) n 1 .402** .000 107 performance pearson correlation sig. (2-tailed) n .402** .000 107 1 table 3 above indicates that learning level of training evaluation has a significant relationship with potential entrepreneurs at significant value, p=0.000 which is less than p=0.01. the results from the “r” value r=0.402 translate a moderate positive relationship between behaviour level and potential entrepreneurs. therefore, the first alternative hypothesis is accepted. (p=0.000, which is less than p=0.01, r=0.402). table 4: pearson correlation on the relationship between results level and potential entrepreneurs performance results performance results pearson correlation sig. (2-tailed) n 1 .876** .000 107 performance pearson correlation sig. (2-tailed) n .876** .000 107 1 table 4 above indicates that results level of training evaluation has a significant relationship with potential entrepreneurs at significant value, p=0.000 which is less than p=0.01. the results from the “r” value r=0.876 translate a very strong positive relationship between results level and potential entrepreneurs. therefore, the first alternative hypothesis is accepted. (p=0.000, which is less than p=0.01, r=0.876). the mediating role of opportunity of participation impact in determining training effectiveness among potential entrepreneurs in business organisations muhammad adamu 30 5.2 pearson’s correlation on the relationship between organization’s culture and potential entrepreneurs performance ha2: there is a significant influence of work environment (construct) on potential entrepreneurs. table 5: pearson correlation on the relationship between participation level and potential entrepreneur’s performance participation performance participation pearson correlation sig. (2-tailed) n 1 .725** .000 107 performance pearson correlation sig. (2-tailed) n .725** .000 107 1 table 5: above indicates that opportunity of participation as a construct of work environment has a significant relationship with potential entrepreneurs at significant value, p=0.000, which is less than p=0.01. the results from the “r” value r=0.725 translate a strong positive relationship between opportunity of participation and potential entrepreneurs. therefore, the second alternative hypothesis is accepted. (p=0.000, which is less than p=0.01, r=0.725). this finding is in line with christopher and khann (2013) that the opportunity to participate as a work environment construct is an employee’s immediate surrounding which he manipulate for his existence. facteau (2006) also indicates that environmental conditions affect employee safety perceptions which have impact upon employee commitment in the workplace. 5.3 testing the mediating variables table 6: results for stepwise regression analysis with opportunity of participation (work environment) as the mediator, and training effectiveness as the independent variable ha3: opportunity of participation mediates the relationship between training effectiveness and potential entrepreneurs. model summary model r r square adjusted r square std. error of the estimate 2 .982a .965 .963 .08821 a. predictors: (constant), participation, learning, behavior, results, reaction model 1 model 2 model 3 independent variables: reaction learning behaviour results .495 .273 .340 .338 mediating variable: opportunity of participation .509 the mediating role of opportunity of participation impact in determining training effectiveness among potential entrepreneurs in business organisations muhammad adamu 31 in table 6 above, the result of this study confirmed that opportunity of participation is statistically in significant linear relationship based on the perception of employees with the dependent variables since it is significant at p=0.003, which is less than p=0.01, therefore, the fourth alternative hypothesis is accepted, and it can be assumed as the dominant factor contributing to the potential entrepreneurs. 5.4 results for sobel test on mediating variables the results of the sobel test on organisation culture mediation shows that the test statistics value=2.203, the standard error value=0.717, and the p value=0.009. this shows that opportunity of participation mediates positively in the relationship between training effectiveness and potential entrepreneurs, and it is considered as a dominant factor at (p=0.01). 5.5 discussion this study was conducted by survey on the sample organization with the total 107 respondents as the sample of the study. the result of this study confirmed that training effectiveness is a major and crucial factor that influences the potential entrepreneur’s performance. the kirkpatrick four levels of training evaluation to determine the impact of training effectiveness towards potential entrepreneurs were found to have a positive relationship towards influencing business performance. opportunity of participation mediates positively in the relationship between training effectiveness and potential entrepreneur’s performance.this shows that opportunity of participation has a mediating influence towards effective performance of potential entrepreneurs in business organizations. when making decisions about the best methods to generate business achievements in their complex environments, organizational leaders are confronted with many complex issues. thus, the sample organization should do everything possible to ensure that every training provided on the task as a participation by to the potential entrepreneurs should be evaluated at the four levels so that gaps and training needs should be identified, and corrective actions has to be consistently taken. 5.6 implications the results of this study will enrich the kirkpatrick training evaluation theory and model, the ludwig open system theory (system theory), and the don elger theory of performance that support the hypotheses of this study, in enhancing future research on the relationship between training effectiveness and potential entrepreneurs performance, and the mediating role of work environment by developing a relevant model in the future researches. future researchers can make further investigations to get more accurate data and reliable information, in terms of the instruments used in this study. by identifying the relationship between training effectiveness and potential entrepreneurs performance, and the mediating role of opportunity of participation, the advantages of understanding how training can be evaluated appropriately, as well as also appreciating the environmental factors that can influence the performance of potential entrepreneurs by policy makers and hr department of the sample organization. this would allow the organization to remain proactive in the issues relating to training and its evaluation, and the environmental context and influence of work environment factors on potential entrepreneurs in a reduced cost within a specified period of time. 6. limitations of the research this research concentrated only on training effectiveness as an independent variable, and work environment as a mediating variable, while potential entrepreneurs performance as a dependent variable. therefore, other researches should be conducted using different variables to proliferate the validity and reliability of this research. another limitation of this research is that its performance evaluation is only based on the sample organisation's employees; other researches may be conducted beyond this. the mediating role of opportunity of participation impact in determining training effectiveness among potential entrepreneurs in business organisations muhammad adamu 32 7. recommendation of the research relatively, this research is important to business organizations in the way they can evaluate the employees training programs in such a way that it can be result oriented, thereby meeting the purpose and targets upon the employees, towards a successful task completion within time frame and with less cost that would firmly put the organisation on the path towards the accomplishment of it's goals and objectives, which is a bedrock for performance and productivity. the hr department of the business organisations should take in to consistent consideration about the four levels of evaluating a training program that has an influence on potential entrepreneurs performance, as well as the work environment factor (opportunity of participation) that also influence potential entrepreneurs performance. the population of this research is from a business organisation, because of the scope and limitation of this study. future researchers should extend it to include public organisations. the sample size should also be increased to have a larger sample size in future research by other researchers. the method of data collection should also be enhanced, qualitative, and the combination of qualitative and quantitative research approach can both be used to improve the quality and reliability of the future research. the instrument to be used should include, in addition, an interview method. this, together with the questionnaire method, would improve the validity and reliability of the future researches, and hence, a way forward. 8. conclusion in conclusion, the kirkpatrick four levels of training evaluation and the work environment construct has a positive correlation relationship with potential entrepreneur’s performance. the stepwise regression analysis was used to determine the mediating role of work environment (organization’s culture), in the relationship between training effectiveness (reaction, learning, behaviour, and results) and potential entrepreneur’s performance. the findings revealed that opportunity of participation act as a mediator and a dominant factor in the relationship between training effectiveness and potential entrepreneur’s performance. the regression analysis results show that opportunity of participation mediate positively in the relationships between training effectiveness and potential entrepreneur’s performance. references babbie, e. 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(2006) human resources and sustained competitive advantage: a resource-based perspective international journal of human resource management,5(2): 301–26. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. american finance & banking review; vol. 3, no. 1; 2018 issn 2576-1226 e-issn 2576-1234 impact factor: 4.1 published by centre for research on islamic banking & finance and business 35 factors that influence the adoptions of internet banking among customers muhammad azimulhakim bin haji saman master student faculty of islamic economics and finance islamic university of sultan sharif ali negara brunei darussalam email: azimul2093@gmail.com received: december 5, 2018 accepted: december 11, 2018 online published: december 18, 2018 abstract internet banking is the latest technology that has revolutionized the changes of banking and business systems around the world. however, arrival of technology has an impact on internet banking and transforms from a traditional banking system to a very useful innovation technology. the purpose of this study is to analyze factors that have influenced users to use internet banking in doing financial transaction. this study uses content analysis on the previous literatures. the findings showed that there were 10 main different factors which influence the adoption of internet banking by the users. this study also proved that the highest factors which consist of 2 main factors are generated from technology acceptance model (tam). contribution of this research are significantly helps bank to have a better understanding on factors that influence the adoption of internet banking as well as help to develop a strategy to improved internet banking services. keywords: customer’s adoption, influence factors, internet banking. jel classification: g21; g40; i22; j16; o32; 035 1. introduction technology has provided many benefits and facilities that have been affecting the banking sector and because of that banks have invested heavily in technology as its benefits contribute greatly to progress and provide faster banking services to customers (heinonen 2006; laukkanen 2007). in addition, internet technology has not only made substantial changes to the banking system but also improved business performance. in the era of globalization today, the advancement of internet technology has been fully utilized by many companies to influence their customers in applying what has been provided by a sector. however, it has become an important measure of the success or effectiveness of users' use of technology. the development of information and communication technology over the past 20 years has had a different impact on businesses and individuals. therefore, internet banking is a technological innovation that plays an important role in changing the structure and nature of banking (shazili et al, 2014). according to different perspectives, mckechnie et.al (2006) & mekter et.al (2003) have concluded that internet banking, automatic teller machine (atms), an electronic business is one of the most popular forms of selfservice technology. however, although customers can see the benefits of using them, there are still users who refuse to use them if they are not comfortable applying them. this matter has been one of the factors that banking industry still has a problem in return for investment in technology as not all customers can receive internet banking. however, melek et.al (2010) has stated that the majority of users can receive internet banking well, especially for educated people. hence, internet banking has been increasingly intensified for the sake of making use internet banking thoroughly. the purpose of this study is to examine the factors that have influenced the user in using internet banking. this study helps identify the main factors that influence the adoption of internet banking. from theoretical perspectives, the result contributes to an existing literature where this article helps provide an amendment factor that may influence the customer to use internet banking. from a practical implications, this research is significantly contributes to banking sector or bank managers to have a better understandings toward internet banking as well as help banks to develop strategies to enhance internet banking services and usage. the banks also able to specified certain budget on which factor should bank invest more so that the internet banking mailto:azimul2093@gmail.com www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 3, no. 1; 2018 36 services are more likely able to use to all age categories and increase bank marketing especially on online services. the rest of the paper will discuss some definitions of internet banking as an explanation of the essence of this study. this study also highlight on demographic impacts that also play a role in influencing users to use internet banking. it addresses the user's ability to adapt internet banking before switching to the main issue of the study, which is the factor of encouraging users to apply internet banking. the discussion will be ended with conclusions and recommendations. 2. concepts of internet banking driga (2014) defines internet banking as an online banking online which uses a website that is a more advanced banking method, a system that allows bank customers to access accounts and find out general information about bank products and services directly through personal computers, mobile phones and others as delivery channels. according to oliveira et.al (2014) says internet banking is an instance commerce that used through mobile device which enables the customer to adapt financial transaction through mobile. in addition, customers can access all their accounts via banking website and are allowed to run banking transactions such as bill payment, sale and purchase transaction and others. according to maitlo (2015) internet banking is one of the conventional phases in bank services. online banking allows banks to increase their operations by lowering cost rates more effectively to transform the traditional banking system into online banking. shaikh & karjaluoto (2015) states that internet banking is a product or service offered by bank or microfinance institutions that used to make transaction using an intelligent devices namely as mobile phone smartphones or tablet. in the current era, by using online banking, it can provide convenience in conducting banking transactions and easily obtain information related to transactions without having to go to a branch bank to conduct transactions such as seeing bank account balance, utility bill payment and so on. the majority of banks have introduced the electronic banking system as more advanced and information systems help customers interact well, quickly and easily. according to pace (2016) internet banking is an online banking that allows its users to conduct several banking activities that are usually carried out on a banking factor and transactions conducted using the internet while according to koksal (2016) says that internet banking is able to use in any kind of banking activities that carried out through mobile devices as a personal digital assistant. thus, internet banking is also a platform that is often used for banking. some types of services provided by the customer by the bank and show that anyone can make transactions such as financial entry or business anywhere they are either a computer or a mobile phone. 3. the ability of users to adapt internet banking the number of users with access to the internet is one of the determinants of the level of use of internet banking services. some issues related to user account security may also distract consumers from using the facilities available in internet banking. it changes from social psychological and research aspects that differ from those in which the user feels more comfortable with the user relationship with the face-to-face banking expert. therefore, users who seek social benefits and psychological benefits through their personal relationships with the banking community prefer to meet face-to-face with banking experts. but some users are able to apply internet banking as a renewal to the banking method. reynolds & betty (2000) states that social benefits and functions are acquired through personal relationships with banking experts, while according to some other research, the determination and assessment of these benefits affects the user's satisfaction and this is also an important factor in driving users and sees their ability to apply internet banking. according to some theorists, consumer satisfaction has an impact and impact on user retrieval and acceptance rates on every newly introduced and innovative tool such as internet banking application. according to roger & shoemaker (1971) states that consumers prefer to collect knowledge and information about innovative products and services such as internet banking before using and adapting them. guiltinard & donnelly (1983) explains the importance of awareness and knowledge related to any innovative products and services before using and adapting them. doll, xia & torkzadeh (1999) argues that consumer satisfaction may be influenced by the nature and quality of information about the products displayed on the website. according to steward (1999), among the failures in adapting internet banking is due to the lack of customer confidence in internet banking. he thinks that consumer confidence and trust towards internet banking depends on the professional attitude and efficiency of banking experts. however, he advises consumers to develop new skills and expertise such as internet banking to enable users to understand and utilize and utilize the latest technological innovations. according to zaman (2016) states that research has been conducted in china related to the behavior and attitude of consumers towards internet banking. he concluded that there are several factors that demonstrate consumer attitudes towards internet banking including their perceptions of innovative technology, attitudes and motivation towards internet banking. the study found that knowledge and experience on relevant technology had an effective impact on the behavior and ability of users of internet banking. according to octavian & daniela (2006) and omar (2011) find that some users are unaware of internet banking services. however, banking users www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 3, no. 1; 2018 37 may use internet banking for the willingness to accept change and innovation and appreciate what bank had given. 4. demographics impact on the use of internet banking users’ demographic characters are one thing that also plays an important role in seeing factors that encourage users to adapt and use internet banking. according to previous studies, demographics have impacted the use of internet banking. according to howcroft et.al (2002), young consumers appreciate the convenience and time that saves the potential of online banking and mobile banking over older users. he argues that the level of respondents' education does not affect the use of internet banking. laukkanen (2012), capgemini (2013), goh et.al (2014) found that younger, smarter users of technology placed higher importance on internet banking than traditional banking conducted face-to-face with banking experts. karjaluoto et.al (2002) found that internet banking user criteria in the finland market is educated, rich and young people and has good knowledge of computers, especially the internet. xiaoyan (2005) found that the majority of internet banking users in china is from men aged up to 44 years old and categorized from high-income groups. he argues that the level of respondents' education does not affect the use of internet banking in china. according to crabble et.al (2009), demographic factors play an important role in making decisions on internet banking adaptation. they point out that social and cultural factors such as credibility, elitism and demographic factors are factors that affect individuals who make decisions on the use of internet banking in ghana. davis (1989); venkatesh & davis (1996); vainio (2006) states that respondents who are influenced by facilitation do not need much knowledge. mobarek (2007) states that internet banking is more popular and chosen by young people. however, polasik & wisniewski (2008) emphasizes that parents aged 65 and above are not interested and refuse to accept internet banking. the results of the analysis have shown that some of the surveys described by teo et.al (2011) reveal that demographics and psychographics affect users to the use of technology as new innovations such as internet banking applications. in addition, analysis is conducted on demographic effects in the use of internet banking. teo et.al (2012) also addresses demographic factors and subjective norms with technology adoption model (technology acceptance model) founded by fred davis in 1989 to assess the level of adaptation of internet banking usage in malaysia and proved that the model exists relates to the adaptation of the use of internet banking in malaysia. goswani (2009) states that university students acquiring and using sophisticated cell phone equipment proved to be very interested in innovative use such as internet banking used by mobile phones. similarly, reports from kpmg (2009) show that users aged 16-34 are the most comfortable age categories of internet banking especially through mobile phones for financial transactions and others while the 65-year-old respondents demographic proves that they are very uncomfortable with the use of internet banking. 5. factor that influence the adoption of internet banking jahangir & begum (2008) states that there are four identified factors that have influenced users in applying internet banking in bangladesh. these factors include the perceived usefulness, perceived ease of use, privacy & safety and individual characteristics which have significantly contributed to the user's use of internet banking. according to polatoglu & ekin (2001) find that relative advantages, perceived risk and trialability where customer want to try a new services from the banks are factors that have influenced the spread and use of internet banking in turkey. the researcher also concludes that users using internet banking find that the banking is very helpful and facilitates users in conducting banking transactions. according to yousafzai (2005) states that there are many factors that have influenced users in adapting the use of internet banking. among the factors that have prompted users to adopt internet banking are perceived ease of use, perceived usefulness, perceived risk, perceived trust, privacy & security and the behavior of users themselves want to apply for banking internet. according to eriksson et.al (2005) the results of his analysis have proven that there are three factors that encourage consumers to choose internet banking. where perceived ease of use, perceived usefulness and trust have been the major factors affecting users choosing internet banking. according to ramayah et.al (2006) found that the majority of consumers have been influenced by two major factors which prompted them not to use internet banking to use it. the factors that motivate them are the perceived usefulness and the behavior of their own users who take them to use the internet banking. cheng et.al (2006) expands the technology acceptance model to incorporate site safety factors considered to obtain factors that have influenced the use of internet banking in hong kong. his analysis shows that the intention to apply internet banking is influenced by perceived usefulness and web security. the results also show indirect effects on convenience factors that bring benefits to the use of internet banking. pikkarainen et.al (2004) uses a traditional technology acceptance model founded by fred davis in 1989 and states that perceived ease of use and perceived usefulness are added with the privacy and security aspects of became an important factor related to the acceptance of internet banking in finland. lin (2010) states that relative advantages, perceived ease of use, compatibility and integrity channels where acceptance of customer to change banking method that suggested by banks have influenced the decision to adopt internet banking services. www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 3, no. 1; 2018 38 in addition, lee (2009) reports that the desire to use internet banking can be affected if privacy and security risks are positively affected positively can impact the benefits of internet banking acceptance. uchenna et.al (2011) says that customers are influence by 6 factors which includes perceived ease of use, perceived usefulness, trust, relative advantage, trailability and individual characteristics. according to sazili et.al (2014) states that there are two main factors affecting the user's application of internet banking is from the aspect of trust and security aspect. alex (2015) argues that there are a number of factors that have been expressed as factors that encourage consumers to choose internet banking but only two of the highest exemplary factors have influenced users to choose internet banking, perceived ease of use and privacy & security. ahmed (2016) says that perceived ease of use and usefulness plays an important role on influencing customer to use internet banking. he also states that a well-managed risk also helps attract customer to use internet banking. meanwhile, according to zaman (2016) states that there are four factors that have influenced the consumers choosing internet banking in pakistan. these factors include perceived ease of use, perceived usefulness, perceptions towards risk and beliefs. amola (2016) says that perceived ease of use is the critical factor that may influence customer to use internet banking as well as customer awareness towards internet banking also able to influence customer to use online services. according to vasiliki (2017) proved that customers are influenced by two factor which is perceived usefulness and compatibility where customers are aware that internet banking gives variety of benefits and compatible to any kind of customers either retail or corporate customers. table 1.0 shows the literature analysis on factors that influence the adoption of internet banking. table 1.literature analysis on factor that influence the adoption of internet banking research analysis factor that influence the adoption of internet banking f1 f2 f3 f4 f5 f6 f7 f8 f9 f10 polatoglu & ekin (2001) / / / / pikkarainen et.al (2004) / / / yousafzai (2005) / / / / / / eriksson et.al (2005) / / / ramayah et.al (2006) / / cheng et.al (2006) / / / jahangir & begum (2008) / / / / lee (2009) / / / lewis et.al (2010) / / / lin (2010) / / / uchenna et.al (2011) / / / / / / perkins (2013) / / / / shazili et.al (2014) / / alex (2015) / / ahmed (2016) / / / sohaib (2016) / / / / amola (2016) / vasiliki (2017) / / total 14 12 6 7 8 2 2 1 2 4 this table above has listed a literature analysis from year 2001 until a recent 2017 regarding on factor that influence the adoption of internet banking. f1 means perceived usefulness, f2 means perceived usefulness, f3 means perceived risk, f4 means trust, f5 means privacy and security, f6 means relative advantage, f7 means compatibility, f8 means integrity channels, f9 means trialability and f10 means individual characteristics. according to the researcher, there are 10 main factors that influence customers to use internet banking because internet banking provides many facilities and benefits to consumers in conducting financial transactions. with the ease of technology, consumers can run financial transactions easily and quickly. overall, the majority of literature proved the factors that drive users to choose internet banking are consisted of perceived usefulness and ease of use factors. both of these factors are factors originated from the theory of technology acceptance model founded by fred davis in 1989 and yet still proved able to influence customer to use internet banking. 6.conclusion this literature reviews has proven that there are 10 main factors that encourage users to apply internet banking. the study found that there were two major factors that greatly affected the users of internet banking. perceived ease of use and usefulness has positively affected the acceptance of internet banking. this may be related to the www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 3, no. 1; 2018 39 fact that the majority of respondents who interested in internet banking are also among young adults who tend to be more exposed on internet than respondents of other age categories. the fact is also proved that there is a demographic impact that encourages consumers to choose internet banking. the results of this literature study also point out that the perceived usefulness is also one of the highest factors that have affected users using internet banking. the perception of the benefits and uses of this factor is an assessment of how far someone believes that certain system applications can improve the performance of a job. the findings show that respondents are interested in the advantages of the system and offer for relative advantages to other systems because the advantages of the system can be used anytime and anywhere. therefore, the results of this analysis proved that the theory of technology acceptance model founded by davis plays an important role in encouraging consumers to apply internet banking. 7. recommendations internet banking is a technology utilized in a worldwide banking system including brunei darussalam itself. in addition to emphasizing the issues that affect users in receiving internet banking, then any several issues that can be problematic should be addressed. among the things that can be emphasized is conducting research on the ability of consumers to accept banking and the demographic continuity of the use of internet banking in brunei darussalam because previous research has proven that there is a demographic impact that affects consumers from receiving internet banking. suggestions for future researchers are also to conduct an analysis of the user's ability to avoid from using internet banking. the next researcher can also relate the age level and education background to see the demographic gap that differentiates the level of consumer applications that choose internet banking and which avoids internet banking. references ahmed, e.m. 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(2005). customer behaviour towards internet banking. cardiff united kingdom: cardiff business school cardiff. www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 3, no. 1; 2018 41 zaman, s. u. (2016). an investigation into prime issues impeding the adoption of internet banking in pakistani firms and organisations. journal of internet banking and commerce. 1(1). 1 -14. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/) american finance & banking review; vol. 3, no. 1; 2018 issn 2576-1226 e-issn 2576-1234 impact factor: 4.1 published by centre for research on islamic banking & finance and business 5 the determinants of the foreign direct investment on the macroeconomic variables: the case of the algerian economy ahmed smahi 1 1 department of economics, university abou –bakr belkaied, tlemcen, algeria correspondence: ahmed smahi, department of economics, university abou –bakr belkaied, tlemcen, algeria. tel: 00(213)551846777. e-mail:delevery10@gmail.com to cite this article: smahi, a. (2018). the determinants of the foreign direct investment on the macroeconomic variables: the case of the algerian economy. american finance & banking review, 3(1), 511. retrieved from http://www.cribfb.com/journal/index.php/amfbr/article/view/136 received: september 10, 2018 accepted: september 15, 2018 online published: september 24, 2018 abstract foreign direct investment in algeria as a percentage of gdp represented 0.9% during the last decade. the goal of this study is to assess the effect of foreign direct investment on algerian economy through an empirical analysis by applying the bounds testing ardl and ecm-ardl using annual data for the period 1970-2014. as far as the role of fdi is concerned, we shall try to highlight its effect that may show causal relationships to nonhydrocarbon gdp, non-hydrocarbon export, industry and employment in long run. our estimation of an ardl model indicates that the political and macroeconomic stability are not enough to attract fdi to help nonhydrocarbon sectors drive economic growth. keywords: algerian economy, fdi, ardl model 1. introduction foreign direct investment (fdi) is a crucial factor to stimulate economic growth for many countries especially in less developed ones that cannot rely solely upon their own resources to promote their economies. it is known that from the early seventies the need for fdi was not so strong for socialist algeria which relied on its own resources as well as international credits for its own development that focuses on petrochemicals, steel and plastics as key industries for economic growth. considering that fdi was viewed as the extension of colonialism boumedienne's planning and his socialist management concentrated on public dominance over all sectors of the algerian economy instead of promoting investment by attracting foreign direct investment. between 1980 and 1990 the fdi flow increased at an average rate of about 7 percent a year compared with average rates of 0.08 percent as a percentage of gdp. the persistence of a low level in foreign direct investment flows since the 1990s (black decade) has been associated with an average rate of 3 % of annual fdi inflows. however, in 1999, fdi remained remarkably high as a percentage of gdp as it rose to 0.6 percent. fdi inflows varied between 1 and 2 billion dollars during last decade. from 2001 to 2014, even though algerian economy has been characterized by some political and macroeconomic stability, it remains that its attractive potential to fdi was not up to its expectations as foreign investors are still reluctant to take the decision to transfer their assets to algerian market. the goal of this study is to assess however, the effect of foreign direct investment on algerian economy through an empirical analysis by applying the bounds testing ardl and ecm-ardl using annual data for the period 1970-2014. the rest of the paper is organized as follows. in section 2 we present a literature review on the relationship. section 3 presents the model and the methodology, followed by the results and discussion in section 4, and finally, section 5 presents the main conclusion. www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 3, no. 1; 2018 6 2. literature review many studies have highlighted the different impacts of fdi on macroeconomic variables such as gdp growth, exports, unemployment rates, inflation, industrial sector, the stock market, etc…. firstly, solow 1956 as among the oldest pioneer in the theorization of fdi emphasized the crucial role of technological progress as a specific investment to explain economic growth followed by the harrod-domar model of economic growth (see sato1964). kaldor 1963, findlay 1978, lucas 1988, romer 1989, barro 1990, robelo 1991, frankel and romer 1999 advanced second generation theories that developed endogenous input to fdi. secondly, there are many empirically studies that focus on the positive impact of fdi on macroeconomic variables, choe (2003) used granger causality test to detect some impacts of fdi to economic growth in 80 developed and developing countries for the period 1971 – 1995. using similar technique, al-iriani (2007) found bidirectional causality between fdi and economic growth in gcc countries during the period from 1970 to 2004. chowdhury and mavrotas (2006) pointed out in their study the existence of bidirectional causality in malaysia and thailand using lag-augmented vector autoregression for the period 1969-2000. shaikh (2010) found a significant relationship between economic growth and foreign direct investment inflows (fdi) in malaysia during the period 1970 to 2005. on the contrary, de mello (1999) found week impact for fdi effects on economic growth in 32 developed and developing countries in the period 19701990. manuchehr and ericsson (2001) confirmed a null impact between finland and denmark as far as the impact of fdi in both economies is concerned since the 1970s. zenasni and benhabib (2015), using a granger causality test for the period 1980-2013, found that fdi had a positive but a negligible effect on algerian economic growth whilst concomitantly domestic investment exhibited significant effects. moreover, belloumi (2014) examined the relationship between foreign direct investment (fdi), trade openness and economic growth by applying the bounds testing (ardl) model for the period from 1970 to 2008. his results suggested that there is no significant granger bidirectional causality between fdi and economic growth particularly in the short run. dritsaki and stiakakis (2014) applied for croatia a ecm-ardl model using annual data for the period 1994-2012 and arrived to the conclusion that there is a negative sign of fdi to lead to substantial economic growth in croatia. additively, sarkar (2007) presented a negative relationship between fdi and economic growth in 51 less developed countries from 1970 to 2002. 3. model and methodology 3.1. data sources the sample comprises 45 annual observations for the period 1970 2014.the sources of our variables are collected from different issues of international financial statistics, world development indicators and the bank of algeria. 3.2. the econometric approach the ardl model is used to analyze cointegration series for short and long-run dynamics, even when the timeseries are stationary i(0) or integrated of order i(1). the variables may include a mixture of stationary and non-stationary time-series for ardl bounds testing approach proposed by pesaran (1997), pesaran, smith and shin (2001) and pesaran et al. (2001). in addition, the bounds testing procedure (pesaran et al., 2001) proposed in this study is robust for small sample (abdpattichis, 1999; mah, 2000; and tang and nair, 2002, halim et al 2008). our variables are fdi, fdit-1, nhgdp, nhexp, empl and indva that represent respectively nonhydrocarbon gdp, non-hydrocarbon export, industry and employment. the mathematical representation of an ardl regression model is: invt = β0 + β1invt-1 + .....+ βkinvt-p + αnhgdp0t + α1nhexpt-1 + α2indvat-2 + α3emplt-3+ + ε………… (1) where: εt is a random "disturbance" term. β0= intercept of the function β1, α0, α1, α2, α3 are parameter estimates. before presenting empirical results of the ardl model, we apply the following econometric steps needed for stationary test of the data. firstly, we use the augmented dickey-fuller & philips-perron test then we proceed to determine the f-test for ardl model. www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 3, no. 1; 2018 7 4. result and discussion 4.1.stationary test results before estimating the ardl bounds approach, we use the augmented dickey-fuller (1979, 1981) and phillips and perron, (1988) tests for stationary and non-stationary time-series. the results are represented in table (1) showing that all variables are integrated of order one (i (1)) except the non hydrocarbon gdp and industry variables, though they are stationary at levels (i (0)) table 1: stationary test results variables adf pp level first difference level first difference level first difference inv -1.89 -10.21*** -1.89 -9.92*** nhgdp -2.95** 4.71** 2.95** -4.94*** nhexp -1.91 -5.76*** -1.92 -5.76*** indva -3.58** -8.67*** 3.61*** -14.93*** unmpl -0.90 5.42*** -1.22 -5.44*** *show values are significant at 10 % level with mackinnon (1996). **show values are significant at 1% level with mackinnon (1996). ***show values are significant at 5 % and 1 level with mackinnon (1996). 4.2. cointegration test secondly in order to detect the best optimal lags length, we use several tests such as : the akaike information criterion (aic) test (1974, 1976), the hannan-quinn criterion (hqc), (1979) and the schwarz criterion (sc) (1978). the ardl model used in long and short run are expressed as follows according to the choice of the equations that present more advantages with less value in former tests. 4.3. long-run ……. (2) … (3) …. (4) …. (5) ……. (6) in order to determine the long-run effect of fdi on algerian macroeconomic variables, we compute the fstatistic compared with the critical value tabulated by pesaran et al. (2001) at the 5 percent level. on the basis of wald test results in different equation :(2), (3), (4), (5), (6) , we accept the null hypothesis (h0) and reject (h1) as the alternative hypothesis, (no existence of cointegration) in long run among the variables. and and and www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 3, no. 1; 2018 8 and on the basis of the results in table (2), we may conclude that there is no effect of foreign direct investment on the algerian macroeconomics variables in the long-run. table 2. long run results dependent variable: gdphh (equation 3) dependent variable: nhexp (equation 4) dependent variable: indva (equation 5) dependent variable: unmp (equation 6) variables coefficients variables coefficients variables coefficients variables coefficients variables coefficients fdi t-1 0,098 fdi t-1 0,442 fdi t-1 -0,106 fdi t-1 -0,396 gdphh t-1 -0,009 nhexp t-1 0,032 indva t 10,005 unmp t-1 -0,324 nhexp t-1 0,060 gdphh t-1 -1,165 gdphh t-1 0,004 gdphh t-1 0,019 indva t-1 -0,434 indva t-1 2,003 nhexp t-1 0,040 nhexp t-1 -0,413 unmp t-1 0,071 unmp t-1 0,047 unmp t-1 0,064 indva t-1 0,350 r2 0,710 r2 0,750 r2 0,800 r2 0,680 f-statistic 2,180 f-statistic 3,350 f-statistic 4,050 f-statistic 2,190 variables coefficients d-w 2,000 d-w 2,360 d-w 2,350 d-w 2,270 serial correlation no serial correlation no serial correlation no serial correlation no *show values are significant at 5 % 4.4. short-run the mathematical representation of the cointegration analysis in the short run is: (7) (8) ) (9) 3 (10) ) www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 3, no. 1; 2018 9 (11) in the short run, all dependent macroeconomic variables exhibit a four cointegration relationship with foreign direct investment. we note furthermore, in table 3, through econometric diagnostic tests, the absence of serial correlation while durbin watson seems to be good with high r 2 more than 60 percent in all modelsexcept for the last one. it is clear to show in the first model that a change in the non hydrocarbon gdp by one percent leads to an increase of non hydrocarbon exports by 0.17%, while a change in fdi shows a negative sign which implies that there is statistically an insignificant effect and a decrease in the non hydrocarbon gdp by 0.09%. the empirical results of fdi on non hydrocarbon exports identified in equation 9 in table 3 show through some coefficients that one percent change in non hydrocarbon gdp and industry sector leads to 0.72% rise and 1.76 drop respectively on non hydrocarbon exports . the foreign direct investment appears to have had a negligible effect on the algerian non hydrocarbon export. finally, we find another negligible effect of nhgdp, nhexp and fdi on industry value added whose coefficient does not exceed 0.05. table 3: short run results dependent variable: gdphh (equation 8) dependent variable: nhexp (equation 9) dependent variable: indva (equation 10) dependent variable: unmp (equation 11) variables coefficients variables coefficients variables coefficients variables coefficients variables coefficients d (inv(-1)) 0,009 d(inv(-1))* -0,020 d(inv(-1))* -0,069 d(inv(-1)) -0,002 d(nhexp(-1))* 0,178 d(gdphh(-1))* 0,722 d(gdphh(-1)) 0,046 d(indva(-1)) 0,155 d(indva(-1)) 0,277 d(indva(-1))* -1,699 d(inv(-1))* -0,011 d(nhexp(-1) -0,051 d(unmp(-1)) -0,137 d(unmp(-1)) -0,247 d(unmp(-1) 0,030 d (gdphh(-1) -0,116 ect (-1) 0,124 ect (-1)* -0,238 ect (-1) -0,031 ect (-1)* 0,991 r2 0,710 r2 0,620 r2 0,600 r2 0,680 f-statistic* 2,180 f-statistic* 2,560 f-statistic 1,720 f-statistic* 4,350 variables coefficients d-w 2,000 d-w 1,960 d-w 1,790 d-w 1,300 serial correlation no serial correlation no serial correlation no serial correlation yes 4.5. ecm t-1 results we use the error correction coefficient (ecm) as signal to explain that the deviation in the long-run relationship will be fed into its short-run dynamics, see granger j. (1987). thus, it may be better that ecm t-1 should be negative and significant. table 3 reports the results for ecm t-1. speed of adjustment for models 2 and 3 that allow correcting long run equilibrium at 26 and 3% respectively, with negative and significant coefficient. thus, model 1 shows a positive and statistically insignificant error correction coefficient. this cannot be interpreted as a good sign for the converging relationship in the long run between non-hydrocarbon gdp and foreign direct investment in algeria. moreover, the ecm t-1 of unemployment as dependant variable presents the problem of autocorrelation. also, this result confirms the absence of any structural change of fdi to converge towards equilibrium in the long run. 4.6. cusum and cusumsq test having found a significant and negative of ecm t-1 coefficient in equation 9 and 10: (figures 1 and 2), the cusum (cumulative sum) and cusumsq (cusum squared) tests are then introduced to check for the stability of the relationship in the short run dynamics within a long run equilibrium, brown et al. (1975). www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 3, no. 1; 2018 10 -15 -10 -5 0 5 10 15 90 92 94 96 98 00 02 04 06 08 10 12 cusum 5% significance -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 90 92 94 96 98 00 02 04 06 08 10 12 cusum of squares 5% significance figure 01: cusum and cusumsq test of fdi impact on non-hydrocarbon exports -15 -10 -5 0 5 10 15 90 92 94 96 98 00 02 04 06 08 10 12 cusum 5% significance -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 90 92 94 96 98 00 02 04 06 08 10 12 cusum of squares 5% significance figure 02: cusum and cusumsq test of fdi impact on industry 5. conclusion in this paper, we investigated if foreign direct investment has an effect on algerian macroeconomic variables (non-hydrocarbon gdp, non-hydrocarbon export, industry and employment). the estimation through the bounds testing ardl and ecm-ardl allows detecting that fdi is ineffective and presents a negligible impact on nonhydrocarbon export as well as industry in the short run. in the long run, our estimation using cointegration analysis does not highlight a dynamic relationship between first, fdi and non hydrocarbon economic growth, second, fdi and unemployment and third, fdi and non hydrocarbon exports. references ahmad. a. halim, mohd. d. s. narazira, and marzuki, ainulashikim (2008). sovereign credit ratings and macroeconomic variables: an empirical analysis on dynamic linkages in malaysia using bound test approach”, the iup journal of applied economics, 6: 29-39. akaike, h. 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business 26 challenges of the nigerian banking sector and the way forward ibrahim aliyu gololo department of accounting faculty of social and management science bauchi state university gadau, bauchi, nigeria tel:+234 8036312938/08026903796 email: aliyugololo2@gmail.com received: december 1, 2018 accepted: december 10, 2018 online published: december 14, 2018 abstract nigerian banking sector struggle with challenges in the day to day running of their business activities, challenges are enormous and can either be market or operational challenges and regulatory or reforms challenges instituted by the regulatory agencies such as cbn, ndic, sec and cibn etc. therefore, this paper seeks to examine the challenges facing the nigerian banking sector and proper possible solutions to the challenges based on the prevailing economic environment. the paper utilized questionnaires as source of data collection, fifteen out of 24 banks were selected based on purposive sampling method. chi-square (x 2 ) method was adopted as a statistical tool of data analysis to analyze the collected data. the result reveals that myriad of challenges exist in the nigerian banking sector some of which are challenges both within and outside nigeria. banks are left behind in technological innovation aspect of banking transactions, movement of high volume of deposit or capital flight to foreign banks by the political class which reduce banks opportunity to expand their market base and the prevalent of fraud in the sector also hinders the banks progress, these challenges affects the sector to compete equally with banking sector in the developed nations. however, we also found that the challenges does not affect their financial performance. it is recommended that that government and relevant regulatory agencies should put heads together to render support and address those challenges identified that affect the sector, also nigerian banking sector should invest in both technological innovation and human capital development, they should imbibe the culture of good corporate governance and stick to the issue of banking ethics and professionalism among others. keywords: banking sector, challenges, nigeria, nigerian economy. 1. introduction the banking sector of any nation is important to the size of its economy. banking system occupies a unique position in every economy [kanayo & micheal, 2011]. nigerian economy is not an exception. most of the developing economy places more responsibilities on the banking sector to support the economic activities of the nation. example banks are expected to mobilize the needed capital to facilitate production, generate employment and income. an economy that does not experience growth on sustained basis is likely to have a very passive financial sector as there are no incentives for investment [basil, 2013]. through the process of growth, banking system offers a wide range of portfolio options for savers and issuable instruments for investors, a function often referred to as financial intermediation. banks are known to be one of the major player in the money market, they perform very important role of intermediation, whereby ensuring mobilization of idle funds from the surplus sector of the nigerian economy to the deficit sector. they also help government to implement monetary policy through issuance of treasury bills and government bonds. it is generally recognized worldwide that the banking sector plays a catalyst role in the process of economic development [ekundayo 2011], as such banking sector of any nation is a function of the size of its economy. a developing economy places more responsibilities on the banking sector to mobilize the needed capital to facilitate production, generate employment and income. researchers have argued that financial sector challenges should be promptly addressed so as to avoid financial fragility that may lead to deterioration of economic activities. to ensure challenges and proper practices are carry out the government came up with regulatory agencies such as ndic, sec, cbn and nse and they came up with several reforms agenda in order to strengthen not only banking sector but the whole financial sector of the country. since independence, the nigerian financial system is made up of financial institutions, such as banks, insurance companies, specialized mailto:aliyugololo2@gmail.com www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 3, no. 1; 2018 27 banks, capital market, finance companies, discount houses, bureau de change, mortgage institutions, community banks, and the development finance institutions (dfis), each covering a particular area of activity or activities (ofanson, ukinamemen and agbadua (2013). it performs the core function of financial intermediation, adequate payment services as well as the fulcrum for monetary policy implementation. the nigerian financial system has undergone several evolutionary stages ever since the independence of the country; foundation phase, expansion phase, consolidation and reform phase. the phases marked different epochs in the evolution of the financial system. 1.1 foundation phase this phase focuses on the establishment of institutions and development of necessary legislative framework. the phase is approximately from 1950 to 1970. during this period, the central bank of nigeria (cbn), the apex regulatory authority in the nigerian financial sector was established. the cbn derives its legal authority from the cbn act no. 24 0f 1991 (amended in 1997, 1998, and 1999) and the banks and other financial institutions act (bofia) no. 25 of 1991 (amended in 1997, 1998 and 1999) and presently the cbn act 2007, which preceded the cbn act of 1958 and banking act of 1969. 1.2 expansion phase the expansion phase was directed at availing the public of banking activities and this was facilitated by the increase in network of branches. this involves the expansion of banks branches into the rural and semi urban areas. the phase also witnessed priority lending to some sector of the economy. this phase takes approximately from 1970 1985. 1.3 consolidation and reform phase the structural adjustment programme (sap), which started in 1986, marked an era in nigeria’s financial sector reform. the monetary authorities relaxed the control and liberalize the sector. there was a deregulation of the economy and many institutions were set-up to regulate the growing financial sector. for example, there was the establishment of nigeria deposit insurance corporation (ndic) in 1988, the security and exchange commission (sec) though established by sec act of 1979 but was further strengthened by sed act of 1989 and investment and securities act no. 45 of 1999. financial sector reforms a peculiar feature of the reform program in nigeria is the associated inconsistency in policy implementation. the financial sector in nigeria is dominated by the banking sector, especially the commercial banking. the deposit money banks (dmbs’) accounts for 93.0 per cent of non-central assets in 2000 (world bank, 1995) and 94.0 and 95.2 per cent of the aggregate financial savings in 2002 and 2003, respectively as well as above 60.0 per cent of the stock market capitalization. commercial banking started in 1892 with the establishment of the first banking firm, standard bank of nigeria ltd (now first bank). since then, the number of commercial banks has exploded. thus, an understanding of the structural changes in the financial sector as a whole is of great importance to all stakeholders; as it would help in designing appropriate legislation to enhance competition. the nigerian banking system has undergone remarkable changes over the years, in terms of the number of institutions, ownership structure, as well as depth and breadth of operations. these changes have been influenced largely by challenges posed by deregulation of the financial sector, globalization of operations, technological innovations and adoption of supervisory and prudential requirements that conform to international standards. prior to the reforms started in 2004, the nigerian banking sector was still weak and fragmented, often financing short-term arbitrage projects rather than productive private investments [kanayo & micheal, 2011]. in essence all these measures and reforms were instituted to address the challenges of the banking sector and this shows that there are numerous challenges faced by the banking sector. this study observe that there is a scarcity of literature on the challenges faced by nigerian banks and therefore intends to explore and investigate the challenges faced by nigerian banks and the way forward to address those challenges. the objective of this paper is to examine the challenges faced by nigerian banking sector and proper solutions to the challenges. to achieve the objective the null and alternate hypothesis were formulated  that the challenges faced by the nigerian banking system affects their financial performance  that the challenges faced by the nigerian banking system does not affects their financial performance 2. literature review 2.1 challenges faced by the nigerian banking sector myriad of challenges exists and are currently affecting the efficacy of operations of the nigerian banking sector to effectively perform their functions of intermediation in the nigerian economy. the major challenges faced by the nigerian banks are as follows: 2.1.1 inadequate technological innovation in operational services the nigerian banking sector market was hitherto dominated by competitiveness nature. the financial market in general was competitive because not only banks provide financial services other financial institutions that are not banks also do. there is fierce competition in the market hence the need for banks to acquire and deploy up to www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 3, no. 1; 2018 28 date ict tools in their operations in order to capture the attention and loyalty of the customers. [ref xxx] thus in the face of the keen competition in the industry, market players must devise new survival strategies. financial institutions world-wide are compelled by the emergence of information technology to fast-forward to more radical transformation of business systems and models. it is in the same spirit that bill gates (2001) noted that: “the successful companies of the next decades will be the ones that use digital tools to re-invent the way the work. these companies will make decisions quickly, act efficiently and directly touch their customers in positive ways. going digital will put on the leading edge of the shock wave of change. that will shatter the old ways of doing business”. we are now in a new era of technological revolution. countries are beginning to compete and fight over control of information rather than natural resources. the vogue today is e-platform which implies offering financial services through electronic media to various customers irrespective of place, time and distance. a customer friendly environment with high quality service delivers needs to be created in order to enhance high patronage. to this end, improvement in banking technology and institutional arrangements for transmission mechanism as well as other operational areas of banking operations to ensure operational efficiency has become a compelling necessity. this encompasses electronic money, internet banking, telephone/mobile banking, reduction of cash transaction, smart card. atm transactions and capacity to process high volume of transactions among others. 2.1.2 human resources management the centrality of the human resource in enterprise management is a generally accepted dictum. it is in this light that management needs to make adequate investment in human factor. it should be noted that there is no competitive weapon more potent and effective in the banking sector than the quality of its human resources. as remarked by sanusi (2010) machines and advanced technology can provide informational and transactional convenience but only manpower can provide the credibility, creativity and care that can build long-term customer and client relationships. in other words, there is need for capacity building in our system to enable us copes with the wind of technological development. besides, no matter how accurate or competent a computer is, it cannot feed itself with input and it can neither offer a welcoming smile nor a warm handshake (ochejele, 2003). banking (and indeed the entire sectors in the financial markets) is people-related and the quality of personnel will make the vital distinction between what constitutes a good bank and a bad one. consequently, of all the challenges facing the nigerian banking sector, human capital development is the most daunting. 2.1.3 fraud prevention and monitoring system another major challenge facing the industry is the need to minimize the high rate of frauds and other malpractices in the system. it is imperative that bank managers and other market players give greater attention to the subject of maintaining the highest ethical and professional standards in all their transactions and dealings with their customers. this entails having adequate knowledge of code of conduct and banking practice jointly designed by the chartered institute of bankers (cibn), central bank of nigeria (cbn) and the bankers committee (general assembly of bank chief executives). issues of business integrity, respect for legitimate laws and regulations, concern for the society in which a bank operates will become as much important as profit consideration in the 21 st century. the level of malpractices in the banking sector is high, hence there is need to put measures in place to curtail the malpractices to the bearest minimum. 2.1.4 liquidity management while it is expected that there will be more external resource inflow to fund growth of the economy in this country, financial institutions must recognize their primary role in internal resource mobilization. it is assumed that the economy is awashed with liquidity and substantial portion of this liquidity is held as idle cash balances outside the banking system. the business of resource mobilization should therefore be seen as a major challenge facing the banking sector. in addition to internal mobilization of funds, banks must also ensure effective channeling of these resources to productive segments of our economy. the responsibility of promoting the economy’s growth should be seen as a major challenge by all banks. fund mobilization and allocation should therefore form a top priority of banks chief executive officers policies in this country. 2.1.5 full autonomy of the central bank of nigeria the turnaround of the banking sector and indeed the economy would be difficult without an institutional and operational autonomy of the central bank of nigeria (ekundayo, 1996). the current situation where the apex institution is only given nominal autonomy which it cannot exercise effectively is not very healthy for the banking sector. the cbn should be given a leverage to establish its authority over its traditional area of jurisdiction. it is only with such authority that the apex institution will be able to formulate viable monetary policies and offer advisory services to the federal government on financial matters. to this, may be added the need for internationalization of the nigeria capital market in spite of the malpractices in the market, the nigerian stock exchange (nse) has been intensifying efforts at encouraging cross-border listings. the nse is reported to www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 3, no. 1; 2018 29 have signed a memorandum of understanding each with the nairobi stock exchange, the ghana stock exchange and the johannesburg stock exchange nse should endeavour to fight the malpractices to accentuate the internationalization of the nigerian capital market. 2.1.6 a need to uphold ethics and professionalism in the banking sector ethics generally revolves around a set body of values, reformative guidelines and principles that embellish an individual with a sense of judgment and differentiation of right from wrong. there is need to adhere to the ethics and professional practice guiding the sector by the players in the banking sector. this is so and it supposed to be from ordinary banks staff to the management staff. currently there is high level of unethical behaviours in the banking sector as evidence by the activities of marketers in the banking sector. it is in this context that this study view with serious concern the spate of ethical misconduct, unprofessional use of female staff in some banks in the name of ‘marketing’ and ‘sourcing of funds, falsification of returns by the banks to the central bank, etc. collectively, the stakeholders can stop these misconducts and give the system a new face. in recent times, the central bank of nigeria has been intervening to investigate fraud, greed, insider abuse, etc. these were the succeeding results of unethical behavior from both bank staff and management. unethical behavior is responsible for distress in banks. and apparently, punishments for these unprofessional behaviors are trivial. 2.1.7 poor corporate governance practices in the banking sector, proper governance is vital for improvement of company performance, attraction of investors and numerous more benefits. whistle blowing and business ethics which can be encouraged through moral corporate governance, would undoubtedly lead to reduction in fraud in money deposit banks. unfortunately, a substantial number of nigerian banks lack moral corporate governance practices. the new code of corporate governance for banks is sufficient to minimize bank distress. but do banks adhere to this? most of the banks do not actually adhere to corporate governance practice and there is need for them to see this as a serious challenge facing the sector. to function more effectively and efficiently banks should embrace the corporate governance issue as soon as possible. 2.1.8 reliance on public sector funds most banks have abandoned the private sector in their chase for government funds. heavy dependence on the public sector, crowds out the private sector from the economy. consequentially, the central bank of nigeria released a policy on the increment of cash reserve requirement for public sector. with the implementation of this policy, most banks began to source for income in the private sector 2.1.9 implementation of the tsa treasury single account the treasury single account is a financial policy used in several countries all over the world. like other third world countries, it was introduced by the federal government of nigeria in 2012 to consolidate all inflows from all agencies of government into a single account at the central bank of nigeria. but the previous government lack the political will to implement the policy until the coming of apc government in 2015 were tsa policy was implemented and it is yielding positive result in the economy as currently over n6 trillion was save under tsa. this system establishes a unified structure as advised by the international monetary fund where all government funds are collected in one account as this would reduce borrowing costs, extend credit and improve government’s fiscal policy, among other benefits. 2.1.10 insecurity and bank fraud fraud according to adeniji (2004) and asuquo (2005) is an intentional act by one or more individuals among management, employees or third parties which results in a misrepresentation of financial statement. the issue of insecurity and fraud in the banking sector is an interruption to the roles banks play towards economic development of the country clementina, & isu, [2016]. the increasing incidence of insecurity and frauds affect the already survival and viability of the banking sector. fraud is not unique to the banking sector but due to the product which the banks deal on cash and nigeria is cash based economy, no area of banking system is immune to fraudsters, not even the operational security. the characteristic of this economy is that the cash will be physically held and touched. in nigeria, studies indicate that more than 90% of funds are outside the banking sector as against the developed world where the money in circulation is 4% and 9% in the uk and us respectively. this explains the reason for the fragile nature of our banking system. the increasing rate of insecurity and fraud in the banking system, if not address might pose serious threats to the stability and the survival of individual banks and the performance of the sector as a whole (nwankwo, 1991). lamenting on the ugly impact of insecurity and fraud in banks, saludo (2004) said that fraud has left untold hardship on the lives of bank owners, staff, customers and family members as most bank failures are always associated with large scale of frauds. bank fraud may take any of the following form: suppression of cash lodgments forgeries of signatures abuse of iou’s un-authorized lending www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 3, no. 1; 2018 30 fraudulent use of bank documents over-invoicing of purchases among others fraudulent loans forgery and altered cheques 2.1.11 poor internal control system mechanism often times the internal control of many banks is not allow to functions well due to management interference. 2.1.12 restriction on foreign currency capital transactions there are many restrictions on the commercial banks on foreign currency transactions and this do not allow banks to actually get involve on the issue of foreign currency at ease and therefore create a hindrance for the banks to fully have a say on the foreign currency transaction in the country and create a big challenge for the banks to satisfy their customers that deals with foreign transactions especially the demand of foreign currency for importers and the issue of bta. 2.1.13 need to access banking services at lower costs (only possible if industry costs are lowered) this is another challenge because customers want to always access banking services at possible lowest cost, in fact a customer want to have banking service at zero cost if possible. this is actually not possible because banks are in business to make profit and satisfy shareholder needs. it is actually a challenge for the banking industry but they can minimize the operation cost to ensure that customers access banking services at lowest possible cost. 2.1.14 poor cost control/cost reduction most of the nigerian banks are not embracing cost control in terms of their spending culture. banks themselves and the staff are flashy in life and are not actually cutting costs that supposed to be reduced. example the use of exotic and flashy official vehicles by banks; this cost can actually be cut down if the banks can revert to using average cars for official purpose. 2.1.15 large percentage of non-performing loans defaulters are many, ranging from corporate defaulters to individuals defaulters and most of the defaulters are not having substantial security where the banks can easily rely on to recover their money. there is presence of non-performing loans and this has adversely affected the financial performance of the banks and consequently affects the benefits of the shareholders in terms of the dividend that is to be provided. 2.1.16 high cost of doing business in the environment the cost of doing business in nigeria is still high when compared with developed economies or some emerging and developing countries owing to the poor state of infrastructure. 2.1.17 challenge of inadequate fx for customers customers find it difficult to get foreign currencies from their banks especially dollars, euro and pounds sterling, banks in nigeria are struggling to source fx for imports to their customers as a result if fail to meet fx for customers tends to lose some of their important customers. 2.1.18 violations of the banking laws, rules and regulations as reported by the ndic nigeria has the fastest growing banking system in africa, and one of the fastest in the world, but the violation of the banking laws pose a serious challenge to this development charles soludo [2004]. banks most often violates money laundering (prohibition) act, 2004 to satisfy the needs of their customers especially the rules pertaining to “know your customers” (kyc) requirements and the cash transfer limits. 2.1.19 granting credit facilities in excess of specified single obligor limits some of the nigerian banks are still violating the credit guidelines of the specified amount to be granted to the single borrower and this pose a serious challenge to the banking operation and the going concern of the bank. 2.1.20 investments in subsidiaries without cbn approval and violation of corporate governance practice some banks had turned their various subsidiaries into vehicles for circumventing regulatory requirements. for instance, some banks engaged in financing highly risky business activities including speculative trading in stocks and shares through their respective subsidiaries. in fact, the cbn reveal that banks total exposure to capital market as at january, 2009 was n784 billion. presently some banks have various weaknesses in corporate governance. some of them were yet to imbibe the tenets of the code of corporate governance issued by the cbn in 2006. example of some critical corporate governance issues includes non-performing-insider-related debts, board oversight was weak in some of the banks, in some instances, the boards had assigned the responsibility of vetting big ticket transactions to their respective credit committees that were often dominated by the executive directors. others are investing in subsidiaries without cbn approval, failure to appoint independent directors etc. 2.2 solutions to the challenges of the nigerian banking sector 2.2.1 improvement in financial and regulatory reporting proponents of banking globalization refer to the multitude of banking crisis during the last two decades and point to the weaknesses of the regulatory and supervisory environment in many emerging markets. www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 3, no. 1; 2018 31 2.2.2 immediate stoppage of capital flight to foreing banks the fact that international banks are perceived to be sounder than local banks in times of crisis has led some to argue that foreign bank presence opens the possibility of a capital flight at home. before the appearance of foreign banks, investing abroad was the only safe haven for domestic depositors, given the lack of credible deposit insurance. now, under the assumption that foreign banks are strong enough to withstand a crisis, all depositors need to do is transfer their savings from local to foreign banks. 2.2.3 globalization of the nigerian capital market there is need to open up the nigerian capital market for foreign investors and foreingn companies to list their shares. by such doing it will give way for foreign investors to have interest in buying the shares of nigerian banks and consequently generates capital flow in to the banks and makes the bank to get more stronger. 2.2.4 acquisition and deployment of latest technological innovation on banking business nigerian banks need to embrace information technology. this is one of the preconditions for a nation to be integrated into the global financial market and reap the benefit therefore, banks must train their staff in e-banking which has the advantage of reducing cost of transactions and increasing the speed of transaction and profitability. there is need for strengthening the regulatory and supervisory institutions and strict implementation of money laundering laws and other legislation laws to effectively tackle fraud and fraudulent activities: upward review of capital market deregulation and introduction of indirect monetary policy instruments. the regulatory bodies in the financial markets such as the central bank of nigeria (cbn) and securities and exchange commission (sec) should be granted complete autonomy. this will enable them fight the malpractices in the system and also formulate viable monetary policies that will insulate the financial markets and the economy at large against domestic and external macroeconomic shocks. recent developments in the banking sector, including increased signs and incidence of distress, are a cause for serious concern and call for decisive and expeditious actions to safeguard the stability and soundness of the banking system. legal and regulatory enforcement is needed to ensure action is taken against those that violate their prudential and financial obligations, and to act as a credible deterrent for all market participants [kanayo & micheal , 2011] there is need for banks to offer better banking services through diversified delivery channels to customers: banks should be customers focus. there is need for banks to imbibe the culture of cost control there is need for banks to imbibe the culture of ethics and professionalism strict compliance to effective corporate governance prevention of fraud and insecurity in banks: it is also necessary to carry out audit checks on all transactions as soon as they are made because delay might have dire consequences on the bank. similar checks should also be carried out on vouchers raised for expenses (printing, stationeries, stock, office equipment etc.) market surveys should be conducted before approvals are given for the purchases. members of the board of directors should not just be people, who have stakes in the banks but should be knowledgeable in banking and accounting, to enable them carry out their supervisory role effectively. there should be greater transparency and accountability in banking operation. these measures, we believe, will help to reduce the increasing rate of fraud and acts of insecurity in nigerian banking sector. 3. methodology the population of this study comprises of all the twenty four (24) commercial banks quoted by the nigerian stock exchange (nse). bank qualify only to be one of the sample of this work if it has a branch in bauchi state metropolis because of the limited time for the research work and the paucity of resources to be employed to conduct this study. the application of these conditions results in the emergence of fifteen (15) banks as the sample of the study, which include: first bank of nig plc, polirisbank plc, keystone bank plc, guarantee trust bank plc, diamond bank plc, sterling bank plc, access bank plc, united bank of africa plc, stanbic ibtc bank plc, heritage bank plc, union bank plc, unity bank plc, zenith bank plc and wema bank plc. the study employed the use of questionnaires of each of the business development officers [bdm] of the each main branch of the banks and two other operation staff of the banks were engage to fill the questionnaires which includes bdm on the challenges facing the bank. the data were analyzed using the chi-square [x2] method of analysis and the result was presented with the explanation of the analysis. 3.1 research instrument in order to have a comprehensive and reliable source of information, strictly structured questionnaires were administered to respondents in the selected banks to obtain information on the challenges facing nigerian banks. the questionnaires is divided into two parts, section a is related to demographic information and section b consist of questions (yes or no questions) relating to the subject of the study. chi-square was used to analyzed data and this include simple percentages, the use of percentages was very much recommended by asika, (2004). simple percentage is given by = number x 100 total 1 www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 3, no. 1; 2018 32 i. chi-square (x 2 ) is given by the formula x 2 = ii. where: x 2 = chi-square =summation fe= expected frequency fo= observed frequency and fe (expected frequency) is given by= (row total x column total) iii. the degree of freedom necessary for the application of chi-square (x 2 ) is determined thus; df = (r 1) (c 1) where: r = number of rows. c = number of columns iv. the level of significant used is 0.05 or 95% v. decision rule: to reject the null hypothesis if the calculated chi-square (x is less than the tabulated chi-square (x thisis, if x x reject ho and accept h+. 3.1 testing hypothesis in testing the hypothesis, the chi-square (x 2 ) test was employed, this is because it could be used for both small and large samples. the chi-square test is a measure of the discrepancies exiting between the observed frequencies and expected frequencies of one or more variables. i. ho: that the challenges faced by the nigerian banking system affects their financial performance ii. h1: that the challenges faced by the nigerian banking system does not affects their financial performance in line with the hypothesis question, question 2 of the questionnaire was used to test the hypothesis and the responses are as follows: table 1. contingency table for testing of hypothesis options number of respondents total operation staff business development officer yes 23 12 35 no 5 2 7 total 28 14 42 source: survey 2018 the table 1. above shows that a total of 42 questionnaires were retrieved out of the 45 questionnaires distributed and the 3 that were not accounted in the table are invalid for the analysis. computation of the test using the chi-square (x 2 ) x 2 = = = 23.33 = = 4.66 = = 11.66 = = 2. 33 4. analysis and discussion of results table 2. chi-square table for testing hypothesis of ef (of-ef) (of-ef) 2 23 23.33 0.33 0.66 0.0283 5 4.66 -0.34 -0.68 -0.1456 12 11.66 -0.34 -0.68 -0.0583 2 2.33 0.33 0.66 0.2832 www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 3, no. 1; 2018 33 0.66 x =0.108 x 2 = x 0.108 x 3.841 while taking @ ( level of significance) =0.05 degree of freedom =1 3.841> 0.108 decision from the abovecalculated chi-square (x is 0.288 which is less than the tabulated chi-square ( x i.e. x < x since the calculated chi-square is less than the tabulated chi-square we can now reject the null hypothesis which says the challenges faced by the nigerian banking system affects their financial performance and accept the alternate hypothesis which says the challenges faced by the nigerian banking system does not affects their financial performance 4. results and discussion this section presents, analyses and interpret the results obtained from the generated data of the questionnaire. 4.1 summary of findings this research work study the challenges of the nigerian banking sector and the way forward. banking sector in nigeria is a very important key to driving the economic activities apart from their role of financial intermediation, they also provides a lot of employment opportunities to the citizens of the country. as such the challenges faced by them should be squarely address by the government and the regulatory authorities to improve their contribution to the nation economy. even though, the findings revealed that, the challenges faced by the nigerian banking sector does not affects their financial performance. however, efforts should be in place to addressed those challenges identified in the study. 5. conclusion and recommendation this study concludes that banking sector challenges in nigeria do not affect the financial performance of the banks, but care and necessary support both in terms of policy and operational support should be given so as to improve their contribution to the nigerian economy. the study recommends that government and relevant regulatory agencies should put heads together to render support and address those challenges identified that affect the sector. also nigerian banking sector should invest in both technological innovation and human capital development, they should imbibe the culture of good corporate governance and stick to the issue of banking ethics and professionalism among others. references adeniji, a.a. (2004). auditing and investigations, lagos: value analysis consult. asika, n. (2004). research methodology in the behavioral science, lagos longman nigeria, limited. auquo, b. e . (2007). microfinance and public. the nation, may 18,2007. pg 16 clementina, k., & isu, i. g. (2016). security challenge, bank fraud and commercial bank performance in nigeria: an evaluation. journal of business and management, 5(2), 1-21 cnbc africa nigeria 6th floor (east & west wing), south atlantic petroleum towers, 1 adeola odeku street, victoria island, lagos state nigeria. ekundayo, b.i. (1996). financial and real sector interactions in developing economies: the case of nigeria. a paper submitted to african development finance policy workshop for consideration in the workshop. kanayo and micheal (2011) foreign portfolio investment and economic growth in nigeria.international journal of business and social science. (5) 11, 1-14 nwankwo, g.o. (1991). bank management, principles and practice. malthouse press ltd. lagos ochejele, j. j. (2003) .the nigerian financial market and the challenges of the twenty first century. unpublished paper. ofanson e. j. ukinamemen a. a. and agbadua o. b. (2013) assessing the impact of banking reforms on the performance of the banking industry in nigeria . indian journal of commerce & management studies. (4) 2, 2240-0310 www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 3, no. 1; 2018 34 sanusi, l. s. (2010). the nigerian banking industry: what went wrong and the way forward. being an address delivered at the convocation square. soludo, c. c. (2004). consolidating the banking industry to meet the development challenges of the 21st century; being an address to the special meeting of the bankers committees held on july 16 th 2004 at the cbn headquarter abuja. uche basil onwe [2013] the nigerian financial market and the challenges of information technologybased operational services. kuwait chapter of arabian journal of business and management review. (2) 6 world bank (1995). world development report 1995, washington copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/) contents american finance & banking review vol. 1, no. 1; 2017 published by centre for research on islamic banking & finance and business 12 entrepreneurial intention among postgraduate students in nigerian universities: conceptual review adamu abdullahi idris1 1school of business management, universiti utara malaysia, malaysia correspondence: school of business management, universiti utara malaysia, malaysia, e-mail: adamabdullahidris584@gmail.com received: september 01, 2017 accepted: september 11, 2017 online published: september 23, 2017 abstract governments in most developing countries are doing their best to ensure that graduates who are not employed should engage in entrepreneurship activities which can go a long way in reducing the problem of unemployment among the youths. nigeria is among one of those developing nations with such problem. the government has introduced some many programs and policies which are aimed at reducing poverty and will encourage self-employment among the youths. yet, students are still lacking the intention of becoming entrepreneur. from this study, there will be need to cover the gap found in the literature and then developed a conceptual framework (from which propositions where developed. the study used factors such as entrepreneurship education, environmental factors and societal entrepreneurship attitude to explore the student‟s entrepreneurial intention. these factors where adopted bases on past theoretical and empirical studies which will cover the gap and contribute to the body of knowledge in the field of literature. finally, this study calls upon researchers and ministry of education to examine this propositions on how to design a more comprehensive and benefice entrepreneurship courses and curriculum to these nigerian universities. this will aim at preparing these students to be self-employed (entrepreneurs) which will reduce and assist the government in overcoming the problem of youth poverty and unemployment in nigeria. keywords: entrepreneurial intention, entrepreneurial education, environmental factor, societal entrepreneurship attitude. 1. introduction the challenges currently faced by most developing countries in the world are how to involve their teeming youths in advantageously employed. the growing rate of unemployment among the graduate youths as a result of delays in getting jobs that harmonized their professions and expectations has therefore become the core goal of intense to both academicians as well as manager's evaluation (aliman & jalal, 2013). moreover, an irregularity that exists between theratio in demand for labour and the total number of graduates that are seeking for jobs also grounds to a strong level in the rate of unemployed youth (ismail, 2011). one strategy which can be used to overcome this problem is to increase the level of entrepreneurship spirit, particularly for unemployed graduates (othman & ishak, 2009). entrepreneurship is one of the main options use by students when they graduate from school (ekpoh & edet, 2011). student engaged in it because entrepreneurship offers a lot of entrepreneurial intention among postgraduate students in nigerian universities: conceptual review adamu abdullahi idris 13 benefits, such as starting their own private business and the possibility for getting substantial rewards (financial) than when they work for others. this has shown how entrepreneurship development plays an important function or role in a nation‟s economic development and growth. experts have proven that the economic transformation in the united states of america that lead to the achievement as one of the best economic nation was as a result of entrepreneurial activities, so entrepreneurship is the bedrock of both developed and developing nations (akinola, 2013).similarly, lucky and minai (2011) added that entrepreneurship is a dynamism for both economic development and economy. it was noted that entrepreneurship development can create wealth, provide jobs and contribute meaningfully to a country‟s gross domestic product (gdp). also karimi, chizari, biemans, & mulder (2010) added to the significance of entrepreneurship on the role it plays in solving problems faced by most developing economies, how it provide employment and the attraction it have drawn from the developing countries and how those countries have adapted with the various entrepreneurship programs. earlier, before the advent of colonial rule, unemployment was a rare phenomenon in nigeria because the people were highly entrepreneurial and productively engaged, mostly in agricultural activities. however, the emergence of colonial administration in nigeria introduced formal education, which enabled people to have the opportunity of being employed in the civil service after graduation. as such, the system of administration destroyed self-reliance, self-employment and entrepreneurial skills of nigerians as they became permanently dependent on the colonial masters (raimi and adeleke, 2010). this has led to massive unemployment and craze in the contemporary times for ready-made jobs. this craze reached its height in the 1990‟s, leading to a phenomenal increase in the number of graduates seeking paid employment in the civil service and in the private sector of the nigerian economy. nigeria is one of the developing nations which face the problem of youths graduate every year from various universities and colleges without getting a job that match them (akanbi, 2013). for example, on march, 15th, 2014 over twenty thousand (20,000) graduate seeking for the job applied for the job in the nigerian immigration service (nis). in the process of the recruitment test over seven applicants died in the screening process as a result of (stampeding) high number of unemployed graduates in the country seeking for a job (premium times, 2014). also the other issue that contributed to the high unemployment rate in nigeria was as a result of poor implementations of the socioeconomic policies and the instability in the political setting of succeeding government in nigeria (ogundipe & kosile, 2012). it was also noted that one of the main challenges unemployed youths faces is that they were being used as political thugs during the election time (awogbenle & iwuamadi, 2010). these youths become gangsters and engage in secrete political and anti-social activities in the society. therefore, this pressed the government to induct various policies which aimed at reducing poverty through the encouragement of stimulates innovation spirit, skill attainment and youth self-independent programs (agbim et al, 2013). 1.1 problem statement there are rising concerns over the enticement state of young entrepreneur in nigeria. the government and people of nigerians are having substantial worries about the poor state which nigeria entrepreneurship is in. one of the major challenges faced by the nigeria education is the inability of the colleges and universities to prepare graduates and students to be entrepreneurs or to be self-reliant (agbim, oriarewo & owocho, 2012). as a result of this, most students or graduates preferred to be employed by private or government sectors than to become self-employed or self-reliant. national bureau of statistics (2014) has shown that the rates of unemployed people in nigeria are students from universities and these students cannot be employed all by both sectors (private and government). so therefore, the nigeria federal ministry of education has to review the entrepreneurial intention among postgraduate students in nigerian universities: conceptual review adamu abdullahi idris 14 education curriculum of subject or courses which is being offered in the colleges and universities to see that student are been encourage and trained to be self-employed and selfreliant, if not it will create room for those student that are not able to gain employment to involve in criminal, religious and ethnic crisis which youths are used for (akanbi, 2013). entrepreneurial activities have enhanced both social and economic development. the majority of the developing countries (nigeria) depend solidly on the foreign nation such as the united states and others for their export and investments to boost its economy. (griffith-jones & ocampo, 2009). nigeria is set to be a vulnerable country if the government fails to encourage and provides incentives to youths to start-up a business. past studies have shown few individual that have certain characteristics can venture and strived into setting up business enterprises (akanbi, 2013; agbim, oriarewo & owocho, 2012). but the reasons to why people established or what drive them into creating these new enterprises remain unanswered. the enthusiasm of the world today in which modifications keep on evolving is necessitated a rebirth of the events of entrepreneurship happening. experience that established big firms which are no longer creating a net increase in the employment has drawn into considerations of encouraging new formations of business as it set to create new jobs. thus, opportunity becomes very important for people strive and set up their business that will make them self-employ (owoseni, 2014). this will result in academic interest of entrepreneurship as an act of creating and making new independent businesses. this follows a dire need to know the individual that stand a great chance of involving into entrepreneurship, but this has to go beyond wanting and inquiring to understand what makes individual start up new business ventures. therefore, the study about entrepreneurial intentions is very necessary because it helps and offers a better means of explaining entrepreneurship. also, it is very critical to understand and focus on the factors which affect student‟s intentions to startup a business venture in the future. henderson and robertson (2000) added that working environment also create and motive individual, especially the graduates to have the intention of starting up their own business. furthermore, to identify motivation and the perceived or actual barriers in the formatting of new businesses is very important. with the increasing number of students graduating from nigeria colleges and universities without being employed have become a nightmare for the government to handle. despites highest academic qualification of these students, but still unemployed. according to the new president of nigeria muhammad buhari, when he was been interviewed by bbc (hausa) on youth development and empowerment, where he estimated over two million graduates from nigeria university and colleges are still unemployed eight months after their graduations. however, the numbers of start-up business are increasing, but it‟s not all graduates that have the opportunity to set up something. thus, some effort has been made by both government and non-government bodies to increase and implementing programs and incentives that will benefit these students in setting their own business. 2. literature review 2.1 entrepreneurship entrepreneurship concepts, development and activities are highly essential (singh, fahmi & riaz, 2011), because it is one of those driving factors that develop an economy by a way of wealth creation and job creation (temtime, chinyoka & shunda, 2004). an entrepreneur has consequent a key number of concept such as entrepreneurial and entrepreneurship (wickham, 2001). he stated that the concepts of entrepreneurship cover what the entrepreneur should do and while entrepreneurial defines how the entrepreneur should undertakes what he or she needs to do. the attitude puts towards entrepreneurship have a stronger predictor of entrepreneurial intention rather compared to subjective norms and perceived control behaviour (malebana, 2014). past entrepreneurial intention among postgraduate students in nigerian universities: conceptual review adamu abdullahi idris 15 researches have pointed out that the approach towards entrepreneurship is being affected either intrinsic and extrinsic motivation or one of this motivational factors, example, earning and ownership (douglas & fitzsimmons, 2013), self-actualization, gain a comfortable earning and freedom (fretschner & weber, 2013) role, recognition and self-realization (saeed, 2013). an individual can be affected when observing on the existing entrepreneurs. it can be either a negatively or positively affection, this can equally affect attitudes in the direction of entrepreneurship and entrepreneurial intention (muofhe & du toit, 2011). 2.2 entrepreneurial intention among postgraduate student scholars have researched and used so many approaches to find the factors which could lead to an individual intention to start up his or her business such as personality traits (akanbi, 2013; owoseni, 2014), values, attitudes and beliefs (gasse & tremblay, 2011), demographic variables and perception of barriers such as gender, age (deh, assume & agyemang, 2013) and student level of studies (bhandari, 2013) which were analysed for their concepts, low explanatory capability and problematic methodologies (karali, 2013). this was supported by bates, maechler, barker and walker (2013) as they stated that individual factors, situational factors, demographic variables and economic factors have a low average strength when predicting an entrepreneurial activity. they also pointed out from the entrepreneurship perspective, where they viewed intention as a very important element when establishing a business. bates et al. (2013) added that an individual who has an opportunities to set up a business and have the capability to get involve into entrepreneurship but also lack the entrepreneurial intention, might not like to involve into business or any risk of such nature. with this it is paramount to have entrepreneurial intentions which will encourage starting up a new business or entrepreneurship activities. entrepreneurial intention can be defined as a person willingness to involve in entrepreneurial activities, to be self-reliant and to perform entrepreneurial behavior (dohse & walter, 2010). it takes ambition, guts and inner courage for an individual to set up a new business. ismail, khalid, othman, jusoff, rahman, kassim and zain (2009) stated that an individual may have potentiality to be an entrepreneur or possess certain qualities and furthers but lack the intention and also the conversion of entrepreneurial activities. therefore, to investigate the individual‟s intention towards self-employed will offer a meaningful inspiration for researchers to apprehend and forecast entrepreneurial stages and entrepreneurship activities which can be successful in a way of setting out the important of entrepreneurial intention (ismail, et al., 2009). entrepreneurial intention was also defined to be the self-acknowledged belief of an individual mind which can give him or her opportunity of setting up a business with sincerity and dedicate a plan for it in a point in time (thompson, 2009). he further added that entrepreneurial intention concept will be determined by the strength of the individual intention of setting up a new business venture. also, lucky and minai (2011) argued that the opportunity for an individual to become an entrepreneur can be influenced base on his attitude. this will result on the type of attitude an individual put towards his intention in business. this intention could be positive or negative, assuming an individual put a positive intention; it will help in guiding and motivating the individual intention while if he or she decide to have negative intention, it will demoralized and discourage the individual. however, there is continues debates on which theories that is comprehensive focuses on the study and attributes of intention. rodrigues, dinis, do paco, ferreira and raposo (2012), stated psychological approach focuses on traits and some personality attributes as determinant factors in intention to be self-employed, these will include; goal orientation, risk taking, internal locus, high need of achievement etc. entrepreneurial intention among postgraduate students in nigerian universities: conceptual review adamu abdullahi idris 16 2.3 entrepreneurship education entrepreneurship education can be said to be the key that leads to national development. this is because it leads to unlocks of the economic potentials in the people; equips individuals, empowers the society and value of the national economy, which provides the basis which is needed for the transformation and enables economic development. it is an important tool for the sustainability and job creation (aluwong, 2010). entrepreneurship education was defined as a part in the educational system which involves skills acquisition, management abilities and ideas that necessitate the intention of people (maina, 2014). this perception draws consideration to the importance of developing the capabilities and social supports that will enable the individuals living in high poverty to pursue entrepreneurship as the valued choice rather than inevitability in the absence of substitute earning opportunities (gries and naudé, 2011). in addition, it is also refers to the development of skills and knowledge either “for the purpose” or “about” entrepreneurship generally, like the familiar education system at primary, secondary and tertiary education institutions (global entrepreneurship monitor, 2010). it was also defined as the training an individual‟s received in regards to entrepreneurship; it can be knowledge or skills which an individual possesses over some period of time and in a given field (ekpe & mart 2012). it was further defined as the programs which student undergo in order to provide them with the basic information and skills concerning their future career as an entrepreneur (ekpoh & edet, 2011 and ooi, selvarajah and meyer, 2011). ediagbonya, (2013) view entrepreneurship education as a kind of training which assist the participants in building their entrepreneurial qualities by backing them up with some service which can lead them to successfully starting up a new ventures. 2.4 entrepreneurship education and entrepreneurial intention studies have shown that there are significant relationships between entrepreneurship education and entrepreneurial intention. according to dohse and walter (2010) argued that students with entrepreneurial knowledge (education) have a high positive relationship with the entrepreneurial intention to start a business than those students who don‟t have the knowledge. they added by providing three reasons which entrepreneurial knowledge became a background for entrepreneurial intention. firstly, students that attend entrepreneurial classes, generate ideas and learn techniques on how to set up is own venture, (e.g. technique innovative) and to be able to analyzed whether those ideas are worthwhile (e.g. analyses of business). second reason is that, all the number of courses ponders the level of departments‟ reflecting the self-reliance as a certified career choice. last, entrepreneurship education suggests ways to improve a student‟s business ideas and how to make opportunities from it than others. besides, there is a positive significant difference in intention among those student that took the course and those who did not undergo the entrepreneurship education program (zain, akram & ghani, 2010; palmer & gonzalez, 2009). from the study of zwan, zurrhout and hessels (2013) stated that there is an existing positive relation between entrepreneurship learning and individual intention. 2.5 environmental factors environmental factors are those components outside an organization which will have impact on the organization either negatively or positively (frederick, kuratko & hodgetts, 2006). baldacchino and dana (2006) called environmental factor as “external components” or “external factors” which play an important role in the creation of a business organization. they added that environmental factor has positive influence on people and organizations since those factors have provided a flourishing environment. it was also defined as the influence and support acquired outside an organization which can be referred to as the environment influence or entrepreneurial intention among postgraduate students in nigerian universities: conceptual review adamu abdullahi idris 17 environment support (fini, grimaldi, and sobrero, 2009). fini, et al. (2009) in their study will operationalize environmental factors as environmental influence and environmental support which will be capable to influence the entrepreneurial intention among postgraduate students in universities. according to lucky, hamzah and minai (2013) confirmed that the studies of entrepreneurship without referencing to environment will be considered as incomplete and insufficient. the environmental factors can be divided into two environmental supports andenvironmental influences. 2.6 environmental supports environmental supports in business plays an important role in influencing an individual entrepreneurial activity. which scholars have associated environmental supports with the role government play in supporting entrepreneurship. these roles that government plays can comes in terms of programs and policies such as externalities, infrastructures and funding (fini et al, 2009). they forward added that universities environment is also recognized as an important mechanism which influences entrepreneurial intention. esuh and najafi (2014) stated that environmental supports can be ways in which government support entrepreneurs in terms of motivating and encouraging people to become entrepreneurs, these supports can be in a form of government patronizing these entrepreneurs products or services, tax holiday and grant. many scholars have identified that resources can make an environment more supportive to entrepreneurial activities as tangible and intangible (beck, demirgüç‐kunt, & maksimovic, 2005). these resources identified are training, plan competition and business idea as (intangible) and financial support and soft loans as (tangible), the most important part is the physical structure support within the environment. 2.7 environmental influence environmental influences can be said to be the characteristics and nature of the environment in terms of competitive changes and nature that are normally the circumstances in a business venture (fini, grimaldi, marzocchi, & sobrero, 2009). they added an assumption that, the more an environmental dynamism the more the need for innovation that will meet the demand in the changing environment. the further argued that organization which operate in different markets tend to have greater experience in dealing with competitors and customers as they have more ideas as a result in their diversity nature of markets operation. the greater diversity in an organization‟s marketing operation the more innovation in terms of entrepreneurial activities. miller and friesen (1983) added that perception of different structures and understanding, programs and policies, administrative and personnel differences displayed are combinations of results that will educate, guide and motivate individual in in considering and emerging new ideas. 2.8 environmental factor and entrepreneurial intention studies have shown that there are significant relationships between environmental factors and entrepreneurial intention (esuh and najafi, 2014; uddin & bose, 2012). the universities should play a key role in determining students‟ entrepreneurial intention by providing to them facilitating environment that will aid their intention toward becoming an entrepreneurs (abdullah, hamali, deen, saban, & abdulrahman, 2009 and lucky & minai, 2011). they further added that, the environmental factors contribute highly for a student to have an effective entrepreneurial intention and may lack the entrepreneurial intention when he or she doesn‟t have an enabling environment support. this is a major challenge face by students in the institution towards building their entrepreneurial intention. in addition, abdullahi, hamali, deen, saban and abdulrahman (2009) stated that the environmental factors has a positive role it plays in influencing entrepreneurial activities and the impact of the development of firms in the entrepreneurial intention among postgraduate students in nigerian universities: conceptual review adamu abdullahi idris 18 society. similarly, uddin and bose (2012) in their study found a very strong correlation between environmental factors and entrepreneurial intention. they also added that the existing relationship between environmental factors and entrepreneurial intention is worth studying. environmental factor plays an important role when determining the possibility of an individual to become an entrepreneur (lucky & minai, 2011). they continued their argument that an enabling environment can assist people to think of having intention for entrepreneur. 2.9 societal entrepreneurship attitudes and entrepreneurial intention researchers have view entrepreneurship attitude from two main approaches. ajzen and fishbein (1977) view the first approach of entrepreneurship attitude as an individual thoughts, conations and feeling toward entrepreneurship. therefore, entrepreneurial intention will be a function of attitude toward benefit, favorability and value of entrepreneurship while robinson, stimpson, huefner, and hunt (1991) view the second approach of entrepreneurship attitude as a multidimension concept which has four personality factors such as need for achievement, perceptions of influence and control on business creation, innovation and self-esteem. entrepreneurship attitude is been analyzed as social welfare attitudes, it is refers to as attitude which will target social welfare such as people‟s responsibility for their well-being and income, society‟s responsibility, customer relationship and social services or other social welfare objective (linan & chen, 2009). they added that the effect of societal attitude and perceived behavioral control on entrepreneurial intention will differs by nation. in addition, entrepreneurship attitude covers three aspects such as, cognition (belief and thoughts), conation (behavior and action) and affection (emotion and feeling). the combination of these three dimensions of entrepreneurship attitude (cognition, conation and affection) persuades an individual intention to become an entrepreneur (pihie & bagheri, 2011). entrepreneurship attitude is considered to have different factors, these factors are competition (rivalry), change, earning money (schwarz et al, 2009), attitude towards inner control, intuition, creativity, leadership and self-efficacy (athayde, 2009). other researchers include inner independency (norasmah et al, 2008) and differentiability and self-effectiveness (florin et al, 2007) as factors of entrepreneurship attitude. studies have shown that there are significant relationships between societal entrepreneurship attitude and entrepreneurial intention. according to schumpeter (1934) and kirzner (1985), that there is a direct relationship between attitudes and entrepreneurship activities. thus, on a societal level, there is a link between culture and entrepreneurial activity which can construct a mind set for an individual to become an entrepreneur. sajjad, imran, haroon, dad, and munir (2010), stated that culture can influence entrepreneurial intention and have impact on it towards perceived desirability and perceived feasibility in their study titled impact of culture on entrepreneurial intention. besides, mariano, gorgievski, laguna, stephen and zarafshani (2011) in their study on cross-cultural approach, that there is a relationship between attitude which effect culture universal and perceived behavioral control over entrepreneurial intention. ali, yilmaz, and afzal (2010) that culture vary in terms of subjective norms and attitudes, which have relationship with entrepreneurial intention. they also added that culture adversely has influence entrepreneurial intention growth. finally, rantanen and toikko (2013) on entrepreneurial intention, societal entrepreneurship attitude and social values among youths in finland which shows how how youths in finnish state understand entrepreneurship. they saw it form a point of view as a sensible career option and it have a fairly positive that has a slight relationship with social values. from this study, there will be a need to cover the gap found in this emigrant literature (which have been discussed above) the study, then developed a conceptual framework (figure 1) from which it proposed the following propositions: entrepreneurial intention among postgraduate students in nigerian universities: conceptual review adamu abdullahi idris 19 i. proposition 1: there is a positive relationship between entrepreneurship education and entrepreneurial intention. ii. proposition 2: there is a positive relationship between environmental factors and entrepreneurial intention. iii. proposition 3: there is a positive relationship between societal entrepreneurship attitude and entrepreneurial intention. figure 1: conceptual framework 4. conclusion and future research directions the issue of unemployment among youth globally is becoming a serious setback faced by developing countries, which nigeria is not left out of this issue. teeming youth in this developing countries where now engaged in activities which can make them to be self-reliant like entrepreneurship to see whether it can solve the issue of unemployment thereby creating more opportunities for employment. in nigeria to be more specific, government has introduce numerous policies and programs aimed towards eradicating poverty among the youth and further make them self-employed. some of these policies and programs include introduction of entrepreneurship education as curriculum into universities and higher education institution in nigerian. however, after all this effort been put by government to see that youths are self-employed after graduation, still lager numbers of them remain unemployed. that means it is not just introducing policies and programs but students need to have that intention before anything can be done. furthermore, studies have only being concentrating on developed nation but this study tries to concentrate in developing nation (nigerian) and also from individual entrepreneurial perspective to study students‟ intention. in the background of this study, it was based on assessing the factors that will lead postgraduate student‟s entrepreneurial intention in nigeria universities and the variables were; (entrepreneurship education, environmental factor and societal entrepreneurship attitude). the results indicated that these three variables have a positive significant impact in students‟ intention to become entrepreneurs. lastly, all these findings made by this study are relevant to nigeria government and the education ministry to help them put in place new policies that will encourage the students‟ entrepreneurial intention. references agbim, k. c., oriarewo, g. o., & owocho, m. 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(2010). the relationship of personality to entrepreneurial intentions and performance: a meta-analytic review. journal of management, 36, 381-404. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. contents american finance & banking review vol. 1, no. 1; 2017 published by centre for research on islamic banking & finance and business 1 an empirical research on fu-wang foods ltd: industry, strategy, accounting, ratio, valuation and proforma analysis k. m. anwarul islam1 1 department of business administration, the millennium university, dhaka, bangladesh correspondence: c/o k. m. kamal uddin, deputy registrar, registrar’s office, room no-201(k),dhaka university, dhaka-1000, tel: +8801768343171, e-mail:ai419bankingdu@gmail.com received: june 21, 2017 accepted: july 15, 2017 online published: july 22, 2017 abstract in this study an attempt was made to prepare the research on fu-wang foods ltd. we have also analyzed the strategies, accounting policies and ratios. historical and proforma income statements, balance sheet and cash flow statement have been made. we have also determined, loosely speaking, the intrinsic value of stocks of firm. the company is in food processing industry. the position of fu-wang is good in this industry. its long term profitability and sustainability is also secured. the accounting policies and estimates of fu-wang as well as the food industry are flexible enough. management enjoys moderate discretionary powers. analysis of the various ratios over the five years reveals that many of them are satisfactory and some are not. by doing the valuation of the company with some assumption we found the intrinsic value of the firm is approximately 36 tk. sensitivity of stock price by changing the discount rate and sales growth rate has also been examined. by projecting the historical accounting figures we have also prepared proforma income statements, balance sheets and cash flow statements and found that the future of fu-wang foods ltd. is rather satisfactory, given some assumptions. keywords: fu-wang foods ltd, industry, strategy, accounting, ratio, valuation, proforma analysis. 1. introduction prior research examines the influence of investor sentiment on corporate decisions such as capital investments, dividend payments, stock splits, and corporate name changes.however, as baker, ruback, and wurgler [2007] observe, there is limited evidence on the association between investor sentiment and managers’ disclosure decisions. we address this issue by examining the relation between investor sentiment and the discretionary disclosure of ―pro forma‖ (adjusted) earnings measures. specifically, we examine the influence of investor sentiment on managers’ decisions to (1) disclose adjusted earnings metric within the quarterly earnings press release; (2) exclude higher levels of recurring and nonrecurring items in calculating the pro forma earnings figure; and (3) emphasize the pro forma metric by placing it more prominently within the earnings press release. we further investigate whether the relation between investor sentiment and pro forma earnings disclosure reflects managers attempt to inform or mislead investors, or whether it reflects managers’ own sentiment-driven beliefs. an empirical research on fu-wang foods ltd: industry, strategy, accounting, ratio, valuation and proforma analysis k. m. anwarul islam 2 while investor sentiment may influence various forms of corporate disclosure, we focus on proforma earnings disclosure for three reasons. first, in a recent survey of financial executives, graham, harvey, and rajgopal [2005] find that managers view pro forma earnings to be one of the most important performance metrics disclosed to investors. second, while prior research finds that investors perceive manager-adjusted pro forma earnings to be more informative than gaap earnings (see, e.g.,bhattacharya et al. [2003]; lougee and marquardt [2004]; bowen, davis, and matsumoto [2005]),several studies suggest that some managers use pro forma earnings disclosures aggressively and that investors may be misled by overly optimistic pro forma measures (e.g., doyle, lundholm, and soliman [2003]; frankel, mcvay, and soliman [2010]; brown, christensen, and elliott 2011). this evidence is particularly salient since prior research suggests that less-sophisticated investors—who are most affected by sentiment (kumar and lee [2006], baker and wurgler [2007])—rely heavily on pro forma earnings information and are arguably the most at risk of being misled (fredrickson and miller [2004]; elliott [2006]; bhattacharya et al. [2007]). third, anecdotal evidence suggests that pro forma reporting trends closely track recent stock market bubbles (bradshaw and sloan [2002]; dyck and zingales[2003]; bhattacharya et al. [2004]) and that investor sentiment may have influenced the disclosure of pro forma earnings measures during bubble periods (henry [2001]; d’avolio, gildor, and shleifer [2002]). taken together, thesearguments suggest that pro forma earnings disclosure provides a unique setting for exploring the relation between investor sentiment and managers’ disclosure decisions. 2. literature review we examine the influence of investor sentiment on managers’ discretionary disclosure of ―proforma‖ (adjusted) earnings metrics in earnings press releases. we find that managers’ propensity to disclose an adjusted earnings metric increases with the level of investor sentiment and, in particular, the propensity to disclose an adjusted number that exceeds the gaap earnings figure. further, ouranalyses suggest that as investor sentiment increases, managers (1) exclude higher levels of both recurring and nonrecurring expenses in calculating the pro forma earnings number and (2) emphasize the pro forma figure by placing it more prominently within the earnings press release. additional analyses indicate that the association between investor sentiment and managers’ pro forma disclosure decisions at least partly reflects opportunistic motives. finally, we find that managers’ own sentiment-driven expectations also play a role in their pro forma disclosure decisions. (brown, n. c., christensen, t. e., elliott, w. b., & mergenthaler, r. d.,2012). drawing on recent research on accounting-based valuation, this paper ventures to produce a structural approach to financial statement analysis for equity valuation. the structure not only identifies relevant ratios, but also provides a way of organizing the analysis task.the result is a fundamental analysis that is very much grounded in the financial statements; indeed, fundamental analysis is cast as a matter of appropriate financial statement analysis.the structural approach contrasts to the purely empirical approach in ou and penman (1989). that paper identified ratios that predicted earnings changes in the data; no thought was given to the identification. the approach also contrasts to that in lev and thiagarajan (1993) who defer to ―expert judgment‖ and identify ratios that analysts actually use in practice. 2. data analysis 2.1 industry analysis of fu-wang foods limited 1.1 the industry my selected company belongs to: food processing industry 1.2 potential profitability of the industry: an empirical research on fu-wang foods ltd: industry, strategy, accounting, ratio, valuation and proforma analysis k. m. anwarul islam 3 1.2.1 maintaining the quality of the product and keeping the processing of food hygienic are two most critical factors for the profitability of the industry. two factors that are also very important and related for the profitability of the industry are:  threat of new entrants  intra-industry rivalry on the basis of porter’s five factor model, the followings can be considered:  threat of new entrants is highest since:  capital requirements are low in foods industry.  customers’ switching costs are low  government does not provide subsidy or regulate prices/entry  low bep in foods industry  bargaining power of buyers is not highest as:  buyers can not in-source backward  buyers don’t know the production costs well  foods industries are concentrated  bargaining power of suppliers is not highest because:  suppliers can not forward integrate  suppliers’ products are not highly differentiated  intra-industry rivalry is fiercest as:  large number of competitors in the industry  industry is growing  buyers have low switching costs 1.3 the industry is capable of retaining the profit it makes because of the following factors:  threat of new competitors entering the industry  rivalry among current competitors in the industry 1.4 other reasons  food is one of the essential products  industry is in growing state  bargaining power of buyers and suppliers are not that much dominant 2.2 strategy analysis of fu-wang foods limited:generic strategy pursued by fu-wang foods limited is “differentiation we think the company can survive and prosper given its strategy because of the following factors:  higher demand at given price  less price sensitive demand  more varieties of product  more value added service  quality product 2.2.1 what kind of competition is observed profit enhancing or profit destroying? fu-wang foods limited belongs to food processing industry. this industry has too many competitors like bangas foods ltd., bd foods ltd., apex foods ltd., bengal foods ltd., etc. before we reach to any conclusion an empirical research on fu-wang foods ltd: industry, strategy, accounting, ratio, valuation and proforma analysis k. m. anwarul islam 4 whether the competition is profit enhancing or profit destroying, the followings can be discussed competition can be done in two sectors -price segment or non-price segment. price competition means changing price of products to attract more customers while non-price competition refers to sales promotions, advertisement, free samples etc. in general, price competition erodes profit by compelling the firm to receive fewer prices per unit of product unless the industry is in a growing phase. while the industry is stagnant in terms of life cycle, price competition will erode industry profit. non-price competition has both negative and positive impacts. impact can be negative because fixed cost is up due to installing new and efficient machineries to provide value added services. impact can be positive as marginal cost and unit cost of value added services and core product are supposed to be decreasing due to efficient machineries. moreover, differentiating the product gives the firm the opportunity to make the products dissimilar to those of others, hence making it increasingly difficult to enter the industry. our firm believes in product differentiation. so do others in the industry because they are not indulging in price competition. lastly, it can be that said i observe the competition is profit enhancing and not profit destroying. 2.3 accounting analysis 2.3.1 identifying key accounting policies fu wang is a manufacturer of processed foods. so, inventory valuation is very critical for it. so is its bad debts provision policy. the key accounting policies can be identified as below: 2.3.1.1 inventory valuation: inventories include raw material, finished goods and packing materials. they are stated at lower of the lower of cost and net realizable value on consistent basis. net realizable value is based on estimated selling price less any further costs expected to be incurred for completion and disposal. 2.3.1.2 bad debts provision: there is no substantial amount of bad debts in the firm and it has no bad debt provision whatsoever. 2.3.1.3 depreciation allowances: depreciation is mainly charged on a straight in a basis with a range of 2.5% to 20%. 2.3.1.4 tax holiday reserve: the company is enjoying tax holiday from august 1997 to july 2002 and is recording tax holiday reserve for future. 2.3.1.5 employee benefit obligations: the company did not introduce any employees’ benefit plan at first but at latter years. 2.3.1.6 revenue recognition: the revenue during the year represents revenue from the sale of foods items which are recognized when deliveries are made, against the dale order received. 2.3.2 assessing accounting flexibility the firm belongs to the foods processing industry. apparently no severe restriction of any accounting treatment is imposed on such firms. managers of the firm are given the flexibility and power to reflect the true condition of the firm. the firm can, at its discretion, charge bad debt provisions at the true level as well as use any type of depreciation method it likes at a consistent basis. though the firm has been enjoying tax holiday, it was deducting tax holiday reserve for future purpose. all these reflect considerable accounting flexibility. an empirical research on fu-wang foods ltd: industry, strategy, accounting, ratio, valuation and proforma analysis k. m. anwarul islam 5 2.3.3 evaluating accounting strategy the accounting strategy followed by it can be comparable with the norm of the foods processing industry (apex foods ltd, bangas ltd, pran ltd etc.). the possibility of having strong incentives to manipulate the profit figure or to do window dressing can’t be rejected just because the management owns about 40% of the stocks and the quality of the information disclosure is not up to the mark. the firm did not change any of its accounting policies these years. for example, depreciation method is straight line over the time. the only substantial change is that the firm has been enjoying tax holiday from august 1997 to july 2002 and is recording tax holiday reserve for future. now the firm is charging provision for income tax instead. the firm does not structure any significant business transactions so far. it did not alter the lease rental method or did not have any acquisition of other companies. 2.3.4 evaluating the quality of disclosure the disclosure of information is not that much satisfactory in some cases. it did not specify whether it uses lifo, fifo or weighted average method for inventory valuation. there is also no trace about bad debt allowance for such a manufacturing firm. there is no long term debt either but short-term debt with interest is termed as notes payable. on the other hand, in many places it reveals justifiable information. it tried to let the stakeholders know their significant accounting policies. it showed all the individual debtors with the amount owed by them.the depreciation schedule of various fixed assets along with rate are given. the extent, to which preliminary expenses and share issue expenses have been capitalized and are written off, provides much clarity. the mode and extent of contingent liabilities have been elaborated and the accounting ratios have been given. unlike many other firms, it provides us with the composition of the shareholders. 2.3.5 identifying potential red flags 2.3.5.1 about audit reports or auditors:the audit reports of the firm are consistent and are unqualified. but the matter of regret is that the auditor of 2015-16 and the auditor for the rest of the years are not the same. the change of the auditor is not backed by information. 2.3.5.2 related party transactions: fu wang ceramic ltd is an associate undertaking of fu wang foods ltd. during the year of 2015-16 it paid 441000 tk as factory rent to fu wang ceramic ltd for use of its land. afterwards nothing significant is mentioned. 2.3.5.3 unusual increases in ar in relation to sales increase: the diagram shows that ar increased disproportionately in the second accounting year, which may be a result less strict credit policy and negligence in ar collection. 2.3.5.4 unusual increases in inventory in relation to sales increase: from the diagram below we can say that inventory increased disproportionately in the second accounting year, which may be a result of fewer sales. 0.10 0.17 0.10 0.14 0.13 0.24 0.43 0.22 0.21 0.24 an empirical research on fu-wang foods ltd: industry, strategy, accounting, ratio, valuation and proforma analysis k. m. anwarul islam 6 2.3.5.5 an increasing gap between reported income and ocf: the reported income as a percent of ocf is showing a constant proportion over time. 0.79 0.79 0.87 0.84 0.80 2.3.5.6 an increasing gap between reported income and tax income: as data is not available, whether such a thing is occurring or not can’t be verified. 2.4 ratio analysis 2.4.1 current ratio: current ratio is diminishing over time which may be considered as bad. cr decreases because of the expansion of current liabilities. among the current liabilities, notes payable (bank loan) is comparatively increasing to meet up the increased demand. moreover, increase of cl is more than that of ca over time. 2.4.2 quick ratio: quick ratio is showing a decreasing trend over time and it is very ominous. qr diminishes principally due to the increase of inventory and current liabilities. increase in inventory might have happened due to frail sales strategy or weak demand. 2.4.3 inventory turnover days (itd): it is relatively low in second year due to lowered cgs. however, itd is relatively satisfactory for fu wang. increase of itd is looked as inefficiency as goods are taking longer time to be finished. launching new machineries and training labors may lower itd. however, the decrease of itd is not a result of jit inventory management. 2.4.4 average collection period: it is remaining stagnant over time because sales are increasing and a/r is almost increasing at the same rate. this may be good but credit policy must be reviewed according to the business scenario. 2.4.5 fixed asset turnover: fsa of the firm is not quite satisfactory. alarmingly, it is fluctuating over time and then shows an increasing pattern. this indicator shows operating leverage of the firm, which is, of course, not satisfactory for this firm. 2.4.6 total asset turnover: tat is also very low. it is slightly decreasing due to wearing out of assets, suggesting manufacturing inefficiency and then has a u-turn. 2.4.7 debt ratio: it is slightly increasing over time due to increase in current liabilities and expansion of business. though optimum debt level varies among firms, the firm has already almost 35% short-term loans on average and other current liabilities, indicating financial risk. 2.4.8 time interest earned ratio: this ratio showed a good situation for the first three years but due to profit reduction this ratio is showing an alarm-bell for the last years. 2.4.9 long term debt ratio (ltd): the value is zero as no long term debt has been utilized. 2.4.10 gross profit margin: here no significant trend is shown. it increases a bit, perhaps, because of utilization of high operating leverage. 2.4.11 operating profit margin: it is also relatively constant over time due to no substantial change in operating expenses. 2.4.12 net profit margin: net profit is vulnerable and slightly decreasing over time due to short-term interest amount (we termed short term bank loans as notes payable).to meet up the increased demand fu-wang foods limited has taken loan from bank which increases the notes payable over time, so does the interest. that is why net profit margin is declining. an empirical research on fu-wang foods ltd: industry, strategy, accounting, ratio, valuation and proforma analysis k. m. anwarul islam 7 2.4.13 roa: roa is satisfactory but vulnerable. it is vulnerable over time due to the vulnerability of profit. 2.4.14 roe: roe is also quite good but decrease for some years due to increased cgs and unidentified admin and selling expense. it is vulnerable due to the fluctuation of profit. 2.4.15 eps: eps is following an upward trend with deviation. earnings of around 2 plus taka out of face value or market value of 10 to 14 taka is not bad at all. it is vulnerable due to the vulnerability of net profit. 2.4.16 p/e ratio: this is not unsatisfactory. but again it is fluctuating over time due to the vulnerability of price and earnings. 2.4.17 sensitivity of roe: roe is more sensitive to total assets turnover and less sensitive to profit margin and financial leverage. from the sensitivity analysis it is seen that total assets turnover has greater standard deviation and the other two indicators have lesser standard deviation. 2.5 valuation: discounted cash flow analysis the valuation of a company can be done with various methods and various accounting figures. we have used discounted free cash flow valuation model. according to the model, the value of a company can be estimated as: v= pv of all fcf = pv of limited time initial growth fcf + pv of adjusted growth fcf thereafter. there are some assumptions in the valuation model and the statement from which the fcfs are derived resembles income statement but is not accurately an income statement. the assumptions are:  secondary growth rate is 0.5%. the reason is that the firm is a manufacturer of essential goods and the growth of demand of this sector is not too much.  no assets disposal will occur.  depreciation rate for the extension is 10%. the depreciation for the extended periods is calculated in a simplified way. the depreciation of this year is equal to depreciation of the previous year plus capital expenditure time’s depreciation rate.  interest expenses are negligible for our firm and the short-term notes payable interest amount is not considered for the valuation model.  capital expenditures are assumed to be 35000000 tk for each year for the extended periods as the firm is trying to expand itself.  sales growth rate is calculated as the average of the first four changes of historical sales figure.  other accounting figures are also projected to the extended periods by expressing themselves as percentage of sales and then smoothing.  fcf is defined as unlevered net income plus depreciation plus capital expenditures and changes of nwc.  cost of equity (part of discount rate) is calculated with the help of sml model. the calculations are done in latter parts. the model is bisected and the first part is just projection of historical accounting figures and the second part is just the normalized value of the last projected values. the sml model comes up with the individual rate of return for a certain security, which can then be used as discount rate. the market rate of return (dse 20) is approximately 26% and b of fu wang is 0.48. the t-bill an empirical research on fu-wang foods ltd: industry, strategy, accounting, ratio, valuation and proforma analysis k. m. anwarul islam 8 rate of return is 7.85%. so the cost of equity is 16.56%. this rate can be approximated as cost of capital because the cost of debt (which is almost 10%) has little impact on the total capital invested. but due to rising inflation, this wacc might tend to overestimate the value of the firm. so, the appropriate discount rate must be more than 16.56% and should be in the range between 22% and 25% as inflation is almost 8 to 9%. we took wacc as 23.5%, to be conservative. the projected figures for 2017-18 to 2021-22 are discounted at 23.5% and the 2021-22 figures is further projected at 0.5% growth rate and discounted to get the value of 711,685,097 tk. from this value cash balance and short term interest debt are deducted to get the equity value. equity value is then divided by shares outstanding (18000000) which yields 36.34 tk. along with the valuation model, there are sensitivity analysis and scenario analysis. the sensitivity analysis allows altering two variables to see what the change of dependent variable is in this case the stock price. also the scenario analysis allows changing more than two variables and see what the change of stock price is. from the sensitivity analysis, we can see the change of stock price due to changes of discount rate and sales growth. for example, when discount rate is 19% and sales growth rate is 16% then stock price is 58.56tk. similarly, scenario analysis shows the change of stock price for various values of discount rate, sales growth rate as well as tax rate. for each of the three scenario’s (base, better, worse) respective values, the stock prices are about 36.34 tk, 153.07tk, and 20.14tk respectively. discount rate .235 .235 0.15 0.26 sale growth .21 .21 .25 .12 terminal growth .005 .005 .030 .001 intrinsic value 36.34 36.84 153.07 20.14 from our estimation can we necessarily infer that the stock price is in the vicinity of 36.34 tk? the answer is: we don’t know it exactly. however, the result tries to represent the intrinsic value of the firm. there are so many assumptions (wacc rate, sales growth rate, and depreciation rate), so many unknown factors (management decisions about future capital expenditure and capital restructuring) and so much systematic risks (economic recession, inflation, natural calamities etc), that the resulted number is nothing but a ballpark number. is the stock underpriced? not necessarily. one may raise his eyebrow when it comes to his notice that our intrinsic value is in the range of forty taka per stock. two factors, we think, contributed this. they are: sales growth rate and discount rate. firstly, sales growth is very vulnerable year to year and is probably overestimated. we used the am of the sales growth rate for future approximation because gm is biased of negative values (two of the four rates are negative). another gm formula could be used: gm= [{(.7)*(2.07)*(1.11)*(.94)}^(1/4)]-1=.11 funnily, this gm formula tends to neutralize the negative values. so, our initial guts proved right that growth rate is a bit overestimated. another reason for discrepancy is inflation. bangladesh is experiencing inflationary problem for some years and the rate is 6 to 8% for almost all the years. certainly, the firm will look forward to increasing the sales price which is reflected on future revenues but the fly in the ointment is that cashflows are not adjusted to inflation properly or partially. hence, we think the stock price of the firm hovers around the initial twodigit figures. an empirical research on fu-wang foods ltd: industry, strategy, accounting, ratio, valuation and proforma analysis k. m. anwarul islam 9 2.6 proforma analysis for preparing the proforma statement of fu-wang foods ltd. we have prepared the following statements:  income statements  balance sheets  cash flow statements 2.6.1 method from the past 5 years historical data (income statement, balance sheet and cash flow statement) we have projected another 5 years prospective statements. first of all, we prepared common size income statement which is expressed against total sales and common size balance sheet which is expressed against both in terms of sales and total assets. from the common size statements we have identified the rate of change and ratios of needed accounting estimates and then smoothing the estimates we have projected those for the future five years. assumptions  sales growth rate will be approximately 21%.  cgs is assumed to be 78% of sales.  inventories growth rate will be approximately 20%.  cash and cash equivalent growth rate will be approximately -2%.  accrued expense growth rate will be approximately 27%.  sundry creditors’ growth rate will be approximately -25%.  sga expense will increase by 10.55%.  loans, advances and deposits growth rate will be approximately 21%.  the company will issue additional 0.2 million shares in 2008-09 and as a result share issue expense will increase. share issue expense will be amortized substantially.  payout ratio will change to 12.5% in the year 2016-17  credits, short term bank loans-secured growth rate will be approximately 5%.  sundry debtors growth rate will be approximately -47% per year. the proforma statements yield the following results: net incomes after tax for the forecasted 5 years are: 2017-18 2018-19 2019-20 2020-21 2021-22 48,198,118 59,892,306 72,469,690 87,688,325 106,102,874 total assets or total liabilities for the forecasted 5 years are: 2017-18 2018-19 2019-20 2020-21 2021-22 448,815,638 356,444,592 305,124,327 286,219,721 289,260,386 changes in cash for the forecasted 5 years are: 2017-18 2018-19 2019-20 2020-21 2021-22 (403,614) (394,577) (385,742) (377,106) (368,662) an empirical research on fu-wang foods ltd: industry, strategy, accounting, ratio, valuation and proforma analysis k. m. anwarul islam 10 the position of fu-wang is expected to be good in this industry. its long term profitability and sustainability is also secured. references baker, m., and j. wurgler. 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(1989). financial statement analysis and the prediction of stock returns.journal of accounting and economics ,11, 295–329. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. contents american finance & banking review; vol. 2, no. 1; 2018 issn 2576-1226 e-issn 2576-1234 published by centre for research on islamic banking & finance and business 44 effect of liquidity risk, premium growth on the performance of quoted insurance firms in nigeria: a panel data analysis lasisi isiaka olalekan1 1department of accounting and management, faculty of arts and social sciences, nigerian defence academy,kaduna, nigeria. correspondence: department of accounting and management, faculty of arts and social sciences, nigerian defence academy, kaduna, nigeria. e-mail:lasmanyk30@gmail.com,tel:+2348037322585 received: january 20, 2018 accepted: january 25, 2018 online published: january 27, 2018 abstract this study assesses the effect of liquidity risk on firm performance of listed insurance companies in nigeria for the period of 2011-2015. the listed insurance firms are twenty five (25) in numbers out of which a sample of twelve (12) were used for the study. liquidity risk as the independent variable was proxy with leverage, claim loss ratio and premium growth, while the return on asset was used to proxy firm performance. the study adopts a panel multiple regression techniques and data were collected from secondary source through the annual reports of the firms after controlling for fixed/random effects.the findings of random effect reveal that leverage has significant negative effect on return on assets. the claim loss ratio has insignificant negative influence on return on assets while premium growth has positive and insignificant effect on firm performance of listed insurance companies in nigeria. it is recommended among others that the managers, shareholders and other stake holders to checkmate and control liquidity risk as it have been found empirically to enhance the quality of the firm’s financial performance. keywords: liquidity risk, claim loss ratio, premium growth, performance and insurance companies. 1. introduction insurance industry plays a major role in the society as the operation of the industry can set energy for other industries and development of an economy (abate, 2012). the insurance market plays an important role in the financial services industry in almost all developed and developing countries, contributing to economic growth, allocating efficient resources, reducing transaction costs, creating liquidity, promoting investments and distribution of financial losses (das, davies, & podpiera, 2003). insurance companies shares the function of banks and other financial institutions beside to the role of risk minimizing by pooling similar risk exposures (daare, 2016). the function of insurance companies and other financial institution is to establish effective and efficient pecuniary structure by risk transfer, intermediation and savings mobilization in economy. consequently financial bodies canal resources and transport risks from one monetary element to another to assist resources pact and trade (saeed & khurram, 2015). one of the most severe liquidity stress scenarios faced by an insurer is a mass surrender of policies owing to a loss of confidence in its financial strength. this happened to equitable life following the house of lords ruling on its guaranteed annuity liabilities in 2000. risk is a natural element of business and community life (kamau, f & njeru, 2016). it is a condition that raises the chance of losses/gains and the uncertain potential events which could manipulate the success of financial institutions (crowe, 2009). financial risk is the unexpected variability or volatility of returns (holton, 2004). it includes credit risk, liquidity risk and market risks which contribute to the volatility of financial performance (tafri et al., 2009 & dimitropoulos et al., 2010). the global financial crisis that began in july 2007 has highlighted gaps in the field www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 45 of liquidity risk management(otieno & nyagol, 2016). financial institution have demonstrated the lack of good forecasting models to manage liquidity risk, which has led to a liquidity spiral and given rise to a sudden deterioration of financial institution balance sheets with consequent difficulties in finding new sources of liquidity on financial markets(cucinelli, 2013). the inability of insurance firms to raise liquidity can be attributed to a funding liquidity risk that is caused either by the maturity mismatch between inflows and outflows and/or the sudden and unexpected liquidity needs arising from contingency conditions (duttweiler, 2009). liquidity risk is a risk of insufficient liquid assets to meet payouts from policies (surrender, expenses, maturities, etc.), forcing the sale of assets at lower prices, leading to losses, despite company being solvent(kamau, f & njeru, 2016). loss from meeting liquidity comes either from fire sale or by paying interest on borrowing to meet payouts. liquidity risk arises due to two reasons, one on the liability side and other on the asset side (sonjai, 2008). financial performance on the other hand refers to the act of performing financial activity; it is used to measure firm's overall financial health over a given period of time. financial performance is a desirable objective for all profit-oriented firms. the absence of it can indeed spells failure. typical measures of financial performance are profitability,( yahaya & lamidi, 2015). in nigeria, previous studies such as (ahmed et al (2011), daniel and tilahun (2012), sumaira and amjad (2013) among others concentrated on the effect of liquidity on profitability of commercial banks and non financial institution. from the review, very few study focus on insurance sectors. this study therefore differs by concentrating on the effect liquidity risk, premium growth on the performance of insurance firms in nigeria. in order to achieve this, we hypothesized that; ho1: liquidity risk, premium growth has no significant effect on the performance of insurance firms in nigeria. 2. literature review 2.1 liquidity risk and firms performance performance measures serve as a basis for evaluating the financial performance of a corporate entity. performance of an organization can be measured through return on assets (roa), return on equity (roe), earnings per share (eps) among others. furthermore, many researchers; pathirawasam and adriana, (2013); ali, mohammed & amer, (2015); yahaya & lamidi, 2015; have used roa to measure the financial performance of companies. for this, roa has been will be used this study as the dependent variable for analysis. this variable is most sustainable because it is measure of efficiency, by revealing how effectively and efficiently a firm utilizes the resources (assets) at its disposal, in revenue generation. the liquidity risk factor that affect the firm performance of insurance companies include, liquidity ratio, premium growth rate, leverage, underwriting risk, claim ratio loss among others. this study therefore focuses on leverage risk, claim ratio loss, and premium growth rate because they are liquidity risk attributes that relates to the performance of insurance companies leverage risk insurance companies could prosper by taking reasonable leverage risk or could become insolvent if the risk is out of control. nevertheless more empirical evidence supports the view that leverage risk reduces the performance of the companies. it is a financial ratio that indicates the percentage of firm’s asset that is financed with debt. leverage is measured as total liabilities to total assets (nikhik, kingshuk, and mihir., 2015; mehari and aemiro, 2013). in this study the ratio of total liabilities to total asset is taken as an independent variable. claims ratio the claim ratio is something very specific for the insurance business. it is claims payable as a percentage of premium income. this is also known as claims loss ratio. (pietersz, 2016.). the claims ratio measures the number of claims in a period and divides that by the earned premium for the same period. insurance is the business of managing liquidity risks and it is essential to have a thorough understanding of the incurred claims www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 46 ratio. if the value is higher than expected or established norms, then further investigation is required to figure out why that is. it is important to investigate if there is a threat of an insurance fraud. if the ratio is lower than expected, it could indicate irrelevant products or difficulties in claiming, possibly affecting customer satisfaction, and obviously requires more investigation. (klipfolio 2016.). premium growth rate premium growth is another important financial variable that influences the financial performance of insurance companies. therefore the growth in premium of the firm has been argued to have influenced on the financial performance of insurance companies and this has been studied frequently. premium growth as measured by percentage change in total assets or sometimes as percentage change in premium of insurance companies (abate, 2012). premium growth rate measures the rate of market penetration (ahmed et al, 2011). 2. 2 liquidity risk and financial performance: an empirical review this section focuses on related studies of which emphasis is placed on the attributes used in this study as they relate to performance of insurance companies. for instance kamau, & njeru, (2016) examine the effect of liquidity risk on financial performance of six insurance companies listed at the nairobi securities exchange for the period 2012-2015. the risks studied included operational risk, market risk and credit risk. the study was descriptive in nature. it was found out that operational, market and credit risks has negative effect on the financial performance. the study recommended that measures should be put into place to hedge these risks and hence maintain a healthy financial performance. muriithi & waweru, (2017) conduct a study on liquidity risk and financial performance of 43 registered commercial banks in kenya over a period of (2005 – 2014). liquidity risk was measured by liquidity coverage ratio (lcr) and net stable funding ratio (nsfr) while financial performance by return on equity (roe). panel data techniques of random effects estimation was used for the study. findings indicate that nsfr is negatively associated with bank profitability both in long run and short run while lcr does not significantly influence the financial performance both in long run and short run. it is recommended that bank’s management to pay the required attention to the liquidity management. similarly, iqbal ,chaudry, qbal & zia ud din (2015) examine the impact of liquidity risk on firm specific factors; a case of four (4) islamic bank of pakistan for the period of 2000-2013. their findings reveal that profitability is negatively co integrated with liquidity risk, exist strong positive significance of return on assets on liquidity risk, leverage is found to be positively correlated with liquidity risk and bank size has positive impact on liquidity risk. the findings of this study might not be widely accepted since the study is centered on islamic banks. otieno & nyagol, (2016) examine the relationship between liquidity risk management and financial performance of microfinance banks in kenya. longitudinal research design utilizing panel data covering the period from 2011 to 2015 was used. the findings were that liquidity risk management with fgr and car parameters had a strong positive correlation (r=0.45), giving a significant negative relationship with both roaa and roae performance measures as depicted by regression coefficient of 0.3 estimated by gmm. also, mehari & aemiro, (2013) conduct a study on firm specific factors that determine insurance companies’ performance in ethiopia. return on total assets (roa) a key indicator of insurance company's performanceis used as dependent variable while age of company, size of the company, growth in writing premium, liquidity, leverage and loss ratio are independent variables. the sample includes 9 insurance companies over the period 20052010. the results of regression analysis reveal loss ratio (risk) is statistically significant and negatively related with roa of insurance companies in ethiopia. but, growth in writing premium, insurers’ age and liquidity have statistically insignificant relationship with roa. saeed & khurram, (2015) examine the factors influencing the financial performance of 24 non-life insurance www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 47 companies of pakistan over the period 2005 2013. fixed effect model of hausman test was employed for the study. the findings indicate that loss ratio proves significant in determining performance. also, nikhik, kingshuk, mihir (2015) conducted a study on firm specific factors affecting the overall financial performance of life insurance companies in india over the period of ten (10) years from 2003-04 to 2012-13. the analysis shows that there is significant negative relationship between leverage and financial performance (roe). also, kambi & ali, (2016) study the effects of financial risk management practices on the financial performance of 44 listed banks at the nairobi securities exchange. secondary data was used and census approach was used since the target population is small. the study recommends that there is need for the management to maintain the liquidity level at safe level and training could be organized for staff so that they learn more about the concept of financial risk management on financial performance. cucinelli, (2013) conduct a study on the relationship between liquidity risk and probability of default: evidence from the euro area. the sample is composed of 575 listed and non-listed eurozone banks and the methodology applied in the analysis is ols regression based on panel data. the results show a relationship only between the liquidity coverage ratio and credit rating, while there is no relationship between the longterm liquidity measure and probability of default. similarly, hossein, dezfouli, hasanzadeh, & shahchera, (2014) inspect the effectiveness of liquidity risk on banks profitability in iran. using a four-step econometric model and gmm linear forecasting model, it was concluded that there is a significant relation between mentioned factors (npl (dependent variablesnon-performing loans ratios, liquidity ratios, liquidity gap ratio, capital ratio, and bank size) and the profitability ones (independent variablesroe and roa). furthermore, ail, tabari, ahmadi, & emami, (2013) examine the effect of liquidity risk on the performance of commercial banks using of panel data related to commercial banks of iran during the years 2003 to 2010. in the estimated research model, two groups of bank-specific variables and macroeconomic variables are used. the results of research show that the variables of bank's size, bank's asset, gross domestic product and inflation will cause to improve the performance of banks while credit risk and liquidity risk will cause to weaken the performance of bank. 2.3 theoretical framework of the study there are two theory that accord these study; risk return theory and extreme value theory. markowitz (1952) is the pioneer scholar that propounded the risk return theory .the theory that underpins this study is risk-return theory; this is because insurance companies is both a risk-taking and profit making business, and insurance firms activities should return profits commensurate with their risk. the higher the risk, the higher will be the financial performance and vice versa. this postulation is true when the insurance firm risk appetite is lower than the risk tolerance. extreme value theory which was pioneered by leonard tippet in the 1950’s. is a practical and useful tool for modeling and quantifying risk. it is the theory of modeling and measuring events which occur with very small probability. this implies its usefulness in risk modeling as risky events per definition happen with low probability. this theory shows that the probability on very large losses is eventually governed by a simple function, regardless the specific distribution that underlies the return process. . 3. research methodology this study adopts the correlation research design. the data were obtained from secondary sources through the firm’s audited annual reports. the population of the study consists of the twenty five (25) listed insurance companies in nigeria as at 31st december 2016 (nse, 2016). the sample size is twelve (12) over the period 2011 to 2015. this study relied on the use of judgemental sampling techniques which is based on the availability and accessibility of data. multiple regression techniques were used for the analysis through the use of stata 13.0. the model encapsulates the contribution of leverage, claim loss ratio and premium growth on the firm www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 48 performance given as; roait= β0it + β1lvit + β2clit + β3pgit + εit where, return on asset (roa) are measure as firm performance, β0 = constant, β1… β3 = the slope which represents the degree in which financial performance changes as the independent variable change by one unit variable., lv = leverage, cl = claim loss ratio, pg= premium growth, ε = error term, t = measure of time, i = number of insurance firm observation. where: return on asset (roa) = profit before tax/total asset leverage (lv) = total liabilities/total asset loss ratio (clr) = net claims incurred/ net earned premiums premium growth (pg) = current premium–previous premium/previous premium 4. result and discussions this section presents the result of data analysis and tests of hypotheses formulated earlier in the paper. first, descriptive statistics, followed by the correlation matrix table and then the summary of regression result are presented and analyzed. table 1: descriptive statistics variables no of obs minimum maximum mean standard dev. roa 60 0.2142 0.2228 0.03353 0.0643 leverage 60 0.1351 1.2628 0.56816 0.2254 claim loss ratio 60 0.1918 1.5808 0.3942 0.1882 premium growth 60 -0.5025 1.4187 0.1467 0.3012 sources: output of stata13 result table 1 above presents the descriptive statistics for all the variables of the study. from the description, it is observed that for the sampled firms and for the period covered by the study, the average value for financial performance (roa) is 0.3353 with standard deviation of 0.6143 which is very far to the mean. the mean value leverage (lv) of 0.568 or 57% is an indication that debt financing in the insurance sector is to the tune of 57% of the total finance sources. the remaining 43% are sourced from asset financing. the claim loss ratio has minimum and maximum value of 0.19 and 1.58 respectively with the mean value of 0.3935 and standard deviation of 0.1882. therefore, there exists a moderate variation among the value of loss ratio across the sample insurance companies included in this study. premium growth has an average mean value of 0.1467 and standard deviation of 0.3012 with a minimum and maximum are -0.5025 and 1, 4186. table 2: correlation matrix table variables roa lv clr pg roa 1.0000 lv -0.4197* 0.0008 1.000 clr -0.1191 0.3649 0.1706 0.1925 1.0000 pg 0.2142 0.1004 -0.1171 0.3730 -0.3138* 0.0146 1.0000 sources: output of stata13 result www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 49 table 2 above captures the correlation values between the independent variables and dependent variable as well as among independent variables themselves. from the table it is revealed that leverage is significant negative related with roa, also there exist insignicant and negative association between claim loss and return on asset. this implies that the higher the claim loss the lower the return on asset and vice versa. furthermore, roa is however positively correlated with premium growth and insignificant, this implies that the higher the premium growth the higher the return on asset. the correlation matrix also revealed that no two explanatory variables were perfectly correlated. this means that there is the absence of multicolinearity problem in the model. 4.1 regression diagnostics tests the value of fstatistics of 9.73 (p-0.0210) is significant at 5% level of significance. this indicates that the model is fit and the explanatory variable are properly selected, combined and used. the results of the vif further prove the absence of perfect multicollinearity among the independent variables, because the mean variance inflation factor (vif) is 1.09. the rule of thumb is that a value of vif of 10 and above is a suggestion of multicolinearity among the explanatory variables (gujarati, 2004). breusch-pagan / cook-weisberg test for heteroskedasticity revealed homoskedastic results (prob > chi2 = 0.0602). besides ramsey reset (regression specification error test) test was performed for model specification and the results show the model has no omitted variable (prob > chi2 = 0.1434). 4.2 the regression result table 3 below is the regression result of the random effect model. the model was selected for interpretation because the hausman specification test favors the random effect model with, probability of 0.3062 which is not significant at 5%. the cumulative r2 of 0.1970 is the multiple coefficient of determination which shows the percentage of the total variation in the dependent variable explained by the independent variable together. therefore, it indicates that 20% of total change in operating performance of quoted insurance companies in nigerian is explained by their level of leverage, claim loss ratio and premium growth. table 3: summary of regression result – random effects model variables coefficient t-value p-value vif 1/vif constant 0.967694 3.34 0.001 leverage -0.0997178 -2.43 0.015 1.03 0.966417 claim loss ratio -0.0253039 -0.59 0.553 1.13 0.883331 premium growth 0.0231079 0.95 0.344 1.11 0.897344 mean vif 1.09 hausman ch2=3.61 pro>chi2=0.3062 r2 (overall) 0.1970 f-statistics fstat=9.73 p>f=0.0210 ramsey test f=1.88 p>f=0.021 source: stata output result** significant at 5% test of hypothesis and policy implication there is no significant effect for leverage on return on asset. it was found that the beta coefficient (β) of -0.0997178 and ρ=0.015 at 5% level of significant. this implies that an increase in the liabilities by 1% will lead to decrease in the performance of the study insurance firm by 9%. the result suggested that the insurance firms should properly manage their liabilities in order to avoid future insolvency or liquidation. thus, it can be www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 50 concluded that insurers with high leverage (using leverage beyond a level) will have adverse impact on the profitability. this finding is against the study results of (charumati, 2012). the study therefore provides evidence to reject the null hypothesis. hence, there is a significant negative relationship between insurance leverage and return on assets. claim loss ratio has no significant effect on the return on assets. the claim loss ratio has a beta coefficient of 0.0253039 with a p-value of 0.553 which is insignificant at 5% level. this implies that for every 1% increase of claim loss ratio, return on assets of insurance companies in nigeria will decrease by 3%. the study is supported by (saeed & khurram, 2015). this provides evidence for us to accept the null hypothesis and conclude that claim loss ratio has negative and insignificant effect on return on assets of listed insurance firms in nigeria. finally, premium growth has no significant effect on the return on assets. the computed value of beta coefficient is 0.0231079 with p-value of 0.344; therefore, premium growth has a positive relationship with return on assets and is found to be statistically insignificant. this implies that an increase in premium growth by 1% will result to 2% increase in return on asset. this indicate that the higher premium growth over the study period, the better the returns on asset and this increase in the insurance firms profitability is at a marginal level. this result is in line with the findings of ((mehari & aemiro, 2013). this provides evidence for us to accept the null hypothesis and concluded that the premium growth has no significant effect on return on assets. 5. conclusion and recommendation in this study, the empirical analysis of examining the effect of liquidity risk on the performance of insurance firms in nigeria was conducted using a panel data set consisting of financial data of twelve insurance companies over the period of 2011 to 2015. the results of panel multiple regression analysis revealed that leverage are negative and statistically significant to explain performance of insurance companies in nigeria. claim loss and premium growth have no a statistical significant relationship with performance of insurance firms in nigeria. the result of the study also shows that insurance firms claim loss was negatively related to performance (roa) while premium growth were positively related to insurance performance. the researcher therefore recommends that there is need to invest on measures to curb liquidity risk in these companies in order to have a sound financial performance and manage properly the leverage of the insurance companies. these risks can be avoided by ensuring correct and effective measures are in place. potential investors, shareholders and managers should monitor the leverage, claim loss levels and the growth of firm’s premium they intend to invest in, so as to check whether they are questionable or favorable. this will help these investors in making wise investment decisions. this will benefit investors to take advantage on the investment opportunities available when these variables vary. while this study provides some insights of the study variables, the implications of the new liquidity frameworks proposed by the study warrants further research. references ahmed, n., ahmed, a., & usman, a. (2011). determinants of performance: a case of life insurance sector of pakistan. international research journal of finance and economics (61), 123-128. ali, f. a., mohammed, s.b., & amer, m.a.,( 2015), corporate governance, firm attributes and financial performance of saudi listed banks. world review of business research, 5 (3). agnes, w k., (2013) relationship between firm characteristics and financial performance of life insurance companies in kenya. unpublished master of science in finance, university of nairobi. ail, n., tabari, y., ahmadi, m., & emami, m. (2013). the effect of liquidity risk on the performance of commercial banks. international research journal of applied and basic sciences, 4(6), 1624–1631. cucinelli, d. (2013). the relationship between liquidity risk and probability of default: evidence from the euro area. risk governance and control: financial markets and institutions, 3(1), 42–50. www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 51 charumati, b (2012). on the determinants of profitability of indian life insurance. an empirical study, proceedings of the world congress on engineering. vol.1. london uk. (www.iaeg.org/publications/wae2012). daare, w. j. (2016). determinants of non-life insurance companies profitability: an empirical study in india. international journal of innovative research and advanced studies, 3(13). ferrouhi, e. m. (2014). bank liquidity and financial performance: evidence from moroccan banking industry. business: theory and practice, 15(4), 351–361. hossein, m., dezfouli, k., hasanzadeh, a., & shahchera, m. (2014). inspecting the effectiveness of liquidity risk on banks profitability. kuwait chapter of arabian journal of business and management review, 3(9), 191–207. kamau, f & njeru, a. (2016). effect of mergers on financial performance of firms listed at the nairobi securities exchange. international journal of science and research (ijsr) issn, 5(10), 867–872. https://doi.org/10.21275/art20162288 kambi, r., & ali, a. i. (2016). effects of financial risk management practices on financial performance of listed banks at the nairobi securities exchange in kenya. the international journal of business & management, 4(4), 19–36. mehari, d., & aemiro, t. (2013). firm specific factors that determine insurance companies’performance in ethiopia. european scientific journal, 9(10), 245–255. retrieved from http://eujournal.org/index.php/esj/article/view/961 muriithi, j. g., & waweru, k. m. (2017). liquidity risk and financial performance of commercial banks in kenya. international journal of economics and finance, 9(3), 256. https://doi.org/10.5539/ijef.v9n3p256 nikhik b, kingshuk i, r. m. (2015). factor determining financing performance of life insurance companies of india-an empirical study. epra international journal of economic and business review, 2(8), 42–48. o a, yahaya & lamidi, y. (2015). empirical examination of the financial performance of islamic banking in nigeria : a case study approach. international journal of accounting research, 2(7), 1–13. otieno, s., & nyagol, m. (2016). empirical analysis on relationship between liquidity risk management and financial performance of microfinance banks in kenya. research journal of finance and accounting, 7(6), 115–142. saeed, u., & khurram, n. (2015). factors influencing the financial performance of non-life insurance companies of pakistan. international journal of empirical finance, 4(6), 354–361. appendix sample nigeria insurance firms 1. consolidated hallmark insurance plc 2. aiico 3. continental reinsurance plc 4. cornerstone insurance plc 5. great nigeria insurance plc 6. guinea insurance plc 7. international energy insurance plc 8. niger insurance plc 9. sovereign trust insurance plc www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 52 10. equity assurance plc 11. mutual benefits assurance plc 12. lasaco assurance plc prob > f = 0.1434 f(3, 53) = 1.88 ho: model has no omitted variables ramsey reset test using powers of the fitted values of roa . ovtest prob > chi2 = 0.0602 chi2(1) = 3.53 variables: fitted values of roa ho: constant variance breusch-pagan / cook-weisberg test for heteroskedasticity . estat hettest mean vif 1.09 lv 1.03 0.966417 pg 1.11 0.897344 clr 1.13 0.883331 variable vif 1/vif . estat vif _cons .0902449 .0254104 3.55 0.001 .0393417 .141148 pg .0342411 .0256712 1.33 0.188 -.0171845 .0856668 clr .0006341 .041422 0.02 0.988 -.0823442 .0836124 lv -.1091059 .033051 -3.30 0.002 -.1753149 -.0428968 roa coef. std. err. t p>|t| [95% conf. interval] total .222649409 59 .003773719 root mse = .05626 adj r-squared = 0.1611 residual .1772759 56 .003165641 r-squared = 0.2038 model .045373509 3 .015124503 prob > f = 0.0049 f( 3, 56) = 4.78 source ss df ms number of obs = 60 . regress roa lv clr pg 0.1004 0.3730 0.0146 pg 0.2142 -0.1171 -0.3138* 1.0000 0.3649 0.1925 clr -0.1191 0.1706 1.0000 0.0008 lv -0.4197* 1.0000 roa 1.0000 roa lv clr pg . pwcorr roa lv clr pg, sig star(5) pg 60 .1467467 .3012165 -.5025 1.4187 clr 60 .3942 .1881533 .1918 1.5808 lv 60 .56816 .2254438 .1351 1.2628 roa 60 .03353 .0614306 -.2142 .2228 variable obs mean std. dev. min max . summarize roa lv clr pg . *(6 variables, 60 observations pasted into data editor) unable to check for update; verify internet settings are correct. http://www.stata.com did not respond or is not a valid update site host not found (contacting http://www.stata.com) checking for updates... 2. new update available; type -update all 1. (/v# option or -set maxvar-) 5000 maximum variables notes: kaduna licensed to: lasisi serial number: 501306208483 3-user 8-core stata network perpetual license: 979-696-4601 (fax) 979-696-4600 stata@stata.com 800-stata-pc http://www.stata.com mp parallel edition college station, texas 77845 usa 4905 lakeway drive statistics/data analysis statacorp ___/ / /___/ / /___/ 13.0 copyright 1985-2013 statacorp lp /__ / ____/ / ____/ ___ ____ ____ ____ ____ (r) www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 53 . prob>chi2 = 0.3062 = 3.61 chi2(3) = (b-b)'[(v_b-v_b)^(-1)](b-b) test: ho: difference in coefficients not systematic b = inconsistent under ha, efficient under ho; obtained from xtreg b = consistent under ho and ha; obtained from xtreg pg .014728 .0231079 -.00838 .0083378 clr -.0650551 -.0253039 -.0397512 .0262091 lv -.0549078 -.0997178 .04481 .0602361 fixed random difference s.e. (b) (b) (b-b) sqrt(diag(v_b-v_b)) coefficients . hausman fixed random . estimates store random rho .21166216 (fraction of variance due to u_i) sigma_e .05031314 sigma_u .02607035 _cons .0967694 .029001 3.34 0.001 .0399286 .1536103 pg .0231079 .0244115 0.95 0.344 -.0247378 .0709537 clr -.0253039 .0426725 -0.59 0.553 -.1089404 .0583327 lv -.0997178 .0410809 -2.43 0.015 -.1802349 -.0192006 roa coef. std. err. z p>|z| [95% conf. interval] corr(u_i, x) = 0 (assumed) prob > chi2 = 0.0210 wald chi2(3) = 9.73 overall = 0.1970 max = 5 between = 0.3500 avg = 5.0 r-sq: within = 0.0859 obs per group: min = 5 group variable: firm number of groups = 12 random-effects gls regression number of obs = 60 . xtreg roa lv clr pg, re delta: 1 unit time variable: year, 2011 to 2015 panel variable: firm (strongly balanced) . xtset firm year . estimates store fixed f test that all u_i=0: f(11, 45) = 2.28 prob > f = 0.0262 rho .36049328 (fraction of variance due to u_i) sigma_e .05031314 sigma_u .03777526 _cons .0882098 .0413802 2.13 0.039 .0048658 .1715539 pg .014728 .0257962 0.57 0.571 -.0372282 .0666841 clr -.0650551 .0500785 -1.30 0.201 -.1659185 .0358083 lv -.0549078 .0729111 -0.75 0.455 -.2017583 .0919427 roa coef. std. err. t p>|t| [95% conf. interval] corr(u_i, xb) = 0.0610 prob > f = 0.1828 f(3,45) = 1.69 overall = 0.1372 max = 5 between = 0.1880 avg = 5.0 r-sq: within = 0.1012 obs per group: min = 5 group variable: firm number of groups = 12 fixed-effects (within) regression number of obs = 60 . xtreg roa lv clr pg, fe delta: 1 unit time variable: year, 2011 to 2015 panel variable: firm (strongly balanced) . xtset firm year copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). contents american finance & banking review vol. 1, no. 1; 2017 published by centre for research on islamic banking & finance and business 34 an investigation of the students attitude towards introductory computer course at bauchi metropolitan universities: an undergraduates survey ibrahim aliyu gololo1 1accounting department, faculty of social and management science, bauchi state university gadau, nigeria correspondence: accounting department, faculty of social and management science, bauchi state university gadau, bauchi, nigeria, tel: +234 8036312938, e-mail: aliyugololo2@gmail.com received: september 25, 2017 accepted: september 28, 2017 online published: october 01, 2017 abstract this study investigates the students‟ attitude on the introductory computer course at bauchi metropolitan university. bauch state is one of the 36 states in nigerialocated in the north east region of the country with only two public universities, atbu and basug. inboth universities it is mandatory for students to undertake introductory computer course in their first year entry to the university and this research was conductedwith the aim to find out the students attitude toward the computer course as part of the requirement to their studies. this study uses a sample of 300 undergraduate students (male=188, female=110) students. primary data were utilized where questionnaire was employ as the tool of data collection. computer attitude related questionnaire was developed and administered to the respondents and retrieved. frequencies and percentages was used to analyzed the respondents demographic information and questions asked while the chi-square x2 analysis was employ to test the stated hypothesis. the result of this study shows that students had positive attitude toward introductory computer course as the calculated chi-square x is 0.253 which is less than the tabulated chi-square x of 3.841i.e. x <x therefore the study conclude that students had significant and positive attitude toward introductory computer course at bauchi metropolitan university and we recommends that priority attention in terms of computer practical session should be given to students to increase their likeness of the computer and adequate arrangements should be made by universities to ensure students have access to computer and the internet whenever needed within the campus area and this will also mould a positive attitude for students. keywords: computer, attitude, universities, metropolitan, bauchi. an investigation of the students attitude towards introductory computer course at bauchi metropolitan universities: an undergraduates survey ibrahim aliyu gololo 35 1. introduction intodaymodern worldit is becoming imperative for students to understand how computer works and assist in the area of everyday learning. it is an obviousthat the traditional context of teaching and learning is experiencing a radical change due to the advent of information technology. student‟s nowadays regardless of their course of study need to acquaint themselves with elementary computer knowledge especially those in the fields of general sciences, management, social sciences and languages etc. therefore, it is essential and necessary for undergraduate‟s students to become computer literate because of the stringent requirements of some employers of labour as a precondition for successful employment ticket. the same way, the knowledge is necessary also for socialisation and professional careerdevelopment and achievement. for this reason education, being an important factor in society development plays an essential role in addressing the issue of computer literacy. therefore, the knowledge of computer is of paramount importanceand cannot be disregarded mohd et al [(2007]. as we notice the concrete role computers plays in the society, prioties have been accorded to computer skills by universities, colleges, polytechnics, business organizations, government ministries, parastatals and agencies (mda‟s) as well as secondary schools. computer has the capacity to accept data as input, process the data and give out result or information as output. similarly, computers provide work speed, work efficiency, work power and removal of human error from work activities. with this brief explanation we understand that human activities now demands computer knowledge and skills in almost all endeavors. this knowledge and skills required in most human activities ranging from shopping to working, e-commerce, e-voting, e-governance etc.this pave way why right from secondary to tertiary levels of education learners are exposed to computer education. [osman & alfred 2014]. however, the introductory computer course in universities was mainly developed to introduce students to elementary concepts of computers such as history/evolution of computers, software and hardware, computer organogram, computer flowcharting, computer arithmetic and computer data capture, data validation and data transmission and the introduction to internet usage etc. while computers make it easy for both learning and business activities to be conducted. student‟s attitudes on the other hand are also an important point to be considered for the success in making students to understand how to use computer. according to oxford dictionary, the word “attitudes” refers to someone state of mind. that is to say someone state of mind toward something. all the same, bebetsos & antoniou [2013] sees attitudes as a personal factor as one‟s positive or negative judgments about a concrete subject. on the other hand, aizen [1988] specifies the word „attitude‟ as an inclination which can be taught and can make people react to a matter either in a positive or negative way. attitudes can be taught either through imminentexperience or by other people. many authors discussed about students attitudes to learning because of the fact that attitude is the major determining factor in predicting people behaviours [yushau 2006]. undoubtedly we can rightly say that attitude reflect the way people think of, feel and intend to react under certain circumstances. therefore, this research work sees attitudes as a paradigm or a reflection of someone feelings toward something. the primary purpose of this article is to ascertain undergraduates students attitudes toward learning introductory computer course at universities normally at their first year of one hundred level entry. 1.1. objectives of the research this research paper intends to achieve the following objectives  what are the undergraduate students‟ attitudes toward introductory computer course an investigation of the students attitude towards introductory computer course at bauchi metropolitan universities: an undergraduates survey ibrahim aliyu gololo 36  to determine the students interest on the introductory computer course  to access how the computer knowledge will assist undergraduate students on their learning activities  to access how the computer knowledge will be beneficial to the students before and after school graduation. 1.2 problem statement obviously computer knowledge is universally becoming a necessity in this modern technological age because of the changes in business and organizational environment. students at tertiary institutions need to embrace computer with positive attitude and seriousness. learning introductory computer course at university demands positive attitude from students, however, a common problem observed is the negative attitudes of students towards computer. so also unseriousness, lack of interest and taking the course for granted are reasons that prompted this research article and therefore the need to investigate the students attitudes toward introductory computer course at bauchi metropolitan universities. 1.3 research questions the following research questions have been formulated  does an introductory computer course change a student attitude toward learning computer?  does student interest and view change a person attitude toward computer?  does a teacher efficacy change a student attitude toward computer?  does o‟ level school attended affect a student attitude toward computer? in this paper we seek to shed more light on the issue of whether student‟s attitudes and introductory computer course have any relationship. to achieve this null and alternate hypothesis are developed. h0: undergraduate students‟ have negative attitude toward introductory computer course. h01: undergraduate students have positive attitude toward introductory computer course. the rest of the paper will be in the following order. section two is the conceptual and theoretical framework, followed by section three which is methodology, and sections four and five are data analysis and discussion, conclusion and recommendations. 2. theoretical framework 2.1 the concept of computer in today global environment computers have changed the way business and government activities had been carried out. irrespective of course of studies, all students will need to know how to work with computer and learn the basic computer softwares such as ms word, ms excel and ms power point. for students to become computer knowledgeable, a computer course is normally introduce in the two bauchi metropolitan universities for all first year entry students as a general and compulsory course. this course are been made part of the rigorous training that each student is required to partake and may help the students to secure quality employment in his/her field after graduation. computer refers to an electronic device capable of accepting input(data) process the input and give the output(information) as a result of that processing under some programs stored.in a similar vein, it can also be seen as an electronic device that can perform a variety of operations in accordance with a set of instructions called programme(aisha 2015). it accepts data from the user, converts the data into informationand gives the desired result. different problems requires different solutions of computer, therefore, this research work view computer as an electronic machine that is defined in terms of its functions. computer is better than human due its high processing power, versatility, speed, accuracy etc it can execute huge volume of activities within a shortest possible time. these an investigation of the students attitude towards introductory computer course at bauchi metropolitan universities: an undergraduates survey ibrahim aliyu gololo 37 features are what make businesses to embrace the use of computers in day to day activities. it is obvious that computers have been apply in many field effectively to assist solve complex problems. recently, modern day computers have made their presence felt in industry and government business in the area of economic planning and forecasting (reference). 2.2 the concept of attitude attitude is a determining factor in predicting people behaviors [yushau 2006]. attitude refers to someone state of mind toward something, or the way a person react/ behave toward a particular thing.kassin(2008) defines attitudes as relatively enduring beliefs or opinions that predispose people to act in a positive, negative, orambivalent way to a person, object, or idea. it is a beliefs tha influence the action of a person toward something. attitude also refers to an inner psychic state influencing behaviour (diana, gediminas & gintaras 2005). therefore, we can understand an inner state from actions and words. for instance, we may presume that a person actively avoiding a computer has a negative attitude towards it and a person that likes to work with computer has a positive attitude toward it. attitudemainly depends upon a person experience and its change is possible due to the internal and external factors. however, attitude play an important role in determining student behaviour toward an introductory computer course and this research work will investigate the student‟s attitudes toward learning the introductory computer course at bauchi metropolitan universities. 2.3 the relevant of computer knowledge to human activities computer is an information processor capable of performing some computations, including numerous arithmetical and logic operations without human intervention [hamid k.t 2014].computer knowledge is a critical factor which should not be disregarded mohd et al (2007).globally the knowledge of computer is essential in all aspect of business transactions and its role in making business activities easy cannot be overemphasized. therefore, for students to be relevant in today labour market they need to acquired basic computer knowledge. it is a fact that the world itself is becoming technologically derived [osman & alfred 2014] in this information and technology age, job requirements are changing and employees need to develop skills andcompetencies required by the job market (nsiah-gyabaah, 2011). senzige and sarukesi (2001) contend that the globaleconomy is becoming a network and knowledge-based economy and that the computer knowledge gaps contribute to the economic gaps. nowadays, a lot of human activities such as e-commerce, e-learning, e-voting, e-shopping, e-booking etc are carried out through the use of computers. we understand that people who possess computer knowledge are tending to understand the economy better. as a result of increasing needs of computer in most human endeavors education area is not left out as monotonous work, tiredness and other associated clerical problems in business environment since the introduction of computer these problems are minimized (reference).therefore, in today business arena, no business can survive without the use of computer. computers play an important role in many areas for instance in the area ofeducation, it support and facilitate research, reading, teaching and learning [2015] writing, listening and speaking activities.in addition, computerscontribute beneficially to learning and development [trundle, & bell, 2011]. in the area of science and technology, robotics and nucleartechnology is of good example as computers replace a lot of manual functions in industries. in the same vein in the area of financial sector, information technology renders a helping hand through computers to the financial institutions and so also in the area of environmental management, metrological information are easily gotten with the use of computers. an investigation of the students attitude towards introductory computer course at bauchi metropolitan universities: an undergraduates survey ibrahim aliyu gololo 38 based on theseactivities the importance of computer skills has long been a topic of concern for business firms, governments, schools, colleges and universities.much of the concern arises because of the importance effective computer knowledge to the sectors. technology provides us to know and follow all issues with keen interest through computers [isman et al 2004]. there is a concrete role of computer technology in the society and schools as they provide work speed, work efficiency, work power and removal of human error from work activities. with these it is obvious that computers render a helping hand to ease day-to-day humanactivities. 2.4 background of the bauchi metropolitan universities bauchi state is a one of the state in nigeria situated in the north east region of the country with vast and arable land area of about 54,926 sq. km and a population of about 9,000,000 million people approximately. the state is blessed with natural resources especially non-minerals deposit and recently a mineral deposit was discovered in the state. bauchi state has been blessed with two universities namely abubakar tafawa balewa univeristy [atbu] and bauchi state university gadau [basug]. the atbu is located in the bauchi metropolyan approxiamately has a xxx of students while the basug is operating multiple campus with its main campus located in gadau town, itas gadau local government area of bauchi state and a law faculty in misau and management and social sciences faculty located in the capital city of bauchi state. however, the two universities offered introductory computer course irrespective of student course of study in their first year entry students to acquaints the students with the reality of the modern teaching and learning and to prepare the to be competitive after graduation. therefore, this research considered it necessary because of the importance of computer knowledge to society to investigate the undergraduate students‟ attitudes towards learning this introductory computer course at the two universities. 2.5 introductory computer course at bauchi metropolitan universities computer is an advanced electronic device that takes raw data as input from the user and processes these data under the control of set of instructions [called program]and gives the result [output] and saves output for the future use [hamid k. t. 2014]. the introductory computer course at bauchi metropolitan universities was introduced mainly to brace up students to appreciates the computer knowledge and to primarily prepared them to embrace the penetration of information technology in the area of research, teaching and learning and most importantly to prepare them with the realitiesof what is obtainable in the working place either private, government or non-governmental organization after graduation. this course is therefore, designed to introduce students to the definition and historical development of computer and its application in business, types and categories of computers, computer storage, memory, input and output devices, computer application in business world, pure sciences and management sciences, data capture, data transmission and validation, introduction to microsoft word, excel and introduction to internet, payroll and accounting system and sales process applications and system analysis and design. based on these areas to be covered in this course, it is therefore, expected that on completion of the course, students should be able to:  understand the definition of computer; understand the historical development of computer.  know the why and how of computers.  know the different types of computers and their uses and application in business and sciences.  understand computer storage, input and output devices.  understand data capture, transmission, nature, validation and error detection.  appreciate the applications of computer in accounting and finance. an investigation of the students attitude towards introductory computer course at bauchi metropolitan universities: an undergraduates survey ibrahim aliyu gololo 39  understand transaction data, master data, payroll and accounting system.  understand data transmission, nature and speed of computer.  understand how to work with microsoft word and excel, know sales process applications like pos and online sales processing and understand system analysis and design. 2.6 review of empirical studies on the computer and attitudes table 1: summary of some empirical studies on the computer and attitude author(s)/date country title of the study & scope research methodology major variables used significant findings isman et al [2004] turkey attitudes of students toward computers [2002-2003] survey questionnaire students characteristics and students perception positive attitude toward computers kitchakarn o. [2015] thailand learners‟ attitudes towardsusingcomputer s as a learning tool in language learning survey questionnaire students perceived abilities and students gender positive attitudes towards using computers as learning tool. magesh g. [2016] vellore a review paper: student attitude towards computer science [1997-2015] descriptive statistics media in education & human-computer interface the review found that majority of the students had positive attitude towards computer science subjects osman& alfred [2014] ghana understanding student attitude towards computer education: a survey of shs in the sunyani municipality survey questionnaire gender, access to computer femalestudentsde monstrate more positive attitudes toward learning of ict than their male counterparts & majority of the students do not have access to computers at home santillan et al [2013] mexico attitude and behavioral among students, computers survey questionnaire & correlation gender procedency & age computer help to understand students attitudes an investigation of the students attitude towards introductory computer course at bauchi metropolitan universities: an undergraduates survey ibrahim aliyu gololo 40 and mathematics: (a case study in publicuniversity) matrix toward mathematics diana, gediminas & gintaras [2005] dublin students' attitudes towards computer: statistical types and their relationship with computer literacy survey questionnaire student and computer & student and studies the study data has revealed that students having formed a positive contact with a computer usually demonstrate higher computer literacy level, whereas persons expressing a negative attitude are of lower computer literacy level. amoo, hambali, & amoo [2013] nigeria students' learning attitudes toward computer studies: astudy of schoolnet, nigeria. survey questionnaire bio data & computer attitude scale all the students had positive attitudes to computer studies chun-chu liu [2012] taiwan factors that influencestudentslearn ing attitudes toward computer courses for technology and vocational institute students in taiwan survey questionnaire internal learning motivators (interest, employment& trend) & external learning environments(hom e &school) the results shows that the interest motivation & the schoolenvironment , employment, had direct most significant effect on subjects‟ learning attitudes & trend variables has a negative effect colin & barbara [2013] rzeszow an examination of students‟ attitudes and directsurvey, observations computer competency the results confirm that an investigation of the students attitude towards introductory computer course at bauchi metropolitan universities: an undergraduates survey ibrahim aliyu gololo 41 preparedness for the introduction of ict-enabled learning at university & spearman rank order correlation rho students with a higher appraisal of their competence were more positively inclined towards a wider use of ict than those with lower levels of competence. bebetsos& antoniou [2013] greek university students differences on attitudes towards computer use. comparison with students attitudes towardsphysical activity the questionnaire, diary on computer attitude scale computer emotion perceived usefulness perceived control computer behavioural the result shows that there were statistical significant differences on two variables due to gender, perceived usefulness and affective. more specifically, men were more positive to use computers than women. hong, ridzuan & kuek [2003] malaysia students' attitudes toward the use of the internet for learning: a study at a university in malaysia t-test one way anova basic internet knowledge. learning environment results from the study indicated that students had positive attitudes toward using the internet as a learning tool taragola & lierde [2015] belgium adoption of computers, internet and accounting software at the glasshouse holdings of the belgian farm accountancy data network personal interview & questionnaire age educational computer training personal objective firm type business goals adoption of internet, computers and accounting department is positively related to computer training of the firm manager, creativity an investigation of the students attitude towards introductory computer course at bauchi metropolitan universities: an undergraduates survey ibrahim aliyu gololo 42 and innovation, growth stabilisation and negatively related to intrinsic objectives. barrier & margavio [2014] usa pretest-posttest measure of introductory computer students attitudes toward computers descriptive statistics correlation analysis computer skills no prior computer experience prior computer experience students have a more negative attitude toward computers after taking an introductory class now than before kofi ayebi arthur (2010) cape coast to investigate if statisticalrelationshipex isted between academicachievement andachievement of studentsin ict spearman correlation, means, standard deviation andmultiple regression analysis academic achievement & achievement ofstudents in ict this study found both setof students showed positive attitudes toward ict source: researcher findings [2017] 3. researh methodology 3.1 research design and instrument this study used survey research design; primary data were obtained from the respondents by using survey questionnaire. the researcher with the help of the students administered the questionnaire and it was designed in two sections, the first section is demographic section and the second one carries general questions pertaining computer studies and attitudes towardcomputer. the questionnaire were designed witha 5-point likert scale (5 = strongly agree; 4 = agree; 3 =undecided; 2 = disagree; 1 = strongly disagree) to determine students agreement with each statement on the questionnaire. however, data obtained from the respondents were analyzed using the chi-square method and percentage analysis and the rationale of using percentage to further analyze the data was very much emphasize by asika (2004). the survey questionnaire was administered toward the end of the semester to observe if there is achange in the undergraduate students attitudes toward computers because in the bauchi metropolitan universities (bauchi state university &abubakar tafawa balewa university) it is compulsory for all new intake students at their first year of entry to offer introductory computer course in the universities. 3.2 population and sample of the study the target populations for this study includes all the undergraduate students at bauchi metropolitan universities that are offering introductory computer course and a convenience sampling technique was adopted were 50 an investigation of the students attitude towards introductory computer course at bauchi metropolitan universities: an undergraduates survey ibrahim aliyu gololo 43 students were selected (25 students from bauchi state university gadau and 25 students from abubakar tafawa balewa university bauchi. 4. analysis and results 4.1 analysis of respondents according to personal information table 2: descriptive statistics of respondents personal information frequency [298] percentage [%] sex male 188 62.6 female 110 36.6 department accounting 22 7.33 business administration 26 8.67 agriculture 18 6.00 engineering 21 7.00 environmental 20 6.67 education 40 13.33 economic 25 8.33 public administration 25 8.33 political science 33 11.00 medical sciences 7 2.33 mathematics 10 3.33 religious studies 20 6.67 sociology 31 10.33 university a.t.b.u 148 49.33 basug 150 50.00 computer ownership yes 95 31.67 no 67 67.00 years of comp experience 1-2 48 16.00 3-4 36 12.00 5-6 10 3.33 7-8 6 2.00 9-10 0 0.00 10 and above 0 0.00 source: [raw data questionnaire 2017] from the descriptive table above, it can be deduced that [188] respondents are male which represents [62.6%] while [110] respondents are female which constitutes [36.6%] this shows that there are more of male students in the both universities [a.t.b.u & basug] than female students and this is because of the number of male that an investigation of the students attitude towards introductory computer course at bauchi metropolitan universities: an undergraduates survey ibrahim aliyu gololo 44 tends to pursue degree qualification more than the female ones. however, looking at the departments the education is having the highest respondent which is 40 and this represents [13.33%] and medical sciences is having the least which 7 respondents and this is only [2.33%] of the respondents. the a.t.b.u respondents were only able to return 148 filled questionnaire with [49.33%] of the total respondents and the basug respondents filled and returned all with 150 that constitutes [50%] of the respondents. conversely respondents with computer ownership occupy [31.7%] and those with those with no computer ownership constitute about [67%].this shows that majority of the students do not possesses personal computer. lastly respondents with 1-2 years of computer experience are having the highest percentage as [16%] while no students is having computer experience of up to 9-10 years, this tells us that all the students access are having computer experience of only 1-6 years. 4.2 presentation and analysis of data from research questionnaire 4.2.1 frequencies of individual items responses from the questionnaire indicating strongly agree, agree, undecided, disagree and strongly disagree were analyse and presented. table 3: frequencies and percentages of individual items on computer knowledge and attitude computer knowledge & attitude questions strongly agree agree undecided disagree strongly disagree f % f % f % f % f % do you think computer helps in your study 198 66 100 34 0 0.00 0 0.00 0 0.00 do you thing all students need to learn basic computer knowledge 150 50 148 49.6 0 0.00 0 0.00 0 0.00 do you love attending an introductory computer class 124 41.6 125 42 49 16 0 0.00 0 0.00 students have enough skills to use computer 50 17 100 34 25 8 123 41 0 0.00 students are interested to engage themselves with computers 74 25 100 34 75 25 49 16 0 0.00 do you think students use computers to do their academic assignment 75 25 223 75 0 0.00 0 0.00 0 0.00 computer knowledge increase students chances of findings 75 25 150 50 50 17 23 8 0 0.00 an investigation of the students attitude towards introductory computer course at bauchi metropolitan universities: an undergraduates survey ibrahim aliyu gololo 45 good job do you think students become successful in introduction of computer course 73 24 150 50 25 9 50 17 0 0.00 do you think students like to read computer related books 23 8 100 33 125 42 50 17 0 0.00 do you think students get good grade in introduction of computer course 50 17 100 33 25 9 100 33 23 8 do you take a long time to understand computer course 25 9 100 33 50 17 123 41 0 0.00 it is difficult for students to learn computers 23 8 50 17 100 33 75 25 50 17 every student should know how to use computer 125 42 98 33 25 8 0 0.00 50 17 students were engage in practical computer session in introduction to computer class 75 25 125 42 23 8 50 17 25 9 introductory computer course lecturers teach effectively and efficiently 75 25 198 66 25 9 0 0.00 0 0.00 computer is a reliable and effective way to obtain information and knowledge 198 66 50 16 25 9 25 9 0 0.00 proper and enough time have been allocated to introduction of computer class 123 41 50 17 25 9 100 33 0 0.00 i can do my research for resources and 148 50 125 42 25 8 0 0.00 0 0.00 an investigation of the students attitude towards introductory computer course at bauchi metropolitan universities: an undergraduates survey ibrahim aliyu gololo 46 information through computer computer lecturers regularly ask students to use computers at their free time 123 41 150 50 0 0.00 25 9 0 0.00 i can learn more things effectively about all subjects with the help of computers 173 58 100 33 0 0.00 25 9 0 0.00 source: [questionnaire survey 2017] 4.2.2 chi-square (x2) table 4: chi-square contingency table of ef (of-ef) (of-ef) 2 38 37 1 1 0.027 50 50 0 0 0.000 37 37.5 0.5 0.25 0.007 25 24.5 0.5 0.25 0.010 35 33 2 4 0.121 46 45 1 1 0.022 43 42 1 1 0.023 24 23 1 1 0.043 0 0 0 0 x =0.253 source:[questionnaire survey 2017] x2= x 0.253 x 3.841 @ (level of significance) =0.05 degree of freedom =1 3.841> 0.253 an investigation of the students attitude towards introductory computer course at bauchi metropolitan universities: an undergraduates survey ibrahim aliyu gololo 47 decision from the abovecalculated chi-square (x is 0.253 which is less than the tabulated chi-square (x i.e. x <x since the calculated chi-square is less than the tabulated chi-square we reject the null hypothesis which says undergraduate students‟ have negative attitude toward introductory computer course and accept the alternate hypothesis that says undergraduate students‟ have positive attitude toward introductory computer course. 5. conclusion and recommendation computer has the ability to make life simple in our day to day activities. positive attitude toward introductory computer course is the likeness of the course and keen interest in using computer while negative attitudes towards a computer includes students considering a computer as a source of weariness, stress, dissatisfaction.as the world is a competitive place university students‟ need to have basic computer knowledge irrespective of their course of studies.in bauchi metropolitan universities [atbu &basug]. it is mandatory for students to undergone an introductory computer course so as to equip students with basic computer skills and hence the need to ensure undergraduate students develop positive computer attitude and prevent students‟ from developing computer-hostile attitudes. based on the findings of this study we therefore, conclude that undergraduate students‟ at bauchi metropolitan universities shows positive attitude toward introductory computer course as such we can say there is positive and significant attitude by students toward introductory computer course at bauchi metropolitan universities and this result is in linewith the findings of norzaidi.et al [2007],amoo & hambali [2013], osman &alfred [2014], but however, contravene the result of barrier & margavio [2007]. this study recommends that students‟ should be given priority attention in terms of computer practical session to increase their likeness of the computer and proper and adequate arrangements should be made by universities to ensure students have access to computer and the internet whenever needed within the campus area and this will also mould a positive attitude for students. references aishatu, a.m (2017) exploring lecturers‟ perceptions of computer-based test in abubakar tafawa balewa university bauchi. unpublished m.sc thesis presented to the department of computer science for the award of mtech computer education in atbu bauchi. amoo, s.a, hambali m.a & amoo, o. a (2013) students‟ learning attitudes towards computer studies: a study of complete net, nigeria. published by research gate. available @ https://www.researchgate.net/publication/279537063 antoniou p. 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(eds.).workshop report 6.9901 pacioli 6 : models for data and data for models, enita bordeaux, france, lei-dlo, den haag, nederland, 128-138 trundle, s.m & bell, r. k (2011).young children's computer skills development from kindergarten to third http://www.ea-journals.org/ an investigation of the students attitude towards introductory computer course at bauchi metropolitan universities: an undergraduates survey ibrahim aliyu gololo 49 grade, computers &education, 57(2), 1698-1704. yushua, b. (2006). computer attitude, use, experience, software familiarity and perceived pedagogical usefulness: the case of mathematics professors. eurasia journal of mathematics, science, technology and education, 2(5), 1-7 copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. copyright © cc-by-nc 2019, cribfb | amfbr american finance & banking review; vol. 4, no. 1; 2019 issn 2576-1226 e-issn 2576-1234 published by centre for research on islamic banking & finance and business, usa 17 functional form for estimating the lorenz curve bijan bidabad b.a., m.sc., ph.d., post-doc. professor economics and chief islamic banking advisor bank melli, iran e-mail:bijan@bidabad.com behrouz bidabad faculty of mathematics polytechnics university, hafez ave tehran, 15914, iran e-mail:bidabad@aut.ac.ir abstract a flexible lorenz curve which offers different curvatures allowed by the theory of income distribution is introduced. the intrinsically autoregressive nature of the errors in cumulative data of the lorenz curve is also under consideration. keywords: lorenz curve, functional form, estimation, income inequality, distribution 1. introduction income distribution is often portrayed on a lorenz curve. in recent years some of its functional forms have been introduced. these forms should satisfy some definitional properties, and also make estimation of the function parameters by the known estimating methods simple. this note emphasizes on two other characteristics of the lorenz curve which have been neglected. first, the lorenz curve could be non-symmetric with respect to the line y=1-x, for 0≤x≤1. this enables that different lorenz curves cross the others which are the same in functional form and different in parameters for 0<x<1 (see e. e. hagen(2)). figure 1 shows this phenomenon by two different lorenz curves of a and b. y=1-x y=x x 100% 100% y b a figure 1. mailto:bijan@bidabad.com mailto:bidabad@aut.ac.ir copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 18 m. r. gupta (1) proposed the following definitional properties. the function y=f(x) represents the lorenz curve, if: (i) f(0) = 0 (ii) f(1) = 1 (iii) f’(x) ≥ 0 for 0≤x≤1 (iv) f”(x) ≥ 0 for 0≤x≤1 (v) f(x) ≤ x for 0<x<1 (vi) 0 ≤ ∫ 𝑓(𝑥). 𝑑𝑥 1 0 ≤ 1 2 it is obvious that (vi) is redundant; when (i) to (v) are satisfied. because by manipulating (i) to (v) we have: 0 ≤ f(x) ≤ x. by integrating this inequality, (vi) is derived: ∫ 0 𝑑𝑥 1 0 ≤ ∫ 𝑓(𝑥). 𝑑𝑥 1 0 ≤ ∫ 𝑥. 𝑑𝑥 1 0 or: 0 ≤ ∫ 𝑓(𝑥). 𝑑𝑥 1 0 ≤ 1 2 therefore property (vi) is always satisfied, and we need no more to test (vi) for any function which satisfies (i) to (v). let’s review the proposed functional forms: kakwani et al. (4): 𝑀 = 𝑎. 𝑁𝑙 (2 1/2 − 𝑁)𝑐 where 𝑀 = 𝑥−𝑦 21/2; 𝑁 = 𝑥−𝑦 21/2; a≥ 0; 0 ≤ l ≤ 1; 0≤ c ≤1 . this form does not satisfy all the properties. rasche et al. (5): 𝑦 = [1 − (1 − 𝑥)𝑎]1/𝑙 where 0≤ a ≤1; 0 ≤ l≤ 1. this form makes the estimation of the parameters by the least squares method difficult. gupta (1): 𝑦 = 𝑥. 𝐴𝑥−1 where a>1 this form satisfies definitional properties and simply can be estimated by ordinary least squares method; but by changing the parameter a (from ai to aj), the resulted functions (yi and yj) will never intersect for 0 < x < 1. to prove this, we can solve the following system: copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 19 { 𝑦 = 𝑥. 𝐴𝑖 𝑥−1 𝑦 = 𝑥. 𝐴𝑗 𝑥−1 solutions are x = y = 0 and x = y =1 which are not in the domain 0 < x < 1. 2. proposition this note suggests the following functional form which satisfies the definitional properties (i) to (v); and by changing its parameters, the resulting curves may cross each other: 𝑦 = 𝑥𝐵 . 𝐴𝑥−1 where b≥1; a≥1 for 0 < x ≤ 1 definitional properties satisfy as follows: (i) f(0) = 0 (ii) f(1) = 1 (iii) f’(x) = 𝑥𝐵−1. 𝐴𝑥−1 (b + x.loga) > 0 for 0<x<1 (iv) f’’(x) = 𝑥𝐵−2. 𝐴𝑥−1 [(b + x. loga)2 – b] ≥ 0 for 0≤ x ≤1 (v) f(x) = 𝑥𝐵 . 𝐴𝑥−1 = 𝑥𝐵 𝐴1−𝑥 ≤ 𝑥 for 0 < x < 1 different shapes of the function as y = 𝑥𝐵𝑖 . 𝐴𝑖 𝑥−1 and y = 𝑥𝐵𝑗 . 𝐴𝑗 𝑥−1 may have intersection for 0 < x < 1. by solving the following system: { 𝑥𝐵𝑖 . 𝐴𝑖 𝑥−1 𝑥𝐵𝑗 . 𝐴𝑗 𝑥−1 (1) we get: 𝑥−1 𝑙𝑜𝑔𝑥 = 𝐵𝑗− 𝐵𝑖 𝐿𝑜𝑔(𝐴𝑖 𝐴𝑗⁄ ) (2) it is obvious when (2) is satisfied; there is an intersection between two curves of (1). so if we solve the following system { 𝑥 − 1 = 𝐵𝑗 − 𝐵𝑖 𝑙𝑜𝑔𝑥 = log (𝐴𝑖 𝐴𝑗⁄ ) (3) we can find a relation in terms of 𝐴𝑖 , 𝐴𝑗 , 𝐵𝑖 and 𝐵𝑗 which satisfies (2). therefore: 𝐴𝑖 𝐴𝑗 ⁄ − 1 = 𝐵𝑗 − 𝐵𝑖 (4) hence, when 𝐴𝑖 , 𝐴𝑗 , 𝐸𝑖 and 𝐵𝑗 can satisfy equation (4), there is a solution (or intersection) for (1). but the intersection is inside the domain 0 > x > 1 when: by using (3) and (4) copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 20 { 0 < 𝑥 = 𝐵𝑗 − 𝐵𝑖 + 1 < 1 0 < 𝑥 = (𝐴𝑖 𝐴𝑗⁄ ) < 1 or: { 0 < 𝐵𝑗 − 𝐵𝑖 < 1 0 < 𝐴𝑖 < 𝐴𝑗 the second thing that has been ignored is the autoregressive nature of the errors in the lorenz curve data. on the other hand, when there is an error in the (𝑡 − 1)th percent of income earners, this error completely will transfer to the next cumulative percent (t). this is because of using cumulative data to estimate the lorenz curve. so if we define 𝑢𝑡 as disturbance term of the tth observation (cumulative percent), autoregressive specification of the error would be: 𝑢𝑡 = 𝑢𝑡−1 + 𝑉𝑡 with 𝑉𝑡 obeying classical assumptions of regression. therefore the stochastic form of our suggested functional form could be as follow: 𝑦𝑡 = 𝑥𝑡 𝐵 . 𝐴𝑥𝑡−1. 𝑒𝑢𝑡 (5) or: 𝑦𝑡−1 = 𝑥𝑡−1 𝐵 . 𝐴𝑥 𝑡−1−1 . 𝑒𝑢𝑡−1 (6) dividing (5) by (6) and taking natural logarithm: log( 𝑦𝑡 𝑦𝑡−1 ) = 𝐵. log ( 𝑥𝑡 𝑥𝑡−1 ) + 𝑙𝑜𝑔𝐴. (𝑥𝑡 − 𝑥𝑡−1) + 𝑢𝑡 − 𝑢𝑡−1 (7) since 𝑢𝑡 − 𝑢𝑡−1 = 𝑣𝑡 and e(𝑣𝑡 , 𝑣𝑡−1) = 0 the problem pf autoregression has been discarded and (7) can be estimated by ordinary least squares easily. references gupta, m.r. “functional forms for estimating the lorenz curve”, econometrica. 52(1984), 1313-1314. hagen, e.e. “the economics of development”. richard d. irwin, inc. homewood, illinois. 1975, 216-217. kakwani, n.c. “functional form for estimating the lorenz curve: a reply”. econometrica, 48, (1980). 1063-1064. kakwani, n.c.; n. podder, “efficient estimation of the lorenz curve and associated inequality measures from grouped observations.” econometrica. 44(1976), 137-148. rasche, r.h., j. gaffney, a.y.c. koo, anan. ofst: “functional forms for estimating the lorenz curve,” econometrica, 48(1980), 1061-1062. bidabad, bijan, continuous l1 norm estimation of lorenz curve. http://www.bidabad.com/doc/l1-articl4.pdf bidabad, bijan, estimating lorenz curve for iran by using continuous l1 norm estimation, economics and management journal, islamic azad university, no. 19, winter 1993, pp. 83-101. http://www.bidabad.com/doc/iraninc-l1.pdf bidabad, bijan, usa income distribution counter-business-cyclical trend (estimating lorenz curve using continuous l1 norm estimation). first meeting of the society for the study of economic inequality (ecineq), palma de mallorca, spain, july 20-22, 2005. http://www.uib.es/congres/ecopub/ecineq/general.html http://www.uib.es/congres/ecopub/ecineq/papers/039bidabab.pdf http://www.bidabad.com/doc/estimating-lorenz-us.pdf http://www.bidabad.com/doc/l1-article4.pdf http://www.bidabad.com/doc/l1-article4.pdf http://www.bidabad.com/doc/iraninc-l1.pdf http://www.uib.es/congres/ecopub/ecineq/general.htm http://www.uib.es/congres/ecopub/ecineq/papers/039bidabab.pdf http://www.bidabad.com/doc/estimating-lorenz-us.pdf copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 21 bidabad, bijan, hamid shahrestani. an implied inequality index using l1 norm estimation of lorenz curve. global conference on business and finance proceedings. mercedes jalbert, managing editor, issn 1931-0285 cd, issn 1941-9589 online, volume 3, number 2, 2008, the institute for business and finance research, ramada plaza herradura, san jose, costa rica, may 28-31, 2008, pp. 148-163. global journal of business research, vol. 4, no. 1, 2010, pp.2945. http://www.bidabad.com/doc/l1-implied-inequality-index-4.pdf http://www.theibfr.com/archive/issn-1941-9589-v3-n2-2008.pdf http://www.bidabad.com/doc/ssrn-id1631861.pdf copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). http://www.bidabad.com/doc/l1-implied-inequality-index-4.pdf http://www.theibfr.com/archive/issn-1941-9589-v3-n2-2008.pdf http://www.bidabad.com/doc/ssrn-id1631861.pdf american finance & banking review; vol. 2, no. 1; 2018 issn 2576-1226 e-issn 2576-1234 published by centre for research on islamic banking & finance and business 54 money supply and inflation: disaggregated time series evidence from nigeria nwonodi daniel ikezam1 1department of banking and finance, rivers state university, port harcourt, nigeria, nigeria. correspondence: department of banking and finance, rivers state university, port harcourt, nigeria, nigeria received: january 20, 2018 accepted: january 26, 2018 online published: february 7, 2018 abstract this paper examined money supply and inflation in nigeria. the objective was to examine the extent to which components of money supply affect nigerian inflation rate. time series data was sourced from central bank of nigeria (cbn) statistical bulletin and stock exchange factbook. nigerian real inflation rate was proxy for dependent (infr) variables while currency in circulation (cr), demand deposit (dd), time deposit (td), savings deposit (sd) and net foreign asset (nfa) were used as independent variables. the ordinary least square (ols) method of cointegration, augmented dickey fuller unit root, granger causality was used as data analysis techniques. regression result in the study shows that currency in circulation, demand deposit and savings deposit has negative relationship while net foreign asset and time deposit have positive relationship with inflation. the augmented dickey fuller test proved non stationarity of the variables at level except net foreign asset but stationary at first difference. the granger causality test reveals no casual relationship running through the variables. the cointegration proved no long run relationship between the dependent and independent variables. the study conclude that money supply have significant relationship with nigerian inflation rate. it therefore recommends effective management of money supply by the monetary authorities to achieve the monetary policy objectives of price stability. keywords: money supply, inflation, currency in circulation, demand deposit, saving deposit. 1. introduction money supply is an instrument of monetary authorities used to fine-tune the economy to achieve desired macroeconomic goals. in nigeria, central bank of nigeria decree 1969 as amended empowered cbn the monetary function of regulating the volume of money in circulation which is influenced by the economic condition, when the economy is inflationary the monetary authority reduces money supply to achieve price stability. however, when the economy is depressed, the monetary authorities increase the decline of money in circulation. this process is the socalled expansionary and contractionary monetary policy. from the classical perspective, inflation is a monetary issue and can only be controlled by reduction in monetary circulation. inflation remains one of the major economic variables that can distort economic activities in both develop and less develop countries. although it has been argued that moderately rising prices (single digit inflation) initially activates the level of economic activities (adeoye 2002), continuous inflation however, is evil to any economy. at the microlevel, it arbitrarily redistributes income, wipes out savings, erodes real income (fixed income earners), leads to price distortions and it brings about misallocation of economic resources at the aggregate level (adeoye 2002). thus, understanding the factors driving inflation is very vital for the formulation and implementation of appropriate macroeconomic policies. the monetarist led by milton friedman believes that inflation is always and everywhere a monetary phenomenon. the argument on factors that determines inflation has long been examined and dates back to the divergences between the classical and the keynesians economist. this argument has been deepened in a developing economy like nigeria where the financial market is emerging and cannot absorb the financial contagion of the economic units. for instance, an empirical examination of nigerian savings reveals that significant proportion of money supply is outside the banking system. this means there is excess money in circulation which is sensitive to inflation. again, there is also mis-match of monetary policy with fiscal policy in the developing country like nigeria, for instance www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 55 monetary policy can be contractionary while fiscal policy can be expansionary. the divergences between the two schools of thought have attracted academic attentions. from the above, this study intends to examine the relationship between money supply and nigerian inflation rate. 2. literature review 2.1 theoretical framework the monetarists, following from the quantity theory of money (qtm), have propounded that the quantity of money is the main determinant of the price level, or the value of money, such that any change in the quantity of money produces an exactly direct and proportionate change in the price level. the qtm is traceable to irving fishers famous equation of exchange: mv=pq, where m stands for the stock of money; v for velocity of circulation of money; q is the volume of transactions which take place within the given period; while p stands for the general price level in the economy. transforming the equation by substituting y (total amount of goods and services exchanged for money) for q, the equation of exchange becomes: mv=py. the introduction of y provides the linkage between the monetary and the real side of the economy. in this framework, however, p, v, and y are endogenously determined within the system. the variable m is the policy variable, which is exogenously determined by the monetary authorities. the monetarists emphasized that any change in the quantity of money affects only the price level or the monetary side of the economy with the real sector of the economy totally insulated. this indicates that changes in the supply of money do not affect the real output of goods and services, but their values or the prices at which they are exchanged only. an essential feature of the monetarists’ model is its focus on the long-run supply-side properties of the economy as opposed to short-run dynamics (dornbush, et al, 1996). the keynesian opposed the monetarists’ view of direct and proportional relationship between the quantity of money and prices. according to this school, the relationship between changes in the quantity of money and prices is nonproportional and indirect, through the rate of interest. the strength of the keynesian theory is its integration of monetary theory on the one hand and the theory of output and employment through the rate of interest on the other hand. thus, when the quantity of money increase, the rate of interest falls, leading to an increase in the volume of investment and aggregate demand, thereby raising output and employment. in other words, the keynesians see a link between the real and the monetary sectors of the economy an economic phenomenon that describes equilibrium in the goods and money market (is-lm). equally important about the keynesian theory is that they examined the relationship between the quantity of money and prices both under unemployment and full employment situations. accordingly, so long as there is unemployment, output and employment will change in the same proportion as the quantity of money, but there will be no change in prices. at full employment, however, changes in the quantity of money will induce a proportional change in price. the neo-keynesian theoretical exposition combines both aggregate demand and aggregate supply. it assumes a keynesian view on the short-run and a classical view in the long-run. the simplistic approach is to consider changes in public expenditure or the nominal money supply and assume that expected inflation is zero. as a result, aggregate demand increases with real money balances and, therefore, decreases with the price level. the neo-keynesian theory focuses on productivity, because, declining productivity signals diminishing returns to scale and, consequently, induces inflationary pressures, resulting mainly from overheating of the economy and widening output gap. but by and large, the theories outlined above by various schools of thought in economics provide a better understanding of the position of inflation as a macroeconomic variable in the mainstream economic thought and its effect on the overall performance of the economy. among all the theories, the monetarist theory is adopted because its proposition fairly satisfied the realities of the projected causes of inflationary pressure in nigeria. 2.2 empirical literature omoke et, al,(2010) tested the causal long term relationship between budget deficit, money growth and inflation in nigeria and the result of the study pointed to a close long term relationship between inflation and money supply. another important issue arising from the foregoing is the link between inflation on one hand and market interest rate on the other. perceptual inflation generates expectations about the cause of factored prices and puts on upward bias on market interest rates as lenders seek to protect the real value of their funds. it is important to point out that the long term positive effect of money stock changes on output is generally considered to be tenuous. thus, the main long term effect of excessive money stock growth appears to be negative, that is a sustained rise in the price level. long term growth is generally considered to depend on real factors such as resources endowments, technology, and high productivity and intertemporal choices between present and future consumption. www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 56 nwaobi (2002) used data from 1960 through 1995 and the johansen co-integration framework found that money demand, real gdp, inflation and interest rate are co integrated in nigeria. he also found stable money demand in the period under study. fatukasi (2004) investigated the determinants of inflation in nigeria between 1981 and 2003. the study made use of non-linear multiple regression models. he posited that the causes of inflation in nigeria are multi-dimensional and dynamic, requiring full knowledge at any point in time to be able to proffer solutions to the inflationary trends in the country. omokeet et al., (2010) tested the causal long-term relationship between budget deficit, money growth and inflation in nigeria. augmented dickey-fuller (adf) and philip-perron (pp) test were carried out to test the stationarity of the variables used. the result of the study pointed to a close long-term relationship between inflation and money supply. olusanya (2009) analyzed the main sources of fluctuations in inflation in nigeria. using the framework of error correction mechanism (ecm) it was found that the lagged cpi, expected inflation, petroleum prices and real exchange rate significantly propagate the dynamics of inflationary process in nigeria. bakare (2011) conducted a study on the determinants of money supply growth and its implications on inflation in nigeria. the study employed quasi-experimental research design approach. the results showed that credit expansion to the private sector determines money supply growth and inflation in nigeria. he therefore concluded that changes in money supply are concomitant to inflation in nigeria. marta et al. (2004), examines monetary policy in albania during the transition period. estimates from a vector auto regression model (var) of key macroeconomic variables which include money growth, inflation, exchange rate, remittances and the trade balance, demonstrate the weak link between money supply and inflation up to mid 2000. they conclude that exchange rate stability has played a key role in keeping inflation low for most of the transition period, and that the range of monetary policy instruments available to the authorities has widened in recent years and this has been associated with more stable and predictable changes in money supply and the price level. the result demonstrates that albania has come a long way in terms of controlling inflation, liberalizing akinbobola financial markets and improving the predictability of inter-relations among key macroeconomic variables. holod (2000) explores the identified vector autoregression to model the relationship between cpi, money supply and exchange rate in ukraine. the results show that exchange rate shocks significantly influence price level behaviour. further, the study also found that money supply responds to positive shocks in price level. the study contributes to the sizable literature on it using overly sophisticated vector error correction model with complex identification structure. there is however an element of data mining in the generation of impulse response functions. nicolleta and edward (2001), updates and extends friedman’s (1972) evidence on the lag between monetary policy actions and the response of inflation. their evidence is based on uk and us data for the period 1953-2001 on money growth rates, inflation and interest rates, as well as annual data on money growth and inflation. their findings reaffirm the result that it takes over a year before monetary policy actions have their peak effect on inflation. novoseletska (2004) discussed this issues taking note of the break point in the statistical relationship. in a more recent period of financial stability (1999-2003) rising monetary aggregate were accompanied by falling inflation and a rebound of output. novoseletska and myhaylychenko (2004), note that nominal exchange rate stability could contribute to moderate growth rates of prices during the last few years. clemens and alex (2002) empirically estimated and tested the relationship between exchange rate accommodation and the degree of inflation persistence using a non-linear autoregressive inflation equation for ten european countries for the period 1974 to 1998. in the estimation procedure they allow for the presence of an unknown number of shifts in the mean of inflation. their results provide supportive evidence for the existence of a positive link between exchange rate accommodation and inflation persistence for most of the smaller and more dependent exchange rate mechanism (erm) countries, even when mean level shifts in inflation are appropriately accounted for. for the larger countries and the countries that remained outside the erm for most of the period they find hardly any evidence of such positive link. overall, their results provide modest support for the existence of the theoretically hypothesized positive link between exchange rate accommodation and inflation persistence. bleaney (2000) implicitly recognizes that at least two problems arise from the literature. first, the identification of periods within which persistence is constant using the prevailing exchange rate regime is generally inappropriate. the dynamics of money supply, exchange rate and inflation in nigeria variation in persistence within constant regime periods to independent changes in the main level of inflation, which is questionable as well. bernhardsen and holmsen (2005) discussed whether inflation forecasts should be based on technical exchange rate assumptions like a constant exchange rate and uncovered interest rate parity (uip) or on assumptions reflecting the www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 57 central bank’s best prediction of future exchange rate movements. because of the strong link between the interest rate and the exchange rate, the exchange rate does not principally differ from other variables that are endogenous in inflation projections. debelle and galati (2005) argued that along with changes in output growth, exchange rate changes have historically played a key role in the adjustment of external imbalances in industrial countries. zettelmeyer (2004), and kearns and manners (2005) finds that, a surprise monetary policy shock that increases the interest rate has a significant appreciating effect on the exchange rate. as frankel (1999) observes, fixing the exchange rate has the advantage of providing an observable commitment to monetary policy. atkenson and kehoe (2001) believed that fixing the exchange rate has the advantage of providing an observable commitment to monetary policy. they formalize the argument that because it is more transparent, the exchange rate has a natural advantage as an instrument for monetary policy. bleaney (2001) asserts that there has been stronger monetary policy response to inflation shocks in recent decades. he finds that monetary growth in the united.mahamadu and philip (2003) explore the relationship between monetary growth, exchange rates and inflation in ghana using error correcting mechanism. the empirical result confirms the existence of a long run equilibrium relationship between inflation, money supply, exchange rate and real income. in line with theory, the findings demonstrate that in the long-run, inflation in ghana is positively related to the money supply and the exchange rate, while it is negatively related to real income. elsewhere, several authors have been pre-occupied with the factors determining inflation, especially in the last few years. canetti and greene (2000) separated the influence of monetary growth from exchange rate changes on prevailing and predicted rates of inflation. the sample covers ten african countries: the gambia, ghana, kenya, nigeria, sierra-leone, somalia, tanzania, uganda, zaire, and zambia. using the vector auto regression analysis, they suggest that monetary dynamics dominate inflation levels in four countries, while in three countries; exchange rate depreciations are the dominant factor. rutasitara (2004) investigates the influence of exchange rates on inflation in tanzania. model estimation lend support to the structural view of inflation and show a high degree of persistence as the current rate reflects about 0.6 of its value four quarters back. the study contributes to the debate on the controversies about the relative role of exchange rates in discussion of structural adjustment programmes (sap) and stabilization policies. bozkurt (2014) examines money, inflation and growth relationship in turkey by using co-integration test. for this purpose, quarterly data of money supply (m2), gdp, velocity of money and deflator are used for the period of 1999:2 – 2012. according to the results from this paper, money supply and velocity of money are the main determinants of inflation in the long run in turkey. on the other hand, 1% decreases in income directly reduces inflation by 1%. koyuncu (2014) uses the time-series approach to investigate the impact of budget deficit and money supply on inflation in turkey for the period of 1987-2013. he finds that while there is no causality from inflation to money supply, there is causality from money supply to inflation in turkey. al-fawwaz and al-sawai’e (2012) analyze the short run relationship between money, the price, and the gross domestic product (gdp) growth for the jordanian economy. time series methods are used for the annual data for the period 1976-2009. the result indicates that there is a causal relationship from money supply to inflation, with low degree of 0.21. mbongo, mutasa and msigwa (2014) examine the effects of money supply on inflation in tanzania. the study applies ols, var and ecm techniques to examine the effect of selected variables on inflation in tanzania. ols and ecm results show that money supply and exchange rate have significant impact on inflation in the short and long run. the var findings indicate that the current inflation can be influenced by the past state inflation. abate and nandeeswara (2015) show the causality effect between money supply growth and price level in ethiopia using a co-integrated vector auto regressive (var) model over the period 1975 to 2012. to explore the short-run direction of causality between money supply and consumer price index (cpi), granger causality test has been applied and in order to investigate the existence of long-run relationship, co-integration analysis has been employed. the causation runs from money supply to prices, but price level does not causes money supply. the cointegration analysis established that money supply and cpi are found to be co-integrated suggesting an existence of long-run relationship. ahmed and suliman (2011) examined the long-run relationships between real gross domestic product (gdp), money supply (ms) and price level (cpi)) for the sudan economy using annual data for the period of 1960 to 2005. to explore the short-run direction of causality between gdp, ms and cpi, granger causality test has been applied and in order to investigate the existence of long-run relationship, co-integration analysis has been employed. the causation runs from money supply to prices, but price level does not causes money supply. the co-integration www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 58 analysis established that the real gdp, money supply and cpi are found to be co integrated suggesting an existence of long-run relationship. mbutor (2014) determines the exact portion of the changes that occur in aggregate prices that could be attributed exclusively to the growth in money supply in nigeria for the period of 1970 to 2012. the gross domestic product, nominal exchange rate, and the maximum lending rate are control variables, while inflation, proxy by the consumer price index and broad money supply are focus variables. all variables enter in logarithm forms, except interest rate. the impulse response function shows a persistent positive relationship between inflation and money supply. the variance decomposition of inflation shows that money supply accounts for up to 34.5 percent of aggregate price changes until the tenth period. olorunfemi and adeleke (2013) examine money supply and inflation rate in nigeria for the period of 1970-2008. the study uses vector auto regressive (var) model. results from the causality test indicate that there exists a unidirectional causality between money supply and inflation rate. the causality test runs from money supply to inflation. umeora (2010) examines the effects of money supply (m2) and exchange rates on inflation in nigeria for the period of 1982 to 2009 using annual data. the data are analyzed using multiple regression analysis (with spss). the results show that money supply and exchange rate have positive and negative effects on inflation in nigeria respectively. the two variables account for only about 12% of the variation of inflation in nigeria. odiba, apeh and daniel (2013) investigate the effect of money supply and aggregate demand on inflation in nigeria for the period of 1986-2009. the data are analyzed using ordinary least square regression. the results show that money supply and aggregate demand are the main determinants of inflation in nigeria during the review period. akinbobola (2012) aims at providing quantitative analysis of the dynamics of money supply, exchange rate and inflation in nigeria. the sample covers quarterly data from 1986:01 to 100 mathias a. chuba: transmission mechanism from money supply to inflation in nigeria 2008. the model was estimated using vector error correction mechanism (vecm). the empirical results show that in the long run, money supply and exchange rate have significant inverse effects on inflationary pressure in nigeria. omanukwe (2010) examines the modern quantity theory of money using quarterly time series data in nigeria for the period 1990:1-2008:4. the granger causality is used to examine the causality between money and prices. the result shows the weak unidirectional causality from money supply to core consumer prices in nigeria. adesoye (2012) examines the co-integration causality between prices, monetary aggregate and real output in nigeria from the period 1970 to 2009 using the inflationary gap model that emanates from the quantity theory of money. the causality is found to significantly run from money supply to price. the econometric findings suggest that inflation in nigeria is a monetary phenomenon. yahya (2000) concluded in his work that despite the distorting effects of a civil war followed by an oil commodity boom and burst, nigeria’s inflationary experience could be traced ultimately to excessive monetary growth. the dynamics of money supply, exchange rate and inflation in nigeria macroeconomic accounting framework, he developed a framework for analyzing nigeria’s inflationary experience, and found that any adjustment policy that does not take into account the role of money and credit is likely to fall short of the overall goal of non-inflationary economic growth. odusola and akinlo (2001) examined the link between the naira depreciation, inflation and output in nigeria, adopting vector autoregression (var) and its structural variant. their results tend to suggest that the adoption of flexible exchange rate system does not necessarily lead to output expansion, particularly in the short-term. issues such as discipline, confidence and credibility on the part of the government (as argued by dordunoo and njinkeu, 1997) are essential. evidence from impulse response functions and structural var models suggested that the impacts of the lending rate and inflation on the output were negative. while most previous studies focus more on the determinants of inflation, using explanatory variables, ours deviates by adopting the vector error correction mechanism (vecm) which eliminates the need to develop explicit economic models and thus impose apriori restrictions on the relationships among variables, vecm analysis permits a more general test of causation among different economic variables than is possible in conventional econometric analysis. 3. research methodology this study intends to examine the impact of money supply on inflation rate in nigeria. the relevant data was sourced from central bank of nigerian statistical bulletin. time series data were used and econometric method of data analyses which involves ordinary least square (ols) were employed. the multiple regressions formulated in this study is based on the theory of money supply and inflation rate. infr= f (cr, dd, sd, td, nfa) …………………………………. (1) transforming equation 1 above to econometric method, we have: www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 59 infr = β0 + β1cr + β2dd+ β3sd + β4td + β5nfa +µ ………… (2) where: infr = nigerian inflation rate cr = currency in circulation dd = demand deposit sd = savings deposit td = time deposit nfa = net foreign asset µ = error term β1 – β5 = coefficient of independent variables to the dependent variable β0 = regression intercept 3.1 estimation techniques 3.1.1 stationarity test time series data are assumed to be non-stationary and this implies that the result obtained from ordinary least square (ols) may be misleading (suleman and azeeze, 2012). it is therefore necessary to test the stationarity of the variables using the augmented dickey fuller 1979 test to both level and first difference. the adf test constructs a parameter correction for higher order correlation by assuming the times series follows an auto regressive process. mathematically expressed as yt = c + βt + αyt-1 +     jt k it j y εt ………………………………….3 yt = c + αyt-1 +     jt k it j y εt ……………………………………….4 equation 1 is used to test for the null hypotheses of non stationarity of unit root against trend stationaerity alternative in yt where y refers to the examined time series. equation 2 tests the null hypotheses of a unit root against a mean stationarity alternative. 3.1.2 johansen cointegration test the cointegration test established whether a long run equilibrium relationship exist among the variables. it is generally accepted that to establish a cointegration, the likelihood ratio must be greater than the mackinnon critical values. the model can be stated as 2211 ttt xxx   + …+ 11   px tp …………5 where  is a constant term. tx represents the first cointegrating differences 3.1.3 granger causality to determine the direction of causality between the variables, the study employed the standard granger causality test (granger, 1969). the test is based on vector error correction model (vecm) which suggests that while the past can cause or predict the future, the future cannot predict or cause the past. thus, according to granger (1969) x granger cause y if past value of x can be used to the past value of y, the test is based on the following regression model. 3.1.4 vector error correction model )6(................. 1 1 1 2221 1 2 1 22            k j k j k j jtjjtjjtjj k j j k j jtjt nfatdsdddcrinfr )7(.................... 1 1 1 2221 1 2 1 22            k j k j k j jtjjtjjtjj k j j k j jtjt nfatdsdddinfrcr )8(................... 1 1 1 2221 1 2 1 22            k j k j k j jtjjtjjtjj k j j k j jtjt nfatdsdcrinfrdd )9(................. 1 1 1 222 11 2 1 22            k j k j k j jtjjtjjtj j k j j k j jtjt nfatdddcrinfrsd )10(................. 1 1 1 222 11 2 1 22            k j k j k j jtjjtjjtj j k j j k j jtjt nfasdddcrinfrtd )11(................. 1 1 1 222 11 2 1 22            k j k j k j jtjjtjjtj j k j j k j jtjt tdsdddcrinfrnfa www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 60 co-integration is a prerequisite for the error correction mechanism. since co-integration has been established, it is pertinent to proceed to the error correction model. the vecm is of this form: ttyyy tt j i jtt ,.....,1,1 1 1 1        ……………………..13 where yt is a vector of indigenous variables in the model. α is the parameter which measures the speed of adjustment through which the variables adjust to the long run values and the β is the vectors which estimates the long run cointegrating relationship among the variables in the model.  is the draft parameter and is the matrix of the parameters associated with the exogenous variables and the stochastic error term. 4. results and discussion to ascertain the dynamic relationship between the variable, the following tables gives an insight. 4.1 presentation of ols results table 1: regression results variable coefficient std.error t-statistics probability infr -0.128869 0.157710 -0.817125 0.4208 cd -0.733564 0.711558 -1.030926 0.3114 dd -2.391441 0.957630 -2.497250 0.0187 sd 1.014112 0.746346 1.358769 0.1851 td 0.149095 0.119291 1.249841 0.2217 nfa 97.13793 35.19558 2.759947 0.0101 β0 0.128869 0.157710 -0.817125 0.4208 r2 0.775921 adj r2 0.646621 f-statistics 12.13390 prob. f 0.000653 d.w 1.475208 source: author’s computation from e-view 7.0 4.1.1 discussion of results the regression results presented in the above table reveal the relationship between the dependent and the independent variable as formulated in the regression model. the model summary proxy by r2 and adjusted r2 shows that 75.9% and 64.6% variation in nigerian inflation rate is traceable to the component of money supply in the model. the f-statistics and the probability value of 12.933960 and probability of 0.000653 prove that the model is significant and fit to test the relationship between the dependent and the independent variables. the durbinwatson statistics of 1.475208 is above 1.00 and less than 2.00 this shows that there is positive auto-correlation between the variables in the time series. the regression co-efficient shows that currency in circulation, demand deposit and time deposit has negative relationship with inflation. this finding is contrary to the classical opinion of inflation as a linear function of money supply but validate the keynesian’s opinion that inflation is a linear function of deficiencies in components of aggregate demand. however, savings deposit and net foreign asset have positive relationship with nigeria inflation rate. this finding is in line with the classical theory but contradict the keynesians view. the probability value and the t-statistics shows that cr, dd and td are statistically significant meaning that increase in the variable will significantly affect nigerian inflation rate. table 2: presentation of adf test at level variable adf statistics critical values prob. order of integration 1% 5% 10% infr -3.259192 -3.646342 -2.954021 -2.615817 0.0253 1(0) cr -3.946979 -3.653730 -2.957110 -2.617434 0.0048 1(0) dd -2.395771 -3.646342 -2.954021 -2.615817 0.1498 1(0) td -3.654719 -3.646342 -2.954021 -2.615817 0.0098 1(0) sd -3.430947 -3.646342 -2.954021 -2.615817 0.0098 1(0) nfa -5.050256 -3.653730 -2.957110 -2.617434 0.0003 1(1) source: author’s computation from e-view 7.0 www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 61 the above table indicates that at level the variables are not stationary except net foreign asset as the adf critical values are greater than the mackinnon critical values at 1%, 5% and 10%. therefore the null hypotheses of nonstationarity are accepted while the alternate rejected. table 3: adf at first difference variable adf statistics critical values prob. order of integration 1% 5% 10% infr -5.730629 -3.670170 -2.963972 -2.621007 0.0000 1(1) cr -6.559663 -3.670170 -2.963972 -2.621007 0.0000 1(1) dd -6.081278 -3.65370 -2.957110 -2.617434 0.0000 1(1) td -6.222737 -3.661661 -2.960411 -2.619160 0.0000 1(1) sd -5.822923 -3.661661 -2.960411 -2.619160 0.0000 1(1) nfa -6.816334 -3.661661 -2.960411 -2.619160 0.0000 1(1) source: author’s computation from e-view 7.0 from the above, all the variables are stationary at first difference, this means the null hypothesis of non-stationarity is rejected and the alternate accepted. table 4: granger causality test null hypothesis: obs f-statistic prob. cr does not granger cause infr 32 0.01574 0.9844 infr does not granger cause cr 0.14977 0.8616 dd does not granger cause infr 32 2.10282 0.1417 infr does not granger cause dd 1.48405 0.2446 td does not granger cause infr 32 0.65479 0.5276 infr does not granger cause td 0.59059 0.5610 sd does not granger cause infr 32 0.21831 0.8053 infr does not granger cause sd 0.59035 0.5611 nfa does not granger cause infr 32 1.94118 0.1630 infr does not granger cause nfa 0.60173 0.5550 from the granger causality results presented above, the probability coefficient of the variables are greater than the critical 0.05 at 5% level of significant and 95% confidence level, thereof the research conclude that there is no causal relationship among the variables.0 table 5: cointegration test results (tracetest) hypothesis ce trace statistics 0.05 critical value probability remark r=0 127.3628 95.75366 0.0001 reject h0 r≤1 67.62563 69.81889 0.0739 accept h0 r≤2 39.46516 47.85613 0.2422 accept h0 r≤3 21.61151 29.79707 0.3206 accept h0 r≤4 9.582501 15.49471 0.3142 accept h0 r≤5 2.631519 3.841466 0.1048 accept h0 source: author’s computation from e-view 7.0 table 6: cointegration test (maximum eigen value) hypothesis maximum eigen value 0.05 critical value probability remark r=0 59.73715 40.07757 0.0001 reject h0 r≤1 28.16047 33.87687 0.2062 accept h0 r≤2 17.85365 27.58434 0.5073 accept h0 r≤3 12.02901 21.13162 0.5448 accept h0 r≤4 6.950982 14.26460 0.4950 accept h0 r≤5 2.631519 3.841466 0.1048 accept h0 source: author’s computation from e-view 7.0 www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 62 from the co integration results, the tables proved no co integrating equations among the variables. this means no long-run relationship that exists among the variables. this is contrary to the expectation of the results. it might be trace to effectiveness. table 7: vector error correction estimates cointegrating eq: cointeq1 cointeq2 error correction: d(infr) d(cr) d(dd) d(td) d(sd) d(nfa) r-squared 0.368850 0.719086 0.648876 0.522421 0.592807 0.536203 adj. r-squared -0.183406 0.473287 0.341642 0.104539 0.236514 0.130380 sum sq. resids 5792.695 1988.201 105.8568 535.7865 714.5933 13579.08 s.e. equation 19.02744 11.14731 2.572169 5.786765 6.682969 29.13232 f-statistic 0.667898 2.925502 2.111996 1.250165 1.663817 1.321274 log likelihood -125.0578 -108.4826 -63.02265 -88.15820 -92.62185 -138.2627 akaike aic 9.035985 7.966617 5.033719 6.655368 6.943345 9.887917 schwarz sc 9.729849 8.660482 5.727584 7.349232 7.637210 10.58178 mean dependent 0.196774 0.051613 0.176774 -0.149032 -0.149355 -0.258710 s.d. dependent 17.49095 15.35972 3.170068 6.115227 7.648370 31.23996 determinant resid covariance (dof adj.) 1.25e+10 determinant resid covariance 2.37e+08 log likelihood -562.8129 akaike information criterion 42.89115 schwarz criterion 47.60943 the speed of adjustment of the variables is examined in the above table; the r2 of the variables indicates that the independent variables explained large variation of the dependent variables. this means the speed of adjustment is adequate. 5. conclusion and recommendations this study examines the relationship between money supply and inflation in nigeria, the independent variables comprises the components of narrow and broad money supply. the variables were sourced from publications. findings revealed that currency in circulation, demand deposits, savings deposit have negative relationship with inflation rate while net foreign assets and savings deposit have positive effect on inflation. the model summary shows that the independent variables can explain 75.5%; the f-statistics proved that the model is significant. the study therefore conclude that money supply have significant relationship with nigerian inflation rate. it therefore makes the following recommendations:  the monetary authorities should device measures of managing the volume of money supply to avert its effect on inflation.  the financial market and institutions such as the banking institutions should be reformed and its efficiency enhanced to absorb through savings the volume of money supplied by the monetary authorities.  there is need to reform the savings rate to attract savings from the difference economic units and the monetary policy rate should be enhanced.  monetary authorities should integrate the objective of money supply with inflation control to enhance the effectiveness of monetary policy in achieving price stability. references ajisafe, r. a., and folorunso, b. a., (2002). the relative effectiveness of fiscal and monetary policy in macroeconomic management in nigeria, african economic and business review, 3 (1), 15 – 70. akinlo, a. e., (2003).the determinants of inflation in nigeria, indian journal of economics, lxxxvi (341). andrew, a., and patrick, k., (2001). the advantage of transparent instruments of monetary policy, federal reserve bank of minneapolis, research department staff report, 297, bernhardsen, t., and holmsen, a., (2005). the choice of exchange rate assumption in the process of forecasting inflation, staff memo, 3, central bank of norway. bleaney, m., (2000). exchange rate regimes and inflation persistence, imf staff papers, 247, 387-402. bleaney, m., (2001). exchange rate regimes and inflation persistence, imf staff papers, 47 (3), 17 – 87. www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 63 brouwer, g., and n. r., (1998). modelling inflation in australia, forthcoming, journal of business and economic statistics. clemens, j. m. k., and alex, l., (2002). inflation persistence under semi-fixed exchange rate regimes: the european evidence, 1974-1998 debelle, g., and galati, g., (2005). current account adjustment and capital flows, bis working papers, 169. elias c., and joshua g., (2000). monetary growth and exchange rate depreciation as causes of inflation in african countries, international monetary fund, washington, d.c., world bank working paper. engle, r. f., and granger, c. w. j., (1987). co-integration and error-correction: representation, estimation and testing, econometrica, 55 (6), 251-276. the dynamics of money supply, exchange rate and inflation in nigeria ed. ihor, 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open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). contents american finance & banking review vol. 1, no. 1; 2017 published by centre for research on islamic banking & finance and business 50 nigeria’s border and its effect on the economic and security development: a case of northern borders in nigeria hamza shehu mohammed 1 1 department of political science, bauchi state university, gadau, nigeria correspondence: department of political science, bauchi state university, gadau, nigeria. e-mail: hamzashehu6@gmail.com received: september 25, 2017 accepted: september 28, 2017 online published: october 07, 2017 abstract generally speaking, the borders in most of the african countries were among the upshot of the colonial ruling in those countries. such demarcations were mostly created in a kind of problematic situation thereby causing serious misunderstanding among neighboring countries. it is also an imperative to know that these creations were actually perpetrated intentionally by the imperialist to serve so many purposes which includes among others the continuation of exploitation, free access to their colonies and coming back as aids providers. moreover, such demarcations are being constructed on the papers without visiting those countries during the berlin conference in 1885 with the aid of complimenting the countries that were affected by the second world to revive them. nevertheless, nigeria without an exception has also faced with so many challenges in its borders especially the northern area. therefore, this paper tries to examine why despite so many consideration by different governments and administrations yet border issues continue to be the most challenging factor in this prevailing situation in the country. furthermore, the borders in the north were so porous to the extent that the issue of proliferation of weapons and food security were very obvious thereby challenging the security and economic wellbeing which in turn affect the nation building in the country.based on the above, thisresearch concentrates on the qualitative technique on the area of economy and security as the drivers that highly contributed to this menaces and also measures to address it. keywords: border, economy, security and development. 1. introduction the question of border administration has become very vital in the world currently because of the increased in illegal actions mostly after the end of the cold war and the rise of globalization. transitional misconducts become an easy to be conducted in the borders of many african countries. this consists of the moving of people, money and goods across the world due to the development in technology, telecommunications and transportation in general. hence, there is even a prominent saying according to some scholars that “the world has turned into a global village” with its own exceptionality as well as difficulties. individuals now have an access to move across the boundaries free and even conduct some illegal trade with liberty. therefore, this affects the socio-economic progress, security and property of the citizens. nevertheless, nigeria is not an nigeria’s border and its effect on the economic and security development: a case of northern borders in nigeria hamza shehu mohammed 51 exemption of this growing phenomenon; hence this calls for the gradual need for defense of both security and economy at our borders. in every country, be it advanced and undeveloped, security has been the major concern. by and large, it is concern of each government to take the matter of economy and security as their own primary purposes. nigeria has been fighting with transnational border related crimes which put a grave danger to national security and the nation building ranging from drug trafficking, money laundering, illegal trafficking of arms, smuggling of all kinds, (stolen cars, smuggled goods, guns) theft, kidnapping and many more. these activities create a threat to economic and national security as they affect the development. it also ruins the image of nigeria especially in the areas of money scams and other related trans-border offenses. besides, another challenge was that of insecurity of lives and property that stems the northern nigeria borders. the recent challenge of boko haram is also alarming in our borders especially the north eastern part of nigeria. boko haram is the mixture of arabic and hausa languages simply means ‘forbiddance of western education’. the group started as islamic sect then transformed into an armed group as we can see the evidentially in bombings and killings in the north part of nigeria (omolara a. 2013). it is part of the economic effect that insurgency had decelerated down the production in northern region that is now struggling. agriculture is accounts for roughly fifth of the nation’s gdp and has employs more than 30 percent of youths aged from 18 to 35, and is starts to show some signs of strain.it is also concentrated in the northern states, with the largest poverty rates and the majority of boko haram’s activity. according to amadousy an africa economist at the brookings institute, told ibtimes, “nigeria’s north is definitely poorer than the south and the conflict is having a negative impact,” adding that the north formerly depends on transfers from the latter (kathleen c. 2014). so, the present global developments such as the rising interdependence between the states and opening of the borders, which exist along with socio-economic, political, cultural and legal inequalities, have facilitate the activities of transnational illegal groups. the international fiscal crisis produced in 2008, has a number of consequences which are the issues of unemployment, a drop in the fees, fall in both the volumes and prices of the export, lesser direct foreign investments and the downward trend in tourism. as more communities are working in the informal part, other individuals have joined an organized criminal network (simon o. e. 2011). in addition, the challenges of border and its security have been other factors that generated such an economic issues were huge amount of funds that was supposed to be for developmental aspect are been relocated to security areas. the first manifestation of conflict at nigeria’s borders is the problem of boundary adjustment. it is important to note that african borders have been designed by the europeans that used subjective lines based on longitude and latitude to map out the africa. in fact, the africa boundaries do not actually represent the complete full-fledged territorial barriers or take into cognizance of the ethnic divisions. for example in nigeria, its physical area joins between the four neighboring states, whose inhabitants were linked by socio-economic, political and cultural ties. it was not surprising therefore that the boundary issues with cameroun and nigeria has been the colonial inheritance (imobighe, 2003: 37). 2. conceptual clarification 2.1 concept of border the two main social and economic practices that take place in the international border are the movement of peoples and goods (for trade). this movement of an integrative process is the linkage between individuals on both sides of our borders; it halts down the artificially imposed walls, and creates interaction. even though, earlier researches have stressed the concept of borders separately from the attached space, this study proposes a http://www.ibtimes.com/reporters/kathleen-caulderwood nigeria’s border and its effect on the economic and security development: a case of northern borders in nigeria hamza shehu mohammed 52 more integrative insight. hence, trans-border movement and transaction are usually measured as socio-economic events across the artificial boundaries. on the contrary, they are seemed here as the activities or methods that took place in the region, in which either one or both sides of the boundary. thus in this study, the borders are seen as surrounding of the borderland (afolayan, a.a, 2000). 2.2 concept of economy adam smith was regarded as father of the contemporary economics. in his book “the nature & causes of wealth of the nation’s in 1776, he termed economics a as knowledge of wealth. according to him, the economy can be seen as the study of means simply and it deals with the area of consumption and production. moreover, only physical goods that are scarce and valuable are wealth. furthermore, professor marshall in his books “the principles of economics” 1890 provides a definition with more importance to human happiness. as per his definition, economics is the study of economic activities of social men that lives in the society. this definition therefore study the cause affecting the material wellbeing and real people who have devotion in social well-being and not the self-centered men, who trusts only in the economic abstracts (https://www.gktoday.in/most-basic-concepts-of-economy). 2.3 security the word security is talking about the state of safety, or being safe from a certain danger. it deals with the defense, safeguard and protection of the core values, and the nonexistence of threats to acquired values (bakut, 2006: 235). similarly, security is defined as the protection, watching and the intelligence roles of the states, and the controlling of dangers to and the breaches of peace through a multilateral and bilateral process (eze and hettman, 2005). although, the issue of security is more attached with the army, some researchers caution its real meaning in this way. for example, sola ogunsanwo views that security is more than just military security or the external attacks. also, for many inhabitants in the emerging countries, security stands for the basic way of the struggle for the survival. hence, in order to offer an integrated african safety valuation, the non-military scopes of the security should be supplemented. hereafter, the african security as an ideology should be understood in its widest sense to comprise the economic security, environmental security, social security, food security, the fairness of life security, and the technical security (quoted in nwolise, 2006: 349-350). as such, the issue of security is connected to development. to this end some scholars are now talking about the “securitization ofdevelopment”, in the sense that underdevelopment and insecurities create the circumstances for wars and armed struggles. therefore, the security must be valued from both the military and non-military perspectives. national security is interpreted as the sum total of the country’s capabilities to preserve, promote and maintain itself, contain instability, its core values, enhance development, by improving the welfare, well-being and the quality of life of the people by increasing the consumption patterns (isa, 2007: 20). on the other hand, nwolise contends that the foundations of insecurity can be seen from two viewpoints. the first perspective is internal sources that include: political domination, inequality, human rights abuses, socio-economic injustices, resource mismanagement, military coups, extreme deprivation, poor leadership and marginalization, revolution, civil wars, terrorism, ethnic and religious riots, secession, food riots and among others, all hanging on the bad government, operation of ethnic and religious differences, et cetera. the second approach is the external causes which include: cross-national raids, military invasion, subversive infiltration, smuggling, sabotage, espionage, terrorism, and cross-border misconduct among others (nwolise, 2006: 350). 2.4 development general speaking, “development” connotes an event which brings about a new phase in a transformation nigeria’s border and its effect on the economic and security development: a case of northern borders in nigeria hamza shehu mohammed 53 situation or the system of change. when citing it to the world or socio-economic system, development typically indicates advancement, either in general or basic elements of the system. development can arise because of some cautious action carried-out by some authority by or single agents pre-ordered to accomplish both advancement and favorable circumstances. development strategies and the private investment, in all their arrangements, are examples of those actions. by this general definition, “development” is multi-dimensional theory in nature, since any movement of complex systems, as truly actual socio-economic structures can arise in different ways, at varying speeds and determined by different powers. moreover, the advancement of one portion of the system can be detrimental to the growth of the other parts, giving rise to incompatible ideas (trade-offs) and conflicts. thus, assessing development, i.e. defining whether or to what extent a structure is developing, is essentially multidimensional process (lorenzo g. b 2011). 3. conceptual/theoretical framework this paper concerns about how our boundary administration encourages both economic and security problems in nigeria thus causes havoc to its development. in view of this, migration theory could be adopted for the purposes of this study. people’s movement has become a major story in the african history. the practice of movement from one place to another can be regarded as a source of modernism, innovation, technological growth and development. transnational migration has constantly brought societies and states together for time immemorial (gugler: 1969; adeola and ogirai: 2010; castles et al 2009). yet, even its importance can be cherished by some, many including the governments are afraid of immigration if it is not obviously defined. the reason was that in contemporary times, the concept of international migration has come with it grave security questions that affect international relations and therefore shape the foreign policy regulations, diplomacy and the security matters. the definition of migration will not be comprehensive without taking analogy to diversity of migration. according to castles and miller 2009, which emphasize that, most of the countries do not have only one type of migration. for example they may have labor migration, permanent or refugee settlement but a complete range of kinds at once (castles and miller: 2009). normally, migrating network which begins with single form of movement often move on with other systems, despite the efforts of the government control the movement. the cross border immigration between nigeria and its immediate neighbors might start by one purpose and finished with another. as stated by everett 1969, the discrepancy among both in terms of amenities and economy become intensified particularly among nigeria and its neighboring states. again, castles and et al (2009) perceive that the increase in politicization of immigration resulting from the internal politics, regional and bilateral relationships and the national security guidelines of countries are slowly implicated by global migration. in consequence, the security repercussions are now dictating the foreign policy instructions of most of the countries all over the globe. the wave of globalization has intricate migration matters in the issue of security. this happens in such a way that national security becomes a determining factor in influencing the way of foreign policy and diplomacy of countries in the sub-region (castles and et al 2009). africa is termed as the region that has the world’s most movable population (curtin: 1997). one of the highest movements in the human history was documented in the sub-saharan africa. it involves the bantu societies that left their area now surrounding nigeria and cameroun and formed their settlements in the southern half of the region (castles et al. 2009). hence, migration is progressively driven by the economic, social and political changes. in the west african sub-region, migration can be explained in theory from the economic standpoint, although, other aspects can play their own role, but economic continue to be the outstanding. according to nigeria’s border and its effect on the economic and security development: a case of northern borders in nigeria hamza shehu mohammed 54 neo-classical, they link migration to travelling from a small to higher income area or more precisely, to variation in the business cycle. the method is known as the push-pull principles (castles et al. 2009). the “push factors” consist of lack of commercial opportunities, political awareness and freedom among others, whereas, the “pull factors” requires good economic opportunities, labor and political freedom. in africa, the style of migration has mostly followed this trend. the merely presence of economic differences among the various areas would be enough to create migrants movement (borjas: 1990; borjas: 2001). however, on the global front, between the countries, definite group may decrease the intervening difficulties to migration. with the reference to nigeria and its surrounding francophone bordering states, which they view nigeria as urban state from all views, growing technology has played a significant role in lessening the intervening obstacles (everett; 1969). even if there are no modification in the balance of factors at the origin and end, therefore improving know-how alone would result in the increase of the volume of migration. 4. security implications on the northern borders in nigeria and its effect on nation building the paper discovered in specifics the challenges to the boundary security as it can be witnessed that nigerian government lacks an appropriate territorial protection and much significance has not been given to our borders. this is because of the vulnerable threats at our national boundaries such as the trans-border activities and the rampant extremist attack that occur in the country as a result of the uncontrolled inflow of immigrants through different routes. some of the challenges are discussed below: 4.1 proliferation of small weapons every state has a responsibility for preserving its power and maintenance of law and order within its own jurisdiction. therefore, a nation cannot be protected when its boundary is permeable. however, the porosity of nigeria’s borders provides an evidence of the effect of cross-border. this is obvious because of the proliferation of small arms and light weapons (salw). this also is facilitated by massive cross-border trafficking and mercenary activities as evident from (chad and niger) and the country’s long poorly constructed borders that are inadequately regulated due to insufficient funds and the lack of capability of the security personnel. part of the consequences of such horrible situation consist of threat to the security and peace of nigeria, danger to nigerian territorial sovereignty especially from the sides of the eastern and northern boundaries, loss of properties and lives of the nigerian citizens present in the border zones and the constant provocation of nigerians in those border parts (ginifer and ismail, 2005:6). 4.2 porosity of borders the porous boundaries have contributed in the cross border offences and insecurity in the region. similarly, it promotes the growing number of different illegal trades such as the smuggling of contra-bands goods, contaminated drugs, stolen cars, expired cars prescribed for use in nigeria and other commodities like poultry products and shoes among others. the porosity of borders can also be explain in the use of dry trees, oil barrels as well as the rims of tires. in drawing these national borders, it makes the boundary to be disordered, poorly administered and unsecured. 4.3 corruption the corrupt activities of the security personnel at the boundaries also pose a grave challenge to the border safety. this has resulted in the establishment of numerous checking points which also contributed destructively to such border. it is imperatives to know that the checkpoints were not intended to check the passport but to obtain money from individuals. hence, criminals can easily penetrate the borders as the smugglers use to bribe their ways into the country. this therefore explains why there are many criminals relating in the trans-border nigeria’s border and its effect on the economic and security development: a case of northern borders in nigeria hamza shehu mohammed 55 doings and extremists in the country. as a result, criminals can move with arms and ammunition which cause thousands of innocent nigerians being killed and many died by activities of islamic sects and also the influx of arms in the country as traffickers continue with business without any punishment. 4.4 inadequate manpower and logistic support another difficulty related to the border security in the country is the insufficient manpower which has negative influence on the security of the national borders. it becomes difficult for the security workers to sufficiently control the national borders and efficiently patrol those several passages that lead into the country. the poor manpower creates problem during patrolling of these banned routes as smugglers use them as a means of access into the country. likewise, the criminals at times overcome these security workers at the boundaries due to shortage personnel and some logistics problems. 4.5 poorly patterned borders african territorial’s borders were artificial design by colonialism which continues to stance a serious danger to the country. the partition of these borders was actually carried out by the colonialist without given considerations to the values and culture of the people. this can be seen obviously with the cultural bonds of marriages, language and celebration of religious festivities among others. it is therefore important to know that boundary demarcation affects the ethnic homogeneity and the culture of the neighboring communities to the large extent that one will not distinguish a nigerian citizen from niger citizen. this is due to their culture and dialects in which societies with identical culture and language can be found at different locations of the borderline. hence, it becomes difficult to adhere with migration laws when some members will just alter with their identity at any time they need. the faulted demarcation of the borders has been a great challenge to the nigeria’s national security. even though, thenorthern and western borders were fairly well defined and maybe need some slight adjustments and up-dating.some parts of our borders with chad and cameroun have not beenwell demarcated which remains the most bond of contention between the two neighboringcountries and nigeria. even along the north-eastern and north-western area where the borders are relatively stable, the geographical condition, which is mostly desert, has makes the border so porous. the place is witnessing a kind of spill-over problem of conflictand such spill-over effect of this skirmish isan overspill of immigrants from the nearby countries to nigeria. the most worst of it was the inflow of dishonestforeigners who normally do involved in illegal activities along the boundaries areas of nigeria (imobighe, 2003: 35). 4.6 problem security capabilities in many instances, there has been news that as a result of lack security gadget, government cannot be able to infiltrate the place of the terrorist or they full-back because of the heavy fighting with their opponents. therefore, the major challenge to nigeria’s domestic security with regards to inter-security organizations at the borders is that the country lacks the abilities that are suitable for intervention in such conflict. in fact, there are serious challenges in terms of both the personnel and materials capabilities. 4.7 institutional framework the economic community of west african states (ecowas) has some protocols on the free movement of people, goods and services which was established by ecowas members in 1979. the key aim of such protocol is to enable free movements of people and goods and services inside the west african states without visa; this simply implies that any citizen of ecowas who have valid travelling documents and certified international health license can enter the whole region without any visa. hence, all members states were discourage of the use of visa in order to simplify the travelling of the people in the sub-region. on the other hand, in spite of the encouraging nigeria’s border and its effect on the economic and security development: a case of northern borders in nigeria hamza shehu mohammed 56 declaration of this procedure, it resulted in many negative effects. this protocol permitted the movements of so many criminals to transfer across the boundary and also involve in cross border actions under the umbrella of such protocol. whereas terrorists travel from in and outside of the country, traffickers of different kinds of illegal imports continue their own business. for example, the current security problems in nigeria, there were rumors that some people among the terrorist groups are also coming from neighboring states; this could not have been happen if there were sufficient security personnel at the northeastern borders. the boundaries have paved way for trafficking of illegal arms and even armed banditries usually do escape across the borders after perpetrating criminalities in the country. all of these tend to jeopardize the social and economic development of nigeria as well as the stability of the polity. moreover, the image and the integrity of the country is now in questioning as citizens of nigerian suffers a lot of intimidation and are subjected to all types of disgrace outside the country. 4.8 lack of provision of basic amenities there is problem of provision of the developmental services by the government in terms of social and basic amenities in the rural parts as well as the boundary communities. this is one of the factors that militate against the good boundary security. so when people at the rural places and the border societies are surviving in an abject poverty and absence of basic infrastructure, it encourages cross-border activities. this also leads them into clandestine actions such as smuggling, armed banditry and many more. therefore, government needs to develop the border communities and the rural areas. 5. political instability and economic crisis in neighboring countries nigeria is the most populated as well as richest in west african region, in terms of economy, military capability and population, nigeria is above all these countries. this clarifies the most reason why disaster in the neighboring countries like instability, diseases and famine has split-over to nigeria. the speech of the former president of nigeria ibrahim babangida was evident when he states that no one can benefit in the collapse of any country’s economy in the region. this basically means that the national security of nigeria is the safety of its close neighbors. this is confirmed in both the scope and strength of cross-border trafficking activities that obtain in their everyday interaction. example, when ghana’s government was suffering from the economic decline, so many inhabitants of ghana fluttered to nigeria for living. 5.1 globalization and challenge of border security at this juncture, it is imperative to trace the consequences of globalization on the national security. goldstein (1991) observes national security as carefully related to the preservation of the boundary of a particular state. to him, preservation of the borders can be seen as important part of any governmental institution. since, in the time of any insecurity, threat is considered as instability. the appearance of globalization has come with innovative communication and information technology. but, it brings a new threat to the national security which challenges the traditional approaches to the national security as an obsolete and insufficient to contest with the new threats. the scenario of 9/11 also has further generated important security dialogues both at domestic and the international levels far from conventional ideas. nevertheless, globalization has its encouraging peculiarities such as the revolution in communication and transportation at all levels of life. globalization brands the modes of communication easy by making new inventions to conduct relations among various countries in the world. despite these positive developments, there are some undesirable consequences which have continued to intimidate the existence of state within the international system. for example, transnational criminality is an illegal activity that can transcends beyond the national borders. it has become an easier for lawbreakers to nigeria’s border and its effect on the economic and security development: a case of northern borders in nigeria hamza shehu mohammed 57 involve in these secret activities with the name of globalization. also, cash, goods and people will easily be transferred across the borders without any restrictions. so it is difficult to track-down those criminals due because the manipulation of technology. also, the emergence of computer and the internet facilities make it possible for these criminals to engage in cybercrimes as locally called ‘yahoo yahoo or yahoo plus’ in which they can easily tap into one’s account and do away with all the money. globalization also brings about moral decadence in youth of these days ranging from watching from pornographic films and all sort, thereby exposing them to sexual abuse which is inimical to the society. this therefore, requires a new trend of security approach as well as shifting from conventional security. these threats include the following: -smuggling of contraband goods such as firearms, human trafficking including child and woman, money laundering, fraud/ theft, prostitution, proliferation of arms/ nuclear products, illegal migrants, hard drug trafficking such as cocaine, heroin and many more. all these pose a threat to nigeria’s national security and put the state at the risk of violence and crisis. these crimes not only pose security threat but also dent the image of the country in which citizens are subjected to harassment in abroad, deny the country of foreign investors and also fear to do business with the nigeria. in this context terrorism, banditry and other incursions at the borders are main concern for states with its highly complicated characteristics as the global world is now faced with an immediate threat. 6. some economic implications on the nigeria’s borders 6.1 import and export issues nigeria was ranked 147th out of 189 countries by the world bank’s ease of doing the business index for the year 2014. the country enforces politically assigned restrictions on the imports and exports to improve the local industries in the area of meat products, spaghetti and noodles, cement, footwear and furniture among others. it also charges heavy duties on other goods. for example, the imported rice levy was at 20%. so, additional trade blocks negatively affect the chains of exporters to nigeria and of indigenous manufacturers each importing inputs or exporting outside nigeria. export and import prices in nigeria are nearly double those in the east asia & pacific region. furthermore, the normal time for importation to nigeria within 33 days, is 81% greater than it counterpart in the latin america; the average period for the exports from nigeria stance at 22 days, is at 36% longer. despite the growth in the exports and imports, delayed in u-turn time have an adverse effect on the nigeria’s trade capacity. many firms are unwilling to deal with the inconsistency of transportation periods. besides, the forum’s research shows, corruption is one major basic impediment. the enabling trade (et) report of 2013 projected that eliminating trade barrier in the sub-sahara africa can lead to the increase of 12% in the gdp and 63% in the exports. in nigeria, that it will translate to closely $31 billion gdp and $79 billion in the exports, with a substantial positive influence on trade in unpreserved or time-sensitive goods such as other foods and drugs (enabling trade, 2014). 6.2 the trade barrier issues in nigeria according to one research forum, it shows that a variety of companies working in nigeria studies that the environment is not conducive to business. among the four classes of trade barriers, the main and commonly mentioned are: inefficiency and impermeability in border administration and lack of transport infrastructure. other problems include: market access barriers, such as the import bans, local content supplies and import and export licensing principles that are intended to provide fee protection to indigenous manufacturers from lower quality importations. the general business setting also has challenges. a commonly poor security condition (the police availability and replying times, and a readiness and capability to investigate criminality) has make it very nigeria’s border and its effect on the economic and security development: a case of northern borders in nigeria hamza shehu mohammed 58 difficult to keep operate, especially the expatriates, prevent and safe theft of finished properties and valuable possessions. hence, delays at nigeria’s seaports are caused by the inefficient border management and seem to stems from overall mismanagement, immature transport setup and corruption. business workers consistently criticize about handling with too much government organizations. arbitrary fees are requested by certain government officials, inappropriate clearing staff at the ports, and unfortunate infrastructures (enabling trade, 2014). illegal agents in the port will look for innocent customers to cheat or total defraud, while pleasing up the valued time of the government officials. many mediators have no registered residence of business or connections to the official self-regulating forms of clearing agents. the misunderstanding created by such activities has results in cargo overstays at the port. a number of percentages of nigeria’s businessmen went through lagos port at apapa and the tin can island port, both in lagos, for further transport by road to the rest of the country. but the roads outside the ports are in such poor condition that moving goods out of apapa can take an entire day instead of 45-60 minutes. that delay is one contributor to port congestion. it also poses a major challenge for importers of time-sensitive or temperature-controlled products. a tyre manufacturer exporting to nigeria described the impact of nigeria’s port challenges: “our nigerian business partner is unable to plan his off-take and cash flow owing to the fact that clearance from the port can take as few as four days to as much as four to six weeks.because of this, at different times, our customer is overstocked and under-stocked, causing sporadic off-take and shipments” (enabling trade, 2014). another typical example can be cited with tropical general investments limited (tgi) is a large diversified conglomerate with operations and investments in several west african markets, morocco, united arab emirates and south africa. the bulk of tgi’s operations are in nigeria. it produces and sells poultry, fish, fruit juices, dairy beverages, frozen foods, cotton, cooking oil, pharmaceuticals and marine vessels; it also provides specialized oil field and dry dock services. the forum reviewed orc fishing that catches processes and packages shrimp and prawns for export to france, portugal, spain, the netherlands and other european union (eu) nations. like other businesses in nigeria, orc face trade barriers in market access, border administration, telecommunications and transport infrastructure, and business environment. 6.3 market access orc’s processing and packaging facility needed approval from the nigeria federal department of fisheries (fdf) before it could operate and export. the eu also requires the orc facility to be maintained to certain standards. export approval can be a bit tough, but the fdf manages ongoing inspections on behalf of the eu. 6.4 port congestion and administrative delays a major problem for importers is the unclear and unnecessary product classification and tariff assignment process of customs. reclassification to product codes with higher duties, along with arbitrary demands for these higher duties, is a constant reason for delays in clearing, additional storage costs and, ultimately, port congestion. many importers end up paying 15-20% in clearing process costs, instead of the statutory costs of about 5%. the delays in administrative process can easily be between five and 15 days, which mean higher payments for storage, personnel and demurrage. altogether, a $100,000 shipment that should cost $6,000-8,000 to clear could end up costing $30,000-35,000. clearly, this unpredictable cost increase deters some firms from entering the industry and can drive up the end-price for products by 20-30%. nigeria’s border and its effect on the economic and security development: a case of northern borders in nigeria hamza shehu mohammed 59 finally, nigeria’s economy remains fragile, underdeveloped, and heavily dependent on oil, mismanagement of resources, unsuitable development plans and lack of welfare programed. indeed, the economy is very important in equipping and maintaining the security agents in the pursuit of their assignments outside nigeria’s borders. 7. some selected solutions to the problems related to nigeria’s economy the volume of international trade with nigeria, while substantial, could grow significantly with the removal of supply chain barriers. the following projects and changes should help to reduce the operating risks for both foreign and domestic companies, and spur nigeria’s economic growth. 7.1 optimization of border administration processes nigeria customs service launched a web portal in 2013 to provide information relevant to importers and exporters. the next step: facilitation of the actual clearing process, including integration via the portal of other government agencies’ procedures and the private sector. this should begin with the product types subject to the longest port delays, followed by other strategic product types. second, a clear set of process instructions for each relevant government agency should be developed for each product type, along with a full list of required approvals. the single window portal should enable importers to register, submit documents, make payments and track the entire process online. this should help to minimize the number of people working in ports. third, the port should be secured, with access limited to registered, licensed clearing agents, or individuals or company representatives with confirmed products in the port. fourth, government agencies should quickly transition to keeping digital records to enable faster record retrieval and elimination of duplicate search processes. 7.2 infrastructure upgrades in the near term, port congestion can be notably eased with faster clearance processes. however, given nigeria’s growth prospects, the country must make a long-term commitment to expanding the capacity of the port infrastructure. the nigerian government already is investing heavily in infrastructure – for example, in a planned seaport in the developing lagos free trade zone. almost $12 billion in new port infrastructure has been announced and completion is expected by 2020. the government is also refurbishing the rail network, with $16 billion in projects under way. plans to integrate the rail network with the ports and industrial sectors are yet to be determined, however. another $16 billion in road projects has been announced, but none explicitly remedies the congestion at port. the roads near the port have not been upgraded. 7.3 rationalization of the duty and tariff structures nigeria customs service should aim to further rationalize its set of import duties and restrictions to avoid the possibility of arbitrary product reclassification and to align with global cost-per-shipment levels. many of the companies interviewed indicate that the nigerian government should support local industry and job creation by reducing duties for raw materials and ensuring that the definitions of a raw material or finished product are indisputable. 7.4 improving security and general business environment companies such as orc need adequate security to run their business without fear of piracy or militant attacks. such security could increase industrial output by 10-20% almost immediately, according to company estimates. joint action plans between the government and the private sector could assist in heightening safety, enabling more complex, value-added output, creating manufacturing jobs, and making prices more competitive for the consumer. tackling matters is vital for nigeria’s trade competitiveness. some good movements have already begun. for example, a trade facilitation committee was established to coordinate implementation of ongoing projects; it should ensure this happens within announced time frames. however, these problems in nigeria’s border and its effect on the economic and security development: a case of northern borders in nigeria hamza shehu mohammed 60 infrastructure, safety and corruption must be resolved and combined with border administration amendments to allow companies in nigeria to maintain cost-competitiveness in imports and exports. 8. conclusion reading through this paper, it will gives you a strong fact that nigeria’s unclear borders will always bring tensions between nigeria and it neighboring countries. therefore, it is the responsibility of nigeria to protect her territory. such responsibilities are duties of nigeria’s government through its security agencies. it also a center on the improvements of border security because of it is important and its protection is equated to national security. the challenges posed by trans-border activities are signs of extensive danger to the political, social and economic stability of states. the extent of these crimes committed lead to the widespread fear, violence and crisis; also undermine the security of the states. it is obvious that security in nigeria and its borders seem to be porous. however, the defense and security arrangement of nigeria has much to do with our borders. when borders cease to function effectively, different forms of crimes will take place in the country and the security of the country will be challenged as nigeria is experiencing in recent times. for example, the terrorist groups that infiltrated the country causing security challenges and political conflict. therefore, it is not well with our border security with the vulnerabilities of fears that befall the country. hence, the following recommendations are made for active border security in nigeria and they are; first, introduction of new techniques in training of the security personnel is important aspect of effective border security and also for them to discharge their duties effectively and efficiently. on the economic front, it is the duty of our policy makers to create policies that will checkmate the movement of foodstuffs around the borers. similarly, nigeria must relate with its neighbors to come out with meaningful ideas by establishing industries in their countries. nigerian businessmen can also be encouraged to establish joint venture participation with potential investors in benin republic. this is to assist the country from making its territory a dumping ground to foreign companies. on the home front, nigeria has two options: the first is to increase coercive measures to combat trafficking and smuggling. references afolayan a. a. 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(2011) “trans-border crime and its socio-economic impact on developing economies” copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. american finance & banking review; vol. 2, no. 2; 2018 issn 2576-1226 e-issn 2576-1234 published by centre for research on islamic banking & finance and business, usa 1 a test of miller and modigliani dividend policy irrelevance theory in nigerian stock market udobi, philomina i. 1 & iyiegbuniwe, wilfred i. 1 1 department of finance, faculty of management sciences, university of lagos, akoka, lagos, nigeria correspondence: udobi, philomina i. ,department of finance, faculty of management sciences, university of lagos, akoka, lagos, nigeria,email:udobiphil@yahoo.com received: may 19, 2018 accepted: may 25, 2018 online published: june 13, 2018 abstract this study empirically tests for the validity of miller and modigliani’s dividend irrelevance proposition in the nigerian stock exchange (nse). secondary data were obtained from the nigerian stock exchange fact book and firms’ annual audited financial statements for fifteen years (2001-2015). mediation analyses, was used to measure the direct and indirect effects of dividend on stock price. correction of the anomalous use of current dividend and current earnings by the use of naive expectation of dividend and earnings revealed that the direct effect of expected dividend on share price is significant but the indirect effect of expected dividend on share price through earnings is not significant. the implication of these results is that expected dividend has its unique (direct) effect on share price beyond the effect on share price which it shares with expected earnings (indirect effect). this conclusion suggests that dividend policy is relevant in valuation of shares in nse. it was therefore recommended that company management should treat dividend as an active corporate finance decision-making variable and should employ dividend in information signalling to capital market investors. keywords: expected dividend, expected earnings, share price, mediation, relevance, irrelevance. 1. introduction dividend policy is a major tool in decision making by corporate managers. it has received keen interest from scholars and researchers worldwide and this has led to the formulation of many theoretical models and testing of various variables. huda and farah (2011) affirmed that the development of theoretical models and variables has helped in determining the factors that assists managers in dividend policy decision making. adesina, uwuigbe, uwuigbe, asiriuwa and oriabe (2017) suggested that corporate managers should use dividend as a vital tool in their firm’s decision making. this suggestion is contrary to the finding of their study that dividend does not have influence on firm’s value. the dividend relevance theory posited by lintner (1956) and dividend irrelevance theory posited by miller and modigliani (1961) are the major contending theories on dividend policy and its impact on share price. the arguments and assertions of these theories did not rule out the influence of earnings on firms’ share prices. the dividend relevance theory agrees that despite the direct relationship between dividend and share price, there is still a possibility of an indirect effect of dividend on share price through earnings while the dividend irrelevance theory argues that the relationship that dividend tends to have on share price is as a result of its relationship with firms’ future earnings. thus, the impact of dividend on share price is not direct but only indirect. in the light of the above arguments, various studies’ all over the world’s stock market has tried to test for the validity of dividend policy irrelevance with no consensus. some of the challenges in the previous empirical tests of the effects of dividend on share price include the inaccurate measurement and definition of the earnings variable which is the unobservable but key variable in mm (1961) dividend irrelevance proposition. amadasun, (2011); toby, (2014) stated that the use of current dividend and current earnings in some previous tests of dividend irrelevance gave erroneous results that led to the conclusion that dividend is irrelevant in the valuation of share price. udobi (2016) asserted that the use of current dividend and current earnings is flawed because share price is determined by www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 2; 2018 2 ex-ante (expected/future) information on determinant variables including dividend and earnings and not ex-post (current) information such as current dividend and current earnings. another limitation in previous studies is the methodology used and its inability to decompose the total effect of dividend on share price into direct and indirect effects. in particular, is the inability of a methodology to isolate the direct effect from the indirect effect which it shares with earnings? this study revisits the miller and modigliani’s (1961) dividend irrelevance proposition. it objective is to overcome some of the limitations in previous studies and to determine if an m&m dividend irrelevance proposition is applicable in the nigerian stock market. 2. review of existing literature dividend relevance miller and modigliani (1961) arguments emphasized that the impact that dividend has on share price is due to its information contents about future earnings which is the real determinant of share price. black and scholes (1974) investigated the impact of dividend policy on firm’s value of companies listed in new york stock exchange. capital asset pricing model (capm) was used to analyze five years secondary data (share prices and dividend) of twenty five quoted firms. they concluded that dividend policy of firms has no impact on their stock price. on the contrary, aharony and swary (1980) applied the naïve expectation model of quarterly dividend and earnings and found that share prices react to increase in dividend payment, coincident with earnings announcement. their finding corroborates dividend relevance proposition. de angelo and de angelo (2006) also found that the information content of dividend is highly relevant. adefila, oladipo and adeoti (2004) examined the effect of dividend policy on the market price of shares. the methodology used was pearson’s product moment correlation of dividend with share price of fifteen companies. the study found that the correlation coefficients are statistically insignificant for most of the fifteen companies. it also found that the correlation between net profits (earnings) and share prices are statistically insignificant for all the companies analysed. the study concluded that there is no significant relationship between dividends and share prices, there is no significant relationship between net profits and share prices. this study was poorly designed and the use of correlation analyses to test dividend relevance is inadequate. hence, the conclusion reached by this study is suspicious. abor (2008) found out that there is a relationship between corporate earnings and dividend payout and concluded that both past and current earnings have impact on a firms’ dividend policy. musa (2009) investigated the impact of dividend policy on the share prices of 53 quoted firms in nigeria, applying parsimonious multiple regression model which employed five variables: current earnings, previous dividend, cash flow, investment and net current asset and three non-metric variables, growth, firm size and industry classification. the study found that the five metric variables have impact on dividend policy of firms in nigeria. adesola and okwong (2009) tested the relevance of dividend theories of share prices in nigeria with cross sectional data on twenty-seven companies for the period 1996 to 2006. they commented that their finding of positive and significant effect of dividend on share prices for the sample of nigerian companies indirectly cast some doubt on the empirical validity of dividend irrelevance. khalid, chijioke and aruoriwo (2010) investigated the impacts of dividend yield and dividend payout ratio on changes in share price of companies listed on the united kingdom stock exchange. a regression model was used to analyze the data which revealed positive relationship between dividend yield and stock prices and revealed that dividend payout is statistically insignificant. amadasun (2011) attempted to test the hypothesis that dividend does not increase stock price in nigeria, using first bank (nig) plc. as a case study. the study used a regression model that included dividend per share, earnings per share, return on capital employed, retained earnings and price earnings ratio as explanatory variables of price per share. the results of the study had statistically insignificant regression coefficients for both dividend per share and earnings per share. though this study concluded that “dividend does not lead to increase in stock value”, and thus purportedly lends support to miller-modigliani thesis of dividend irrelevance, the conclusion is consistent with the statistical insignificance of the dividend variables in the regression results. furthermore, the study has the following deficiencies: (1) it used a case study of a bank rather than cross sectional or panel data; and the regression model included four earnings variables; earning per share, return on capital employed, retained earnings and price earnings ratio. it therefore would have the problem of multi-collinearity. these observations indicate that the results and conclusion of the study are not reliable. khan (2012) sampled of twenty-nine companies to explicate the effect of dividend on stock prices for the period 2001 to 2010. the study used fixed and random effect model on panel data and found that dividend policy has positive effect on share prices after controlling for the effects of earnings per share, profit after tax, and return on equity and concluded that dividend irrelevance theory is not applicable in case of pakistan stock market. www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 2; 2018 3 abubakhar (2012) examined the influence of dividend pay-out ratio on the share prices of listed non-service firms in nigeria with a probabilistic sample of twenty-six firms using multiple regression models. the study found a statistically significant relationship between dividend pay-out and share prices. it also found that the size of the listed non-service firms significantly explains share prices in nigeria. both dividend pay-out and size of the firms had positive impact on share prices. the findings of the study do not however constitute valid test of the dividend irrelevance proposition became it did not consider the effect of earnings and dividend in the model. rabindra (2012) examined the impact of dividend on stock price in financial and non-financial institutions of nepal stock exchange, analyzing the secondary data with a regression model. stock price being the dependent variable while dividend per share (dps), retained earnings per share, lagged price earnings ratio and lagged market price per share are the explanatory variables. the result showed that dividend has impact on share prices more than retained earnings. kanwal (2012) studied the impact of dividend on stock prices of chemical and pharmaceutical companies in pakistan stock exchange for the period 2001-2010. secondary data of five variables: stock dividend, earning per share (eps), profit after tax (pat), retention ratio and return on equity (roe) were analyzed with panel regression model. the study showed that stock dividend, (eps), (pat) are statistically significant. in other words, these variables have positive impact on stock prices while retention ratio and return on equity have negative impact on share prices. the study asserted that changes in dividend policy provide statistically significant information content which can be used to make predictions about future stock prices”, and that the findings support the informational content of dividend hypothesis. these findings’ assertions indicate that changes in dividend payment merely create occasions for changes in stock prices and that there was no sufficient evidence to suggest that stock price changes are caused by dividend payments. the study did not include earnings in its analyses. hence, its findings cannot be quite conclusive as to the impact of dividend on share price given the effect of earnings. ozuomba, okaro and okoye (2013) carried out research to test the effect of dividend policy on shareholder’s wealth of public firms in nigeria for a period of twelve years (2000-2011). secondary data of ten randomly selected firms out of two hundred and sixteen public limited firms were analysed with multiple regression model using dividend per share as the dependent variable while earning per share (eps) and market price per share (mps) are the independent variables. the results showed that the eps and mps of eight firms are both statistically significant and have impact on shareholder’s wealth of the quoted firms while that of two firms are not statistically significant at 10% confidence interval. the model of this study is wrong as it used dividend as the dependent variable instead of share price to represent shareholders wealth as stated in its objective. the data on eps, dps and mps are not synchronized. data used is also scanty because instead of using panel data, it did the analyses as time series of individual companies, and therefore its findings are very misleading. ordu, enekwe and anyanwaokoro (2014) conducted a study to find out the effect of dividend payment on the market share prices in nigeria. seventeen quoted firms were considered for a period of twelve years (2000-2011). using the ordinary least squares technique, positive effect was found between market share price (mps) and dividend per share (dps). this result supports the dividend relevance theory, confirming that dividend increase results to an increase in market share price. dada, malomo and ojediran (2015) support this argument and concluded that investors prefer dividend payment to future growth. iqbal, ahmed and shafi (2014) looked at the effect of dividend bubble on share prices of thirty quoted firms in karachi stock exchange for a time frame of eleven years. time series data of the thirty listed firms were analysed with linear regression model. the result showed that earning per share, return on equity, retention ratio are positively correlated with share price while dividend yield and price earnings ratio have a negative impact on share price. the study however concluded that dividend has a strong positive impact on share prices of kse and thus, supports the dividend relevance theory. this study is faulted because of the use of time series of thirty firms for a period of eleven years. a panel data would have been more appropriate in order to get valid findings and conclusion. oyinlola and ajeigbe (2014) examined the impact of dividend policy on stock prices of quoted firms in nigeria, using 22 companies listed on the nigerian stock exchange over the period 2009 – 2013. it used panel regression model to determine the impact of dividend per share and retained earnings per share on share price. the results indicate that both dividend and retained earnings significantly impact on share price. in addition, granger causality tests indicate that dividend per share granger cause share price. toby (2014) studied the relevance of dividend policy in share price determination in the nigerian stock market with a sample of twenty stocks within the period 2005-2012 with regression analyses of dividend and retained earnings time series data on individual companies. the study found that there is no significant relationship between change in dividend policy and change in share price. this surprising result differs from the extant literature on the impact of dividend on share price. the result carried out the analysis on company basis (separate regression analyses for each www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 2; 2018 4 stock in the sample) rather than use cross-sectional or panel data which will capture inter-company variations. furthermore, the study did not include appropriately defined earnings variable in the analyses. it instead used retained earnings. in the results neither dividend nor retained earnings was a statistically significant determinant of share price. the conclusion of the study that “the results agree with the earlier research works which argue that dividend policy is irrelevant in determining enterprise value” is therefore very suspect and invalid. edward’s (2014) investigated the effect of dividend on share price of some selected quoted firms in ghana stock exchange for a period 2005-2009 using descriptive analyses on the primary data, found that dividend is highly correlated with share prices in ghana. ojeme, mamidu and ojo (2015) studied the impact of dividend policy on shareholders wealth in nigerian quoted banks before and after the global financial meltdown within the period of four years (2007 – 2010). secondary data of all 21 quoted banks during this period were gathered from nse and firm’s published annual reports. the study concluded that positive correlation between average market value of share and dividend paid by banks is an indication that payment of dividend is relevant and the amount paid affect the market value of banks’ shares. this is not a valid test of dividend irrelevance theory. it used only correlation analysis and four years data. it did not consider the influence of earnings on share price as posited by the dividend irrelevance theory. oduwole (2015) evaluated and compared the predictive power of earnings and dividends in nigeria for a period of fourteen years (2001-2014). the quarterly data of the variable used (eps, interim and final dividends) were collected from the nigerian stock market. the study used portfolio evaluation measures (sharpe ratio and jensen alpha) to assess the investment performance of portfolio based on dividend yield and earnings yield, respectively. the results indicate that a portfolio formed using a market capitalization weighted approach for the highest quartiles of dividend yield outperformed buy the market and hold policy while similar portfolio based on earnings yield did not outperform the market. this is not a test of dividend irrelevance theory. chirima (2015) investigated the impact of dividend pay-out on stock prices of quoted service firms of zimbabwean stock exchange for a period of five years (2008-2012). the data were analysed with chi-square and regression model. the result showed a statistically significant relationship between dividend announcements and share prices. egbeonu, edori and edori (2016) examined the weighted average of five year financial summary data of twelve listed firms from the various sectors of the nigerian stock exchange in order to measure the impact of dividend policy on firms’ value. the study reported that internal rate of return is inversely insignificant, dividend per share is inversely significant while earning per share is positively significant to share price. adesina, uwuigbe, uwuigbe, asiriuwa and oriabe (2017) examined the impact of dividend policy on share price valuation in nigeria. data of four out of twenty two banks were analysed during ten years’ timeframe (2006-2016). they observed in their study that earning per share has a strong impact on share price while there is significant impact of dividend yield and retention ratio on share price. it was however concluded that there is need for nigerian firms to consider dividend policy in other to increase the firm’s earnings and future performance. iftikhar, raja and sehran (2017) established that dividend has a positive statistical influence on stock price after they investigated the impact of dividend policy on five state banks of the karachi stock exchange (kse) for a period of ten years. they concluded that dividend is relevant in kse. budagaga’s (2017) study supported the dividend relevance theory after observing the effect of dividend payment on forty-four firms’ value of istanbul stock exchange for duration of nine years. udobi, iyiegbuniwe & ezike (2018) examined the impact of current dividend on market shares prices of the nigerian stock exchange. the study analysed fifteen years (15) secondary data of nse quoted firms with mediation analysis. stock prices is the dependent variable while current dividend, current earnings, asset-growth, salesgrowth, insider-shareholding and leverage are the independent variables. the findings indicate that current dividend has a direct (unique) effect on share price, and at the same time has indirect effect on share price through current earnings. it concluded that current earnings partially mediate the effect of current dividend on quoted nigerian firms. 3. research methods the purpose of this study is to test the validity of miller and modigliani dividend irrelevance theory in nigeria by defining dividend and earnings as expected dividend and expected earnings. this study is based on all the shares listed on the nigerian stock exchange (nse). it covers a period of fifteen years, (2001-2015). this time period is chosen because of the availability of data, to accommodate the pre and post consolidation of nigerian’s financial institutions. it was further reduced because of firms with incomplete data points were deleted. stock price data were obtained from the daily official price list of the nigerian stock exchange. data on earnings per share, dividend per share, insider-shareholding, assets, and sales turnover were collected from the nigerian stock exchange fact book and published annual reports of the listed companies that constitute the sample of this study. assets-growth (proxy www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 2; 2018 5 for investment opportunity), sales-growth (proxy for investment growth), and leverage (proxy for risk) variables were computed from the earnings, sales turnover, and total assets data. the study uses a panel study to measure the impact of expected dividend and expected earnings on share price in nigeria. 3.1. model specification mediation analysis, a new methodology in finance adapted from the field of social psychology is used to determine the irrelevance of expected dividend on share price. it is imperative to estimate the direct effect of expected dividend on share price which is beyond the effect of expected dividend on share price that is due to the relationship between dividend and a mediator (such as earning). mediation refers to a situation when the relationship between a predictor variable (expected dividend) and an outcome variable (share price), can be explained by their relationship to a third variable called the mediator (for example, expected earnings). mediation is said to have occurred, if the strength of the relationship between the predictor variable (expected dividend) and the outcome variable (share price) is reduced by including the mediator variable (expected earnings). in the case of perfect or complete mediation, the effect of the predictor is completely wiped out by including the mediator. baron and kenny (1986), judd and kenny (1981), james and brett (1984) discussed three models in establishing mediation, these three models are needed in investigating the mediation of the effect of a predictor variable(dividend) on an outcome variable(share price) by a mediating variable(earnings):  model 1 is to determine that the predictor (expected dividend) is correlated with the mediating variable (expected earnings). this step requires the regression of earnings on dividend to confirm that dividend is a significant predictor of earnings. the regression model is: m = β1 + β2 x1 + ei (1) where: β1 = intercept β2 = coefficient of the relationship between dividend and the mediating variable (earnings) x = dividend m = earnings ei = error term  model 2 is to determine that the predictor variable (expected dividend) is correlated with the outcome variable (share price). in other words, regress outcome variable (share price) on the predictor variable to confirm that dividend is a significant predictor of share price. the regression model is; y = λ1 + λ2 xi + ei (2) where: y = outcome variable λ1 = intercept; λ2 = total effect of dividend on share price xi = predictor variable; ei = error term the value of the coefficient “λ2” is the total effect of expected dividend on share price. this step establishes that there is a dividend effect on share price that may be mediated.  model 3 is to determine that the mediating variable (expected earnings) affects share price. the regression model is y = ɤ1 + ɤ2 x + ɤ3m + ei (3) where: ɤ1 = intercept; ɤ2 = the direct effect of expected dividend on share price ɤ3 = the direct effect of expected earnings on share price y = share price; x = dividend; m = earnings; www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 2; 2018 6 ei = error term, equation (3) produces the direct effect of expected dividend on share price, ɤ2, and the direct effect of expected earnings on share price, “ɤ3”. the model controls for the influence of earnings on the effect of dividend on share price by establishing the effect of earnings on share price as suggested by baron and kenny (1986), judd and kenny (1981), mediation analysis can be done through a series of regression analyses which reflect the above conditions necessary to demonstrate mediation. fields (2012),however affirmed that by far, the best way to tackle mediation analyses is to use the process custom dialog box written by hayes (2012) to wrap the preacher and hayes(2004, 2008a) mediation and moderation tools in a convenient menu and dialog box interface in ibm statistical package for social sciences statistical software (spss). this software was employed to do mediation analysis in this study. 3.2. estimation technique field (2012) states that the three models discussed earlier (equations 1, 2 and 3) above test the four conditions of mediation:  expected dividend must significantly predict expected earnings in model 1 (equation 1).  expected dividend must significantly predict share price in model 2 (equation 2).  expected earnings must significantly predict share price in model 3 (equation 3).  expected dividend must predict share price less strongly in model 3 than in model 2. to establish that earnings completely mediates the dividend-share price relationship, in model 3 (equation 3), the effect of dividend on share price after controlling for earnings (coefficient ɤ2) should not be significantly different from zero. such result will uphold dividend irrelevance proposition. but if in model 3 (equation 3) the coefficient c' is significantly different from zero and the coefficient ɤ3 is not significantly different from zero, dividend irrelevant proposition is refuted. but if in model 3 (equation 3), the coefficient, ɤ2, is significantly different from zero and coefficient “β1” in model 1(equation 1) and “ɤ3” in model 3(equation 3), are significantly different from zero, then earnings has partial mediation effect on dividend, suggesting that dividend has both indirect (mediation) effect (through earnings) and direct effect on share price. field (2012) further observed that although baron and kenny (1986) advocated looking at the size of the regression parameters, in practice, people tend to look for a change in significance. so mediation would occur, if the relationship between the predictor (dividend) and outcome (share price) was significant (p< 0.05) when looked at in isolation (model 1) but not significant (p > 0.05), when the mediator (for example, earnings) is included (model 3). where the coefficient of the predictor (dividend) is significant in both models 1 and 2, mediation can exist, if there is a reduction in the size of the coefficient of relationship between the predictor(dividend) and outcome (share price) in model 3, as compared to model 1. in other words, the predictor variable (dividend) predicts the outcome variable (share price) less strongly in model 3 than in model 1. field (2012) remarked that the problem with baron and kenny (1986) test of mediation is the question of how much of a reduction is necessary to intermediation. 4. data analysis and interpretation descriptive statistics and correlation table 1. descriptive statistics n minimum maximum mean std.deviation earnings 609 -20.000 28.000 2.065 3.724 dividend 602 0.00 24.000 1.293 2.658 share price 608 0.50 1056.65 38.14 78.827 insider -holdings (%) 612 5 88 54.44 20.317 assetturnover (nm) 592 57.04 3186128 34443 148532 sales -turnover (nm) 596 93.17 673181 50580 84363 change in earnings 559 -20.00 25.00 0.133 2.287 change in dividend 548 -7.00 8.30 0.073 1.255 change in share price 558 -214.02 483.43 4.115 32.254 sales –growth (%) 541 -97.44 3254.45 28.877 155.903 leverage 423 -1460.01 803.67 -1.954 85.695 asset growth (%) 535 -3785.49 6091.16 40.546 332.678 source: author’s computation, 2016. www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 2; 2018 7 4.1. correlation of expected dividend, expected earnings, and share price a necessary condition for use of mediation analysis is that expected dividend is correlated with the mediator variables respectively (expected earnings, insider-shareholding, assets-growth, sales-growth, and leverage); and that the mediator variables are correlated with share price, respectively. the correlation matrix of expected dividend and the mediation variables (expected earnings, insidershareholding, assets-growth, sales-growth, and leverage) and share price is presented in table 2. expected dividend is correlated with share price with a coefficient of 0.82 which is statistically significant at p value of 0.00. expected dividend and expected earnings have a correlation coefficient of 0.89 which is statistically significant at p-value of 0.000. the correlation of expected earnings with share price is 0.78, which is statistically significant at p-value of 0.000.these results indicate that expected earnings has the potential of mediating the impact of dividend on share price. these results confirm that mediation analysis is an appropriate technique to evaluate the influence of earnings on the impact of dividend on share price. the correlation coefficient of dividend and the other mediating variables (insider-shareholding, assetsgrowth, salesgrowth, and leverage) are relatively low and suggestive that these variables may not be significant dividend signalling variables. table 2. correlation matrix of variables expected earnings expe cted divid end share price insider share holding asset sales earnings change div. change share price change sales growth % leve rage asset growth % expected earnings 1 expected dividend p-value 0.89 .000 1 share price p-value 0.78 .000 0.82 .000 1 insider share – holding p-value 0.08 0.39 0.10 0.16 0.09 0.23 1 asset p-value 0.04 .338 0.01 .778 0.01 .844 -0.26 .000 1 sales p-value 0.31 .000 0.31 .000 0.27 .000 -0.16 .000 0.45 .000 1 expected earnings change p-value 0.37 .000 0.17 .000 0.07 .000 0.02 .048 0.02 .575 -0.02 .000 1 expected dividend change p-value 0.15 .000 0.31 .000 0.01 .000 0.03 .028 0.00 .830 0.00 3 .936 0.28 .000 1 share price change p-value 0.37 .000 0.41 .000 0.58 .000 0.04 .023 -0.02 .789 0.02 .600 0.07 .506 0.08 .496 1 sales growth (%) p-value -.02 .818 -.02 .956 -0.02 .496 0.03 .503 0.00 .998 0.00 .932 0.02 .504 0.03 .396 0.00 .786 1 leverage 0.02 0.05 0.03 0.05 0.00 0.03 0.00 0.02 0.02 0.01 1 www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 2; 2018 8 p-value .666 .334 .520 .319 .973 .597 .949 .751 .660 .458 asset growth (%) p-value 0.02 .539 0.02 .883 0.00 .932 -0.06 .000 0.15 .000 0.09 .000 0.08 .862 0.04 .520 -0.03 .319 0.12 .597 0.01 .395 1 source: author’s computation, 2016 4.2. relationship between expected dividend and expected earnings table 3 presents the regression of expected dividend on expected earnings. the regression coefficient is 0.4649 and it is statistically significant at p-value of 0.0000. this confirms that expected dividend is a significant predictor of expected earnings and that expected earnings is a possible mediator in the relationship between dividend and share price. the positive sign of the regression coefficient confirms that increase in dividend pay-out is a signal of increase in future earnings as posited by the dividend information signalling theories (bhattacharya, 1980). the estimated regression model is: mi = ɵ1+ ɵ2xi + ei (4) = 0.0686 + 0.4649xi + ei where: ɵ1 = intercept ɵ2 = the influence of expected dividend on expected earnings xi = expected dividend mi = expected earnings ei = error term the null hypothesis is: ho: ɵ2 = 0. table 3. relationship between expected dividend and expected earnings model summary r r 2 mse f df1 df2 p 0.2957 0.0875 4.2941 38.33 1 400 0.0000 model coefficient s.e t p constant 0.0686 0.1036 0.6627 0.5079 expected dividend 0.4649 0.0751 6.1913 0.0000 source: author’s computation, 2016. 4.3. total effect of expected dividend on change in share price the total effect (without control of the effect of the moderators) of dividend on share price is shown in table 4. the regression coefficient of expected dividend is positive and statistically significant at p-value of 0.0018. this confirms that expected dividend is a significant predictor of changes in share price. the coefficient of determination (r 2 ), 3.13 per cent, is small and suggests that there are other variables that determine changes in share price other than expected dividend. the positive sign of the regression coefficient of dividend indicates that share price will increase with increase in expected dividend. the total effect of dividend on share price measures its influence without the mediating variables in the regression model. the total effect of expected dividend on change in share price is obtained by the regression of expected dividend on change in share price as in the model below. yi = + xi + ei = 5.2943 + 3.8465 xi + ei (5) where; α = intercept = coefficient of expected dividend y = change in share price www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 2; 2018 9 table 4. total effect of expected dividend on change in share price model summary r r 2 mse f df1 df2 p 0.1770 0.0313 1153.37 2.129 6 395 0.0492 model: outcome variable is change in share price coefficient s.e t p constant 5.2943 1.6930 3.1273 0.0019 expected dividend 3.8645 1.2273 3.1489 0.0018 source: authors’ computation, 2016. as seen earlier, it is necessary to decompose the total effect of dividend into the direct and the indirect (mediated) effects of dividend on share price via the following mediating variables: expected earnings, insidershareholding, assets-growth, sales-growth, and leverage. 4.4. direct effect of expected dividend and the mediators on change in share price the direct effect of expected dividend on change in share price is the influence of dividend on share price in the presence of the mediating variables in the regression model: the regression model is as follows: yi = α1 + α2 xi + α3 m1i + α4 m2i + α5 m3i + α6 m4i + α7 m5i + ei (6) yi = 0.59 + 3.5545xi + 0.68m1i+ 0.09m2i – 0.005m3i – 0.005m4i + 0.006m5i + ei where: α1 = intercept α2 = direct effect of expected dividend on share price α3 = direct effect of expected earnings α4 = direct effect of insider-shareholding α5 = direct effect of assets-growth α6 = direct effect of sales-growth α7 = direct effect of leverage y = change in share price x = expected dividend m1 = expected earnings m2 = insider-shareholding m3 = assets-growth m4 = sales-growth; m5 = leverage; and ei = the error term. the null hypothesis is that: h0 : α1 = α2 = α3 = α4 = α5 = α6 = 0 table 5. direct effect of expected dividend on change in share price model summary: outcome variable is change in share price r r 2 mse f df1 df2 p 0.1770 0.0313 1153.37 2.129 6 395 0.0492 model coefficient s.e t p constant 0.5859 5.1726 0.1133 0.9099 expected earnings 0.6831 0.8255 0.8275 0.4084 insider-shareholding 0.0921 0.0881 1.0457 0.2963 assets-growth -0.0047 0.0053 -0.8838 0.3773 sales-growth -0.0054 0.0216 -0.2494 0.8032 leverage 0.0064 0.0193 0.3286 0.7426 expected dividend 3.5545 1.2904 2.7545 0.0062 source: author’s computation, 2016. www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 2; 2018 10 the results in table 5 show that only the regression coefficient of expected dividend is statistically significant with a p-value of 0.0062. the regression coefficients of all the mediators, particularly expected earnings, are not statistically significant. these results indicate that dividend has unique effect on share price because the direct effect of expected dividend was estimated with control on the influence of the moderators (particularly expected earnings) on share price. 4.5. indirect effect of expected dividends on change in share price the verification of relevance or irrelevance of the influence of dividend on share price dictates that the respective indirect (mediated) effect of dividend on share price via the mediators (expected earnings, insider-shareholding, assets-growth, sales-growth, and leverage) are estimated and tested for statistical significance. the indirect effects of dividend on share price through earnings, insider-shareholding, assets-growth, sales-growth and leverage are shown in table 6. table 6. indirect effect of expected dividend on change in share price mediating variable effect boot s.e boot llci boot ulci total indirect effect 0.3100 0.5015 -0.4850 1.6731 expected earnings 0.3175 0.4823 -0.4697 1.5961 insider shareholding 0.0454 0.0388 -0.0061 0.1599 asset growth -0.0382 0.0547 -0.1507 0.0312 sales growth -0.0212 0.0878 -0.2666 0.0925 leverage 0.0064 0.0375 -0.0749 0.0566 source: authors’ computation, 2016. as shown in table 6, none of the indirect effect of dividend on share price via the mediating variables is statistically significant, since their respective bootstrapped confidence interval contain zero value. hence, the null hypothesis that the indirect effect is zero cannot be rejected for all the mediating variables. of particular note is that the indirect effect of dividend on share price via expected earnings is not statistically significant. this indicates that while the direct effect of dividend on share price is significant, the indirect effect of dividend on share price via expected earnings is not significant. further insight into the statistical significance of the indirect effects is done with the normal theory (sobel) test of indirect effect, shown in table 7. this ultimate test of indirect effect shows that none of the indirect effects of the mediating variables is statistically significant. table 7. sobel test of indirect effects of expected dividend on change in share price variable effect s.e z p expected earnings 0.3175 0.3921 0.8099 0.4180 insider shareholding 0.0454 0.0999 0.4543 0.6496 asset growth -0.0382 0.0939 -0.4067 0.6843 sales growth -0.0212 0.1060 -0.1997 0.8417 leverage 0.0064 0.0677 0.0948 0.9244 source: authors’ computation, 2016. though none of the indirect effect of dividends on share price is statistically significant the relative importance of the mediating variable can be established by computing the completely standardized effect size of the mediating variables. the completely standardized effect coefficients are not dependent on the units of the mediating variables. they are measured in standard deviation units and so are directly comparable (field, 2012). standardized coefficients represent the number of standard deviations that the outcome variable will change as a result of one standard deviation change in a predictor variable. the completely standardized indirect effect of dividend on share price is exhibited in table 8. table 8. effect size (completely standardized) indirect effect mediating variable effect boot se boot llci boot ulci total 0.0125 0.0240 -0.0187 0.0815 earnings 0.0128 0.0236 -0.0179 0.0787 www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 2; 2018 11 insider-shareholdings 0.0018 0.0016 -0.0004 0.0070 investment-growth -0.0015 0.0023 -0.0064 0.0013 sales-growth -0.0009 0.0037 -0.0099 0.0044 leverage 0.0003 0.0016 -0.0032 0.0027 source: author’s computation, 2016. as shown in table 8, the most important mediating variable is expected earnings with a standardized effect size of 0.0128. insider-shareholding variable comes a distant second with standardized effect size of 0.0018. next are assetgrowth, salesgrowth and leverage in a descending order of importance. the above findings are inconsistent with the dividend irrelevance proposition that the influence of dividend on share price is due to its relationship with expected earnings. rather, the significance of the direct effect of dividend on share price suggests that dividend has unique influence on share price. the results of this study are therefore consistent with dividend relevance proposition. 5. conclusion the argument of miller and modigliani (1961) dividend irrelevance proposition implies that the effect of dividend on share price is fully mediated by earnings. full mediation of the effect of dividend on share price by earnings means that the direct effect of dividend on share price will not be significantly different from zero and indirect effect of dividend on share price via earnings will be significantly positive. on the other hand, if the mediation effect is partial, then both the indirect and direct effect of dividend on share price will be significantly positive. in this case, there will be a reduction from the total effects of dividend on share price, which is accounted for by the indirect effect of expected dividend on share price. if the effect of expected dividend on share price is not mediated by expected earnings, the indirect effect of expected dividend on share price via expected earnings will not be significantly different from zero, while the direct effect will be significantly positive. in this study,mediation analyses was applied to isolate and measure the direct, indirect and total impact of expected dividend on firm’s share prices with the mediation of expected earnings,insider shareholdings. asstes-growth, salesgrowth and leverage. the results shows that the direct effect of dividend on share price is positive and statistically significant while the indirect effect of expected dividend on share price, through expected earnings is insignificant. furthermore, mediation of the effect of expected dividend on share price by insider-shareholding, assets-growth, sales-growth, and leverage (risk) were found to be statistically insignificant, respectively. while the total effect of dividend on share price is positive and statistically significant. these results contradict dividend irrelevance proposition but are consistent with dividend relevance hypothesis. the conclusion following from these results is that earnings do not mediate the effect of dividend on share price. dividend has significant direct effect on share price that is not due to the relationship between dividend and earnings and thus, the miller and modigliani’s dividend irrelevance proposition do not hold in the nigerian stock market. dividend is relevant for the 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(1962). dividend policy: it’s influence on the value of the enterprise. journal of finance, 18(2), 280291. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). american finance & banking review; vol. 3, no. 1; 2018 issn 2576-1226 e-issn 2576-1234 impact factor: 4.1 published by centre for research on islamic banking & finance and business 12 oil price volatility, exchange rate movements and stock market reaction: the nigerian experience (1985-2017) onyemachi maxwell ogbulu 1 1 department of banking and finance, abia state university, uturu, nigeria correspondence: onyemachi maxwell ogbulu, department of banking and finance, abia state university, uturu, nigeria. email: onyemachi.ogbulu@abiastateuniversity.edu.ng to cite this article: ogbulu, o. (2018). oil price volatility, exchange rate movements and stock market reaction: the nigerian experience (1985-2017). american finance & banking review, 3(1), 12-25. retrieved from http://www.cribfb.com/journal/index.php/amfbr/article/view/200 received: october 10, 2018 accepted: october 25, 2018 online published: november 12, 2018 abstract given the observed volatility in crude oil prices in the international oil market and the role which oil and gas play in the nigerian economy, this paper is an attempt to investigate the impact of crude oil prices and foreign exchange rate movements on stock market prices in nigeria. in addition, the paper examined whether there is any volatility pass-through between the dollar price of nigerian crude oil, foreign exchange rate of the naira and stock market prices respectively. data employed for the study are monthly values of the nigerian stock exchange (nse) all-share index (asi), dollar price of nigerian crude oil (dpo) and the official exchange rate of the naira to the us dollar (fxr) from january, 1985 to august, 2017. the methodology adopted for the study include the adf unit root tests, johansen co-integration tests, the ecm technique, granger causality tests, variance decomposition as well as the garch(1,1) to model the volatility relationships among the variables. findings reveal that there is one long-run dynamic co-integrating relationship among the variables asi, dpo and fxr while the ecm results indicate that crude oil price (dpo) significantly impact on stock market prices. the granger causality test reports a bi-directional causality relationship between asi and dpo and a unidirectional causality running from fxr to asi. the arch-garch volatility analysis demonstrates vividly that stock market prices in the nse exhibit arch effect with a significant and positive first order arch term. the garch term is also positive and significant indicating that previous month’s stock market price volatility significantly influences current stock market volatility in the nse. in addition, findings show that the volatility of dollar price of nigerian oil (dpo) in the world oil market is significantly transmitted to the volatility of stock market prices in nigeria. the pass-through effect of the volatility of exchange rate (fxr) to the volatility of stock market prices is also positive and significant. these findings offer significant informational signal to policy makers, portfolio managers/advisors and the investing public in achieving optimal asset and portfolio profile. keywords: crude oil prices, stock market price, exchange rates, volatility, arch-garch, variance decomposition. 1. introduction ever since the discovery of oil in oloibiri, nigeria on sunday, 15 th january,1956 and the coming on stream of its first oil field producing about 5,100 bpd in 1958, the oil and gas sector has continued to playa central role in the economic development of nigeria and even in the current world economy. for instance, oil contributes about 90% of all foreign exchange earnings of nigeria, account for as high as 20% of gdp, 80% of total government revenue and about 65% of total trade. given the level of interdependence among nations in today’s global economy, fluctuations in crude oil prices in the international oil market are bound to have profound impact on different sectors of the economy including the stock markets and the foreign exchange markets. the nature and extent of this impact depends to a large extent on whether the country is an oil-importing or oilexporting country. for oil-importing countries, rising oil prices obviously leads to increases in production costs, lower output levels and lower stock returns whereas oil-exporting countries would be happy with rising oil prices www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 3, no. 1; 2018 13 since this would translate to higher disposable incomes, consumption, investments and cash flows. thus, the transmission mechanisms through which oil prices impact on real economic activity include both supply and demand channels (ogbulu and torbira, 2012). in addition, the magnitude of these supply-side and demand-side effects is in turn stronger the more the shock is perceived to be long-lasting.. the literature of finance is replete with several studies conducted by scholars to explore the nature of the relationship between changes in crude oil prices and stock markets and other key macroeconomic variables such as real economic growth. however, the controversy has not been settled as there is as yet no consensus on the raging controversy. for example, while studies conducted by authors like muhtaseb and al-assaf (2017), ono (2011), iheanacho (2017), basher and sadorsky (2016) find significant and positive impact of oil price shocks on stock market returns, the works of others like yusuf (2015), bastianin and manera (2014) as well as berk and aydogan (2012) found mixed results for the impact of oil price shocks on stock market volatility. the objective of this paper therefore is to empirically examine the nature and extent of the relationship between fluctuations in crude oil prices in the international oil market and stock market prices in nigeria. in addition, the paper investigates whether there is any volatility relationship between crude oil prices and stock market prices and the extent to which volatility in crude is transmitted to stock market prices in nigeria. the paper is arranged as follows. section 1 contains the introduction while in section 2, we have literature review. methodology and data are in section 3, while results and discussion of findings are presented in section 4. section 5 contains the conclusion and recommendations. 2. literature review 2.1 theoretical framework the theoretical foundation of asset valuation can be traced to the seminal work of gordon (1959), lintner (1965) and mossin (1966) who demonstrated that the value of an asset at any particular point in time (t) depends on the stream of benefits to be derived by the holder of the asset over the life of the asset. thus, the price an asset would command in the market is a function of the expected stream of benefits accruable to the investor as well as the risk attendant on the investment. however, it has been observed by many scholars and practitioners alike that numerous factors both economic and non-economic, affect the price of assets in the stock market and this has given rise to the emergence of many theories of valuation of assets. a brief survey of these theories includes the fundamentalist approach, the technicalist approach, the efficient market hypothesis model as well as the arbitrage pricing theory. as amply cited by ogbulu (2012), the fundamental approach is predicated on the assumptions that every security has an intrinsic value and that the intrinsic value of every security is reflected in the market price of that security. it is also assumed that the basic economic and fundamental facts and features about a firm or corporation determine the intrinsic value of securities issued by the firm or corporation. thus according to the fundamentalists, the task of the rational investor is to undertake rigorous fundamental analysis of the basic economic facts relating to assets to determine their intrinsic values as a prelude to identifying mis-priced assets in the market. hence, armed with information on mis-priced securities the rational investor can formulate profitable trading rules. (okafor, 1983), (bodie, et al.,2008) on the other hand, the technical approach dismisses the quest to obtain knowledge of intrinsic value as irrelevant in the buy or sell decisions of investors in the capital market. the assumptions here are that the value of a security is determined by the forces of supply and demand and that prices of securities are observable, chartable and follow recurring patterns which can be used to formulate profitable trading rules in the market. for the technicalists therefore, reliance on market prices and their patterns over time would provide signals for timing of market transactions to optimum advantage.(francis, 1980). the efficient market approach is anchored on the emh which assumes that market prices of securities fully reflect all available and relevant information about such securities and changes in security prices are random and not systematic as propounded by the technicalists. for the emh approach therefore, there is no specific and recurring patterns in the behavior of stock prices which could provide the basis for formulating reliable and profitable trading rules. (hirt and block,1983) the culmination of the emh is the single-factor capm according to which the expected return on an asset is postulated be an increasing function of the asset’s beta coefficient. although some authors like roll (1977) are of the view that the capm is untestable on account of the difficulty in finding a perfect proxy for the market portfolio, the work by ogbulu (2012) demonstrates the use of an allasset market portfolio to test the validity of the single-factor capm. expectedly, the discussions and controversies that have been generated over the years on the proper meaning of the term “all available information” have given rise to the characterization of the emh into three levels of market efficiency namelythe weak form, the semi-strong form and the strong form (bodie, kane and marcus, 2008; ogbulu, 2009). the weak form asserts that current market prices of securities in the capital market fully reflect the information implied by the historical sequence of prices of the securities. hence, the weak form efficiency implies that knowledge of past prices of a security cannot be used to predict future prices of that asset www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 3, no. 1; 2018 14 nor consistently secure abnormally high rates of return. the semi-strong form says that all public information about the securities including historical information is already fully reflected in the current prices of the securities hence an investor cannot use fundamental analysis of the securities to determine whether an asset is mis-priced or not in order to produce abnormal returns. on the other hand, the strong form states that all, not just publicly available information about a security is fully reflected in security prices such that even those with privileged or what may be considered as insider information can utilize such information to earn superior returns in the market. the arbitrage pricing theory (apt) in contrast to the emh single-factor capm, postulates a multifactor apt which generalizes the single-factor model to incorporate several other sources of systematic risk beyond the beta coefficient. (ross,1976); (chen, roll and ross, 1986). notwithstanding the apparent contradictions inherent in these theories, it should be noted that each approach has its adherents and in practice many practitioners are wont to use a combination of these approaches to arrive at optimal decisions. resting on the tenets of the fundamentalist approach therefore, it is apposite to contend that prices of financial assets quoted on any stock exchange are influenced not only by firm-specific and industry factors but also by macro-economic, socio-economic, political and even socio-cultural factors within and outside the domestic economy given the inter-connectedness of many nations today. the focus of this paper therefore is to examine the nature and extent of the impact of nigeria’s crude oil price and the naira exchange rate on stock market prices in nigeria as well as investigating the volatility spillover effect from crude oil price and exchange rates to the stock market prices. 2.1 theoretical background the oil price-stock market price transmission path can be traced in two ways. first is the cash flow path and the second relates to the wealth effect the link between oil prices and stock returns can be explored by explaining the channels through which the changes in oil price can affect real stock market returns. in theory, there are several transmission mechanisms that clarify this relation. according to the financial economic science, there are two main channels. first, based on a microeconomic perspective, a logical way is the channel of expected cash flow. oil is an important input in the production process; therefore, higher production costs due to higher oil prices will adversely affect margins, cash flows and hence stock prices. second, according to the macroeconomic view, oil prices may impact stock returns via the discount rate. an oil price increase often results in inflationary pressures. the central bank may raise the interest rate to combat these pressures (basher and sadorsky, 2006). since both the inflation rate and interest rate, which constitute the discount rate, are influenced by oil price, it follows that the rise in oil price raises the discount rate, and thus, reduces the stock returns. in fact, the response of aggregate stock returns to oil price changes greatly depends on whether the country in question is an oil-importing or exporting country. for a net importer of oil, a rise in oil price puts a downward pressure on the country’s foreign exchange rate and upward pressure on domestic inflation rate. because a higher expected inflation rate raises the discount rate, an increase in oil prices has a negative impact on stock returns (huang et al. 1996). a positive impact is, however, expected on stock market in oil exporting countries as a reaction to a change in oil prices. the mechanism can be explained through income and wealth effects. a rise in oil prices raises government revenues, and public expenditure on infrastructure may increase. furthermore, higher prices lead to an immediate transfer of wealth from net oil importers to net oil exporters. government spending on purchasing domestic goods and services generates a higher level of economic activity and improves stock market returns in these countries (bjornland, 2009). 2.2 empirical literature review in their paper, lake and katrakilidis (2009), explored the effects of oil price returns andoil price volatility on the greek, the us, the uk and the german stock markets. more specifically, the authors’ research focused on the interactions among oil prices, its volatility, and the stock market returns as well as on the futures indices of each index. the volatility of the employed indices has been quantified by applying egarch models and the relationship between the variables has been examined by means of structural equation models (sem). the findings from their analysis reveal that the greek stock market index returns and the us stock market index returns are both sensitive to the oil price returns movements while the german and the uk stock market returns are not affected at all. in addition, ono (2011) investigated the impact of oil prices on real stock returns for brazil, china, india and russia, the bric countries, over the period 1999:1-2009:9 using the multivariate var models. the results suggest that whereas real stock returns positively respond to some of the oil price indicators with statistical significance for china, india and russia, those of brazil do not show any significant responses. in addition, the author found statistically significant asymmetric effects of oil price increases and decreases for india but in the cases of brazil, china and russia no asymmetric effects of oil prices were detected. the analysis of variance www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 3, no. 1; 2018 15 decomposition shows that the contribution of oil price shocks to volatility in real stock returns is relatively large and statistically significant for china and russia. the paper by muhtaseb and al-assaf (2017) examined whether amman stock market returns respond asymmetrically to oil price fluctuations for the quarterly period 2000-2015 by applying asymmetric cointegration. the authors employed both tar and mtar specification models and based on the asymmetric ecm, the results of their analysis provide evidence that stock returns in the amman stock market react to oil price variations in an asymmetric manner. specifically, the findings indicate that rising oil prices have a larger impact on stock returns which implies that increases in oil prices have a significant effect on the behavior of stock market in jordan. hence the significant relationship between oil prices and stock returns strengthen their predictability power, so that appropriate strategies may be built on the basis of expected increases or decreases in oil prices. in examining the impact of oil price fluctuations on economic growth in nigeria, yusuf (2015) undertook a study to investigate the impact of oil price shocks on the nigerian economic growth using quarterly data from 1970:12011:4 while controlling for the effects of unrest in the international oil market, exchange rates and agricultural output. employing the methodology of adf unit root tests, johansen-joselius co-integration as well as the svar, irf and vdc analyses, findings revealed that all the variables are integrated of order one. in addition, the results from the irf and vdc analysis show that the response of oil price shocks and unrest to real gdp depicts both negative and positive impacts. hence, the author concludes that oil price, exchange rates, agricultural output and unrest contained some useful information in predicting the future path of economic growth in nigeria and recommended that the nigerian government should diversify the economy away from oil to non-oil sectors as well as improving the security situation in the niger delta region to boost oil output and the economy in general. furthermore, the trio of masih, peters and de mello (2011) explored the empirical relationship between oil price volatility and stock price fluctuations in south korea using monthly data from may, 1988-january, 2005. the authors adopted the multivariate vec model incorporating the variablesinterest rates, economic activity, real stock returns, real oil prices and oil price volatility. the results of the analysis vividly show the dominance of oil price volatility on real stock returns and emphasized how this has increased over time thus underscoring the point that oil price volatility can have profound effect on the time horizon of investment and firms need to adjust their risk management procedures accordingly. zubair, okorie and sanusi (2013), in their study investigated the exchange rate pass-through to domestic prices in nigeria by employing the impulse response from an estimated svar model of the inflation process using quarterly data for the period 1986-2010. the results suggest that the exchange rate pass-through is incomplete, low and fairly slow. in addition, the authors report that the elasticity of inflation to exchange rate changes is about 0.02, and that it takes about eight quarters to reach its full-impact of only 0.26. the authors further argue that given the large share of imports in nigeria’s consumption basket, this surprisingly low pass-through indicates that importers practice the so-called pricing-to-market strategy of price setting for the nigerian market. the variance decomposition analysis suggests that money supply has contributed more to nigeria’s inflation process relative to the exchange rate. this suggests that policy makers must beep up efforts at achieving monetary stability. furthermore, bastianin and manera (2014) in their research paper explored the impact of oil price shocks on the us stock market volatility by deriving three different structural oil shock variables namely aggregate demand, oil-supply and oil-demand shocks which the authors related to stock market volatility using bivariate svar models, one for each oil price shock. monthly data from february, 1973-december, 2013 were employed in the analysis. the findings of the study show that volatility responds significantly to oil price shocks caused by sudden changes in aggregate and oil-specific demand while the impact of supply-side shocks were negligible and insignificant. using cross-country analysis, dhaoui and khraief (2014) examined the empirical linkage between oil price shocks and stock market volatility in eight developed countries namely-usa, switzerland, france, canada, uk, australia, japan and singapore. using monthly data for the eight developed countries from january 1991 to september 2013 and employing the methodology of egarch with an arch-in-mean model (egarch-m), findings reveal that strong negative connections between oil price and stock market returns are found in seven of the selected countries. oil price changes are without significant effect on the stock market of singapore. furthermore, the authors report that on the volatility of returns, the changes in oil prices are significant for six markets and they have not much effect on the others. berk and aydogan (2012) in their paper investigated the impact of crude oil price variations on the turkish stock market returns. the authors employed vector autoregression (var) model using daily observations of brent crude oil prices and istanbul stock exchange national index (ise-100) returns for the period between january 2, 1990 and november 1, 2011. in addition, they also tested the relationship between oil prices and stock market www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 3, no. 1; 2018 16 returns under global liquidity conditions by incorporating a liquidity proxy variable, chicago board of exchange’s (cboe) s&p 500 market volatility index (vix), into the model. according to the authors findings of the variance decomposition test suggest little empirical evidence that crude oil price shocks have been rationally evaluated in the turkish stock market. rather, it was global liquidity conditions that were found to account for the greatest amount of variation in stock market returns. the work by hamma, jarboui and ghorbel (2014) examined the links and interaction between oil and stock markets in tunisian terms of volatility at the sector-level and secondly to determine the best hedging strategy for oil stock portfolio against the risk of negative variation in stock market prices. the authors investigated seven sectors namely-automobile &parts, banks, basic materials, utilities, industrials, consumer services and financial services using weekly data from 2 nd april, 2005 to 12 th july, 2012. the methodology adopted is the bivariate garch model to capture the effect in terms of volatility in the variation of oil price on the different sector index, and to use the conditional variances and conditional correlation to calculate the hedging ratio and then determine the best hedging strategy. the empirical results obtained indicate that the majority of relationships are unidirectional from the oil market to tunisian stock market. in addition, the conditional variance of a stock sector returns is affected not only by the volatility surprises of the stock market, but also by those of oil market. further empirical research on sectoral impact of oil price volatility include the work by caporale, ali and spagnolo (2015) in which the researchers investigated the time-varying impact of oil price uncertainty on stock prices in china using weekly data on ten sectoral indices over the period january 1997–february 2014. they estimated a bivariate var-garch-in-mean model and the results suggest that oil price volatility affects stock returns positively during periods characterized by demand-side shocks in all cases except the consumer services, financials, and oil and gas sectors. the latter two sectors are found to exhibit a negative response to oil price uncertainty during periods with supply-side shocks instead. by contrast, the impact of oil price uncertainty appears to be insignificant during periods with precautionary demand shocks. the paper by kang, ratti and yoon (2015) examined the impact of structural oil price shocks on the covariance of u.s stock market return and stock market volatility. the authors constructed from daily data on return and volatility the covariance of return and volatility at monthly frequency. the measures of daily volatility are realized-volatility at high frequency (normalized squared return), conditional-volatility recovered from a stochastic volatility model, and implied-volatility deduced from options prices. results indicate that positive shocks to aggregate demand and to oil-market specific demand are associated with negative effects on the covariance of return and volatility while oil supply disruptions are associated with positive effects on the covariance of return and volatility. in addition, the spillover index between the structural oil price shocks and covariance of stock return and volatility is large and highly statistically significant. 3. methodology and data 3.1. methodology the methodology adopted for this study is the econometric investigative enquiry which involves the application of regression analysis, unit root tests, johansen co-integration tests, the error correction mechanism (ecm), granger causality tests and the arch-garch(1,1) model to test for volatility effect from changes in crude oil price and exchange rates to stock market prices. in addition, the paper employed the variance decomposition (vdc) analysis within an unrestricted var setting to examine the forecast error decomposition of the variables ten months into the future. 3.1.1model specification the functional relationship describing the response of stock market prices to changes in the international crude oil prices and exchange rates can be stated as in equation (1) thus: asi = f(dpo, fxr)…………………………………………………………………….(1) while the functional model is specified as asi = β0 + β1dpo + β2fxr +μ………………………………………………….(2) where: asi= nigerian stock exchange all-share index dpo= nigerian crude oil price in the international market fxr= exchange rate of the naira to the us dollar www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 3, no. 1; 2018 17 the apriori theoretical expectation about the signs of the parameter coefficients are given as β1> 0 and β2<0 given that nigeria is an oil-exporting nation, increase in oil prices leads to increase in aggregate income and cash flows and hence a bullish stock market, all things being equal. 3.1.2 unit root test the unit root test has become a popular test of the stationarity or otherwise of time series data in many econometric studies given the time-dependent nature of many economic variables. some of the most popular tests for unit root are the augmented dickey-fuller (adf) test, the phillips-perron (p-p) test and the kwiatkowski-phillips-schmidt-shin (kpss) test the adf unit root test is adopted in this study. the tests usually consist of estimating the regression: n ∆yt = β1 + β2t + δyt-1 + ∑αi∆yt-1 + εt…………….(3) i=1 where εt is a pure white noise error term and ∆yt-1 = (yt-1 – yt-2), ∆yt-2 = (yt-2 –yt-3), and so on with a number of lagged difference terms included so that the error term is serially uncorrelated to enable the researcher obtain an unbiased estimate of δ, the coefficient of lagged yt-1 in equation (3) above (gujarati and porter, 2009). in testing for unit root, the null and alternative hypotheses are stated as ho: η = 1 (unit root exists and series is nonstationary) as against h1: η = 0 (no unit root, series is stationary). 3.1.3 the granger causality test the granger causality test is used for testing the direction of causality between variables say y and x (granger,1969). the test is based on estimating the following bivariate regressions. n n yt= ∑ αixt-i + ∑ βjyt-j + u1t ………………………………………….( 4 ) i=1 j=1 n n xt = ∑ δiyt-i + ∑ λjxt-j + u2t ……………………………………………(5) i=1 j=1 where yt and xt are the variables of interest while u1t and u2t are the disturbance terms assumed to be uncorrelated. the present study employed the granger causality test to estimate the degree of causality between stock market prices, crude oil prices and exchange rates (brooks, 2008 ). 3.1.4 the arch-garch test the development of the autoregressive conditional heteroscedasticity (arch) model is usually attributed to engle (1982) who developed the arch model to capture the effect of serially correlation of volatility in time series data according to which the arch model expresses conditional variance as a distributed lag of past squared innovations. (goudarzi, 2013). in developing the arch model, the conditional return must be modeled first by stating the return relationship as an autoregressive ar(p) process with lags up to (p) stated as follows say: asit= αo + ∑ αt asit-1 + εt ……………………………………………(6) where asit is current stock market price in period t. equation (8) above implies that asit depends not only on (asit-1) but also on previous prices (asit-p). given that the arch model assumes that the residuals (ε’s) have no constant variance, the conditional variance is modeled to incorporate the arch process of (ε 2 ) in the conditional variance with (q) lagged values of the residuals (ε 2 ) as stated in equation (7). σt 2 = αo + α1εt-1 2 +… + αp εt-p 2 …………………………………(7) however, bollerslev (1986) as well as bollerslev, chou and kroner (1992) refined engle (1982) linear arch (q) model as represented in equation (6) above to remove its long lag structure by including the lagged values of the conditional variance in his formulation which bollerslev called the generalized conditional heteroscedasticity (garch) model. that is, the garch (p,q) model specifies the conditional variance to be a linear combination of (q) lags of the squared residuals (ε 2 t) from the conditional return equation and (p) lags from the conditional variance (σt-j 2 ). the garch (p,q) model is then written as follows: σt 2 = αo + ∑αiεt-i 2 + ∑βjσt-j 2 ………………………………………….(8) where αi, βj>0 and αi, βj< 1 to avoid the possibility of negative conditional variance. from equation (8), it means that the current value of the conditional variance is a function of a constant and values of the squared residuals from the conditional return equation plus values of the previous conditional variance. (goudarzi, 2013). thus, given the standard garch (p,q) model, if both the arch and garch coefficients are significant then there is evidence of volatility in the squared series. in addition, the garch model can be utilized to model volatility clustering. if the coefficients of the arch and garch terms sum up www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 3, no. 1; 2018 18 to 1, then there is volatility clustering and confirms the presence of arch and garch effects in the variable (s) of interest. 3.2 data data for the study are secondary data (monthly) sourced from the nse official daily stock market price list of the nse from january, 1985 to august, 2017. the data on crude oil prices and foreign exchange rates were extracted from the cbn statistical bulletin. the summary descriptive statistics for the data series on asi, dpo and fxr are as presented in table 1. the raw data are presented in the appendixes. table 3.1 presents the summary statistics for the variables for the period under study. the mean of asi is 15349.46 with a standard deviation of 15135.06. for dpo, the mean dollar price of crude oil is 38.88 us$ and standard deviation of 29.7us$. the mean of fxr is n90.5607 to $1 with a standard deviation of n76.3737 to$1. the j-b statistic for all the series show that they are all not normally distributed. table 1: summary statistics (1985:1-2017:8) asi dpo fxr mean 15349.46 38.88087 90.56069 median 9872.700 24.26500 111.6000 maximum 65652.40 128.0800 309.7300 minimum 111.3000 8.030000 0.820300 std. dev. 15135.06 29.70307 76.37374 skewness 0.863020 1.024385 0.594463 kurtosis 3.009841 2.789413 3.008463 jarque-bera 48.66207 69.28283 23.08907 probability 0.000000 0.000000 0.000010 sum 6016988. 15241.30 35499.79 sum sq. dev. 8.96e+10 344968.6 2280683. observations 392 392 392 4. results and discussion 4.1 unit root test results table 2 shows a summary of the adf unit root test results obtained using the e-views version 9.0 statistical package. the results indicate that all the variables are integrated of order one. that is, they all become stationary after the first differencing. table 2 adf unit root test results variable adf test statistic at 1st diff order of integration asi -8.153873 1(1) dpo -10.615780 1(1) fxr -14.243390 1(1) critical values: 1% -3.447036; 5% -2.868790; 10% -2.570698 source: author’s computation 4.2 co-integration test results having established that the series are integrated of the same order, it becomes plausible to apply the johansenjoseluis co-integration test to determine whether there is any long-run dynamic relationship among the variables. in table 3, the johansen co-integration test results are presented. the results show that there is one long-run cointegration relationship between stock market prices, crude oil price and exchange rates for both the trace test and the maximum eigenvalue test. the test assumes a linear deterministic trend and was estimated with lag interval of 1 to 8. table 3: johansen co-integration test results sample (adjusted): 10 392 included observations: 383 after adjustments trend assumption: linear deterministic trend series: asi dpo fxr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 3, no. 1; 2018 19 lags interval (in first differences): 1 to 8 unrestricted cointegration rank test (trace) hypothesized trace 0.05 no. of ce(s) eigenvalue statistic critical value prob.** none * 0.062490 34.88953 29.79707 0.0119 at most 1 0.023737 10.17525 15.49471 0.2675 at most 2 0.002540 0.974171 3.841466 0.3236 trace test indicates 1 cointegrating eqn(s) at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **mackinnon-haug-michelis (1999) p-values unrestricted cointegration rank test (maximum eigenvalue) hypothesized max-eigen 0.05 no. of ce(s) eigenvalue statistic critical value prob.** none * 0.062490 24.71428 21.13162 0.0150 at most 1 0.023737 9.201075 14.26460 0.2698 at most 2 0.002540 0.974171 3.841466 0.3236 max-eigenvalue test indicates 1 cointegrating eqn(s) at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **mackinnon-haug-michelis (1999) p-values source: author’s computation 4.3 error correction model having established that there exists long run relationship among the variables, the oil price-stock market price linkage under investigation is then specified in an ecm incorporating a fourperiod lagged residual. the ecm is employed to capture the short-run deviations of the parameters from the long-run equilibrium within the framework of an ardl technique to obtain an overparameterized ecm and then arriving at the parsimonious error correction result using the general specific approach. table 4: parsimonious ecm result dependent variable: d(asi) method: least squares date: 09/03/17 time: 22:25 sample (adjusted): 6 392 included observations: 387 after adjustments variable coefficien t std. error t-statistic prob. c 92.45219 78.76416 1.173785 0.2412 d(asi(-1)) 0.056604 0.051333 1.102690 0.2709 d(asi(-2)) 0.170585 0.050269 3.393427 0.0008 d(asi(-3)) 0.210106 0.050362 4.171922 0.0000 d(asi(-4)) -0.137790 0.052094 -2.645016 0.0085 d(dpo) 65.86481 17.39081 3.787335 0.0002 d(dpo(-1)) 23.24333 17.79356 1.306278 0.1923 d(dpo(-4)) -28.88898 17.53848 -1.647177 0.1004 d(fxr) -14.95351 15.42477 -0.969448 0.3329 d(fxr(-1)) -8.333265 15.43510 -0.539890 0.5896 www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 3, no. 1; 2018 20 d(fxr(-3)) -13.43361 14.72812 -0.912106 0.3623 ecm(-1) -0.025511 0.010777 -2.367129 0.0184 r-squared 0.176671 mean dependent var 93.15098 adjusted r-squared 0.152520 s.d. dependent var 1628.564 s.e. of regression 1499.235 akaike info criterion 17.49381 sum squared resid 8.43e+08 schwarz criterion 17.61656 log likelihood -3373.053 hannan-quinn criter. 17.54248 f-statistic 7.315248 durbin-watson stat 1.973917 prob(f-statistic) 0.000000 source: author’s computation table 4 presents the results of the parsimonious ecm estimated using difference data of the variables. from the results, it is evident that changes in crude oil prices (dpo) have a significant and positive impact on stock market prices (asi). changes in foreign exchange rates are positive but not significant. the adjusted r 2 is approximately 15.25% while the d-w statistics of 1.97 shows the absence of autocorrelation in the residuals. the ecm coefficient value of -0.0256 approximately, is appropriately signed and significant and indicates that the speed of adjustment of the model back to the long-run equilibrium when disturbed by any short-run shock is 2.56% per month. 4.4 granger causality test results as mentioned in 3.1.3, granger causality test is employed to examine the direction of causality between two variables of interest. in table 5 the results of the granger causality tests are exhibited. the results report a bidirectional causality relationship between crude oil price (dpo) and stock market prices (asi) while the causality relationship between asi and fxr is uni-directional running from foreign exchange rates (fxr) to asi. there is no significant causality relationship between fxr and dpo. table 5: granger causality test results sample: 1 392 lags: 2 null hypothesis: obs fstatistic prob. dpo does not granger cause asi 390 4.64971 0.0101 asi does not granger cause dpo 10.7126 3.e-05 fxr does not granger cause asi 390 3.70910 0.0254 asi does not granger cause fxr 0.14697 0.8634 fxr does not granger cause dpo 390 2.70202 0.0683 dpo does not granger cause fxr 1.16005 0.3146 source: author’s computation 4.5 arch-garch test results for volatility the test for the presence of volatility and its transmission effect in the crude oil price-stock market price relationship is modeled using the arch-garch(1,1) technique. the first step in the volatility analysis is to establish whether the residuals in the crude oil price-stock market price model possess any arch effect. table 6 presents the results of the heteroskedasticity test which indicates significant arch effect in our model. that is, the variances of the residuals are not constant from one period to another thus confirming the presence of high volatility in the series. www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 3, no. 1; 2018 21 table 6: heteroskedasticity test: arch f-statistic 1714.830 prob. f(1,389) 0.0000 obs*r-squared 318.7038 prob. chi-square(1) 0.0000 test equation: dependent variable: resid^2 method: least squares date: 09/03/17 time: 22:33 sample (adjusted): 2 392 included observations: 391 after adjustments variable coefficien t std. error t-statistic prob. c 5100817. 3040211. 1.677784 0.0942 resid^2(-1) 0.902918 0.021804 41.41051 0.0000 r-squared 0.815099 mean dependent var 5291325 1 adjusted r-squared 0.814624 s.d. dependent var 1.29e+0 8 s.e. of regression 55612294 akaike info criterion 38.51081 sum squared resid 1.20e+18 schwarz criterion 38.53111 log likelihood -7526.863 hannan-quinn criter. 38.51886 f-statistic 1714.830 durbin-watson stat 2.342716 prob(f-statistic) 0.000000 presample variance: backcast (parameter = 0.7) garch = c(4) + c(5)*resid(-1)^2 + c(6)*garch(-1) + c(7)*dpo + c(8) *fxr variable coefficient std. error z-statistic prob. c -1166.007 40.83944 -28.55100 0.0000 dpo 51.83831 3.161708 16.39567 0.0000 fxr 109.1698 0.730276 149.4910 0.0000 t variance equation c -47756.27 3360.200 -14.21233 0.0000 resid(-1)^2 1.060223 0.224648 4.719479 0.0000 garch(-1) 0.030020 0.099226 0.302543 0.7622 dpo 3554.836 35.39264 100.4400 0.0000 fxr 198.9288 235.7687 0.843746 0.3988 r-squared 0.514602 mean dependent var 15349.46 adjusted r-squared 0.512107 s.d. dependent var 15135.06 s.e. of regression 10571.74 akaike info criterion 18.24893 sum squared resid 4.35e+10 schwarz criterion 18.32998 log likelihood -3568.791 hannan-quinn criter. 18.28106 durbin-watson stat 0.026526 the presence of volatility in the model can also be demonstrated graphically by observing the plot of the residuals. fig.1 below is the plot of the residuals from equation (2). -40,000 -20,000 0 20,000 40,000 -20,000 0 20,000 40,000 60,000 80,000 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 residual actual fitted fig 1: plot of residuals of oil price-stock price model www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 3, no. 1; 2018 22 from the graph above, we can deduce the presence of volatility in the model where small (large) changes are followed by large (small) changes especially during the period 2006 to 2010. the next step involves the estimation of the arch-garch model to examine the nature and extent of the volatility relationship among the variables. in table 7, we present the results of the estimated garch model using e-views 9. the mean equation shows a significant and positive relationship between stock market prices (asi) and crude oil prices (dpo) as well as between foreign exchange rates (fxr) and stock prices. the variance equation indicates that both the arch and garch terms are positive and significant meaning that stock market prices in the nigerian stock market exhibit strong volatility. it is also evident from the results that changes in the international crude oil price (dpo) contribute significantly to the volatility in stock market prices in nigeria just as changes in foreign exchange rates (fxr) do also contribute significantly to the volatility in stock market prices. in addition, there is evidence of volatility clustering in the model given that the sum of the arch and garch terms is one (1) approximately. this implies that shocks to the conditional variance are highly persistent. table 7: arch-garch test result dependent variable: asi method: ml arch normal distribution (bfgs / marquardt steps) sample: 1985m01 2017m08 included observations: 392 failure to improve likelihood (non-zero gradients) after 70 iterations coefficient covariance computed using outer product of gradients presample variance: backcast (parameter = 0.7) garch = c(4) + c(5)*resid(-1)^2 + c(6)*garch(-1) + c(7)*dpo + c(8) *fxr variable coefficien t std. error z-statistic prob. c -861.9789 49.69672 -17.34478 0.0000 dpo 36.40032 3.200040 11.37496 0.0000 fxr 100.1106 0.689781 145.1340 0.0000 variance equation c -38153.37 6898.508 -5.530670 0.0000 resid(-1)^2 0.985343 0.192599 5.116042 0.0000 garch(-1) 0.125656 0.050631 2.481799 0.0131 dpo 2355.079 450.4689 5.228061 0.0000 fxr 580.9129 109.5096 5.304677 0.0000 r-squared 0.424575 mean dependent var 15349.46 adjusted r-squared 0.421616 s.d. dependent var 15135.06 s.e. of regression 11510.44 akaike info criterion 18.20694 sum squared resid 5.15e+10 schwarz criterion 18.28799 log likelihood -3560.561 hannan-quinn criter. 18.23906 durbin-watson stat 0.022134 source: authors computation 4.6 variance decomposition analysis to further our investigation, the variance decomposition analysis was undertaken to examine the response of stock market prices emanating from own shocks and also from shocks in crude oil prices and foreign exchange rates within an out of sample period of ten months. in tables 8, we show the results of the vdc obtained from the unrestricted var estimation of the model. the results in table 8 indicate that own shocks from stock market prices (asi) account for 100% of the forecast variance decomposition in the first month in the future and none is attributable to the other variables and steadily decreases to 98.68 % in the 10 th month. in the 10 th month for example, shocks emanating from dpo and fxr account for the remaining 1.32% in the variance decomposition of asi. www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 3, no. 1; 2018 23 the first panel in the graph in fig 2 amplifies the variance decomposition of asi due to shocks from asi and the other variables. table 8: variance decomposition test results variance decomposition of asi: period s.e. asi dpo fxr 1 1582.229 100.0000 0.000000 0.000000 2 2372.300 98.97639 0.936641 0.086969 3 2982.137 98.48131 1.399620 0.119073 4 3475.070 98.33504 1.553430 0.111530 5 3887.317 98.35498 1.553003 0.092016 6 4241.111 98.44049 1.480838 0.078667 7 4550.743 98.53915 1.378907 0.081947 8 4825.831 98.62279 1.269258 0.107947 9 5073.153 98.67554 1.164028 0.160430 10 5297.680 98.68792 1.070191 0.241888 0 20 40 60 80 100 1 2 3 4 5 6 7 8 9 10 percent asi var iance due to asi 0 20 40 60 80 100 1 2 3 4 5 6 7 8 9 10 percent asi var iance due to dpo 0 20 40 60 80 100 1 2 3 4 5 6 7 8 9 10 percent asi var iance due to fxr 0 20 40 60 80 100 1 2 3 4 5 6 7 8 9 10 percent dpo var iance due to asi 0 20 40 60 80 100 1 2 3 4 5 6 7 8 9 10 percent dpo var iance due to dpo 0 20 40 60 80 100 1 2 3 4 5 6 7 8 9 10 percent dpo var iance due to fxr 0 20 40 60 80 100 1 2 3 4 5 6 7 8 9 10 percent fxr var iance due to asi 0 20 40 60 80 100 1 2 3 4 5 6 7 8 9 10 percent fxr var iance due to dpo 0 20 40 60 80 100 1 2 3 4 5 6 7 8 9 10 percent fxr variance due to fxr variance decomposition fig 2: graph of variance decomposition of asi 4.7 discussion of findings the results from the parsimonious ecm indicate that changes in crude oil prices (dpo) significantly and positively affect changes in stock market prices (asi) in nigeria. foreign exchange rate movements are appropriately signed but not significant. the above ecm results when taken with the granger causality results www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 3, no. 1; 2018 24 which show a bi-directional causality relationship between asi and dpo underscores the fact that there is a strong and significant relationship between crude oil prices and stock market activities. the uni-directional causality from fxr to asi suggests that activities in the foreign exchange market also influence prices in the stock market. these findings are in consonance with the results of the studies carried out by kang, ratti and yoon (2015), zubair, okorie and sanusi (2013) as well as an earlier work by ogbulu and torbira (2017). furthermore, the results of the volatility test using the garch (1,1) model vividly confirm the presence of arch effect in the asi-dpo model. the mean equation shows that both dpo and fxr are positive and significant just as the variance equation depicts that both the arch and garch terms are significant and positive. the implication is that both the previous month’s squared residual (volatility) and the previous month’s residual (volatility) of stock market prices (asi) significantly and positively influence the current month’s volatility of the nigerian stock market. in addition, both dpo and fxr contribute significantly to the volatility of stock market prices in the nigerian context. the observed results also indicate the presence of volatility clustering in the market. the results of the forecast variance decomposition of asi emanating from own innovations dominate those of dpo and fxr within the forecast period of 10 months. these results agree well with earlier results from the works of basher, alfred and sadorsky (2010) and berk and aydogan (2012). 5. conclusion and recommendations this paper set out to investigate in the main the nature and extent of the relationship between crude oil prices and stock market prices in nigeria with foreign exchange rate movements as a control variable. in addition, the paper sought to explore the nature of the volatility relationship between crude oil prices and stock market prices in nigeria using the garch (1,1) model. the findings of the paper vividly indicate that changes in crude oil prices in the international oil market significantly affect stock market prices in nigeria. on volatility, it is evident that crude oil prices and foreign exchange rates contribute significantly to the volatility of the stock market in nigeria. in the light of the above results, it is recommended that investors in the nigerian stock market should always incorporate information emanating from the international oil market and the nigerian foreign exchange market in their investment-decision process. given the observed significant relationships between crude oil prices and the stock market including the presence of volatility pass-through in the markets, it is apt for policy makers in nigeria to design and sustain investment-friendly policies that would help in boosting oil production. the issue of security, infrastructure and energy are of paramount importance in achieving this goal. references basher, s. a.& sadorsky, p. 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(2013). exchange rate pass-through to domestic prices in nigeria: an empirical investigation, economic and financial review, central bank of nigeria, vol.51, no.1, pp. 128 copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/) copyright © cc-by-nc 2019, cribfb | amfbr american finance & banking review; vol. 4, no. 1; 2019 issn 2576-1226 e-issn 2576-1234 published by centre for research on islamic banking & finance and business, usa 22 a small macro-econometric model bijan bidabad b.a., m.sc., ph.d., post-doc. professor economics and chief islamic banking advisor bank melli, iran e-mail:bijan@bidabad.com abstract different sizes of macro-econometric models are used for different policy purposes. in this paper, we introduce a small macroeconometric model that includes macro-aggregates variables that can be solved dynamically and be used as a sample model to be estimated for other countries. keywords: macro-econometric, econometric model, mathematical model. 1. introduction the largest-scale macro-econometric model for iran performed by the author is a high detailed model, and working with it is more cumbersome for those who need a general forecast scheme for major macro-variables. indeed this model is used to draw a simple working scheme to fulfill general view’s needs. in addition to its simplicity, this model substantially has a good performance. this model compromises the fiscal position of the government; a well understood transmission mechanism between monetary aggregates, price level, production, and balance of payments. 2. the model a very simple monetary model is presented according to the monetarist's view. the following flow chart presents the relationship between the main variables of the model. as it is seen, the liquidity is decomposed to the net domestic assets and net foreign assets of the banking system. the net foreign asset component is affected by the official exchange rate and the balance of payments. the net domestic assets consist of three components: private sector debt to the banking system, government debt to the banking system, and net of other assets. the private sector debt to the banking system is affected by gross domestic product (gdp). the government debt to the banking system is influenced by the government budget deficit and foreign exchange obligations account. the price level is defined as a function of liquidity. change in gdp is affected by the balance of payments. the estimated results are presented in the following section. the econometric model was estimated by ols technique. the sample period covers 1960-2001. to avoid integration problem, all level variables are used in their first differences. 2.1 variables: m2nfae = net foreign assets of the banking system (in billion dollars) m2ngv = net government debt to the banking system (in billion rials) m2lpv = net private sector debt to the banking system (in billion rials) m2nw = other assets of the banking system (in billion rials) obd = government budget deficit (in billion rials) bop = balance of payments (million dollars) mailto:bijan@bidabad.com copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 23 gdpv = nominal gdp (in billion rials) gdp = gross domestic production at fixed prices of 1982 (in billion rials) pgdp = gdp deflator (base year=1982) m2 = liquidity (in billion rials) e = exchange rate d…. = dummy variables. @trend = time trend 2.3 relationship between the main variables of the monetary model 2.4 the mathematical model the following system of equations was built and estimated: d(m2nfae) = c(11)*bop/1000+c(12)*d72+c(13)*d69+c(14)*d60+c(15)*d7680 d(m2ngv) = c(20)+ c(21)*obd +c(22)*d79 +c(23)*d80 d(m2lpv) = c(31)*d(gdpv)+c(32)*d80 d(m2nw) = c(41)*d7780+c(42)*d79+c(43)*d80+c(44)*@trend d(pgdp) = c(51)*d(m2) +c(52)*d80 d(gdp) =c(60)+c(61)*bop/1000+ c(62)*d(gdp(-1))+c(63)*d5659 +c(64)*d65 +c(65)*d55 m2 = m2nfae * e + (m2ngv + m2lpv + m2nw) gdpv = gdp * pgdp real gdp nominal gdp official exchange rate liquidity m2 price level balance of payments changes in other assets of the banking system net other assets net gov. debt to banking system net private debt to banking system government budget deficit changes in previous real gdp copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 24 ====================================================== estimation results ====================================================== system: sys_inf estimation method: least squares date: 12/03/03 time: 15:57 sample: 1339 1380 (1960-2001) included observations: 42 total system (unbalanced) observations 251 ====================================================== coefficient std. error t-statistic prob. ====================================================== c(11) 0.914673 0.097201 9.410124 0.0000 c(12) -21.40064 1.346235 -15.89666 0.0000 c(13) 9.443943 1.346362 7.014414 0.0000 c(14) 5.263224 1.367823 3.847885 0.0002 c(15) -2.368778 0.621046 -3.814173 0.0002 c(20) -274.1686 167.8247 -1.633661 0.1037 c(21) 1.257852 0.055344 22.72777 0.0000 c(22) -14060.40 975.8079 -14.40899 0.0000 c(23) 11626.61 962.0447 12.08531 0.0000 c(31) 0.309446 0.012301 25.15634 0.0000 c(32) 33424.48 2846.179 11.74363 0.0000 c(41) -12933.99 598.0382 -21.62736 0.0000 c(42) 29662.57 960.1021 30.89523 0.0000 c(43) 4877.350 960.1694 5.079677 0.0000 c(44) -15.28007 5.684013 -2.688254 0.0077 c(51) 7.03e-06 2.96e-07 23.79357 0.0000 c(52) -0.294803 0.032899 -8.960742 0.0000 c(60) 6249.474 1531.646 4.080234 0.0001 c(61) 1354.759 568.7077 2.382171 0.0180 copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 25 c(62) 0.368434 0.093348 3.946897 0.0001 c(63) -23153.95 4256.940 -5.439107 0.0000 c(64) -26557.75 8121.092 -3.270219 0.0012 c(65) 23064.76 8199.437 2.812969 0.0053 ====================================================== determinant residual covariance 5.51e+22 equation: d(m2nfae) = c(11)*bop/1000+c(12)*d72+c(13)*d69 +c(14)*d60+c(15)*d7680 observations: 42 r-squared 0.913271 mean dependent var 0.132592 adjusted r-squared 0.903895 s.d. dependent var 4.341973 s.e. of regression 1.346047 sum squared resid 67.03814 durbin-watson stat 2.147208 equation: d(m2ngv) = c(20)+ c(21)*obd +c(22)*d79+c(23)*d80 observations: 42 r-squared 0.971197 mean dependent var 2320.165 adjusted r-squared 0.968084 s.d. dependent var 5260.589 s.e. of regression 939.8117 sum squared resid 32680103 durbin-watson stat 2.238885 equation: d(m2lpv) = c(31)*d(gdpv)+c(32)*d80 observations: 42 r-squared 0.960945 mean dependent var 5773.873 adjusted r-squared 0.959969 s.d. dependent var 13071.46 s.e. of regression 2615.321 sum squared resid 2.74e+08 durbin-watson stat 1.049681 copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 26 equation: d(m2nw) = c(41)*d7780+c(42)*d79+c(43)*d80+c(44) *@trend observations: 42 r-squared 0.967070 mean dependent var -692.9867 adjusted r-squared 0.964470 s.d. dependent var 4158.716 s.e. of regression 783.8891 sum squared resid 23350323 durbin-watson stat 3.436861 equation: d(pgdp) = c(51)*d(m2) +c(52)*d80 observations: 42 r-squared 0.923764 mean dependent var 0.047743 adjusted r-squared 0.921858 s.d. dependent var 0.089887 s.e. of regression 0.025127 sum squared resid 0.025254 durbin-watson stat 2.826425 equation:d(gdp)=c(60)+c(61)*bop/1000+c(62)*d(gdp(-1))+c(63)*d5659+c(64)*d65+c(65)* d55 observations: 41 r-squared 0.706315 mean dependent var 6893.122 adjusted r-squared 0.664359 s.d. dependent var 13732.14 s.e. of regression 7955.646 sum squared resid 2.22e+09 durbin-watson stat 1.521260 as it is seen in the estimated results, the net foreign assets of the banking system has a positive significant relationship with the balance of payments. the coefficient on c(21) is positive and significant, supporting a positive link between the government budget deficit and the government debt to the banking system. equation (5) suggests that nominal gdp is positively and significantly related to the liquidity, supporting the monetarists' view. in other words, any change in the money supply will affect the nominal gdp. in addition, net private sector debt to the banking system is positively and significantly correlated with nominal gdp. equation (6) suggests that real gdp at fixed prices is positively and significantly related to the bop. in iran, the interest rate does not affect the real output. indeed, monetary transmission policy affects the general price level, leaving trivial effects on the real output. copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 27 graph 1 plot of residuals of estimated equations -3 -2 -1 0 1 2 3 4 40 45 50 55 60 65 70 75 80 m2nfae residuals -5000 -4000 -3000 -2000 -1000 0 1000 2000 3000 4000 40 45 50 55 60 65 70 75 80 m2ngv residuals -12000 -8000 -4000 0 4000 8000 12000 40 45 50 55 60 65 70 75 80 m2lpv residuals -3000 -2000 -1000 0 1000 2000 3000 40 45 50 55 60 65 70 75 80 m2nw residuals -.12 -.08 -.04 .00 .04 .08 .12 40 45 50 55 60 65 70 75 80 pgdp residuals -20000 -10000 0 10000 20000 40 45 50 55 60 65 70 75 80 gdp residuals copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 28 2.5 dynamic simulation to evaluate the performance of the model, we solved the whole system for the whole ex-post sample period through dynamic simulation. graph 2 plots the actual value of the endogenous variables versus their simulated values. the 8 plots of graph 1 show the high dynamic response and credibility of the model to build simulated series as near as the actual series with a concordance of turning points. graph 2 simulated versus actual values of the endogenous variables in the dynamic solution -15 -10 -5 0 5 10 15 20 25 40 45 50 55 60 65 70 75 80 85 actual m2nfae (scenario 1) m2nfae -40000 -30000 -20000 -10000 0 40 45 50 55 60 65 70 75 80 85 actual m2nw (scenario 1) m2nw -20000 0 20000 40000 60000 80000 100000 40 45 50 55 60 65 70 75 80 85 actual m2ngv (scenario 1) m2ngv -50000 0 50000 100000 150000 200000 250000 40 45 50 55 60 65 70 75 80 85 actual m2lpv (scenario 1) m2lpv copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 29 as it is seen, the model simulation has a good performance and can be used for policy evaluation and forecasting purposes. this small model is an adaptable model that can be used for other countries as well. -50000 0 50000 100000 150000 200000 250000 300000 350000 40 45 50 55 60 65 70 75 80 85 actual m2 (scenario 1) m2 -0.4 0.0 0.4 0.8 1.2 1.6 2.0 2.4 40 45 50 55 60 65 70 75 80 85 actual pgdp (scenario 1) pgdp -100000 0 100000 200000 300000 400000 500000 600000 700000 40 45 50 55 60 65 70 75 80 85 actual gdpv (scenario 1) gdpv 40000 80000 120000 160000 200000 240000 280000 320000 360000 40 45 50 55 60 65 70 75 80 85 actual gdp (scenario 1) gdp copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 30 references bijan bidabad, macroeconometric model of iran, version 6.1, technical document. lap lambert academic publishing, omniscriptum gmbh & co. kg, isbn: 978-3-659-14252-9, winter 2014. bidabad, bijan, macro-econometric model of iran, version 1.00, monetary and banking research academy, central bank of iran, 1996. bidabad, bijan, macro-econometric model of iran, version 2.00, monetary and banking research academy, central bank of iran, 1996. bidabad, bijan, macro-econometric models of iran, version 3.00, vol. i, main document, monetary and banking research academy, central bank of iran, 1996. bidabad, bijan, macro-econometric model of iran, version 3.00, vol. ii, simulation and forecast, monetary and banking research academy, central bank of iran, 1996. bidabad, bijan, macro-econometric model of iran, version 4.00, descriptive document, monetary and banking research academy, central bank of iran, 1996. http://www.bidabad.com/doc/mac-model-ver4-detail.pdf bidabad, bijan, macro-econometric model of iran, version 4.00, simulation and forecast, submitted to the model building for iranian economy meeting, central bank of iran, 1997. reprinted in iran’s economy modeling, central bank of iran, 1997. http://www.bidabad.com/doc/mac-model-ver4-kholaseh.pdf bidabad, bijan, macro-econometric model of iran, version 4.00, monetary and banking research academy, central bank of iran, 1997. http://www.bidabad.com/doc/mac-model-ver4-ketab.pdf bidabad, bijan, critics on the macro-econometric model of the 3rd five years plan of iran. parliament research center, office of economic surveys, tehran, iran, 1999. revised and reprinted in "tazehaye eghtesad", the monthly review of science, economic and banking, pp. 4-7, no. 87, april 2000. monetary and banking research academy, central bank of iran. bidabad, bijan, data banks of united nations’ link project for iran. spring 2003. monetary and banking research academy, central bank of iran. http://www.bidabad.com/doc/databank-link.pdf bidabad, bijan, macro-econometric model of iran, version 5.00, main document. monetary and banking research academy, central bank of iran, 2004. http://www.bidabad.com/doc/model5book.pdf bidabad, bijan, macro-econometric model of iran, version 5.00, descriptive document. monetary and banking research academy, central bank of iran, 2004. bidabad, bijan, a glance at the macro-econometric model of iran, version 5.00. monetary and banking research academy, central bank of iran, 2004. http://www.bidabad.com/doc/model5koliat.pdf bidabad, bijan, summary of the macro-econometric model of iran, version 5.00. monetary and banking research academy, central bank of iran. presented at the monthly conference of monetary and banking research academy, 12, may 2004. tehran. http://www.bidabad.com/doc/model5kholaseh.pdf bidabad, bijan, effects of loan’s interest rate decrease on iran’s economy (macro-econometric model of iran simulation). monetary and banking research academy, central bank of iran, 2004. http://www.bidabad.com/doc/ketabeinterestrate7.pdf bidabad, bijan, a scheme of the macro-econometric model of iran, version 6.0. monetary and banking research academy, central bank of iran. presented at the 11th monthly conference of monetary and banking research academy, 1, march 2005. tehran, iran. mbra monthly conferences (2004-2005), monetary and banking research academy, central bank of iran, pp. 271-309. summarized in: tazehaye eghtesad, the monthly review of science, economic and banking, pp. 109122. no. 106, march 2005. monetary and banking research academy, central bank of iran. http://www.bidabad.com/doc/mac-model-ver4-detail.pdf http://www.bidabad.com/doc/mac-model-ver4-kholaseh.pdf http://www.bidabad.com/doc/mac-model-ver4-ketab.pdf http://www.bidabad.com/doc/databank-link.pdf http://www.bidabad.com/doc/model5book.pdf http://www.bidabad.com/doc/model5koliat.pdf http://www.bidabad.com/doc/model5kholaseh.pdf http://www.bidabad.com/doc/ketabe-interestrate7.pdf http://www.bidabad.com/doc/ketabe-interestrate7.pdf copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 31 http://www.bidabad.com/doc/model6shema.pdf bidabad, bijan, analysis of built models for appropriate monetary policy for economic stabilization in iran, parliament and research, journal of research center of iran's parliament, no. 9, 2nd year, pp. 59-95, tehran, iran, 1994. http://www.bidabad.com/doc/siyasathaye-pooli-banameh-dovom.pdf bidabad, bijan, structured data bank of system of national accounts of iran, http://www.bidabad.com/doc/sna131.xlsx bidabad, bijan, structured data bank of balance of payments of iran, http://www.bidabad.com/doc/databop12.xls bidabad, bijan, structured data bank of monetary accounts of iran, http://www.bidabad.com/doc/m2det12.xls bidabad, bijan, structured data bank of government budget of iran, http://www.bidabad.com/doc/databud7.xls bidabad, bijan, data bank for macro-econometric model of iran, http://www.bidabad.com/doc/allchk41.xls bidabad, bijan, m.j. mojarrad, the inflation targeting policy for iran. proceeding of the 6th conference of monetary and exchange rate policies, monetary and banking research academy, central bank of iran, pp. 21-57, 1996. some parts of it reprinted under the titles: "price control by inflation targeting" and "experience of some countries on inflation targeting policy"; tazehaye eghtesad, the monthly review of science, economic and banking, pp. 10-14. 22-27, no. 79, august 1999. monetary and banking research academy, central bank of iran. http://www.bidabad.com/doc/hadafgozaritavarom.pdf komijani, a; bijan bidabad, appropriate monetary policy for economic stabilization in iran. research project no. 111. ministry of finance and economic affairs, deputy of economic affairs, tehran, iran, phase i, 1992. reprinted (book) by deputy of economic affairs, ministry of finance and economic affairs, 1994. reprinted in economic journal, deputy of economic affairs, ministry of finance and economic affairs, vol. 4, pp. 2-14, vol. 5 pp. 2-12, vol. 6, pp. 2-9, vol. 7 pp. 2-7, 1996. http://www.bidabad.com/doc/siyasathayepooli-vol1.pdf komijani, a; bijan bidabad, appropriate monetary and exchange rate policy for economic stabilization in iran (emphasizing adjustment policies), deputy of economic affairs, ministry of finance and economic affairs, tehran, iran, phase ii, 1993. reprinted (book) by deputy of economic affairs, ministry of finance and economic affairs, 1996. http://www.bidabad.com/doc/siyasathaye-pooli-vol2.pdf copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). http://www.bidabad.com/doc/model6shema.pdf http://www.bidabad.com/doc/siyasathaye-pooli-banameh-dovom.pdf http://www.bidabad.com/doc/sna131.xlsx http://www.bidabad.com/doc/databop12.xls http://www.bidabad.com/doc/m2det12.xls http://www.bidabad.com/doc/databud7.xls http://www.bidabad.com/doc/allchk41.xls http://www.bidabad.com/doc/hadafgozari-tavarom.pdf http://www.bidabad.com/doc/hadafgozari-tavarom.pdf http://www.bidabad.com/doc/siyasathayepooli-vol1.pdf http://www.bidabad.com/doc/siyasathaye-pooli-vol2.pdf copyright © cc-by-nc 2019, cribfb | amfbr american finance & banking review; vol. 4, no. 1; 2019 issn 2576-1226 e-issn 2576-1234 published by centre for research on islamic banking & finance and business, usa 32 insurance and chain bankruptcy theory bijan bidabad b.a., m.sc., ph.d., post-doc. professor economics and chief islamic banking advisor bank melli, iran e-mail:bijan@bidabad.com abstract purpose: this paper aims to explain the effects of the bankruptcy of one firm in other interrelated companies which are in connection with the bankrupted firm, and shows how the insurance breaks the chain of serial bankruptcy. design: by economic analysis of insurance, the “chain bankruptcy” theory is put forward as a new theory. findings: through a mathematical-behavioral model, we will show how insurance breaks the chain bankruptcy in the economy. research limitations: we have developed the case with simple modeling based on specific assumptions. in the next step, it would be extended to a more complicated and real set of assumptions. practical implications: we show how insurance products can break serial bankruptcy in the economy. social implications: it is shown that how insurance stabilizes the economy and make the business cycle oscillation range narrow. originality/value: this approach is entirely different and new. article type: research paper keywords: insurance, bankruptcy, stabilisation policy, economic stabilisation, business cycles, economic fluctuations 1. introduction economic insurances that are often called commercial insurance have a long history, going back to 6500 years ago. according to a found papyrus belonging to 65 centuries ago, in order to help and protect each other against accidents, ancient egyptian lithographers used to pay a share to a fund. in 2250 b.c., hammurabi, king of babel legislated a law according to which transporters were responsible for the cargo they carried until delivery. in 588-640 b.c., in greece, there were associations, which established funds and received monthly fees to help and protect members against injury and damages. a similar organization has also been seen in ancient rome1. there are similar cases in the middle ages that we will not go through2. modern various3 economic insurances can be counted as follows:  life insurances  personal accidents insurances  health insurances  insurance for fire accidents and other hazards, such as explosion, theft, earthquake, flood and plane crash  cargo insurances 1 salehi, jan ali mahmoud (2002), insurance law, bimeh markazi iran, training and publication office, pp. 65-73. 2 before islam, kinds of insurance have been prevailing in arabia peninsula. the reason for not being mentioned in narrations may be because the legislator did not want to go in detail of economic subjects except when necessary. 3 there are two kinds of insurances called co-insurance and re-insurance, which distribute the consequent accident risks subjected to the insurance policy. in co-insurance, two or more insuring companies jointly insure the asset. this kind of insurance is usually used for insuring large risks such as fire accidents or explosions in factories and in case of accident, each insurance company pays his share. re-insurance is a kind of double insurance, and the first insurer insures the extra risk by another insurer. in other words, the first insurer insures a part of his obligations by another one. another kind of insurance called complimentary insurance, which is different from double insurance covers other, or extra risks for the insured. mailto:bijan@bidabad.com copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 33  transportation vehicle (sea, air, road) insurances and its related civic responsibility  general (civic and professional) responsibility insurance  all risk insurances for contracting and installations and related civic responsibilities (engineering insurance)  operation and cash in till insurances  workers honesty insurances  oil exploration and excavation and associated industries insurances  agricultural products insurances  export insurances in all kinds of above insurances upon the conditions written in their contracts and by taking fees from the insured, the insurer will cover financial support mentioned in their policy, the following general rule is satisfied. although these contracts are different in details, generally they are similar. the generality of insurance can be mathematically explained; suppose insurer receives ai dollars from the i th insured to insure asset bi. assume that the probability of losing the asset is equal to p. accordingly, if the number of insured of this kind of asset is n, and i=1… n, the amount received by the insurer will be equal with:    n 1i iaa (1) the mathematical expectation of the payments of the insurer to insured in case of loss of the assets will be equal to:    n 1i i n 1i i bpbpb (2) if the insurance fee is equal to the below ratio: n,...,1i b a q i i  (3) by replacing the terms, we can write:    n 1i i n 1i i bqa (4) by replacing (1) and (2) in (4), we will have: b p q a  (5) that is to say, the received amount by the insurer (a) is equal to the ratio of insurance fee (q) to the probability of loss of the asset (p) multiplied by the amount paid to insured (b) by the insurance company. insurer company profit will be: b p q ai  (6) if 0i  , the relation (5) will satisfy and insurer practically will have no profit, which means her economic activity has no yield. therefore, she should not enter the market. it is the same when 0i  , which means his income is less than his payments ( b p q a  ). so, when copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 34 p q b a b p q a0i  , (7) her activity is profitable. in other words, if the probability of an accident is truly estimated, the rate of insurance should be higher than the occurrence of accident probability so that the ratio of income (a) of the insurance company to her cost (b) is larger than one. in this case, the profit rate of the insurance company will be 1 p q  . this analysis means that the insurance company is a commission-receiver agent and by rendering service, obtains a percentage for risk coverage. this action is similar to levying a tax on n firms to cover their risks. in spite of reba, insurance acts against economic fluctuations. we can study this phenomenon in business cycle performance. in business cycles, fluctuations caused by seasonal fluctuations and cycles which take 8-11 years to finish, turn the economy from recession to crisis and then to recovery and prosperity and again to the recession and a new cycle. business cycles are a lengthy subject in economics that we do not go into details now. when the economy is at prosperity stage, total production is at its maximum level and then tends to decline towards recession until finally reach to the crisis. in this process, unemployment of factors of production exacerbates and reaches its peak in crisis. firms become bankrupt one after another until inventories empty and prices start to rise, and increasing demand increases output and supply and a new recovery, and then prosperity starts in the economy within 8-11 years. when the economy is in crisis, by a decrease in prices, producers and intermediates start to bankrupt, and since they cannot keep their financial obligations, social problems will be the consequences of this compulsory cycle in the economy. when the economy reaches its lowest in the crisis stage, prisons will be filled with people who can not afford to pay their debts and obligations. insurance practically will minimize this cycle and decreases its range. as it is seen in the figure below, the hashed curve has reduced production and income during recovery and prosperity, and instead, has decreased depression and crisis in the next steps. in other words, insurance has reduced the cycle range of short term oscillations and guided the growing trend towards the long-term economic trend, and the economy has been more surrounded. long term and short term economic conditions during business cycles 2. chain bankruptcy theory let us start a new discussion about chain bankruptcy. any firm at time t has some assets and liabilities. its total assets (w i) is equal to the value of all goods and physical capital and other acceptable items in firm’s (ci) portfolio plus its claims (fi) from others. that is: production time lower range upper range lon run trend crisis prosperity recovery recession insurance effect short run trend copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 35 iii fcw  (8) on the other side, debts (di) are equal to the financial obligations of the firm. altogether, in an economy with n firms, all claims will be equal to all obligations, or:    n 1i i n 1i i df (9) the net worth (asset) of each firm is equal to: iii n i dfcw  (10) by summing up the above equation, and replacing from (9), the inventory in the economy will be equal to the net worth of asset, or,    n 1i i n 1i n i cw (11) now suppose n firms have transactions with each other and ith firm buys ci amount of goods from the i-1th firm and sells it to the firm i+1th. if this process of purchase is based on credit, it will cause transmission of bankruptcy to other firms. as commodities are sold payable at maturity, ith buyer promises to the i-1th seller to pay him the amount of di at maturity. on the other hand, he sells the good to the i+1th buyer and receives a payable written document equal with fi, and the commodity goes from firm i-1 to firm i and then to firm i+1. these simple sequences will continue several times. to simplify the subject, let us suppose that the face value of the commodity ci increases  percent in each transaction between firms and these firms have no other assets except this commodity, and all their claims and obligations are related to this commodity, which creates their assets and liabilities. we can design the above chain as follows: the sale of firm zero to firm nth has been shown in the first row, and each term indicates the value of the commodity for firm j. this process is in the form of difference equation; therefore, the second row by replacing ci in terms of c0 is essentially the solution for the first row. the third row shows the debt flow of the firms, and the fourth row shows the firms’ claims. the fifth row shows the profit of firms zero to firm nth. total profit of the transactions in the economy will be equal to:        n 1i 1i 000 n 1i 1i 0 n 0i i )1(ccc)1(c (13) total debts created in the economy will be: 1 ... 1 .... 120100 )12( 1 )1(... 1 )1(..... 1 )1( 20)1( 100 1 .... 1 .... 1201 00 0)1(....0)1(....0 2 )1(0)1(0 1 )1(... 1 )1(... 1 )1( 20)1( 10)1(0                  n cnj c j ccc n cnf j c j fcfcfcf n cnd i cidcdcdd c n c j ccc n cnc j ccjcccccc     copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 36          n 0i 1i 0 n 0i 0 1i n 0i 1i n 0i i )1(cc)1(cdd (14) total claims set up in the economy will be:    n 0i i 00 n 0i i n 0i i )1(cc)1(ff (15) all the above relations have a summation of a geometric progression term:       1)1( )1( 1nn 0i i (16) therefore, we have: n 0 )1(c  (17) ) 1)1( (cd n 0    (18) ) 1)1( (cf 1n 0     (19) again, we can find the trueness of the above relations by the below replacement: df  (20) now suppose that the inventory of the last firm cn is spoiled or damaged because of an accident. therefore, his claims, which were supposed to be created by selling goods to the next firm and could compensate its debts (dn) and leave some profit n for the firm, which is equal to 1n)1(  have been ruined. that is to say, his claim, which is regarded as assets, becomes zero, but his debts and obligations remain. therefore: 0fn  (21) nn d (22) now its loss is equal to its debts to the firm n-1. the unfulfillment of his financial obligations in equations (12) will follow a reverse trend; that is equal to dn of claims of the n-1th firm ( 1nf  ) is not paid, and the profit of the n-1th firm is also lost. by using equations (12), we can write: 1n2nnn f)1(c)1)(1(d)1(f   (23) therefore: n1n f )1( 1 f   (24) copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 37 that is to say, the claims of the firm n-1 from the firm n have been equal to zero, because of the accident for goods of the n th firm. the general form of the above equation applies to all firms: i1i f )1( 1 f   (25) since this equation is recursive, when 0fn  , all 1n0 f,...,f  will be zero too. that means, in the business of c, all merchants become bankrupt, and since they cannot obtain their claims, they cannot pay their debts. therefore, all merchants, in relation to this commodity, will be bankrupt. in this case, the losses of all merchants will be: jj d (26) which can be extracted from equations (12). the nominal loss to the economy will be: ) 1)1( (cd n 0 n 0i i n 0i i      (27) 3. insurance and chain of bankruptcy now suppose in each transaction of commodity c, its owner pays a percentage of it as an insurance fee to the insurance company. if the insurance rate is q and the ith insured always pays qci to the insurance company, by using equations (12) we can calculate insurance fees at any time. in the following sequence, qj is the insurance fee of the jth insured: nj210 qc...qc...qcqcqc  (28) 0)1(...0)1(...0 2)1(20)1(100 cnqnqcjqjqcqqcqqqcq   (29) the total insurance fee paid will be: qf)1(qcqq i n 0i 0 n 0i i    (30) which means that the total insurance fee paid is equal to the insurance fee rate multiplied by total claims of merchants from each other for transacting commodity c. assume there is one accident which ruins the commodity in n transactions, so the probability of this accident will be equal to: n 1 p  (31) therefore, if the commodity is destroyed in the nth transaction, the insurance company has to pay 1nn cd  to the nth merchant. the company can afford to pay this amount for her obligations, and since 1nf  is not zero in this case, the recursive equation (25) for all claims of previous merchants will not become zero, and they obtain their profits. in this case, only the nth merchant has no profit, but has even no loss, because the insurance company has covered his loss by paying him dn which is equal to the value of his lost commodity. the insurance company calculates the accident probability through equation (31) and thereof, insurance fee. in our example, the insurance fee will be: copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 38 f q q  (32) and insurance cost for the jth insured will be j 0j )1(qcq  , and therefore, the income of the insurance company will be: ) 1)1( (qcq 1n 0     (33) the mathematical expectation of insurance company cost from equation (31) will be: ) 11)1( (0)(   n n cb   (34) the mathematical expectation of insurance company profit is as follows:                11)1( 0) 1 ()( n c n qbqi (35) if the insurance fee rate is equal to one divided by the number of transactions, the insurance company profit will be equal to zero, but even in this case, the economy gets rid of bankruptcy. but since the insurance company has offered this service to the community, he has to obtain a profit: n f q n 1 f q q  (36) that means the total insurance fee received by the company should be more than the average claim of one transaction, which is a clear result. references bidabad, bijan, (2003) religious-economic analysis of insurance and characteristics of the islamic government. monetary and banking research academy, central bank of iran, 2003. http://www.bidabad.com/doc/bimeh.pdf bidabad, bijan, (2003) problems of macroeconomic policymaking in iran, collection of 40 articles by the author, http://www.bidabad.com/doc/ketab-eghtesade-kalan.pdf bijan bidabad, insurance products in rastin banking, 2014. http://www.bidabad.com/doc/rastin-insurance-en.pdf salehi, jan ali mahmoud (2002), insurance law, bimeh markazi iran, training and publication management. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). http://www.bidabad.com/doc/bimeh.pdf http://www.bidabad.com/doc/ketab-eghtesade-kalan.pdf http://www.bidabad.com/doc/rastin-insurance-en.pdf american finance & banking review; vol. 2, no. 2; 2018 issn 2576-1226 e-issn 2576-1234 impact factor: 4.1 published by centre for research on islamic banking & finance and business, usa ownership structure and return on assets of commercial bank in nigeria joseph igbiks orumo 1 1 department of banking and finance, rivers state university, port harcourt, nigeria correspondence: joseph igbiks orumo, department of banking and finance, rivers state university, port harcourt, nigeria received: august 1, 2018 accepted: august 25, 2018 online published: september 4, 2018 abstract this study examined the effect of ownership structure on return on assets of deposit money banks in nigeria. the objective was to investigate the relationship between the composition of ownership structure and deposit money banks return on assets. cross sectional data was sourced from financial statement of fifteen quoted commercial banks. return on assets was modeled as a function of domestic ownership, ownership concentration, foreign ownership institutional ownership and management ownership. after cross examination of the validity of the pooled effect, fixed effect and the random effect, the study accepts the fixed effect model. the result found that ownership concentration, management ownership and institutional ownership have negative relationship with the dependent variable while private ownership and management ownership have positive relationship with the dependent variable which is return on investment. while private ownership, ownership concentration, institutional ownership and foreign ownership have positive effect on the dependent variable which is return on assets while management ownership have negative effect on the dependent variable. we recommend that regulatory authorities such as the securities and exchange commission, the nigerian investment promotion council should encourage private investors to invest into the equity shares of the commercial banks and the need for commercial banks to increase their ownership structure through public listing, right issue and other means of attracting public and institutional investors. keywords: ownership structure, return on assets, commercial bank. 1. introduction however, the problem in ownership structure and its effect on corporate profitability borders on the role of the owners in influencing management decision. (kobeissi and sun, 2010) noted that it is rarely difficult to separate ownership and control within any firm, thus the controllers always have some degree of ownership of the equity of the firms they control, also in some cases owners by virtue of the size of their equity position they have some effective control over the firms they own (denis and mcconnel, 2003). shleifer and vishny (1997) reveal that ownership concentration is linked with legal protection and this is one of two main element of determinant of corporate governance which is one of the key determinants of corporate performance. fractional ownership of the higher shareholders concentration exceeds a certain threshold; a higher ownership concentration raises the likelihood of tunneling and reduces firm efficiency. this situation is one of the main agency problems in countries with poor shareholder protection. the implication is that a rise in ownership concentration can decrease market liquidity as well as diversification of opportunities which consequently increases the cost of capital of a firm (lannota, nocera and sironi, 2007). the limitations on managers’ discretionary powers, which tend to affect their efficiency and profitability, are usually imposed governance mechanism by the owners. concentrated ownership considerably motivates major shareholders and parallel to the increase of their share in company, their incentives to improve operations and controlling the management will increase there are quite 20 www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 2; 2018 21 obvious benefits of concentrated ownership, but some discussion of the opposite is also true. first, the major shareholders are typically risk-averse. dispersed ownership causes the ability to improve stock liquidity and provides investors with creating diversification to lower risk. second, when the excessive control is done by concentrated ownership, internal stakeholders will be discouraged from costly investing. thirdly, concentrated ownership may cause the agency problem in another way and it is that the conflict between major shareholders and minor shareholders components arises. major shareholders will have the required incentives to use their controllable position so that they can obtain their specific interests through expense of minor shareholders (fazlzade, mohammadzade and tahbaz hindi, 2009). it is therefore imperative to examine the relationship between ownership structure and profitability of commercial banks in nigeria. the efficiency and profitability of the banking sector is of importance at macroeconomic level in a given nation. during the past decades, new movement of private ownership in the banking industry has significantly changed the banking ownership structure in many countries around the world while the ownership stake of foreigners and domestic companies & individuals witnessed increase; the involvement of government ownership has been reduced. as a result, the banking sector in nigeria has experienced major changes in its operating environment. the transformation of the banking sector from government to private and foreign company’s ownership has increased competition amongst the banks, and played a great role in improving efficiency of the sector. the financial theories and empirical reviews have all revealed that there is relationship between ownership structure and firm performance and that there is significance influence of firm owners to the way it conducts its business activities. the agency theory has revealed that agency conflicts can be reduced through ownership concentration which is more effective with investors with large stakes who proactively monitor and protect their investments thereby leading to a higher performance of the firm. according to the stakeholder theory state-owned banks tend to implement plans that are subjective to the government strategies which restrict them to optimize their potential in the market which in tandem with the situation in kenya. foreign banks tend to implement products that have been rolled out in other regions which do not automatically suite in the developing economies where they operate thereby resulting to poor performance according to the institutional theory. the theories are better applied in the developed financial market rather than the developing financial market like nigeria where the degree of market imperfection is greater than that of the developed country. the empirical studies examined above failed to establish the direction of causality that exists between the components of ownership structure and performance of corporate organizations. the studies of (kim, pattanapom, john, 2004; kiuri, 2013; kobeissi and sun, 2010; kosak and cok, 2008; lannota, nocera and sironi, 2007) failed to capture the various component of corporate ownership and its effect on corporate performance. this study therefore examines the relationship between ownership structure and profitability of nigerian commercial banks by disaggregating commercial banks profitability into return on assets, return on equity and return on investment while ownership structure is disaggregated to have managerial ownership, government ownership, ownership concentration, foreign ownership and institutional ownership. based on the above, this study intends to examine the effect of ownership structure on the profitability of the quoted commercial banks in nigeria. 2. literature review the concept of ownership structure ownership structure is defined by the distribution of equity with regard to votes and capital as well as the identity of the equity owners (jensen and meckling, 1976). these structures are of major importance in corporate governance because they determine the incentives of managers and also the economic efficiency of the corporations they manage. ownership structure is one of the main dimensions of corporate governance and is widely seen to be determined by country-level corporate governance characteristics such as the development of the stock market and the nature of state intervention and regulation (la porta, lopez de silanes, shleifer & vishny, 1998). in addition, it affects the scope of a firm’s agency costs (jensen & meckling, 1976). managerial ownership managerial ownership ordinarily represents the proportion of shares owned by the firm’s directors to total number of shares issued. warfield, wild and wild (1995) posited that corporations exhibit a myriad of managerownership structure extending from owner manager holding the vast majority of equity shares to professional managers whose ownership share is negligible. the separation of ownership and control begets questions of managers’ incentives to take action in the best interest of owners. the extent of proportion of share held by management may affect control over the firms’ decision (jensen & meckling, 1976). rudiger and rene (2007) in their study review theories of the determinants of managerial ownership and their implications for the relation between firm value and managerial ownership. they consider three theories: the agency theory, the contracting theory, and the managerial discretion theory. rudiger and rene (2007) assert that agency theory takes managerial ownership as given; greater managerial ownership aligns the interests of management better with the interests of shareholders. the contracting agency view www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 2; 2018 22 portrays that shareholders face trade-off. as the managers stake in the firm increases, their incentives become better aligned with those of shareholders in that, if they increase firm value by one dollar, their wealth increases by a greater fraction of that dollar. institutional ownership this ordinarily represents the proportion of shares owned by institutions to total number of shares issued by a firm .institutional investors are organizations which pool large sums of money and invest those sums in securities, real property and other investment assets. they can also include operating companies which decide to invest their profits to some degree in these types of assets. typical investors include banks, insurance companies, retirement or pension funds, hedges funds, investment advisors and mutual funds. their role in the economy is to act as highly specialized investors on behalf of others. for instance, an ordinary person will have a pension from his employer. the employer gives that person's pension contributions to a fund. the fund will buy shares in a company, or some other financial product. funds are useful because they will hold a broad portfolio of investments in many companies. this spreads risk, so if one company fails, it will be only a small part of the whole fund investment. (wikipedia) an institutional investor can have some influence in the management of corporations because it will be entitled to exercise the voting rights in a company. thus, it can actively engage in corporate governance. furthermore, because institutional investors have the freedom to buy and sell shares, they can play a large part in which companies stay solvent, and which go under. influencing the conduct of listed companies, and providing them with capital are all part of the job of investment management. ownership concentration ownership concentration is a measure of the existence of large shareholders in a firm. zhang (2006) defined ownership concentration as stockholders ownership proportion. it can also represent the concentration degree of ownership in firms, which means large shareholders proportion in a firm. zhang (2006) further reiterated that there are three types of ownership structure. first, absolute concentration of ownership, that is, there is only one stockholder who has the absolute power to control the firm and usually keep 50% ownership; second, absolutely dispersed ownership, implying that there are numerous stockholders; there is complete separation of ownership and control when the share ownership is highly concentrated than individual ownership as they keeps share below 10%. third, where there coexists relative concentration of ownership and some large shareholders in a firm. however, in the firm, which has relative concentration of ownership and some large shareholders, ownership structure can almost decide the composition of board. it is always assumed that only shareholders who hold large share may closely monitor the management of board. dispersed shareholders have little or no incentive to monitor the management and may have no power to decide for the board. foreign ownership there are several studies that have shown the importance of foreign ownership and its effect on the financial performance of banks. moreover, havrylek (2006) used data for 265 banks in eastern and central europe for the period (1995-2003) .she analyzed the differences in profitability between domestic and foreign banks. she found that foreign banks earn higher profits than domestic banks. in addition, she studied the benefits and costs of foreign ownership by analyzing the determinants of profitability for domestic banks. indeed, the profits of foreign banks are less affected by macroeconomic conditions of the host country. also, it should be noted that it is assumed for a long time that foreign banks in the developed countries have less profits than domestic banks (the inverse case in developing countries). return on assets return on assets (roa) is measures of firm’s performance that reveals to the users of financial statement how well a company uses its assets to generate income. a higher roa denotes a higher level of firm performance. a rising roa, for instance, may initially appear good, but turn out be unimpressive if compare with other companies in same line of activities or industrial average. hence, if company’s roa is below industrial average the company is not utilizing its full capacity. booth, berger and clarke (1999) posit that this measure was used in their study because it was the only variable that can be calculated across countries. they conclude that country comparisons of profitability are therefore difficult. among other authors that adopted this measure in their empirical studies are zeitun and tian (2007), zeitun (2009), tze-sam and heng (2011), onaolapo and kajola (2010) and khan (2012). the roa ratio may thus be more useful when compared to the risk free rate of return to be rewarded for the additional risk involved. if a firm’s roa is equal or even less than the risk free rate, investors will be indifferent and better off just purchasing a bond with a guaranteed yield. roa = profit before interest and tax total asset www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 2; 2018 23 theoretical review there are several theories done by scholars in the fields of banking, but the study will focus discussions on three financial theories in relation to the effect of ownership structure on performance of commercial banks. namely: institutional theory, agency theory and the stakeholder theory. agency theory agency theory suggests that the firm can be viewed as a nexus of contracts between resource holders. an agency relationship arises whenever one or more individuals, called principals, hire one or more other individuals, called agents, to perform some service and then delegate decision-making authority to the agents. the primary agency relationships in business are those between stockholders and managers; and between debt holders and stockholders. these relationships are not necessarily harmonious; indeed, agency theory is concerned with so-called agency conflicts, or conflicts of interest between agents and principals. this has implications for, among other things, corporate governance and business ethics. when agency occurs it also tends to give rise to agency costs, which are expenses incurred in order to sustain an effective agency relationship. accordingly, agency theory has emerged as a dominant model in the financial economics literature, and is widely discussed in business ethics texts. agency theory in a formal sense originated in the early 1970s, but the concepts behind it have a long and varied history (bowie & edward, 1992). stakeholder theory this theory states that managers react to pressures put forth by owner-stakeholders because of legitimacy, power, and urgency considerations. freeman (1984) suggests that the firm stakeholders influence the top managers who are in charge of strategy development and implementation through resource usage and withholding mechanisms. murtha and lenway (1994) suggest that states are able to influence management because they control authority, markets, and property rights which are the main strategic resources by their involvement in the appointment of a firm’s top management as well as board members and providing direct or indirect government subsidies and incentives. states involvement in the markets can negatively affect the degrees of openness (free market) or control (closed market). this influence can also manifest itself through property rights in countries where the government has undue powers in regard to property ownership. the implication of this theory is that most of the policies and market approaches implemented by commercial banks owned by the government are highly subjective to government strategies being rolled out in that period. the assumption is that the state as the major stakeholder supplies resources to these banks but with a lot of ‘strings attached’. therefore, state owned banks will perform well if and only if the ruling government influences competitive strategies. empirical review barros, ferreira and williams (2007) are less commonly found in countries outside us and uk. concentrated ownership structure is found to be more pronounced especially in the developing countries. hartzell and starks (2003) indicates that more than 40 percent of publicly traded firms in nine east asian countries are controlled by family. chen, guo and mande (2003) finds that about 80 percent of non-financial companies in thailand are family owned, while (claessens, 2003) corporate finds that majority of companies listed on bombay stock exchange are controlled by families. although studies addressing the issue of ownership structure and bank performance have increased rapidly in the past few years, but the theoretical and empirical evidences did not conclusively resolve the issue. furthermore, most of the studies are centered on non-financial firms and developed countries and very limited study done on financial institutions and developing countries such as malaysia. as developing countries are characterized with different characteristics such as high dependency on banks as source of funding, concentrated ownership structure, less expertise and skills, technology, management and compensation and wages, it creates concern whether the results of the studies on developed countries could be generalized or applicable to the developing countries. gursoy & aydogan (2002) finds that ownership structure in malaysian banks in 2002-2003 are highly dominated by family and government ownerships with shareholdings of up to 60.9 percent, and 64.4 percent respectively. they argue that the merger exercised of the domestic banking system in the year 2000 has no significant impact on the ownership structure of the domestic banking industry; concentrated ownership structure with large shareholdings continues to exist in the domestic banking institutions, government shareholdings in malaysian banks for the year 2000-2003 is 40 percent. they indicate that malaysia has the highest percentage of government controlled banks compared to thailand (30%), republic of korea (28%) and indonesia (26%). further, they also find that malaysia has the highest percentage of family shareholding in banks which is 30 percent, followed by thailand (17%) and indonesia (9%). www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 2; 2018 24 morck, daniel and bernard (2005) in their study of uk firms, in his study of firms in switzerland find that insider ownership has a positive relationship with firm performance. however, a study finds that insider ownership has an unambiguous negative effect on firm performance while insider ownership boosts risk taking strategies among managers. standard & poors 500 firms find that family-owned firms perform better than the non-family firms. they indicate that family ownership is an effective organizational structure as compared to the non-family-owned firms. nguyen hong son (2012) finds that firm‘s profitability is lower when the controlling family’s ownership is lower. pei sai (2004) finds that family-owned firms have lower performance and lower risks while oluyemi, (2006) argues that due to the high concentration of wealth in the business and the concern for the family legacy, family-owned firms tend to display an excessive risk aversion and forego profitable expansion strategies. as for the impact of government ownership to performance, nguyen and tran (2014) in their studies of ownership structure of 179 countries around the world finds that government-owned banks in developing countries have lower profitability and higher costs than their private counterparts. sun and tong (2003) finds that higher government ownership of firms in 1970 is associated with the slower subsequent financial development and lower economic growth while thorsten and pedersen (2006) finds that government-owned banks have less profits than the privately-owned banks in spite of their lower costs. tran, thanh, pham and phung (2014) found that government-owned banks have high risk taking and high performance while uwalomwa & olamide, (2012) in their study of 11 transition countries finds that government owned banks performs better than the domestic private banks. vethanayagam, yahya and haron (2006) found that government ownership has a positive relationship with performance. they noted that most investors are more confident to conduct business with government-owned firms as they believe that the government would assist the firm in the time of trouble. wang (2005) argues that institutional ownership advances firm performance. wen (2010) suggests that institutional ownership affects the relationship between ownership and firm value whereby increased in voting power and control enhances the firm performance. further, studies which looked at the direct impact of institutional ownership on performance such as (beiner and cornett, 2005) found that institutional ownership is positively related to firm performance. detragiache & gupta (2006) finds that institutionally-owned firms does not adopt the code of best practice, have weak and even negative relationship with firm value. ayorinde (2001) founds that there is no significant relationship between institutional ownership and firm performance. on the relation between foreign ownership and bank performance (demsetz & villalonga, 2001) argues that due to the advantages of foreign banks such as large capital, diversification, high expertise, superior ability to diversify risks and the ability to offer services to multinational clients, foreign banks perform better that the domestic banks. dages, linda and kinney (2000) in their study on argentina found that foreign banks have better performance than the domestic banks. zaini (2003) found that foreign-owned banks are the most cost-efficient and provide better service than other banks antoniadis, lazarides and sarrianides (2010). berger et al, (2005) found that foreign banks in pakistan are less effective at recovering impaired loans than the domestic banks. aggarwal & klapper (2003) finds that a rise in foreign ownership negatively affects bank performance. mian (2003) indicates that foreign banks in developed countries are less profitable than the domestic banks but perform better than the domestic banks in developing countries. claessens et al. (1998) did a study on how foreign entry affects domestic banking markets in eighty countries across the world using seven thousand nine hundred observations. using regression analysis they investigated how overhead, taxes, net interest margins, and profitability differ between foreign and domestic banks. they used accounting data and macroeconomic data for the period 1988-1995. the findings revealed that foreign owned banks are more profitable than the domestic owned banks in developing countries but in well developed countries, the domestic banks perform better than foreign banks. bonin, hasan and wachtel (2004) did a study on bank performance, efficiency and ownership in transition countries. using data from the period between 1996 and 2000 they investigated the effects of ownership, especially by a strategic foreign owner on bank efficiency for eleven transition countries in an unbalanced panel consisting of 225 banks and 856 observations. applying stochastic frontier estimation procedures, they computed profit and cost efficiency taking account of both time and country effects directly. in second-stage regressions, they used the efficiency measures along with return on assets to investigate the influence of ownership type. the result revealed that privatization of banks is not enough to enhance their performance. they also concluded that state owned banks are not more inefficient that domestic and private owned banks. dadson (2012) did a study on concentrated share ownership and financial performance of listed companies in ghana. data on listed firms at the ghana stock exchange over a period of ten years between 1999 and 2008 was www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 2; 2018 25 used. the study used panel data regression analysis and performance was measured by using tobin's q and roa. significant statistical relationships were found in this research. the findings showed that share ownership on the ghana stock exchange is heavily concentrated in the hands of ghanaians and that ownership concentration, institutional and insider ownership precipitate higher firm financial performance. he recommended that there is the need to encourage concentrated ownership structure and those investments by insider and institutional ownerships should be promoted in order to ensure proper monitoring, reduced agency costs and improve performance. mwathi (2009) studied on the relationship between commercial banks’ financial performance and their ownership structure. she categorized them as be private banks, government banks, foreign banks, domestic banks. using regression analysis, the study was centered on banks w here the top 10 shareholders hold more than 50% of the shares for the period between 2004 and 2008 in kenya. using roa as the performance measure, the study revealed that bank ownership structure had a fair positive influence on performance. the findings also showed that both private and state owned banks had a negative correlation with performance. she underscored that both banks that are foreign owned and those owned domestically had a positive correlation with performance. the study hypothesized that commercial banks that are state owned perform dismally than the foreign or domestic commercial banks. the study concluded that widely held banks perform well than closely held ones. bwire (2012) did a correlation study to establish whether there are any differences between the profitability of foreign and local banks listed at the nse by examining the determinants of their profitability. the sample involved 3 foreign commercial banks and 6 local commercial banks listed at the nse. data was scrutinized using correlation analysis, descriptive analysis, and regression analysis. the study showed that there were no significant differences between the performance of foreign and domestic listed banks. the regression findings also revealed that foreign ownership did not affect bank profitability. the study also found that none of the variables had a significant influence on roa or roe. the study hypothesized that listed foreign banks in kenya do not outperform the domestic listed banks. maina and ondongo (2013) studied on the effect of capital structure on financial performance of firms listed at the nse from year 2002 to 2011 using their financial statements as the secondary data. they conducted their research using causal research design and gretl statistical software to perform the panel regression analysis. its output will be significant to the management of quoted companies and government. the results showed that debt and equity are the main determinants of financial performance of firms listed at the nse. the findings demonstrated a negative and significant relationship between capital structure (debt equity) and performance implying that the more debt firms use as a financial source the more likely they will perform dismally. the study also showed that firms listed at nse used more short-term debts than long term. xiaotian and zhang (2014) found that private banks are more efficient than state owned ones; state ownership of the banks is related p the low productivity of the bank. sukhdey and spong, (2016) also conducted study on the performance of indian banks, and concluded that private sector banks perform better than public owned banks. several other research results (allen and cornette, 2009; alejandro and reeb, 2007; muhammet mercon and nagid, 2003; micco, berger, clarke, cull, klapper and udell, 2005; mian, 2006; micco, panizza and yanez, 2004; la porta et al., 2002; sapienza, 2004; berger et al., 2005; giuliano and iannotta, 2007) have been documented that; state ownership of banks negatively affects financial development and economic growth, and hence efficiency and profitability. faizul & rehnuma (2016) also found that government ownership of banks is positively related to default risk, and negatively associated with bank profitability in a study conducted on indian banks. on the other hand, zhao shi feng, (2013); mohammad alipour, (2013); and toni aburime, (2008), have found in their study and concluded that state and private ownership structure has no significant impact on the profitability of commercial banks. yidersal and wang (2017) conducted to examine the effect of state and private ownership on the profitability of the commercial banking sector in ethiopia initiated following the emergence of researches, in different economic set ups, with varied results on the effect of ownership structure on the performance of banks. the research used panel data set of 8 banks operating in the sector for more than 10 years in ethiopia, where the financial sector is at its enfant stage and closed for foreign investors, for the period covering 2005 to 2014. the mean profitability of the commercial banks under study were described, compared, and then tested for the relationship between banks’ profitability and ownership structure using pooled ols regression model with dummy ownership variable. after performing some statistical tests, return on equity (roe) has been used as a measure of profitability. the result shows that there is a significant outperformance of state owned commercial banks than private competitors during the period. of the control variables used, bank size, liquidity, loans and advances, and bank capitalization have been found to have significant effect on profitability of the commercial banking. www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 2; 2018 26 shaqhelany lor (2012) has addressed the relationship between capital structure, ownership concentration and firm performance in his study. the results showed that there is a significant inverse relationship between the financial leverage (capital structure index) with q tobin and the ratio of price-to-earnings (performance index). also there is a significant direct relationship between the ownership share of the five greater shareholders (ownership concentration index) with q tobin and the ratio of price to earnings. on the other hand, there is a significant inverse correlation between the ownership share of the largest shareholder (ownership concentration index) and q tobin and finally, no relationship was found between the ownership share of largest shareholder and the ratio of price to earnings. ebrahimi and kordlor (2010) examined the impact of institution al ownership type on the performance of listed companies in tehran stock exchange during the years 1998 to 2006 began. to measure company’s performance, three in dices of q tobin, return on assets and net profit margin has been applied. research‘s find in as generally represent a significant positive relationship between both institution al ownership (both active and passive) with the company’s performance. rahmani and silanes (2010) examined the effect of ownership structure type on company’s performance in their study. the criteria was considered for the performance of return on assets rate, the return on of asset cash flow, return on sales, productivity (sales per capita and asset per capita) and q tobin's ratio. the results acquired of hypotheses testing using regression test showed that the ownership structure affect son firm performance. the results also showed that the companies which their major shareholders are the quasi-government al public groups, have better performance than others. governmental and state groups, non-governmental public groups, and the private sector respectively are in the next category. namazi and juana (2009) studied the impact of institution al ownership on the past and future financial performance of listed companies in tehran stock exchange. the study period was over 2004 to 2006 and the selected sample includes 72 companies. in this study, the results of this research hypotheses test using the method of partial least squares related to partial regression suggest that there is a significant relationship between institutional ownership and firm performance. further analysis of these findings indicates a significant positive relationship between performance and institutional ownership. namazi and juana (2008) studied the impact of ownership structure on the performance of companies listed in the stock exchange of tehran. the main hypothesis of the study is that there is a significant relationship between companies’ ownership structure and their performance. research’s findings indicate that there is a significant negative relationship between institutional ownership and firm performance and there is a positive and significant relationship between firm ownership and firm performance. managerial ownership significantly and negatively affects the performance and about foreign ownership, information representing ownership of foreign investors in the statistical sample firms has not been observed. the major ownership is better to be in possession of company investors in private ownership. in general, there is a significant relationship between firm ownership structure and their performance. bhattacharya and graham (2009) addressed the relationship between institutional ownership and firm performance from the disaggregated view of finnish companies. a system approach includes using the potential size of the two way causal relationship between performance and ownership structure. evidence shows the problem of being endogenous between firm performance and institutional ownership. they achieved the results that more than an equal distribution of voting power among the largest institutional shareholders may lead to enforce positive effects on performance. they also found the significant difference related to firm performance and ownership equality between two categories of institutional investors. tsaia and gu (2007) studied the relationship between institutional ownership and firm performance in the casino industry for the years 1999 to 2003. institutional ownership is the percentage of the share held by state companies from the tot al capital stock, and these companies include insurance companies, financial institutions, banks, state companies and other components of government. they showed that institutional investing in the casinos may help the industry’s investors so the agency problems resulting from the separation of management and ownership decreases. mueller and spitz (2006), analyzed the relationship between managerial ownership (which includes the stock held by family members of the board of directors) and performance of medium and small private enter pries in german with motivation al hypothesis testing. in their research, they used a sample of 356 firms in the service sector associated with the trade, for the years 1997 to 2000. this research’s findings show that the companies’ performance with percentage of managerial ownership above 40 percent, is improving 3. research methodology this study adopted the ex-facto research design which involves the examination of causal relationship between the dependent and independent variables. according to asika (1991) the population is a census of all the elements or subject of interest and may be finite or infinite. the full set of cases from which the sample is taken is called the population. the major types of data collection methods are questionnaire, interview, participant observation these www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 2; 2018 27      are called primary data source and the source from published material such as central bank of nigeria statistical bulletin and annual report which is known as secondary data. the data in this study comprises a cross sectional data which will be sourced from the financial statement of the 15 quoted commercial banks. the study adopts the panel data method of data analyses which involve the fixed effect, the random effect and the hausman test. the technique used in this study is the ordinary least square (ols) estimation technique. the test instruments in the ols are the t-statistics and f-test which were used to test the significance of variables and the overall significance of the regression respectively. other test instruments also employed were the durbin watson test which was used to test the presence or absence of auto correlation between and among the explanatory variables and the adjusted r square used to test the percentage variation of the dependent and the independent variables.from theories, principles and empirical findings, the models below are specified in this study. roa = f (do, owc, fo, ino, mo) 3.1 it is empirically stated as roa =  0  1po  2owc  3 fo   4 ino  5 mo   where: roa = return on assets do = domestic ownership owc = ownership concentration fo = foreign ownership ino = institutional ownership mo = managerial ownership 3.2 0 1  5 = intercept term = coefficients µ = error term pooled effect the study adopts the panel data method of data analyses which involve the pooled effect, fixed effect, and the random effect and the hausman test. pooled effect model roa =  0  1po  2owc  3 fo   4 ino  5 mo   fixed effects 3.5 the fixed effects focus on the allowance between ownership structure and profitability of commercial banks differences by using a fixed intercept for each of the different cross-sectional structures. if we assume that the dummy variable for a bank is either 1 or 0, then di , which is the dummy variable for bank i, can be expressed as: l , i 0, j  1 otherwise d2  l , j  2 0, otherwise ... dn l , j  1 0, otherwise . .. 3.6 the regression of total samples can be expressed as n yit  ot dt  i ds  2 dma  3 s1  it d4 s2   it . t 1 3.7 the dummy variables are expressed as follows: if j = i, then dj = 1; otherwise dj = 0. 2 to further investigate the fraud effect, adebayo (2012) analyzed whether ownership structure affects profitability of commercial banks. the regression of the effect ownership structure affects profitability of commercial banks is specified. roait   t 1 0  1po  2owc  3 fo  4 ino  5 mo    3.9 because the fixed effects account for both cross-sectional and time-series data, the increased covariance caused by individual-bank differences is eliminated, thereby increasing estimation-result efficiency. random effects random effects focus on the relationship with the study sample as a whole; thus, the samples are randomly selected, as opposed to using the entire population. the total sample regression (a function of the random effect) can be expressed as: n d www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 2; 2018 28 oj 0 roait   t 1 0  1po  2owc  3 fo  4 ino  5 mo    3.10 if this is represented with random variables, then  oj  0   j , randomly, and the expectation value of  is  5 . hausman test which indicates that the difference occurs 3.12 the hausman test (yair mundlak 1978) is the most commonly used method for evaluating fixed and random effects. if variables are statistically correlated, then the fixed-effects estimation is consistent and efficient, whereas the randomeffects estimation is inconsistent, and the fixed-effects model should be adopted. conversely, if the variables are statistically uncorrelated, then the random-effects estimation is consistent and efficient, whereas the fixed-effects estimation is consistent but inefficient, and the random-effects model should be adopted. a-priori expectation of the result the elasticity parameter also known as the a-priori expectation of the variables proposes that an increase in the independent variables ownership structure will reduce bank profit. therefore it can be mathematical stated as follows:1,2  0,5  0 4. analysis and discussion of findings table 1. test of models redundant fixed effects tests chi-square statistics d.f prob. cross-section f 1.183289 (12,55) 0.3179 cross-section chi-square 10.393651 5 0.1586 correlated random effects hausman test chi-square statistics d.f prob. cross-section random 10.393651 5 0.0048 source: extract from e-view 9.0 again, in testing the validity of the models, the fixed effects on the cross section redundant fixed effect likelihood ratio, the pvalue is 0.0000 indicating that the effects are significant. select the random effect and perform the correlated random effectshausman test, testing the random effects model against the fixed effects model. the null hypothesis in that case is that both tests are consistent estimators and the fixed effects model is efficient. under the alternative hypothesis, only the fixed effect is consistent. since the pvalue is 0.000, the null hypothesis is rejected and, therefore, the fixed effects model is to be preferred. table 2. the effect of ownership structure on return on assets of quoted commercial banks in nigeria variable pooled effect fixed effect random effect coefficient t. stat p. value coefficient t. stat p. value coefficient t. stat p. value po -0.139002 -0.923149 0.3592 0.308363 1.647947 0.0051 0.141401 0.926468 0.3575 oc -0.125156 -1.053310 0.2960 0.341684 1.804054 0.0367 0.148521 1.179491 0.2424 mo 0.172699 0.999882 0.3210 -0.277094 -0.933340 0.3547 0.115888 0.611747 0.5428 ino -0.508699 -2.400715 0.0191 0.613713 2.102973 0.0401 -0.509061 -2.288807 0.0253 fo -0.150157 -1.730337 0.0882 0.405652 2.986403 0.0042 0.168054 1.901850 0.0615 c 59.94781 6.244941 0.0000 81.79295 6.096105 0.0000 61.56087 6.292005 0.0000 r2 0.103840 0.349859 0.099169 adjr 2 0.036962 0.148907 0.031943 f-stat 1.552689 1.741005 1.475153 fprob 0.185568 0.062419 0.209631 d w 2.023028 2.511353 2.125518 source: extract from e-view 9.0 n www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 2; 2018 29 table 2. above indicates the effect of ownership structure of return on assets on the quoted commercial banks in nigeria. evidence from the pooled effect model proved that the independent variables can explain 10.3% and 3.6% variation on the dependent variable which is return on assets of the quoted commercial banks. the f-statistics from the pooled effect model shows that the model is statistically not significant while the durbin watson statistics is greater than 2.00 but less than 2.50, this proved the presence of serial auto correlation. the β coefficient shows that private ownership, ownership concentration, institutional ownership and foreign ownership have negative relationship with return on assets of the commercial banks while management ownership have positive relationship on the dependent variable. from the fixed effect model, the independent variables can explain 34.9% and 14.8% variation on the dependent variable. the f-statistics and the f-probability shows that the model is significant whereby we reject the null hypothesis in favor of the alternate. the durbin watson statistics indicates the absence of negative serial autocorrelation while the β coefficient of the variables shows that private ownership, ownership concentration, institutional ownership and foreign ownership have positive effect on the dependent variable which is return on assets while management ownership have negative effect on the dependent variable. the random effect result, the independent variables can explain 9.9%% and 3.1% variation on the dependent variable. the f-statistics and the f-probability shows that the model is not significant whereby we accept the null hypothesis. the durbin watson statistics indicates the absence of negative serial autocorrelation while the β coefficient of the variables shows that private ownership, ownership concentration, institutional ownership and foreign ownership have positive effect on the dependent variable which is return on assets while management ownership have negative effect on the dependent variable. table 3. presentation of granger causality test null hypothesis obs f-statistics prob po does not granger cause roa 56 7.91769 0.0004 roa does not granger cause po 0.66563 0.5184 oc does not granger cause roa 56 0.55490 0.5776 roa does not granger cause oc 0.55288 0.5787 mo does not granger cause roa 56 4.91539 0.0177 roa does not granger cause mo 2.06006 0.1379 ino does not granger cause roa 56 3.54753 0.0026 roa does not granger cause ino 0.54581 0.5827 fo does not granger cause roa 48 0.50295 0.6083 roa does not granger cause fo 0.07624 0.9267 source: extract from e-view 9.0 the causality test above shows that there is unidirectional relationship from private ownership to return on assets, from management ownership to return on assets and from institutional ownership to return on assets. this means we reject the null hypothesis and accept the alternate. the remaining variables have no causal relationship between the dependent and the independent variables, this means we accept the null hypothesis and rejects the alternate that there is no causal relationship among the variables. 5. discussion of findings the study found that private ownership has positive and significant impact on the profitability of the commercial banks in nigeria. the results show that investors have the tendency of improving the profitability of the quoted commercial banks. evidence from the coefficient shows that a unit increase on private ownership will increase 3.0% on return on assets and 1.0% on return on investment. this finding confirms our earlier expectation and validates the shareholders’ theory. it is also in line with the findings of chen et al., 2003 and the findings of nguyen et al. 2012. the implication is that more private investors into the shareholding of the commercial banks will increase the profitability of the banking industry. the finding also validates the findings of hu and zhou (2006); cheung, fung and tsai, (2007); din and javid, (2011); ioraver and wilson, (2011) and not in line with wang, (2003). it is also evidence from the findings that ownership concentration have negative and significant impact on return on investment but positive and significant impact on return on assets. the implication is that increase ownership concentration will reduce return on investment by 2.2% while it will increase return on assets by 3.4%. the positive impact of ownership concentration on return on assets confirms the a-priori expectation of the results and validates the stakeholders’ theory. it is in line with the findings of hu and zhou (2006); cheung, fung and tsai, (2007); din www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 2; 2018 30 and javid, (2011); ioraver and wilson, (2011) and not in line with wang, (2003). however, the negative impact of ownership concentration is contrary to the findings of henry and wang, (2003), zheng (2007); per-olof et al., (2007); jean and hidaya, (2010); shoreh et al., (2015) but confirm the findings of prasad and michael, (2007); charfeddine and abdelaziz, (2011). management ownership has a negative and insignificant impact on the profitability of commercial banks in nigeria. the negative coefficient of the variables shows that a unit increase will reduce profitability of commercial banks by 2.7% and 2.3%. the findings are contrary to expectation of the results and validate that agency theory formulated by jensen and meckling in 1973. the negative impact can be traced to the fact that management objectives conflicts the shareholders’ objective. this finding confirms the impact of management ownership on the performance of commercial banks in nigeria such as the management role of cecilia ibru in the acquired oceanic bank. the findings is contrary to the findings of of hu and zhou (2006); cheung, fung and tsai, (2007); din and javid, (2011); ioraver and wilson, (2011) and not in line with wang, (2003). however, the negative impact of ownership concentration is contrary to the findings of henry and wang, (2003), zheng (2007); per-olof et al., (2007); jean and hidaya, (2010); shoreh et al., (2015) but confirm the findings of prasad and michael, (2007); charfeddine and abdelaziz, (2011). the effect of institutional ownership on the profitability of nigerian quoted commercial banks shows that institutional ownership has negative and significant impact on return on investment but positive and significant impact on return of assets. the implication is that a unit increase on institutional ownership will reduce return on investment by 7.3% but increase return on assets by 6.1%. the positive impact or the independent variable on the dependent variable confirms the a-priori expectation of the results while the negative impact is contrary to the expectation of the results. the positive effect of the independent variable confirm the findings of henry and wang (2003), zheng (2007), per-olof et.al (2007), jean and hidaya (2010), shohreh et.al (2015) while the negative impact confirm the findings of prasad and micheal (2007), charfeddine and abdelaziz (2011). the impact of foreign ownership shows positive and significant impact on return on investment and return on assets of the quoted commercial banks such that a unit increases in the variable with result on 0.4% increase on return on investment and 4.0% on return on assets. this finding is confirmed the a-priori expectation of the results and validates the theory of portfolio diversification as one of the objective of cross boarder banking is to diversify investment from domestic economy. the findings confirm the findings of it is also in line with the findings of chen et al., 2003 and the findings of nguyen et al. 2012. the implication is that more private investors into the shareholding of the commercial banks will increase the profitability of the banking industry. the finding also validates the findings of hu and zhou (2006); cheung, fung and tsai, (2007); din and javid, (2011); ioraver and wilson, (2011) and not in line with wang, (2003). 6. conclusion private ownership has positive significant impact on profitability of the 15 quoted commercial banks, which means that having more private owners in the banking industry will enhance the profitability of the banking institution. ownership concentration, management ownership and institutional ownership have negative relationship with the dependent variable while private ownership and management ownership have positive relationship with the dependent variable which is return on investment. private ownership, ownership concentration, institutional ownership and foreign ownership have positive effect on the dependent variable which is return on assets while management ownership has negative effect on the dependent variable. 7. recommendation  the regulatory authorities such as the securities and exchange commission, the nigerian investment promotion council should encourage private investors to invest into the 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journal of financial economics, 80 (2), 385-417. wen, w., (2010). ownership structure and banking performance: new evidence in china. working paper. zaini, a. k. m., (2003). ownership and efficiency in malaysian banking, the philippine review of economics, 40 (2), 91-101. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). http://dx.doi.org/10.1016/s0304-405x http://creativecommons.org/licenses/by/4.0/) copyright © cc-by-nc 2020, cribfb | amfbr american finance & banking review; vol. 5, no. 2; 2020 issn 2576-1226 e-issn 2576-1234 published by centre for research on islamic banking & finance and business, usa 1 financial stability implications of stress testing for risk taking and credit growth orobah ali barghouthi assistant professor faculty of business and economics department of banking & finance alquds university, abu dis, palestine e-mail: obargothi@hotmail.com k. m. anwarul islam associate professor department of business administration the millennium university, dhaka, bangladesh phd candidate university of selangor, malaysia e-mail: ai419bankingdu@gmail.com received: august 17, 2020 accepted: august 30, 2020 online published: september 22, 2020 doi: 10.46281/amfbr.v5i2.778 url: https://doi.org/10.46281/amfbr.v5i2.778 abstract this paper examined the literature on financial stability implication of stress testing for risk-taking and credit growth in banks. macro prudential considered one of the most stress testing tools by applying countercyclical macro prudential tools to build up capital buffers in good times that can be run down during bad times. but to improve timing, monitories authorities may need to develop a comprehensive framework to monitor macro prudential conditions and establish appropriate warning and trigger thresholds. regarding scope, they examine the entire financial system. this entity contributes to fire sales whose default has follow-on effects, or which can exacerbate a credit crunch that is included. liability considerations contain a scale of wholesale funding that is run-prone is paramount. capital adequacy depends on the health of the overall financial system. for asset considerations, the test indicates whether the financial system is vulnerable to deleveraging that might amplify adverse shocks, at the end authorities' development guidance about whether to close a bank and when to sell its assets to maximize taxpayer recovery. we have concluded that the financial stability implications of stress tests for risk-taking and credit growth among banks are the following: a reduction in credit is a feature on stress tests. post-crisis reforms traded the expectation of lower credit growth for reducing the probability that the larger banks would fail. this has a high negative impact on the economy. higher capital requirements for the larger banks have prompted a reduction in the supply of credit, especially to riskier borrowers. smaller banks have increased their share of local market-wide lending, and larger businesses have seen quite generous credit availability in bond and leveraged loan markets. consider the structure of the financial system and its complexity long the levels of economic integration and openness. keywords: financial stability, stress testing, for risk-taking, credit growth. 1. introduction: importance of stress testing financial stability refers to the robustness of the financial system to external shocks. it provides the endogenous, the dependence on collective behaviour, and the nature of financial distress. it describes financial stability in terms of resilience to shocks originating within the financial system or the vulnerability to financial distress in response to normal-sized shocks rather than large shocks. (galati and moessner, 2011) https://doi.org/10.46281/amfbr.v5i2.778 https://doi.org/10.46281/amfbr.v5i2.778 copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 2; 2020 2 financial stability provides sufficient assurance that the efficiency of intermediation between the supply and demand of funds will not be significantly affected by adverse events. financial stability is an end and also a means of guaranteeing a suitable financial environment and achieving sustained and balanced economic growth in both industrialized countries and emerging economies (lee, gaspar, and villaruel, 2017). stress tests are major post-crisis innovations in supervision. the stress tests help prevent a repeat of the financial crisis by requiring banks to hold enough capital to continue to lend a hypothetical severe macroeconomic recession and to demonstrate strong risk management practices for capital planning. but stress tests are only one of the several reforms that are working in that direction which includes increases in capital requirements, new rules requiring banks to hold ample liquidity, and derivative market reforms. one of the stress tests includes macro prudential tools. applying countercyclical macro prudential tools to build up capital buffers in good times can be run down during bad times. to improve timing, authorities need to develop a comprehensive framework to monitor macro prudential conditions and establish appropriate warning and trigger thresholds. purpose limit the likelihood and costs of aggregate fire sales, credit crunches, and systemic defaults scope examines the entire financial system. the entity that contributes to fire sales, whose default has follow-on effects, or which can exacerbate a credit crunch should be included liability considerations the scale of wholesale funding that is run-prone is paramount. capital adequacy depends on the health of the overall financial system asset considerations the test indicates whether the financial system is vulnerable to deleveraging that might amplify adverse shocks. output develop guidance about whether to close a bank and when to sell its assets to maximize taxpayer recovery figure 1. elements of a macro prudential stress test source: greenlaw, kashyap, schoenholtz, and shin (2012) macro stress tests enable economies to assess how the financial sector as a whole responds to significant shocks such as interest rate and exchange rate movements. the table shows the essential elements of a stress test. there is a need to incorporate general equilibrium dimensions where the outcome depends not only on the size of the shock and buffers of individual institutions but also on their behavioural responses and interactions with each other and other economic agents (lee, gaspar, and villaruel, 2017). through macro tests, interventions by regulators are drafted and implemented. however, it remains that these tests are posted on crisis interventions. the limitation is that regulators will know if the stress tests contribute to sound judgment only after the crisis. three categories of macro prudential policy instruments:  reduce risk from excessive credit or credit growth; authorities can apply credit controls-such as caps on the loan-tovalue ratio, caps on the debt-to-income ratio, caps on foreign currency lending, and ceilings on credit or credit growth.  constrain funding or liquidity risks, liquidity-related instruments include limits on net open currency positions or currency mismatches, limits on maturity mismatches, and reserve requirements.  build sufficient buffers to withstand the cycle, capital-related tools can include counter-cycle capital requirements, time-varying/dynamic positioning, and restrictions on profit distribution (lee, gaspar and villaruel 2017). policy area primary objective financial stability objective prudential limit distress of individual institutions address systemic risk (cross-section over time) monetary stabilize prices lean against boom or bust cycles in credit and asset prices exchange rate stabilize exchange rate reduce capital flow volatility fiscal manage demand counter-cyclically maintain fiscal buffers that allow a response to financial system stress figure 2. towards a global financial stability framework source: hannoun (2010) copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 2; 2020 3 although these are not the only options, the simplified tale by hannoun can be used as a guide in dealing with a financial stability objective vis-à-vis policy area. it remains that there is a need to reduce risk from excessive credit growth, constrain liquidity risk in reserve requirements and currency positions, and provide buffers to withstand shocks in the financial cycle. 2. financial stability implications of stress testing the stability of the financial system as a whole hinge essentially on the banking system; and a mainstay of efficiency in channeling the flow of saving between investors and savers within the banking sector is the existence of prudential regulation and adequate supervision that adequately complement each other; the former should provide the basis and the appropriate legal structure so that credit institutions can accurately assess the financial risks they incur. the latter must ensure that banks observe the rules, standards, and codes of prudence that provide them with appropriate levels in the key variables underpinning and ultimately, determining their financial condition (profitability and solvency). the financial sector is examined as a whole to evaluate the stability of the financial system. detection of vulnerable parts of the financial industry and their attachment to economic development provides the possibility to reduce risks and to strengthen the resilience of the financial sector against negative shocks impacts. stress tests are a rough estimation of a portfolio transformation due to changes in risk factors (stankova, 2014). stress testing is an approach to gauge the impact of a large shock on financial soundness and market functioning. stress testing has the potential to support macro prudential policy in the design, calibration, and assessment of the impact of macro prudential tools (constancio, 2017). regular stress testing should provide a more reliable and accurate assessment of the possible impact of adverse shocks in the form of extreme movements in variables liable to affect the economic setting and the main determinants of the stability, and therefore the soundness of the financial system. to address excessive credit growth and leverage, the countercyclical capital buffer may be used to measure resilience in banks and to contribute to curbing excessive credit growth. the loan-to-value and loan-to-income cap may be used to measure the resilience of borrowers and banks to mitigate pro-cyclicality mortgage credit (lee, gaspar, and villaruel, 2017). in a study conducted in the united states, the impact of the federal reserves' stress tests on the lending of us bank holding companies. the study concluded that there is no systematic evidence in favour of the risk mitigation hypothesis. the capital gap is not constraining bank loan growth or causing banks to tighten their lending standards. growth differences were driven largely by credit quality and by other factors beyond the stress tests such as loan demand (basset and berrospide, 2018) more capital is associated with higher loan growth. increased level of capital and the higher capital buffers brought by the post-crisis regulatory reform, which makes banks safer, more resilient, put banks in a better position to lend more (basset and berrospide, 2018). two hypotheses were considered. the risk mitigation hypothesis is where additional capital required by the stress tests causes banks to reduce their risk-taking activities by tightening their lending standards and decreasing credit supply. the risk facilitation hypothesis is where higher capital buffers resulting from the stress tests make banks more resilient and thus put them in a better position to loosen their lending standards and take more risks by increasing their lending (basset and berrospide 2018). the progressive implementation of stress tests as a toll complementing traditional supervisory practices is making them increasingly valuable to financial authorities in monitoring and safeguarding the stability of the economic environment. the increasing use of stress tests highlights the need to establish basic principles and guidelines providing for a systematic approach to them that are rigorous and straightforward (rodriguez, trucharte, and marcelo, 2018). the possible deficits of stress tests may be seen when it selects stress scenarios in a way that might leave many dangerous scenarios and thus create an illusion of safety, which might consider highly implausible scenarios and thus trigger a false a larm. stress tests should include tools to analyze systemic risk arising from the interaction of banks with each other and with the markets (breuer and summer, 2018). disclosure of stress-test results facilitates the coordination of risk decisions among banks by providing information about the likelihood of a bailout. the results may make risk decisions in the banking industry more extreme (corona, nan, and zhang, 2019) stress test result likelihood of a bailout level of risk the small number of low-type banks low likelihood of a bailout low level of risk a large number of low-type banks high likelihood of a bailout aggravates bank’s excessive risktaking figure 3. disclosure of stress-test results source: kohn and liang (2019) copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 2; 2020 4 if absent stress tests low-type banks would coordinate on an equilibrium in which they take low risk, then the disclosure of the test result can induce them to coordinate instead on an equilibrium in which they take a high risk. this forces the regulator to ban some banks from investing, which in turn leads to a welfare loss compared to the no-stress-test scenarios, because, absent stress tests, the banned banks would have generated a positive social surplus. stress tests provide the regulator with information about banks’ type and allow the regulator to fine-tune intervention policy to optimally depend not only on the individual but also on the aggregate stress-test outcomes. therefore, conducting stress tests yields the social benefit of allowing the regulator to both intervene selectively and discipline the risk decisions of un-intervened banks (corona, nan, and zhang 2019). 3. conclusion the financial stability implications of stress tests for risk-taking and credit growth among banks are the following: a reduction in credit is a feature of stress tests. post-crisis reforms traded the expectation of lower credit growth for reducing the probability that the larger banks would fail. this has a high negative impact on the economy. higher capital requirements for the larger banks have prompted a reduction in the supply of credit, especially to riskier borrowers. smaller banks have increased their share of local market-wide lending, and larger businesses have seen quite generous credit availability in bond and leveraged loan markets. consider the structure of the financial system and its complexity long the levels of financial integration and openness. references basset, w., & berrospide, j. (2018). impact of post stress tests capital on bank lending. research. breuer, t., & summer, m. (2018). systematic systemic stress tests. oesterreichische nationalbank. constancio, v. (2017). macroprudential stress-tests and tools for the non-bank sector. esrb annual conference. frankfurt. corona, c., nan, l., & zhang, g. (2019). the coordination role of stress tests in bank risk-taking. ssrn. galati, g., & moessner, r. (2011). macroprudential policya literature review. bank for international settlements. greenlaw, d., kashyap, a. k., schoenholtz, k. l., & shin, h. s. (2012). stressed out: macroprudential principles for stress testing. chicago booth research paper, (12-08). hannoun, h. (2010, february). towards a global financial stability framework. in speech at the 45th seacen governors' conference, siem reap province, cambodia (pp. 26-27). kohn, d., & liang, n. (2019). understanding the effects of bank stress tests: a q&a. brookings. lee, m., gaspar, r., & villaruel, m. l. (2017). macroprudential policy framework in developing asian economies market. asian development bank. rodriguez, a., trucharte, c., & marcelo, a. (2018). stress tests and their contribution to financial stability. journal of banking regulation, 65-81. stankova, l. (2014). macro stress tests and their use in the analysis of financial stability and creating the business strategy. researchgate. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). copyright © cc-by-nc 2019, cribfb | amfbr american finance & banking review; vol. 4, no. 1; 2019 issn 2576-1226 e-issn 2576-1234 published by centre for research on islamic banking & finance and business, usa 1 sovereign wealth fund asset and liability management by rastin banking financial instruments (rastin certificates and rastin swap bonds) bijan bidabad b.a., m.sc., ph.d., post-doc. professor economics and chief islamic banking advisor bank melli, iran e-mail:bijan@bidabad.com abstract low rate of return of national development fund (ndfi) resources and the concern regarding sovereign wealth funds (swfs) motivations and incentives to distort financing toward those investments and companies that are influenced by different political pressure groups and other types of corruptions are important problems with these funds.we try to propose a different financing procedure by using rastin banking mechanism and standards to fulfill both non-usury financial operations and fruitful supervised investments. this goal is achieved through rastin profit and loss sharing (pls) system through rastin certificates financial instruments. moreover, the governments operationally construct swfs to use their surplus resources of the prosperity period in recession and crises years. we also show that asset and liability management (alm) of swfs can be done by using rastin swap bonds (rsbs) that are other rastin banking financial instruments.the proposed procedures positively improve ndfi regarding corruption reduction, supervision, preventing usury, availability of resources, funds stability, transactable instruments, operational alm, rate of return, risk of bad loans, outstanding claims and transparency. keywords: islamic finance, financial instrument, sovereign wealth fund, swf, rastin swap bond, rsb, finance, islamic banking, asset and liability management, alm, national development fund, ndfi, rastin certificate, rastin banking 1. introduction assets and liabilities management (alm) consists of technical instruments and methods, which consider both value creation and risk control. a financial institute applies alm techniques to increase more benefits by covering himself from risks and minimize losses due to transactions. dissimilarities between alm approaches in islamic finance, and conventional financing come from differences on usury illegalness and accounting system in islamic finance in comparison to conventional one. jurisprudence specifications indicate that time is not the sole effective factor on increasing equity (deposited capital) return, but profit and loss sharing resulted from investment in the real economy sector is the essential base for monetary transactions. these two important factors are considered in islamic alm of any financial fund. non-usury financing requires specific alm approach to improve efficiency and effectiveness of this type of financing. islamic finance same as conventional one follows maximizing shareholders assets, but subject to observe islamic laws and ethics.1 international working group of sovereign wealth funds (iwg) defines sovereign wealth fund (swf) as: special purpose investment funds or arrangements that are established and owned by governments for macroeconomic purposes to hold, manage or administer assets to achieve financial objectives and to employ various investment strategies, including investment in foreign financial assets.2 the term swf is usually used to cover a spectrum of government investment vehicles from central banks and monetary authorities to government-owned enterprises that invest in specific economic sectors.3 several organizations and 1 bidabad, bijan, mahmoud allahyarifard (2010). assets and liabilities management in islamic banking. paper presentet at the 3rd international conference on islamic banking and finance. bidakara, jakarta, indonesia, 23 -26 february, 2010. proceeding of the conference: risk management, regulation and supervision, pp. 396-413. http://www.bidabad.com/doc/alm-english.pdf 2 international working group of sovereign wealth funds, (2008) sovereign wealth funds: generally accepted principles and practices. the "santiago principles". http://www.iwg-swf.org/pubs/eng/santiagoprinciples.pdf 3c. o’brien, t. mattei, n. thomas (2012). sovereign wealth funds: evolving perceptions and strategies. international developments, vol mailto:bijan@bidabad.com http://www.bidabad.com/doc/alm-english.pdf http://www.iwg-swf.org/pubs/eng/santiagoprinciples.pdf copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 2 commentators have offered somewhat different definitions that can affect whether certain institutions would be considered as swf.4 the appropriate assessment of sovereign wealth fund (swf)'s alm requires a deep understanding of assets and liabilities, investments, customers, economic environment and competitive conditions of the capital and monetary sectors. swf is also defined as an investment vehicle that5:  is owned directly by a sovereign government,  is managed independently of other state financial institutions,  does not predominately have explicit pension obligations,  invests in a diverse set of financial asset classes in pursuit of commercial returns  has made a significant proportion of its publicly reported investments internationally. swfs invest in a broad range of assets such as public equities and fixed income investments assets. recently swfs' funds have been directed toward the assets other than stocks, bonds, and cash. the proportion of private equity, real estate, and infrastructure is increasing significantly.6 actually, size of investments, ability to act quickly, autonomy and immediate access to a large amount of capital, fewer public reporting obligations are positive characteristics of swfs, and enable them to be crucially effective in crises and natural disasters financing and saving bankruptcy of different private and public entities. but, the concern regarding swfs motivations and incentives to distort financing toward those investments and companies that are influenced by different political pressure groups and other types of corruptions7 are very important and have been led to pushing swfs to increase their transparencies.8 to reduce this concern, in this paper, we try to propose a slightly different financing procedure by using rastin banking9 mechanism and standards to fulfill both non-usury financial operations and fruitful supervised investments. this goal is done through rastin profit and loss sharing (pls) system through rastin certificates financial instruments. moreover, the governments operationally construct swfs to use their surplus resources of the prosperity period in recession and crises years. in this paper, we also show that alm of swfs can be done by using rastin swap bonds (rsbs) that are other rastin banking financial instruments. rastin banking is a completely new solution to islamic banking based on islamic and ethic teachings with a scientific and technological approach.10 some parts and modules of rastin banking have been implemented in bank melli iran. the installed parts of the system are now functioning and have attracted depositors and investors, and since the procedures and instructions are well defined, the bank's staff is performing its procedures easily. the results of the test system are very satisfactory. 2. investment process in national development fund of iran (ndfi) national development fund of iran (ndfi) was established to allocate some portions of iran's oil revenue to durable wealth and productive capital to preserve oil and gas resources for future generations. ndfi strategies include11: 44, no. 50. december 24. 4preqin ltd., (2012), the 2012 preqin sovereign wealth fund review, preqin review. https://www.preqin.com/item/2012-preqinsovereign-wealth-fund-review/1/4985 5 international working group of sovereign wealth funds, (october 2008), sovereign wealth funds: generally accepted principles and practices. "santiago principles" http://www.iwg-swf.org/pubs/eng/santiagoprinciples.pdf 6preqin ltd., (2012), the 2012 preqin sovereign wealth fund review, preqin review. https://www.preqin.com/item/2012-preqinsovereign-wealth-fund-review/1/4985 7 l. cadigan, r. hadley, e. robertson, a. (april 2012). fcpa and other anti-corruption concerns facing sovereign wealth funds. the sovereign wealth fund initiative, sommers, k&l gates llp. the fletcher school, tufts university. http://fletcher.tufts.edu/swfi/~/media/fletcher/microsites/swfi/pdfs/2012/fcpa%20kl%20final.pdf 8c. o’brien, t. mattei, n. thomas (2012). sovereign wealth funds: evolving perceptions and strategies. international developments, vol 44, no. 50. december 24. http://fletcher.tufts.edu/swfi/~/media/fletcher/microsites/swfi/pdfs/2012/fcpa%20kl%20final.pdf 9 the persian and english documents of rastin banking including detailed explanation of this banking method can be accessed through http://www.bidabad.com in full texts. 10 bidabad, bijan, general characteristics of rastin banking, 2013. http://www.bidabad.com/doc/rastin-bank-general-en.pdf 11national development fund of iran. http://en.ndfi.ir/guidelines.aspx https://www.preqin.com/item/2012-preqin-sovereign-wealth-fund-review/1/4985 https://www.preqin.com/item/2012-preqin-sovereign-wealth-fund-review/1/4985 http://www.iwg-swf.org/pubs/eng/santiagoprinciples.pdf https://www.preqin.com/item/2012-preqin-sovereign-wealth-fund-review/1/4985 https://www.preqin.com/item/2012-preqin-sovereign-wealth-fund-review/1/4985 http://fletcher.tufts.edu/swfi/~/media/fletcher/microsites/swfi/pdfs/2012/fcpa%20kl%20final.pdf http://fletcher.tufts.edu/swfi/~/media/fletcher/microsites/swfi/pdfs/2012/fcpa%20kl%20final.pdf http://www.bidabad.com/ http://www.bidabad.com/doc/rastin-bank-general-en.pdf http://en.ndfi.ir/guidelines.aspx copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 3  to spotlight outcomes of spatial plans in the country for a regional sustainable and balanced development  to make plans for reaching the goals of the development plans  supporting the private sector to improve economic infrastructure  supporting investment opportunities in deprived areas  providing financial resources for energy consumption optimization plans  participation in foreign monetary and financial markets  ensuring the return of ndfi’s resources to be preserved for future generations as it is simply understood from the by-laws12 and regulations of ndfi financing procedures and measures, a lot of ndfi's financial operations are usury broadly due to fixing interest rate.13 as it was underlined before, islamic asset and liability management is restricted to use interest-free islamic financial instruments. this restriction mostly distinguishes islamic alm from the conventional one. if ndfi is going to operate usury-free, should adopt different procedures to reach islamic alm. this is why we introduce rastin banking mechanism to remove usury from ndfi financial operations and increase automatic built-in supervision to reduce corruption concerns. accordingly, ndfi allocates her resources to investment projects via an agent bank, as is shown14 in figure 1. provincial specialized workgroup introducing project to agent bank national administrative agency introducing the project to bank agent bank accepting project in line with ndfi priorities agent bank project evaluation in line with ndfi articles of association, agency contract, by-law of donating loan. approving economic-financials-technical justification informing the details of approved project to ndfi ndfi does approved project comply with rules? ndfi freezing the funds for approved project at central bank central bank freezing the funds and notifying the agent bank agent bank concluding agreements with applicant, obtaining guarantees, opening lc, loan payment ndfi reviewing the approved projects according to ndfi articles of association, agency contract, by-law of donating loan figure 1. acceptance, evaluation, approval and allocation of funds process in ndfi no yes source: national development fund of iran. http://en.ndf.ir/about-us/procedures.aspx 12national development fund of iran. http://en.ndf.ir/about-us/by-law.aspx 13 national development fund of iran. http://www.ndf.ir/portals/0/farayand.zip 14national development fund of iran. http://en.ndf.ir/about-us/procedures.aspx http://en.ndf.ir/about-us/procedures.aspx http://en.ndf.ir/about-us/by-law.aspx http://www.ndf.ir/portals/0/farayand.zip http://en.ndf.ir/about-us/procedures.aspx copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 4 3. rastin pls base system and its financial subsystems rastin pls base system15 refers to the main process and general regulations of rastin profit and loss sharing (pls) banking system. on request and on behalf of the depositor16, the bank17 invests his fund in one of rastin pls products and instead, gives rastin certificate of the selected project18 to him and allocates his fund to the selected project of the entrepreneur; and supervises the implementation and execution of the project. in the end, after deducting its own commission, bank divides the profit/loss (if any) among engaged sides (depositors and entrepreneur). the bank is an agent of the depositor, and is responsible for observing his rights (depositor). he must use all his expertise to reach this end. the bank's trustee unit19 will supervise the obligations carry out of entrepreneur on behalf of depositor and bank receives a commission for his financial intermediation. in rastin pls base system, musharakah (participation) certificates are used for finite projects20, and pazireh (subscripted) certificates are used for infinite projects21. these two certificates belong to the category of rastin certificates, and activities are done under rastin banking regulations. the fixed profit rate is eliminated in rastin pls banking, and the return rate is calculated according to the real return of capital in the real economy. most of the regulations of rastin pls base system are extended to its financial subsystems. to make the bank capable of reaching his goals in a proper way, this system has its own organization, structure, and working process. major topics in rastin pls base system consist of organizational, professional behavior of assessor22 and trustee, project proposal23, assessment, guarantees, collaterals and entrepreneur cash contribution (brought), insurance, contract set-out, supervision, entrepreneur24, financial transparency, information disclosure, governance, auditing, rastin participation accounting, change of project timing, settlement, bank receipts, transforming pazireh (subscripted) certificates into shares of entrepreneur company, inspection and commodity standard, auxiliary financial tools, unexpected accidents (force majeure), arbitration and more … rastin pls financial subsystems refer to specific financing methods or services in rastin pls banking. these subsystems work under general regulations of rastin pls base system, and are:  joalah financial sharing (jfs):25 is a method in which, the bank finances entrepreneur (producer) from depositor's 15 bidabad, bijan, rastin profit and loss sharing (pls) base system. journal of islamic economics, banking and finance, pp. 32-57, vol. 9, no. 4, oct-dec 2013. http://ibtra.com/pdf/journal/v9_n4_article2.pdf http://www.bidabad.com/doc/pls-base-en.pdf 16 depositor is a real or legal person who asks pls bank to participate his certain amount of fund (cash) in rastin pls banking products through direct contact or internet and buys rastin certificate of one of the pls banking products. 17 in rastin pls banking, bank is a unit which allocates resources from depositors to entrepreneur and according to specific contracts the obtained profit or loss is divided between depositor, entrepreneur. by receiving commission (joalah fee), bank provides capital management services to depositor, and invest his resources according to his choice and in return, delivers rastin certificate to him. bank has to protect depositors' rights by using all his specialized potentialities. 18 project is a collection of economic activities with specified and concrete plan with defined cost and term for making profit through rastin pls banking offered to pls bank. 19 the trustee unit is a unit in rastin pls bank for supervision and control of rastin pls proposed projects on behalf of bank and regarding good performance of projects in comparison to initial proposal through key indicators and financial reports till final delivery of project. 20 finitude projects are those projects that after completion of construction and by starting utilization period are to be consumed from viewpoints of bank and depositor. finitude projects are not productive in depositor’s viewpoint and do not make value added for depositor, although the depositor in utilization period receives his installments for principal or rent of the project. 21 infinitude projects are those projects that after completion of construction period and starting utilization period are productive in viewpoints of depositor and entrepreneur, and depositor shares in the yield of the project. 22 assessment unit is a unit in pls department of pls bank which assesses the competence and capabilities of entrepreneur and his proposal. 23 proposal is a written document covering a collection of necessary information about the proposed project of entrepreneur and describes analytical justification of the project from economic, technical and financial points of view, with enclosed necessary legal licenses and documents which is submitted to rastin pls bank by entrepreneur. after evaluation of bank if be approved, the proposal will be a reference document and can be used against entrepreneur executive operations. 24 entrepreneur is a real or legal entity who proposes a project to pls bank for financing through pls banking system and executes the project until the end. in addition to have legal, financial, technical and performance capabilities, the entrepreneur should have the other capabilities and facilities/possibilities to carry out the job. 25 bidabad, bijan, joalah financial sharing (jfs). journal of islamic economics, banking and finance, volume-12, no. 1, january-march, 2016, pp. 33-48. http://www.bidabad.com/doc/jfs-paper-en.pdf http://ibtra.com/pdf/journal/v9_n4_article2.pdf http://www.bidabad.com/doc/pls-base-en.pdf%20%0d http://www.bidabad.com/doc/pls-base-en.pdf http://www.bidabad.com/doc/jfs-paper-en.pdf copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 5 resources or the provided sources by the buyer; by selling future certificates (to depositor or buyer) and in the framework of another joalah contract, entrepreneur produces the buyer requested commodity. future certificate is used in jfs.  mudarabah financial sharing (mfs):26 is a kind of mudarabah under rastin pls banking in which bank introduces the entrepreneur project proposal in the field of trade or transaction of commodities (commerce) to depositors and by selling them mudarabah certificates, finances the entrepreneur (modarib). in mfs mudarabah and periodic mudarabah certificates are used.  installment financial sharing (ifs):27 in ifs, installer (moghsit or depositor) will finance a portion of the needed fund of an entrepreneur through the bank for a certain period of time (amortization period). the entrepreneur will pay back his share by installments and will own the total property of the project, and ifs ends. ifs can be carried out through one of the contracts of ordinary mughasatah (installment), rental mughasatah (installment) and musharakah (sharing) mughasatah (installment); and by application of three related kinds of certificates of ordinary mughasatah and rental mughasatah certificates for finite projects and musharakah mughasatah certificate for infinite projects.  rent financial sharing (rfs):28 entrepreneur temporarily donates the ownership of a part of his productive asset29, rental asset30 , or dead asset31 to the depositor who finances him but keeps it as a mortgage. then pays back the fund received from the yields of the asset proportional to depositor's share to depositor at the end of the contract, or periodically. the original deposit of depositor will be given back to him after the end of the project. the profit of the project will be given to depositor periodically or in a lump. mortgage sharing, periodic mortgage sharing, mortgage mudarabah (commerce), periodic mortgage mudarabah, mortgage muzaraah (cultivating), periodic muzaraah, mortgage mugharasah (planting), periodic mortgage mugharasah, mortgage musaghah (irrigation), periodic mortgage musaghah, mortgage istisna (industrial/manufacturing), periodic mortgage istisna and rental certificates are used in rfs.  bail financial sharing (bfs):32 is the application of deposit of depositor by an entrepreneur to produce a defined commodity and delivering the commodity or paying back its value in a future specified time. bfs uses bail certificate.  rastin group funding (rgf):33 is collecting deposits of specific depositors for the specific beneficial project under the regulations of rastin banking. in rgf, rastin certificate is not issued.  rastin personal security (rps):34 to create competitive conditions and to increase the efficiency of social security insurance and diminishing antitrust of social security systems and pension funds, private and public pension funds are http://ibtra.com/pdf/journal/v12_n1_article2.pdf 26 bidabad, bijan, mudarabah financial sharing (mfs). journal of islamic economics, banking and finance, 2014. http://www.bidabad.com/doc/mfs-paper-en.pdf 27 bidabad, bijan, installment financial sharing (ifs): a financial subsystem of rastin pls banking. international journal of islamic banking and finance research, 3(1), 28-42, 2019. https://www.cribfb.com/journal/index.php/ijibfr/article/view/267 http://www.bidabad.com/doc/ifs-paper-en.pdf 28 bidabad, bijan, rent financial sharing (rfs). journal of islamic economics, banking and finance, 2014. http://www.bidabad.com/doc/rfs-paper-en.pdf http://ibtra.com/pdf/journal/v10_n2_article2.pdf 29 "productive assets" refers to the assets of an operating firm. 30 "rental assets" refers to those assets, which can be let. 31 "dead assets" refers to non-operating (suspended) firms or uncultivated lands assets. 32 bidabad, bijan, bail financial sharing (bfs): a financial subsystem of rastin pls banking. bank melli iran, tehran, iran, 2014. international journal of islamic banking and finance research, 3(1), 21-27, 2019. https://www.cribfb.com/journal/index.php/ijibfr/article/view/266 http://www.bidabad.com/doc/bfs-paper-en.pdf 33 bidabad, bijan, rastin group funding (rgf): a financial subsystem of rastin banking. bank melli iran, tehran, 2014. international journal of islamic banking and finance research, 3(1), 43-48, 2019. https://www.cribfb.com/journal/index.php/ijibfr/article/view/268 http://www.bidabad.com/doc/rgf-paper-en.pdf 34 bidabad, bijan, rastin personal security (rps). journal of islamic economics, banking and finance, jiebf, volume 11, number 2, april june 2015, pp. 47-61. http://ibtra.com/pdf/journal/v11_n2_article3.pdf http://www.bidabad.com/doc/rps-paper-en.pdf http://ibtra.com/pdf/journal/v12_n1_article2.pdf http://www.bidabad.com/doc/mfs-paper-en.pdf https://www.cribfb.com/journal/index.php/ijibfr/article/view/267 http://www.bidabad.com/doc/ifs-paper-en.pdf http://www.bidabad.com/doc/rfs-paper-en.pdf http://ibtra.com/pdf/journal/v10_n2_article2.pdf https://www.cribfb.com/journal/index.php/ijibfr/article/view/266 http://www.bidabad.com/doc/bfs-paper-en.pdf https://www.cribfb.com/journal/index.php/ijibfr/article/view/268 http://www.bidabad.com/doc/rgf-paper-en.pdf http://ibtra.com/pdf/journal/v11_n2_article3.pdf http://www.bidabad.com/doc/rps-paper-en.pdf copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 6 established according to rastin banking regulations. people and firms can allocate a portion of their obligatory (or optional) insurance premium payments (for himself or his employees) for social security to the funds that operate under rastin personal security (rps) and enjoy its benefits. therefore, they will be exempted from obligatory insurance premium payments equal to the payment they have paid to these funds. rps uses social security certificate, personal security certificate, and pension security certificates.  rastin social takaful (rst):35 benevolent people can deposit their funds at banks for charity purposes, and the bank will be allowed to pay profit (or the principal as well) of deposit to needy people, in the form of a loan or nonreturnable payments (according to the depositor request). rst works under rastin banking regulations as "public takaful" (humanistic duty of people to resolve others' needs), or "ziman-e-i'alih" (government duty to provide people's livelihood of the society). in addition, the bank can collect waqf (devoted) deposits to raise fund. waqf deposit is a kind of deposit devoted by the depositor (benefactor) to the bank, and the bank will use the yields of this deposit to support needy people in the framework of rastin banking regulations. rastin social takaful is applicable by issuing takaful certificate and loan certificate.  sponsor crowdfunding (scf):36 is the process of collecting non-returnable funds for a specific protective goal of an entrepreneur through the bank via social networks. in scf, rastin certificate is not issued.  peer to peer loan (ppl):37 is the process of collecting funds for loan-financing the entrepreneur through the bank and via social networks. in ppl, rastin certificate is not issued.  rastin swap bond (rsb):38 is based upon mubadalah (swap) contract between mobadil (swapper) and motebadil (swapee) in which the durations and substances of swaps are equal for first and second swaps. motebadil (swapee) issues the bond and owes to mobadil equal to the nominal value of the bond, and should pay this amount (badal) to mobadil (swapper) at maturity. the issuer (motebadil) is obliged to give the mobaadal for the same amount and period as badal to mobadil. he can choose a combination of amount and period that the multiplication of amount by the period of mobaddal be equal to that of badal. at second maturity, mobadil is committed to returning mobaddal to motebadil.  rastin swap deposit (rsd):39 is a new banking deposit account, which is interest-free and is based on swap contract in rastin banking. in this depositing by opening the deposit, the depositor is entitled to use an interest-free loan to the amount and duration that his resources have been being deposited and then return the money back to the bank.  rastin swap card (rsc):40 is a bank card, and has no interest rate and is issued based on the swap contract in rastin banking. in rastin swap card there are two periods. in the first period, card issuer lends money to the cardholder; and in the second period borrows money from cardholder instead. at the first stage card-issuer credits a certain amount of money for specific time duration to the card of cardholder and requests the cardholder to deposit the same amount for the same period at the end of the cited time duration (first maturity) in the issuer's deposit account. 35 bidabad, bijan, rastin social takaful (rst). journal of islamic economics, banking and finance, jiebf, volume 11, number 1, january march 2015, pp.: 13-23. http://ibtra.com/pdf/journal/v11_n1_article1.pdf http://www.bidabad.com/doc/rst-paper-en.pdf 36 bidabad, bijan, rastin crowdfunding (rcf): a financial subsystem of rastin banking. bank melli iran, tehran, 2014. international journal of islamic banking and finance research, 3(1), 13-20, 2019. https://www.cribfb.com/journal/index.php/ijibfr/article/view/265 http://www.bidabad.com/doc/rcf-paper-en.pdf 37 bidabad, bijan, rastin crowdfunding (rcf): a financial subsystem of rastin banking. bank melli iran, tehran, 2014. international journal of islamic banking and finance research, 3(1), 13-20, 2019. https://www.cribfb.com/journal/index.php/ijibfr/article/view/265 http://www.bidabad.com/doc/rcf-paper-en.pdf 38 bidabad, bijan, mahmoud allahyarifard. usury-free bonds and islamic central banking monetary instruments. 2010. http://www.bidabad.com/doc/islamic-banking-bond-en.pdf 39 bidabad, bijan, rastin swap deposit (rsd): a financial account of rastin banking. tehran, 2015. international journal of islamic banking and finance research, 3(2), 17-23, 2019. https://www.cribfb.com/journal/index.php/ijibfr/article/view/270 http://www.bidabad.com/doc/rsd-paper-en.pdf https://doi.org/10.20193/ijibfr.v3i2.270 40 bidabad, bijan, rastin swap card (rsc): a financial instrument of rastin banking. tehran, 2015. international journal of islamic banking and finance research, 3(2), 24-31, 2019. https://www.cribfb.com/journal/index.php/ijibfr/article/view/271 http://www.bidabad.com/doc/rsc-paper-en.pdf http://dx.doi.org/10.20193/ijibfr.v3i2.271 http://ibtra.com/pdf/journal/v11_n1_article1.pdf http://www.bidabad.com/doc/rst-paper-en.pdf https://www.cribfb.com/journal/index.php/ijibfr/article/view/265 http://www.bidabad.com/doc/rcf-paper-en.pdf https://www.cribfb.com/journal/index.php/ijibfr/article/view/265 http://www.bidabad.com/doc/rcf-paper-en.pdf http://www.bidabad.com/doc/islamic-banking-bond-en.pdf https://www.cribfb.com/journal/index.php/ijibfr/article/view/270 http://www.bidabad.com/doc/rsd-paper-en.pdf https://doi.org/10.20193/ijibfr.v3i2.270 https://www.cribfb.com/journal/index.php/ijibfr/article/view/271 http://www.bidabad.com/doc/rsc-paper-en.pdf%0d http://dx.doi.org/10.20193/ijibfr.v3i2.271 copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 7 moreover, complementary systems of rastin banking that refers to innovations, platforms, and supplementary rastin banking methods that facilitate true, ethical, and efficient banking operations will strengthen the operations. they are as follows:  rastin certificate market (rcm):41 is a web-based settlement system for the transaction of interest-free rastin certificates and rastin swap bond in rastin pls bank.  crowd funding system (cfs): this system is a web-based system, which collects funds for sponsor crowd funding (scf) and peer to peer loan (ppl) projects via social networks.  operation control and monitoring system (ocm): is a computerized web-based system that provides the possibility of online inspection and control of bank personnel activities.  mortgage securitization system (mss):42 this system facilitates people to change their assets into guarantee certificates through the bank.  collateral registration system (crs): is an online web-based integrated system for registering movable and immovable assets.  serial commitments clearance (scc):43 provides the necessary arrangements for settlement of obligations of people who are in debt to someone from one hand, while they are creditors to someone else in a chain of debits and credits in a set of people.  interbank withdrawal protocol (iwp):44 is an interbank agreement that allows the bank to withdraw its claims online from other debtor's accounts o at different banks when the debtor's account at the agent bank is empty.  non-usury scripless security settlement system (nssss):45 this is an online-integrated web-based settlement system at the central bank for the transaction of rastin certificates and rastin swap bonds coordination and supervision.  money laundering detection system (mld):46 provides necessary structural and electronic bases to compare tax information and bank information to discover money laundering. 4. swf asset and liability management through rastin certificates rastin certificates are a collection of designed certificates in rastin pls banking base system and its financial subsystems. these certificates can be anonymous or named papers, which are transferable and negotiable online through the website of the bank and are issued with a nominal price and for a certain period. the owners of these certificates share the results of the project proportional to nominal price and participation period of the certificate. bank by issuing and creating market and basket of rastin certificates provides various opportunities for the transaction of these papers. various rastin certificates and their 41 bidabad, bijan, rastin certificate market (rcm), complementary system of rastin banking, 2013. international journal of islamic business & management, 3(1), 35-43, 2019. https://www.cribfb.com/journal/index.php/ijibm/article/view/260 http://www.bidabad.com/doc/rastin-bank-rcm-en.pdf 42 bidabad, bijan, mortgage securitization system (mss), a complementary system of rastin banking. international journal of law and management (ijlma), vol. 59 issue: 6, pp.778-783, 2017. emerald group publishing limited https://doi.org/10.1108/ijlma-05-2016-0045 http://www.bidabad.com/doc/mss-paper-en.pdf 43 bidabad, bijan, serial commitments clearance (scc) in rastin banking. international journal of law and management (ijlma), vol. 57, iss: 6, 2015, pp. 600-609, emerald group publishing limited. http://dx.doi.org/10.1108/ijlma-02-2015-0007 http://www.bidabad.com/doc/scc-paper-en.pdf 44 bidabad, bijan, mahmoud allahyarifard, interbank withdrawal protocol (iwp), complementary system of rastin banking 2013. international journal of islamic business & management, 3(1), 30-34, 2019. https://www.cribfb.com/journal/index.php/ijibm/article/view/259 http://www.bidabad.com/doc/iwp-paper-en.pdf 45 bidabad, bijan, mahmoud allahyarifard. it based usury free financial innovations. proceeding of ecdc 2010, 5th international conference on e-commerce in developing countries: with focus on e-banking & e-insurance. ecdc 2010, 15-16 september 2010. http://www.bidabad.com/doc/non-usury-finance-it-en.pdf 46 bidabad, bijan, money laundering detection system (mld), a complementary system of rastin banking, journal of money laundering control, vol. 20 issue: 4, pp. 354-366, 2017. https://doi.org/10.1108/jmlc-04-2016-0016 http://www.bidabad.com/doc/mld-paper-en.pdf https://www.cribfb.com/journal/index.php/ijibm/article/view/260 http://www.bidabad.com/doc/rastin-bank-rcm-en.pdf https://doi.org/10.1108/ijlma-05-2016-0045 http://www.bidabad.com/doc/mss-paper-en.pdf http://dx.doi.org/10.1108/ijlma-02-2015-0007 http://www.bidabad.com/doc/scc-paper-en.pdf https://www.cribfb.com/journal/index.php/ijibm/article/view/259 http://www.bidabad.com/doc/iwp-paper-en.pdf http://www.bidabad.com/doc/non-usury-finance-it-en.pdf https://doi.org/10.1108/jmlc-04-2016-0016 http://www.bidabad.com/doc/mld-paper-en.pdf copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 8 characteristics according to the kind of participation in the pls base system or its financial subsystems regarding the type of project and the asset used, will be bound to rastin banking regulations. regarding the supervisory role of trustee unit of banks over entrepreneurs, these certificates are distinguished from ordinary papers with “certificate” prefix. being anonymous, transferability, negotiability in the secondary virtual market (rastin certificate market), the profitability of their transactions for the bank, pricing according to supply and demand mechanism of rastin certificate market (rcm)47, a periodic settlement with the latest certificate owner, are some of the characteristics of these certificates. by applying rastin banking and using rastin certificates, ndfi can reach a more safe and efficient resource allocation and investment as depicted by figure 2. as compared by figure 1, in figure 2, the entrepreneur can also deliver his project proposal to rastin agent bank to finance his project. after the assessment and evaluation of his proposal according to the rules depicted by figure 1, the proposal is assessed and evaluated according to rastin banking standards, which are more subtle and well measured. this step closes many doors of misachievement and malfunctioning and even corruption in using fund resources. as before other national governmental agency and workgroup can introduce their proposals, but subject to observing rastin banking rules, regulations, measures, and standards. when the proposal is approved, rastin agent bank signs the contract with entrepreneur and issues corresponding rastin certificates according to the specified rastin banking product that were cited before in the name of ndfi and delivers these digital certificates to ndfi. ndfi can sell his certificates in rastin certificate market (rcm) at market prices. the certificate holder will owe the principle and benefit of the certificate. he can also transact his certificate in rastin certificate market (rcm) at market price. bank at the end of the project will settle with certificate holders. according to the rules and regulations of rastin banking,48 bank supervises the execution of the project, and at the end, account settlement will be done by the bank, and the shares of the entrepreneur, certificate holders, and bank's commission will be paid. this procedure actually has the following major positive effects on ndfi asset and liability management:  corruption reduction  supervising the execution of the project  prevents usury  ndfi has certificates for his resources that can be transacted  asset and liability management of ndfi can be done by transacting certificates  rate of return of the funds will be increased due to profit and loss sharing  risk of bad or delayed loans, outstanding claims, doubtful financing or loans decreases  transparency of operations will increase  by supplying a certificate to rastin certificate market, resources of ndfi will be replaced back by other certificate buyers  will stabilize ndfi's funds due to the participation of ndfi in the real project through pls 47 rastin certificate market (rcm): bank establishes rcm with specific characteristics and capabilities. different rastin certificates and rastin swap bonds can be transacted in this market. bank activates the information portal about projects and entrepreneurs of rastin pls bank through rcm and releases information about rastin pls financial projects to public. the system should be capable of online updating the information about available certificates, transactions, settlements, capitalization, transfer or any other activity on rastin certificates transactions. فرد، بیژن بیدآباد، آذرنگ امیراستوار، سعید عبداللهی، محمود الهیاری 48 اسکندر پردل، مریم حیدری، علیرضا شفیعی، محمدعلی پوربهروز، پیشنویس الیحه -http://www.bidabad.com/doc/rastin-banking .1391قانونی بانکداری راستین، بانک ملی ایران، bill.pdf فرد، بیژن بیدآباد، آذرنگ امیراستوار، سعید عبداللهی، محمود الهیاری اسکندر پردل، مریم حیدری، علیرضا شفیعی، محمدعلی پوربهروز، پیشنویس .1391تین، بانک ملی ایران، نامه اجرائی بانکداری راس آئین http://www.bidabad.com/doc/rastin-banking-regulation.pdf http://www.bidabad.com/doc/rastin-banking-bill.pdf http://www.bidabad.com/doc/rastin-banking-bill.pdf http://www.bidabad.com/doc/rastin-banking-bill.pdf http://www.bidabad.com/doc/rastin-banking-regulation.pdf http://www.bidabad.com/doc/rastin-banking-regulation.pdf copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 9 provincial specialized workgroup introducing project to rastin agent bank national administrative agency introducing the project to rastin agent bank rastin agent bank accepting project in line with ndfi priorities rastin agent bank project evaluation in line with ndfi articles of association, agency contract, by-law of donating loan and rastin banking standards approving economic-financials-technical justification informing the details of approved project to ndfi ndfi does approved project comply with rules? ndfi freezing funds at central bank for approved project central bank freezing the funds and notifying the rastin agent bank rastin agent bank concluding agreements with applicant, obtaining guarantees, opening lc, loan payment ndfi reviewing the approved projects according to ndfi articles of association, agency contract, by-law of donating loan figure 2. acceptance, evaluation, approval and allocation of funds process in ndfi through rastin banking entrepreneur introducing project to rastin agent bank rastin agent bank supervision on executive operations of entrepreneur final settlement with entrepreneur rastin agent bank paying principle and yields of funds to rastin certificate holder informing ndfi no yes rastin agent bank issuing rastin certificate rastin certificate market (rcm) sell rastin certificate rastin certificate buyer purchasing rastin certificate copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 10 5. rastin swap bonds (rsbs) islamic financial activities based on islamic faith must stay within the limits of islamic law in all actions and deeds. to conduct islamic financial policy, innovative sharia complied financial instruments are necessary. the prevailed islamic instruments are controversial among islamic scholars, and the majority of them believe that such contracts are not sharia compliant.49 essentially, debt purchase and substance purchase in the non-usury transaction of debt-based financial papers are controversial to be based for innovating islamic financial instruments. despite jurisprudents' views that believe transaction of debt-based papers is usury, these transactions are conducted in forms of murabaha, partnership, and ijarah (rent) contracts. in order to use appropriate financial instrument and policy that are mostly based upon transaction of bonds, we need true islamic financial innovations, which in addition to complying with sharia, could be efficient. rastin swap bonds (rsbs)50 were defined to remove this shortage. rsbs can be used as islamic monetary, fiscal and financial instruments in islamic banking and finance at different levels of central banking, commercial banking, treasury and commercial entities in the conventional banking system as well as islamic system.51 furthermore, these bonds may be issued in domestic money and foreign currency as well. this instrument is defined in rastin banking system. rastin swap bond is a financial paper that observes the right for the lender to borrow an equal amount to his lending from the borrower. the lender can sell his paper in the market at market price. in this bond, no interest rate is determined, but the market price of the bond is determined at each transaction in the market, and thus, the return of the bond is not fixed and not predetermined. four types of rastin swap bonds are:  central bank rsb to be issued by the central bank  bank rsb to be issued by commercial banks, and money and credit institutions supervised by the central bank  treasury rsb to be issued by government treasury  commercial rsb to be issued by private or public entities through an agent bank. the financial structure of rastin swap bonds is substantially different from conventional bonds and bills. in rsbs, while there is no interest, the funds will be offered to the other party in the form of “debt equal to future loan”, or “loan equal to future debt” with "time-drawing right". this also differentiates rsbs from conventional bonds, as the latter are interest-bearing securities, whereas rsbs are basically, non-interest-bearing financial investment certificates and with ownership claims. similar to conventional debt securities, rsbs may be issued for a fixed period. the period variation is due to specific rules. each type of rsbs can be transacted in the secondary market (rcm), but the transactions are permitted for different groups of seller and buyers (central bank, commercial banks, treasury, and public) for specific types of rsbs. rsbs pricing will be formed on a base of demand for and supply of money rather than a fixed interest rate for a fixed period. the interest rate of rsbs is zero, but the return is not fixed due to market bonds' prices changes. thus, interest rate rigidity vanishes, and when the economy goes toward the recession, price (return) of rsbs become lower and reduces the cost of using money resources; and vice versa for the case of going toward prosperity. that is, rsbs has a built-in automatic adjustment mechanism, which stabilizes the economy. in other words, we can say that rsbs market prices will be commensurate to the capital return of the real economy. rastin swap bonds are issued under certain conditions with a face value. accordingly, by buying $a bonds with a maturity of n months, the buyer will have the right to obtain $a interest-free loan for a period of n months from the issuer of bonds. the buyer and seller will agree on fixing combinations of $a and n months so that the buyer can choose smaller, equal or larger than one ratios from $a in proportion with n months in such a way that the result of the amount of money multiplied by time, be equal to a×n. for example, buyer instead of a dollars, can borrow a/2 dollars for 2n months at the nth month, or $a/3 for 3n months at the nth month. where, in all cases, the result will be equal to a×n. that is: (a/2)×(2n)=(a/3)×(3n)=a×n 49 mansoori, m. t. (2010), fiqh regulations on finance and business transaction, ulil alba institute, pasca sarjana universitas ibn khaldun, bogor, indonesia. 50 bidabad, bijan, abul hassan, ben ali mohamed sami, mahmoud allahyarifard. interest-free bonds financial innovation, a monetary instrument for economy at crisis. journal of economic cooperation and development (jecd). 32, 1, 2011, 55-70. http://www.sesric.org/jecd/jecd_articles/art10102201-2.pdf 51 bidabad, bijan, abul hassan, mohamed sami ben ali, mahmoud allahyarifard (2011), interest-free bonds and central banking monetary instruments, international journal of economics and finance, vol. 3, no.3; august. http://www.sesric.org/jecd/jecd_articles/art10102201-2.pdf copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 11 or generally speaking, instead of $a, we will receive $a/k for k×n months after the n months. the parameter k can be agreed mutually by the parties, or offered by the buyer. this procedure is depicted in figure 3. generally, rsbs have two periods and two maturity dates. the first period is equal to n months from the selling time to the first maturity, and the second period is from the first maturity date (n) until the payback date of funds (kn+n) or second maturity date. the first maturity is when the seller of papers is obliged to provide the loan equal to a dollars for n months, or a/k dollars for kn months to the buyer. therefore, the first maturity occurs at the end of n months. the second maturity is the end of the contract when the seller will receive back his funds after kn+n months after selling time. deposit a×n loan (a/k)×(k×n) time dollars $a n kn+n selling time first maturity second maturity n k×n $a/k first period second period figure 3. two-phases maturity of rastin swap bonds the buyers are limited to buy specific types of rsbs.  if the issuer is treasury (treasury rsb), then the buyer is the central bank.  if the issuer is a central bank (central bank rsb), then the buyers are government, banks, and those financial institutes who have prudential and legal reserves beside the central bank. since banks have prudential and legal reserves at the central bank, they will not face loan defaults.  if the issuer is a commercial bank or financial institute (bank rsb), then the buyers are a central bank, treasury, other banks, and financial institutes.  if an agent bank is an issuer (commercial rsb), then all people, banks, entities, and government can buy the rsb.  accordingly, they can transact rsbs in the secondary market. for the first three types of rsbs, there is no need for extra collaterals due to the existing legal arrangements, but commercial rastin swap bonds need appropriate mechanism to be arranged to decrease default probability to zero. for this reason, the seller provides a (first) guarantee equal to the face value of bonds at the time of issuance and surrenders it to buyers. at the end of the first period, the buyer will be obliged to surrender the same bank guarantee to the seller of bonds. after returning the funds back from the seller to buyer – at the end of the first period – the first guarantee is canceled. another (second) guarantee is to be issued again for the second part of borrowing. at the end of the second period –after returning the funds back from the buyer to the seller – the second guarantee will also be canceled. all these operations are done through an agent bank. all these bonds are issued by the new contract of mubadalah defined in rastin banking. rastin swap bond (rsb) is based upon mubadalah (swap) contract between mobadil (swapper) and motebadil (swapee) in which the durations and substances of copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 12 swaps are equal for first and second swaps. motebadil (swapee) issues the bond and owes to mobadil equal to the nominal value of the bond, and should pay this amount (badal) to mobadil (swapper) at maturity. the issuer (motebadil) is obliged to give the mobaadal for the same amount and period as badal to mobadil. he can choose a combination of amount and period that the multiplication of amount by the period of mobaddal be equal to that of badal. at second maturity, mobadil is committed to returning mobaddal to motebadil. rsbs are not based upon participation and just indicate swapping of assets and can be transacted in rastin rastin certificate market. similar to rsbs in domestic money, foreign exchange nominated rsbs can also be issued. the only difference is that both loans of rastin foreign exchange swap bonds should be in one unique currency; except for the central bank rastin foreign exchange swap bonds that can be in two different currencies for the first and second periods. similar to rsbs, the four kinds of rastin foreign exchange swap bonds can be issued. the issuers, sellers and buyers of rastin foreign exchange swap bonds are as cited before. in neither cases, especially when one foreign exchange is used for the first period, and another foreign exchange is used in the other period, no skepticism of usury exists. 6. swf asset and liability management through rastin swap bonds (rsbs) rastin swap bond will serve as an important instrument for resource mobilization and will be a primary vehicle for the development of the islamic capital market. sole52 argues that expanding the range of financing opportunities by different institutions by developing sukuk is likely to deepen the financial sector as well as the economy as a whole. therefore, the effects of issuing rsbs by the central bank, commercial banks, government treasury, and private entities separately will enormously contribute in real sector economy.53 to show the applied alm procedure, suppose that the economy is at the top of a business cycle. the economy is in prosperity, and as a matter of fact, it will go to recession in the next period. at this position, ndfi's resources are high, and the government will be confronted with a fiscal deficit in the next period due to the recession. ndfi start to buy rsb and decrease his cash. the rsb issuer is obliged to return ndfi's fund and lend him an equal amount in the next period that the economy is in recession and government needs some resources to cover her fiscal deficit. at the contrary, in recession or crises period ndfi can issue rsb and finance government fiscal deficit and in next period that the economy grows up to prosperity return his loan back and give equal loan to rsb holders. ndfi can transact rsbs in rastin certificate market to perform asset and liability management. the monetary effect of commercial rastin swap bonds is neutral, and will not increase the liquidity, but promotes money resources allocation. this is because these operations will likely to be lagged borrowing from each other. this will result in no changes in liquidity of the economy and is neutral in the sense of monetary effect. references فرد، اسکندر پردل، مریم ستوار، سعید عبداللهی، محمود الهیاریبیژن بیدآباد، آذرنگ امیرا حیدری، علیرضا شفیعی، محمدعلی پوربهروز، پیشنویس الیحه قانونی بانکداری راستین، بانک .1391ملی ایران، http://www.bidabad.com/doc/rastin-banking-bill.pdf فرد، اسکندر پردل، بیژن بیدآباد، آذرنگ امیراستوار، سعید عبداللهی، محمود الهیاری نامه اجرائی بانکداری مریم حیدری، علیرضا شفیعی، محمدعلی پوربهروز، پیشنویس آئین 1391راستین، بانک ملی ایران، http://www.bidabad.com/doc/rastin-banking-regulation.pdf bidabad, bijan, new operational islamic banking system, volume one, theoretical foundations, lap lambert academic publishing, omniscriptum gmbh & co. kg, 2014, isbn: 978-3-659-54463-7. http://www.amazon.com/rastin-banking-operational-theoretical 52 sole, j. (2007). introducing islamic banks into conventional banking system. working paper no. 07/175, imf, washington, dc. 53 bidabad, bijan, mahmoud allahyarifard. usury-free bonds and islamic central banking monetary instruments. 2010. http://www.bidabad.com/doc/islamic-banking-bond-en.pdf http://www.bidabad.com/doc/rastin-banking-bill.pdf http://www.bidabad.com/doc/rastin-banking-regulation.pdf http://www.bidabad.com/doc/rastin-banking-regulation.pdf http://www.amazon.com/rastin-banking-operational-theoretical-foundations/dp/3659544639/ref=sr_1_2?s=books&ie=utf8&qid=1402563518&sr=1-2 http://www.bidabad.com/doc/islamic-banking-bond-en.pdf copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 13 foundations/dp/3659544639/ref=sr_1_2?s=books&ie=utf8&qid=1402563518&sr=1-2 http://pub.npdr.ir/product/rastin-banking/ bidabad, bijan, new operational islamic banking system, volume two, applicational issues, lap lambert academic publishing, omniscriptum gmbh & co. kg, 2014, isbn: 978-3-659-55210-6. http://www.amazon.com/rastin-banking-ii-operationalapplication/dp/3659552100/ref=sr_1_1?s=books&ie=utf8&qid=1404643353&sr=1-1 http://pub.npdr.ir/product/rastin-banking-volume-ii/ bidabad, bijan, mahmoud allahyarifard. it role in fulfillment of profit & loss sharing (pls) mechanism. proceeding of the 3rd international islamic banking and finance conference, the monash university, kl, malaysia, 16-17 november, 2005. international journal of islamic banking and finance research, 3(2), 44-59, 2019 . https://www.cribfb.com/journal/index.php/ijibfr/article/view/274 http://www.bidabad.com/doc/english-pls-5.pdf http://www.bidabad.com/doc/pls-it-en.ppt bidabad, bijan; mahmoud allahyarifard. assets and liabilities management in islamic banking. proceeding of the 3 rd international conference on islamic banking and finance, risk management, regulation and supervision, bidakara, jakarta, indonesia, 23-26 february, 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(jecd). 32, 1, 2011, 55-70. http://www.sesric.org/jecd/jecd_articles/art10102201-2.pdf bidabad, bijan, installment financial sharing (ifs): a financial subsystem of rastin pls banking. international journal of islamic banking and finance research, 3(1), 28-42, 2019. https://www.cribfb.com/journal/index.php/ijibfr/article/view/267 http://www.bidabad.com/doc/ifs-paper-en.pdf bidabad, bijan, rent financial sharing (rfs). journal of islamic economics, banking and finance, 2014. http://www.bidabad.com/doc/rfs-paper-en.pdf http://ibtra.com/pdf/journal/v10_n2_article2.pdf bidabad, bijan, rastin social takaful (rst). journal of islamic economics, banking and finance, jiebf, volume 11, number 1, january march 2015, pp.: 13-23. http://ibtra.com/pdf/journal/v11_n1_article1.pdf http://www.bidabad.com/doc/rst-paper-en.pdf http://www.amazon.com/rastin-banking-operational-theoretical-foundations/dp/3659544639/ref=sr_1_2?s=books&ie=utf8&qid=1402563518&sr=1-2 http://pub.npdr.ir/product/rastin-banking/ 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https://www.cribfb.com/journal/index.php/ijibm/article/view/258/353 http://www.sesric.org/jecd/jecd_articles/art10102201-2.pdf https://www.cribfb.com/journal/index.php/ijibfr/article/view/267 http://www.bidabad.com/doc/ifs-paper-en.pdf http://www.bidabad.com/doc/rfs-paper-en.pdf http://ibtra.com/pdf/journal/v10_n2_article2.pdf http://ibtra.com/pdf/journal/v11_n1_article1.pdf http://www.bidabad.com/doc/rst-paper-en.pdf copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 14 bidabad, bijan, mortgage securitization system (mss), a complementary system of rastin banking. international journal of law and management (ijlma), vol. 59 issue: 6, pp.778-783, 2017. emerald group publishing limited https://doi.org/10.1108/ijlma-05-2016-0045 http://www.bidabad.com/doc/mss-paper-en.pdf bidabad, bijan, bail financial sharing (bfs): a financial subsystem of rastin pls banking. bank melli iran, tehran, iran, 2014. international journal of islamic banking and finance research, 3(1), 21-27, 2019. https://www.cribfb.com/journal/index.php/ijibfr/article/view/266 http://www.bidabad.com/doc/bfs-paper-en.pdf bidabad, bijan, rastin personal security (rps). journal of islamic economics, banking and finance, jiebf, volume 11, number 2, april june 2015, pp. 47-61. http://ibtra.com/pdf/journal/v11_n2_article3.pdf http://www.bidabad.com/doc/rps-paper-en.pdf bidabad, bijan, joint stock company with variable capital (jscvc), international journal of law and management (ijlma), emerald group publishing limited, vol. 56, iss: 4, pp.302 – 310, 2014. http://dx.doi.org/10.1108/ijlma-09-2012-0031 http://www.bidabad.com/doc/vjsc-paper-en.pdf bidabad, bijan, rastin profit and loss sharing (pls) base system. journal of islamic economics, banking and finance, pp. 3257, vol. 9, no. 4, oct-dec 2013. http://ibtra.com/pdf/journal/v9_n4_article2.pdf http://www.bidabad.com/doc/pls-base-en.pdf bidabad, bijan, money laundering 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http://www.bidabad.com/doc/rastin-bank-ejraye-asnad-en.pdf bidabad, bijan, saeed abdollahi, mahshid sherafati, enforcement of the purports of binding banking documents in rastin banking – part i. international journal of law and management (ijlma), emerald group publishing limited, vol:59, iss:1, pp. 52-65, 2017. https://doi.org/10.1108/ijlma-07-2015-0041 bidabad, bijan, saeed abdollahi, mahshid sherafati, enforcement of the purports of binding banking documents in rastin banking – part ii. international journal of law and management (ijlma), emerald group publishing limited, vol:59, iss:2, pp.178-191, 2017. https://doi.org/10.1108/ijlma-10-2015-0055 bidabad, bijan, serial commitments clearance (scc) in rastin banking. international journal of law and management (ijlma), vol. 57, iss: 6, 2015, pp. 600-609, emerald group publishing limited. http://dx.doi.org/10.1108/ijlma-02-2015-0007 http://www.bidabad.com/doc/scc-paper-en.pdf bidabad, bijan, rastin swap deposit (rsd): a financial 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research on islamic banking & finance and business, usa 64 monetary policy and return on equity of quoted insurance firms: a time series study from nigeria macfubara, minafuro suzane1 , norteh dumbor1 & gberesuu, barida barry1 1insurance and risk management department, ken poly, bori, rivers state ,nigeria correspondence: macfubara, minafuro suzane, insurance and risk management department, ken poly, bori, rivers state, nigeria received: may 5, 2018 accepted: may 26, 2018 online published: june 6, 2018 abstract the financial system is the transmission channel of monetary policy. this study examines the effect of monetary policy on the performance of insurance firms in nigeria from 1990 – 2017. the objective is to investigate the existing relationship between monetary policy instruments and the performance indicators of insurance companies. secondary data were sourced from stock exchange factbook, central bank of nigeria (cbn) statistical bulletin. multiple linear regressions were formulated to examine the effect of the independent variables on the dependent variable. return on equity was modeled as a function of treasury bill rate, monetary policy rate, interest rate, growth of money supply and exchange rate. r2, t-statistics, β coefficient, f-statistics and durbin watson were used to examine the extent to which the independent variables affect the dependent variables while augmented dickey fuller unit root test, granger causality test, cointgration test and error correction models was used to ascertain the dynamic relationship between monetary policy variables and return on equity of the insurance firms. findings revealed that, all the explanatory variables have positive effect on return on equity except treasury bill rate. the unit root test found that the variables are stationary at first difference, the cointgration test found the presence of long run relationship while the granger causality test found a uni-directional causality. the study concludes that monetary policy has moderate effect on the return on equity of the insurance firms. we recommend that management of insurance companies should devise measures of managing the negative effects of the monetary policy instruments to enhance the performance of the insurance companies. keywords: monetary policy, return on equity, quoted insurance firms, monetary policy rate, treasury bill rate. 1. introduction monetary policy has long been acknowledged as instrument used to influence investment and other macroeconomic indicators. the opinion that the non-banks financial institutions matters in the transmission of monetary policy can be traced to the radcliffe committee meeting of 1950s which suggested strongly that the nonbank financial institutions such as insurance companies can influenced and be influenced by monetary policy and thereby be brought under the control of monetary authorities. this led to the redefinition of money supply as ms = c+ dd + sd + td + nbfi (onoh, 2002). insurance companies provide unique financial services to the growth and development of every economy. such specialized services ranges from underwriting of risk and mobilization of long-term fund for capital investment, hence monetary policy variables can affect the performance of the industry negatively or positively. the relationship between monetary policy and performance of private investment and financial institutions is perennial issue in development economic judging from the hundreds of theoretical and empirical scholarly papers that have been written to capitalize how monetary variables such as interest rate, money supply, monetary policy rates and liquidity reserves, money supply, affect private investment or financial institutions. morgan (1981) identified two casual relationships between monetary policy instruments and return on private investment which are finance-led hypothesis and growth led hypothesis. the effect of monetary policy variables such as interest rate, money supply, monetary policy rate and liquidity on the qualitative measures of insurance of insurance performance such as profit, investment, employment and cash flow is lacking in literature. however, it is generally accepted in theory and principle that the financial sector which www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 65 includes the insurance industry is the transmission mechanism for the realization of government monetary and macroeconomic goals. despite the growing literature on the relationship between monetary policy and the performance of the financial institutions, the effect of monetary policy on the non-banks financial institutions such as the insurance companies is lacking in literature as significant proportion of literature is focused on the effect of money banks. this creates a knowledge gap in the effect of monetary policy on the performance of insurance companies in nigeria. again, the existing literatures and findings on the effect of monetary policy and the performance of financial institution is inconclusive and controversial as some report positive while others report negative effect. this result to failures or report negative effect, this result to failures of monetary authorities in effect management of monetary policy to achieve prudential and financial sector stability. the failure of previous financial policies of government to achieve desirable economic growth was the concern that demands re-structuring of the system, especially in the era of an ailing economy (dagogo and okorie, 2014). this results to the difficulties of accessing the relative effect of monetary policy on the non-bank financial institutions. from the above, this study intends to examine the effect of monetary policy on the performance of insurance companies in nigeria. the following null hypotheses are formulated from the variables:  there is no significant relationship between treasury bill rate and return on equity of quoted insurance firms in nigeria.  there is no significant relationship between monetary policy rate and return on equity of quoted insurance firms in nigeria.  there is no significant relationship between interest rate and return on equity of quoted insurance firms in nigeria.  there is no significant relationship between growth of money supply and return on equity of quoted insurance firms in nigeria.  there is no significant relationship between exchange rate and return on equity of quoted insurance firms in nigeria. 2. literature review 2.1 insurance in nigeria insurance companies provide unique financial services to the growth and development of every economy. such specialized service ranges from the underwriting of risks inherent in economic entities and the mobilization of large amount of funds through premium for long-term investment (akotey et al, 2011). the risk absorption role of insurers promotes financial stability in the financial entities (lowes, 2010). categorically, insurance in nigeria is classified into life, general, composite and reinsurance (ezirim, 2003). apart from the risk management functions, insurance policy such as life and whole life is an aspect that provide savings plans and in direct completion with the investment in other financial institutions such as the deposit money banks, savings associations, mutual funds and real estates and other real and financial investments (ezirim and muoghalu, 2002). insurance plays financial intermediation function, a major source of long-term capital and facilitate the growth of the capital market (catalan et al., 2000). hence monetary and macroeconomic shocks can affect positively or negatively insurance investment. nigerian government over the years has embarked on monetary and macroeconomic reforms to enhance real and portfolio investment in the financial sector. for instance the deregulation of interest rate and the financial sector in the last quarter of 1986, the reforms in the foreign exchange market to attract foreign real and portfolio investment, the establishment of national insurance commission (naicon) in 1997. the enactment of the insurance act 2003 which increase the capital base of the categorized insurance businesses to n15m for life insurance, n200m for general insurance and n350m for reinsurance and the recapitalization policy in 2005 which further increase the capital base to n2billion life insurance, n3billion non life and n10billion reinsurance which reduce number of insurance companies from 104 to 49, reinsurance from 4 to 2 (fatula, 2007) with the objective of consolidating in the sector maximize investment returns and to attract foreign capital infusion (ayeleso, 2010). however, the extents to which these reforms have affected investment in the insurance industry remain a matter of research interest as investment in the industry continues to decline. record revealed that only 10% of nigerian have insurance policy of any type (mordi, 1990, wilson, 2004). a close examination of cbn report (2012) indicate that total investment of nigerian insurance industry total n336,247.9 in 2008, n343,894.2 in 2009, n351,459.9 in 2010 and n 359,192.0 in 2011 representing a marginal annual increase of 2.89% compared with the commercial banks of 43.78%. 2.2 conceptual of monetary policy monetary policy is defined by the central bank of nigeria (cbn) as combination of measures designed to regulate value supply and cost of money in an economy, in consonance with the level of economic activities. odufalu, (1994) defined monetary policy as the combination of measures taken by monetary authorities (the cbn and the ministry of www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 66 finance) to influence directly or indirectly both the supply of money and credit to the economy and the structure of interest rate for economic growth, price stability and balance of payment equilibrium. he added that the cbn is empowered by decree 25 of 1991 act, to formulate and implement monetary policy in nigeria, in consultation with the ministry of finance subject to the approval of the president. onyido (1993) sums it up when he said that monetary policy is therefore applied to influence the availability and cost of credit in order to control the money supply policy. he generally describe the action taking by the central bank as using tools / instrument at its disposal to influence monetary conditions in particular, the quantity and supply of money in the macro-economic goals. 2.3 agency theory most of the hypotheses formulated in the following are based on the economic principal-agent theory, where a positive effect stems from the amelioration of the shareholder-management conflict, by disciplining the management. analogously, an aggravation of the conflict results in a negative effect. the principal-agent theory is part of the new institutional economics, which developed as extension of the neoclassicism. it abandons the assumption of a complete market by allowing informational asymmetries and transaction costs to cause incomplete contracts. this leads to a methodological individualism, which does no longer consider institutions as profit maximizing collectives, but as a “nexus for a complex set of explicit and implicit contracts of individuals. consequently, the economic focus on markets is shifted to man-made institutions, incorporating the individual into economic theory. 2.4 empirical review mazviona, dube and sakahuhwa (2017) examined factors affecting the performance of insurance companies in zimbabwe. we utilized secondary data from twenty short-term insurance companies. the data was for the period from 2010 to 2014. we used factor analysis and multiple linear regression models to determine the factors affecting performance and identifying their impact. the findings revealed that expense ratio, claims ratio and the size of a company significantly affect insurance companies’ performance negatively, whilst leverage and liquidity affect performance positively. gonga and sasaka (2017) investigated the determinants of financial performance of selected insurance firms in nairobi county. the target population was 55 licensed insurance firms (42 locally owned insurance firms and 13 foreign owned insurance firms). the study used two respondents in each insurance firm who were finance managers and corporate affairs managers and all these had total of 96 respondents. the study used both primary and secondary data. the main primary data source was semi structured questionnaire. the data from the study was analyzed qualitatively and quantitatively using percentages, means and frequency distribution with the aid of statistical package for social sciences (spss) version17. since data was descriptive, variants such as means, frequencies and percentages were used to describe the findings of the study. bivariate anova statistical data analytical technique was used to find the determinants of financial performance of selected insurance firms in nairobi county. the study concluded that insurance firms had liquid investments which helped them to settle claims especially if their underwriting income cannot cover claims. the firms would sell off their investments if they lacked money to settle claims. majority of insurance firms relied on cash flow from operations in liquidity management. this implied that all firms had certain source of funds for liquidity management. the study recommended that insurance firms should establish a well matched portfolio of their assets and liability in terms of cash flows or rather they should ensure that they create additional reserve so that it can assist them to cover the interest rate since low interest may create a discrepancy on the earnings. yuvaraj and abate (2013) examined on factors affecting profitability of insurance companies for nine years (20032011) in ethiopia using 7 firm specific factor (i.e. age of company, size of company, volume of capital, leverage ratio, liquidity ratio, growth and tangibility of assets) on profitability. according to their regression results they found that size is most important factor and positively related with profitability. daniel and tilahun (2013) also studied on firm specific factors that determine insurance companies’ performance in ethiopia using 7 firm specific factors (i.e. size, leverage, tangibility, loss ratio (risk), growth in writing premium, liquidity and age) on 9 insurance companies for six consecutive year staring from 2005-2010 and they found that insurers’ size is statistically significant and positively related with return on total asset. abate (2012) studied factors affecting insurers profitability in ethiopia sampling nine of insurance companies for nine years (2003-2011) and found out that assize is the most important determinant factors of profitability and positively related with it. mistere (2015) also found out the same result. the effect of size on profitability in this study also was found to be significant and positively related with profitability. nino (2016) examined the association between insurer-specific indicators and macroeconomics on profitability in philippine non-life insurance market utilizing the panel data over the period of 2008 through 2012. return on assets (roa) and operating ratio were used for profitability. the study found out that that firm size significantly affects profitability both in roa and operating ratio. www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 67 hamdan (2008) examined determinants of insurance company’s profitability in uae, the study revealed that there is significantly positive relationship between profitability and size. bilal javaria et al. (2013) similarly, investigated on the determinants of profitability in insurance sector of pakistan with a panel data set of 31 insurance firms, and they found that size, earnings volatility and age of the firm are significant determinants of profitability. bilal javaria et al. (2013) investigated on the determinants of profitability in insurance sector of pakistan with a panel data set of 31 insurance firms (life insurance sector and no-life insurance) of pakistan from 2006-2011 the study suggests an opposite and significant relationship between leverage ratio as independent variables and profitability. shami and ahmed (2008) explore on determinants of insurance companies' profitability in uae using 5 firm specific variables and they found that an opposite and significant relationship between leverage ratio as independent variables and profitability. hen-ying lee (2014) also estimated the effects of firm specific factors and macroeconomic factors on profitability (measured by operating ratio and roa) of property liability insurance industry in taiwan and he found that financial leverage is significantly and negatively correlated with profitability. anilaçekrezi (2015) investigated factors that affect financial performance of albanian insurance companies the study population consisted of 5 insurance companies with private capital, for the period 2008-2013 with a total of 30 data. the results showed that leverage has negative impact on the financial performance (roa) of these companies. therefore, in this study too it was found out that leverage has a significant effect and statistically negative relationship with profitability. curak et al. (2012) examined the determinants of the profitability of the croatian composite insurers’ between 2004 and 2009. the determinants of profitability, selected as explanatory variables include both internal factors specific to insurance companies and external factors specific to the economic environment. by applying panel data technique, the authors show that underwriting risk (loss ratio) had a significant influence on insurers’ profitability. umotho (2013) examined the relationship between firm specific and macroeconomic variables with financial performance of insurance companies. in his study he investigated the relationship of interest rate; inflation rate (cpi), currency exchange rate fluctuations, money supply, gdp, as macro-economic factor, and claim ratio (cr) and he found that claim ratio has positive effect on roa. therefore, this study is also consistent with most of the previous studies and found out that loss ratio is negatively related with profitability and its effect is significant. chen-ying lee (2014) also estimated the effects of firm specific factors and macroeconomic factors on profitability (measured by operating ratio and roa) of property-liability insurance industry in taiwan and he found that reinsurance is significantly and positively correlated with operating ratio. however, in case of profitability measured by roa, he found that underwriting reinsurance is positively correlated with roa. ornella and anderloni (2014) tested the impact of several firm characteristics, such as dimension, capital structure and investment policies on economic performance for a panel of non-life insurance firms operating in the main european markets spanning from 2004 to 2012.the findings suggest that various factors contribute to the performance measured by return on equity and return on asset. according to the study, the three main areas that constitute the core insurance activity (insurance in its narrower sense, financial and reinsurance activities) strongly influence profitability, but reinsurance does not seem to contribute either positively or negatively to performance. muhaizam ismail (2013) investigates the determinants of financial performance of general islamic and conventional insurance companies in malaysia using panel data over the period of 2004 to 2007, using investment yield as the performance measure. this measure is related to a number of economic and firm specific variables, which are the profit/interest rate levels, equity returns, size of company, retakaful/reinsurance dependence, solvency margin, liquidity, and contribution/premium growth, chosen based on relevant theory and literature. based on the empirical results, the study found that retakaful dependence is statistically significant determinants of the investment performance of the general islamic insurance companies in malaysia. kozak (2011) examined determinants of profitability of non-life insurance companies in poland during integration with the european financial system for the period of 2002–2009 and suggested that companies improve profitability and cost efficiency with an increase of their gross premiums and decrease of total operating expenses. additionally increases of the gdp growth and the market share of foreign owned companies positively impact profitability of nonlife insurance companies during the integration period. cassandra et al (2015) in their multivariate analysis, they find evidence that market concentration and insurers’ underwriting profits are positively related. more specifically, insurers in states with greater market concentration are more profitable than insurers in states with lower levels of market concentration öner kaya (2015) investigated the determinants of profitability in the bosnia and herzegovina insurance industry between the years of 2005– 2010. according to their results, age of company, market share, and past performance are positively and significantly related with current profitability they have also found that foreign owned companies perform better than domestically owned companies; and there is no significant relationship between diversification www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 68 and profitability. in this study also, it was found that market share correlates positively wit profitability and had insignificant effect, which is consistent to the above studies. michael doumpos et al (2012) using a sample of over 2000 nonlife insurance firms operating in 91 countries between 2005 and 2009,they found that macroeconomic indicators such as real gdp growth, inflation, and income inequality influence the overall performance of firms and a statistically significant effect on the overall performance of insurers. kozak (2011) examined determinants of profitability of non-life insurance companies in poland and according to the study of the gdp growth and the market share of foreign owned companies positively impact profitability of nonlife insurance companies. suheyli reshid (2015) found that economic growth rate has significant influence on profitability. mister (2015) found that economic growth is not significant determinants of profitability. hadush (2015) found that gdp is negatively but significantly related with profitability. gdp growth shows positive but insignificant relationship with insurers’ profitability. hana mariam (2015) found that out that gdp growth shows positive but insignificant relationship with insurers’ profitability. nino datu (2016) examined the association between insurer-specific indicators and macroeconomics on profitability in philippine non-life insurance market utilizing the panel data over the period of 2008 through 2012. return on assets (roa) and operating ratio were used for profitability. according to the study there was no evidence found in the gross domestic product (gdp) on profitability in both roa and operating ratio. in this study, gdp was found to be negatively related with profitability and it has insignificant effect on profitability. therefore the studies were found to be contradictory. chen-ying lee (2014) found that inflation rates exhibit negative correlation with roa, but is not significantly different from zero. curak et al. (2012) examined the determinants of the profitability of the croatian composite insurers’ between 2004 and 2009.the finding showed that inflation and return on equity have a significant influence on insurers’ profitability. michael doumpos et al (2012) using a sample of over 2000 nonlife insurance firms operating in 91 countries between 2005 and 2009,they found that macroeconomic inflation influence the overall performance of firms and a statistically significant effect on the overall performance of insurers. viktorianikolaus (2015) examines determinants of firm performance of indonesian and dutch firms over the period of 2009-2013. the study found that inflation, which is high in indonesia, has a negative influence. the more moderate inflation rate of the netherlands leads to a positive, although not significant effect. nino datu (2016) examined the association between insurer-specific indicators and macroeconomics on profitability in philippine non-life insurance market utilizing the panel data over the period of 2008 through 2012. return on assets (roa) and operating ratio were used for profitability. according to the study there was no evidence found that inflation has effect on profitability in both roa and operating ratio. in this study, inflation has negative relationship with profitability and it affects profitability insignificantly. chukwulozie (2006) explained that low level of income, low level of education, lack of insurance awareness, high inflation rate, lack of reliable actuarial data for research and underdeveloped financial market had affected savings for life insurance consumption. although, his work was based on life insurance as a source of long term savings, there is no empirical evidence to justify his work. zhu (2007) explained that life insurance and stock purchases are independent of each other; life insurance purchases influence by individual’s income, bequest intensity, risk attitude, survival probability, and the insurance risk premium and stock purchases are affected by individuals’ income, risk attitude, the risk free rate of return, stock return, stock volatility. life insurance and stock purchases are positively related with each other and affected by all factors. chui and kwok (2008) examined that national culture affects the consumption pattern of life insurance across countries. research hypothesis were tested empirically by using hofstede’s cultural dimensions and data from 1976-2001 across 41 countries and found that individualism indeed has a significant, positive on the life insurance consumption, whereas power distance and masculinity/ femininity have significant, negative effects. chen and mau (2009) focused on ethical and non-ethical sales behavior of salesperson’s regarding customer trust in the salespersons’ and in the company which affects customer loyalty in the life insurance industry and found that the salesperson’s ethical sales behavior does play a crucial role in customer loyalty through customer trust. malik (2011) investigated that determinant of profitability in insurance industry in pakistan, the effect of factors such as age of company, size of company, volume of capital, loss ratio and leverage ratio on profitability. the sample of 35 life and non-life insurance cover the period of 2005-2009 and concluded that there is positive association between size of company and profitability and there is no relationship between profitability and age of company and also showed that volume of capital is significantly and positively related to profitability. leverage ratio and loss ratio showed negative but significant relationship with profitability. tang (2001) revealed that some sources of customer value such as relational quality price and corporate image were differentiated significantly across psychographic segments while service and product qualities were not significantly affected by psychographics, service quality was found to be the core factors to all customers. by applying factor analysis and k-means clustering methods were used to develop psychographic segments and concluded that www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 69 demographic and psychographic characteristics found to have significant effect on sources from which customers derived value. ayaliew (2013) examine the determinants of life insurance for a time series data for the period 19912000. there is a casual relationship between life insurance sector development and economic growth in the developing country. this study showed that life insurance is determined by per capita income, life expectancy, real interest rate and inflation. oke et al (2010) examined the determinants of life insurance consumption in nigeria during the period 1970-2005 within an error correction framework. co-integration technique revealed that real gross domestic product and structural adjustment facility positively and significantly influence life insurance consumption in nigeria while indigenization policy and domestic interest rate are statistically significant but inversely related to life insurance consumption. on the other hand return on investment, inflation rate, openness of the economy, political instability are insignificant predictors of life insurance consumption in nigeria. moullee et al., (2013) showed that insurance consumption decision is influenced by monetary considerations such as consumer’s evaluation of a service in monetary terms and the search for the possibility to reduce the amount premiums payable for insurance and indicated that demographical and socio-economical characteristics of consumers influence their behavior. factor analysis and multiple regression analysis were used to determine how the factors are formed and their relative’s weights. five factors had been identified the acceptability of insurance condition, insurance service providers competence, consumers monetary attitudes towards insurance, the positively of consumers insurance experience, and the possibility to reduce the amount of premiums payable for insurance. lee (2001) found that without aging process, the purchase rate in 1990 and 1995 was lover. the baby boomers purchase less life insurance than their earlier counterparts and this phenomenon consequently led to the decline of recent life insurance purchases in the u.s. men show a strong age effect and strong negative cohort effects while women have strong positive cohort effects. wee et al (2007) examined the determinants of life insurance consumption in oced countries and found that there is significant positive income elasticity of life insurance demand. demand increases with the no of dependents and level of education and decrease with the expectancy and social security expenditure whereas high inflation and real interest rates tend to decrease consumption. life insurance demand was better explained when the product market and socioeconomic factors were jointly considered. omar and frimpong (2007) found that increased level of consumer consciousness and lack of welfare benefits were increasing growth factors for the life insurance market in nigeria and the purchase behavior towards life insurance was determined by normative factors, the suggestion was that the initial point of contact for marketing communication regarding the purchase of life insurance should have family and friends. beck and webb (2002) highlighted the issues of finding the reasons behind the variations in life insurance consumption by using unbalanced panel data of 68 countries from 1961 to 2000. they employed four various proxies of consumption, economic, demographic and institutional factors. results cleared that countries with large income per capita, stable banking sector and lower inflation tend to use huge quantity of life insurance. in addition to its life insurance consumption was observed to be directly affected by private savings and real interest rate. demographic elements such as education, urbanization, life expectancy, young and old dependency ratio had not any robust effect on the life insurance consumption. hwang and gao (2003), examined the elements for life insurance demand in china by explaining the huge growth in this industry after the economic reforms of 1978. study found that the basic element that have effected people to buy insurance policies are positively related to upper stages of economic security, the rise in the education level and the modification in social structure. however, this study had not found an inverse influence of inflation on life insurance consumption; even china faced large inflation in the mid-1990s. sen and madheswaran (2007) investigated the role of economic and political variables in the life insurance consumption pattern of 4 saarc, 6 asian and 2 greater china region economies from 1994 to 2004. insurance penetration and density were the dependents element in cross country analysis and the estimates of fixed and random effects model proved that incomes, savings and inflation were main variables in describing insurance consumption. study also done the time series analysis of life insurance demand for india from 1965 to 2004 and findings cleared that income (gdp per capita), financial depth, per policy price of insurance products and real interest rates were significant factors. nesterova (2008) explored the modifications in life insurance demand for 14 countries of former soviet union and central and eastern europe including ukraine from 1996-2006. panel results cleared that economies with greater life expectancy at birth, income and education level, old dependency ratio had larger life insurance consumption while, financial development, inflation and real interest rate decreased the life insurance demand across countries, whereas, young dependency ratio, urbanization level and institutional factors did not had any significant relation to life insurance demand. www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 70 ade et al, (2010) explored the elements of life insurance consumption in nigeria by using co integration and error correction model from 1970-2005. study found the presence of a long run link and a short run dynamics among the factors. co-integration results cleared that real gross domestic product and sap directly and significantly affect life insurance demand in nigeria while indigenization policy and interest rate are statistically significant but negatively linked to life insurance demand. on the other side study found that return on investment, inflation, openness and political instability are insignificant determinants of life insurance demand. chen and wong (2004) revealed that size, investment and liquidity are significant determinants of the profitability of insurers. however, ahmed et al., (2011) in a similar study of the pakistani life insurance industry, claimed that liquidity is not a significant determinant of insurers’ profitability. they posited that, whereas size and risk (loss ratio) are significant and positively related to the profitability of insurance firms, leverage is negative and hence decreases the profitability of insurers significantly. malik (2011) delved into the determinants of the financial performance of 35 listed life and non-life companies covering the period of 2005 to 2009. although his study covers both sectors of the insurance business, much of his findings seem to confirm that of ahmed et al (2011). specifically, malik found that whereas size and capital have strong positive association with insurers’ profitability, loss ratio and leverage have strong inverse relationship with profitability. hrechaniuk et al. (2007) examined the financial performance of insurance companies in spain, lithuania and ukraine. their results showed a strong correlation between insurers’ financial performance and the growth of the written insurance premiums. pervan and pavic (2010) and curak et al (2011) investigated into the impacts of firm-specific, industry-specific and macroeconomic variables on the financial performance of the croatian non-life and composite insurance companies respectively. the results of pervan and pavic revealed an inverse and significant influence of ownership, expense ratio and inflation on profitability. in lending support to the findings of pervan and pevic (2010), curak et al (2011) indicated that size, underwriting risk, inflation and equity returns have significant association with composite insurers’ financial performance. there has not been any known study on the effect of monetary policy on the performance of the insurance industry in nigeria. similar study such as aburieme (2008) examined the effect of monetary policy on the performance of nigerian banking industry. the neglect in empirical research can be traced to the indirect effect of monetary policy on the insurance industry. 3. research methodology data collections for this study were from secondary sources of information. the sources include the central bank of nigeria (cbn), financial statement of the quoted insurance firms, textbooks, and journals, write ups and various publications such as cbn statistical bulletin and periodical bulletin. a regression method of ordinary least square (ols), granger causality test, error correction estimate, augmented dickey fuller unit root test and johansen co-integration test of research design were adopted to ascertain the effect of monetary policy on return on equity of the quoted insurance firms within the periods covered in this study. 3.1 analytical framework the econometric model to consider in this study takes monetary policy and return as the explanatory variables and return on equity as dependent variable respectively. these variables are used at constant prices to obtain a reliable parameter estimates in the time series regression. this study used the multiple regression models. the test is basically modeled based on an estimated regression model, by ordinary least square (ols) estimator (pesaranet al., 2001). an f-test of the joint significance of the coefficients of the model, t h e variables was used to test the hypothesis of no co-integration among the variables against the presence of cointegration among the variables . the null hypothesis of no co-integration bet ween the dependent and the independent var iables as specified below: roe = f (exr, intr, tbr, mpr, g-m2) 1 it is empirically stated as roe = 0 exr1 intr2 tbr3 mpr4  25 mg  2 where roe = return on equity of the quoted insurance firms exr = naira exchange rate per us dollar intr = interest rate tbr = treasury bill rate mpr = monetary policy rate g-m2 = growth of money supply a-priori expectation: 00,,, 35421   www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 71 formulating model for hypotheses testing hypothesis i roe = 0 +  exr2 3 roe = 0 +  intr2 4 roe = 0 +  tbr2 5 roe = 0 +  mpr2 6 roa = 0 +   22 mg 7 3.2 estimation procedure 3.2.1 unit root test most of time series have unit root as demonstrated by many studies including nelson and plosser (1982), stock and watson (1988) and campbell and peron (1991). therefore, their means of variance of such time series are not independent of time. conventional regression technique based on non-stationary time series produce spurious regression and statistic may simply indicate only correlated trends rather true relationship granger and newbold (1974). spurious regression can be detected in regression model by low durbin watson and relatively moderate r2. therefore, to distinguish between correlation that arises from share trend and one associated with an underlying causal relationship; we use both the augmented dickey fuller (dickey and fuller, 1979, 1981) ttt xx   1 8 the null hypotheses for the adfstatistic test are h0. non stationary (unit root) and h0: stationary respectively 3.2.2 cointegration to search for possible long run relationship amongst the variables, we employ the johansen and juselius (1990) approach. thus, the study constructed a p-dimensional (4x1) vector auto regression model with gaussian errors that can be expressed by its first differenced error correction form as ttktkttt yyyyy    1112211 ..... 9 where yt are the data series studied, t is i. i. d, n(0,∑) i + -1 + a1 + a1 + a2 + a3 + ……. + ai for i = 1,2,3……..,k-1, п = i – a1 – a2 ……-ak. the п matrix conveys information about the long term relationship among the yt variables studied. hence, testing the cointegration entails testing for the rank r of matrix п by examine whether the eigenvalues of п are significantly different from zero. johansen and juselius (1990) proposed two tests statistics to determine the number of cointegrating vectors (or the rank of п), namely the trace and the maximum eigen-value (-trace) is computed as; )1( 1   n rj jinttrace  10 the trace tests the null hypothesis that “at most” r cointegration vector, with “more than” r vectors being the alternative hypothesis. the maximum eigenvalue test is given as: )1( 1max  rtin  11 it tests the null hypothesis of r cointegrating vectors against the alternative hypothesis of r + 1 cointegration vectors. in the equation (3) and (4), is the sample size and  is the largest canonical correlation. 3.2.3 granger causality in case we do not find any evidence for cointegration among the variables, the specification of the granger causality will be a vector auto regression (var) in the first difference form. however, if will find evidence of cointegration, there is the need to augment the granger-type causality test model with a one period lagged error term. this is a crucial step because as noted by engel and granger (1987).  xxyy n i at n i y ot      1 11 1 1 12 and t n i t y n i ot xyxyx      1 111 1  13 www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 72 3.2.4 error correction model (ecm) co-integration is a prerequisite for the error correction mechanism. since co-integration has been established, it is pertinent to proceed to the error correction model. 4. analysis and discussion of findings to contribute on the existing body of knowledge on the effect of monetary policy on the performance of insurance companies in nigeria, this study used data sourced from central bank of nigeria statistical bulletin, comprising growth rate of money supply, interest rate, monetary policy rate, exchange rate and treasury bill rate variable as independent variables while insurance performance is the dependent variables which is proxy by return on capital employed of the industry. the multiple regression models formulated in section three of this study was used to examine if there are any significant affect between monetary policy variables and the performance indicator of insurance companies. table 1: presentation of results variable coefficient std errs. t-statistics prob. tbr -3.128729 4.405528 -0.710182 0.4854 mpr 0.558755 5.215878 0.107126 0.9157 intr 1.697928 3.954184 0.429400 0.6720 g_m2 1.438339 1.280460 1.123299 0.2740 exr 0.901562 0.335393 2.688077 0.0138 c 235.5590 105.8539 2.225322 0.0371 r-squared 0.434751 adjusted r-squared 0.300168 f-statistic 3.230356 prob(f-statistic) 0.025598 durbin-watson stat 2.082706 source: extracts from e-view 4.1 interpretation of results from the regression results, the coefficient of determination (r2) shows that 43.4 % and 30. 0% variance in the return on equity of insurance companies can be traced to the independent variables in the model. the durbin watson statistics of 2.08 indicate the presence of negative serial autocorrelation between the variables. the f-statistics of 3.2303356 at the probability of 0.0025598 signify goodness of fit of the model and conclude that there is significant relationship between the independent variables and the dependent variable. the regression intercept shows the positive effect of the dependent variable at constant. the independent variables are positively related to the dependent variable except treasury bill rate. the positive coefficient of 1.69 as parameter for interest rate, 0.558 as parameter for monetary policy rate, 3.559, 1.438 as growth of money supply and 0.901 for exchange rate indicates that an increase of 1% will lead to increase return on equity of the quoted insurance firms 1.6%, 0.5%, 0.9%, 3.5%, while the negative coefficient of 3.128 will reduce return on investment by 3.1%. table 2: unit root test summary results at level variable adf statistics mackinnon prob. order of intr. 1% 5% 10% roe -3.353256 -3.711457 -2.981038 -2.629906 0.0225 1(0) tbr -2.934911 -3.711457 -2.981038 -2.629906 0.0550 1(0) mpr -2.807462 -3.711457 -2.981038 -2.629906 0.0710 1(0) intr -3.152949 -3.711457 -2.981038 -2.629906 0.0349 1(0) g_m2 -3.998872 -3.752946 -2.998064 -2.629906 0.2163 1(0) exr -2.184019 -3.711457 -2.981038 -2.622989 0.0000 1(0) unit root test summary results at first difference roe -5.409135 -3.769597 -3.004861 -2.642242 0.0003 1(1) tbr -4.455081 -3.808546 -3.020686 -2.650413 0.0025 1(1) www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 73 mpr -6.952318 -3.724070 -2.986225 -2.632604 0.0000 1(1) intr -8.903711 -3.752946 -2.998064 -2.638752 0.0000 1(1) g_m2 -4.464667 -3.788030 -3.012363 -2.646119 0.0023 1(1) exr -4.422308 -3.724070 -2.986225 -2.632604 0.0019 1(1) source: extracts from e-view the stationarity of the variables were examined using the augmented dickey fuller tests. the results of the stationarity test of the variables are presented in table ii. the results reveal the order of integration and the significance level of the variables of the model. after the application of the adf test on the level and first difference series, the computed variables of the adf statistics are more negative than the mackinnon critical values; we therefore reject the null hypothesis that the time series data variables are non-stationary (have a unit root). the time series exhibit difference stationarity (i.e. stationary at first difference). table 3: johansen co-integration test results: maximum eigen hypothesized no. of ce(s) eigen value trace statistics 0.05 critical value prob.** decision none * 0.842539 127.8286 95.75366 0.0001 reject h0 at most 1 * 0.752612 81.61417 69.81889 0.0043 reject h0 at m+ost 2 0.551278 46.69427 47.85613 0.0640 reject h0 at most 3 0.437992 26.66048 29.79707 0.1102 accept h0 at most 4 0.274238 12.25448 15.49471 0.1451 accept h0 at most 5 * 0.156036 4.241139 3.841466 0.0394 accept h0 trace statistics none * 0.842539 46.21446 40.07757 0.0090 reject h0 at most 1 * 0.752612 34.91990 33.87687 0.0374 reject h0 at most 2 0.551278 20.03379 27.58434 0.3388 accept h0 at most 3 0.437992 14.40600 21.13162 0.3326 accept h0 at most 4 0.274238 8.013342 14.26460 0.3774 accept h0 at most 5 * 0.156036 4.241139 3.841466 0.0394 reject h0 source: extracts from e-view having established the presence of unit root in most of our variables, we conducted multivariate cointegration tests using johansen maximum likelihood tests to determine whether a long run relationship exist between the variables of the model. the results of the cointegration test presented in the table iii above. the results of the johansen’s co-integration test reflect the two statistics test namely, the trace statistic and the maximum eigen-value proposed by johansen and juselius (1990). from the tables, the trace statistic is small when the values of the characteristic roots are closer to zero (and its value will be large in relation to the values of the characteristic roots which are further from zero). the other test, the maximum eigen-value is an alternative test statistic which tests the null hypothesis that the number of r co-integrated vectors is r against the alternative of (r+1) cointegrated vectors. (i.e. the null hypothesis r = 0 is tested against the alternative that r = 1; r = 1 against the alternative r = 2). if the estimated value of the characteristic root is found to be close to zero, then the maximum eigen-value will be small. the co-integration results suggest the existence of two co-integrating vectors as the trace statistics rejects the null hypothesis of no co-integrating vector at 5% significant level and accept the alternate hypothesis two co-integrating vectors. similarly, the maximum eigen-value rejects the null hypothesis of r = 0 co-integrating vector at 5% significant level and accepts the alternate hypothesis of two co-integrating vectors. therefore, since both test statistics suggest the presence of two co-integrating vector, we can conclude that the variables are co-integrated and follow long-run equilibrium relationship. table 4: normalized conintegrating equation roe tbr mpr intr g_m2 exr 1.000000 -16.68808 3.265243 9.267604 0.185339 -1.814423 www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 74 (4.11521) (5.30918) (2.68680) (0.87176) (0.22047) source: extracts from e-view test for normalized cointegration is necessary to ascertain the direction of long run relationship between the dependent variable and independent variables. from the table above, treasury bills and exchange rate have negative long run while monetary policy, interest rate and growth of money supply have positive long run effect on return on equity of the quoted insurance firms. table 5: error correction estimate error correction: d(roe) d(tbr) d(mpr) d(intr) d(g_m2) cointeq1 -0.291610 -0.015426 0.009619 0.026969 0.045262 (0.24888) (0.00982) (0.00513) (0.00643) (0.03422) [-1.17167] [-1.57109] [ 1.87602] [ 4.19338] [ 1.32251] cointeq2 -7.608238 -1.290766 0.921757 1.211761 4.573301 (16.4824) (0.65025) (0.33957) (0.42591) (2.26649) [-0.46160] [-1.98502] [ 2.71448] [ 2.84510] [ 2.01779] c 14.43325 -0.518821 0.105338 1.028680 1.885706 (25.6970) (1.01378) (0.52941) (0.66402) (3.53359) [ 0.56167] [-0.51177] [ 0.19897] [ 1.54917] [ 0.53365] r-squared 0.556701 0.551684 0.850064 0.863455 0.627888 adj. r-squared 0.073103 0.062613 0.686497 0.714496 0.221947 sum sq. resids 152532.0 237.4014 64.74072 101.8491 2884.225 s.e. equation 117.7563 4.645638 2.426009 3.042862 16.19266 f-statistic 1.151164 1.128023 5.197053 5.796615 1.546748 log likelihood -139.1394 -61.55491 -45.96256 -51.39978 -91.52202 akaike aic 12.67829 6.212909 4.913547 5.366649 8.710168 schwarz sc 13.31640 6.851022 5.551659 6.004761 9.348281 mean dependent 7.036250 -0.173333 -0.031250 0.437917 -0.312083 s.d. dependent 122.3118 4.798282 4.332833 5.694772 18.35751 determinant resid covariance (dof adj.) 2.69e+08 determinant resid covariance 5443935. log likelihood -356.3928 akaike information criterion 35.94940 schwarz criterion 39.63082 source: extracts from e-view results from error correction estimates proved that return on equity and treasury bills have negative coefficient while other variables in the model have positive coefficient in equation i this also confirm the results in equation ii. the r2 and adjusted r2 shows the explained variation of the variables. table 6: parsimonious error correction results variable coefficient std. error t-statistic prob. c 22.20226 23.58401 0.941412 0.3637 d(roe(-1)) 0.390055 0.475306 0.820639 0.4266 d(roe(-2)) -0.070217 0.361520 -0.194228 0.8490 d(roe(-3)) -0.133370 0.230699 -0.578110 0.5731 d(tbr(-1)) 0.211941 4.788389 0.044262 0.9654 d(mpr(-2)) -2.197283 5.266743 -0.417200 0.6833 d(intr(-1)) -0.629065 4.381392 -0.143576 0.8880 d(g_m2) 2.897508 1.350514 2.145486 0.0514 www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 75 d(exr(-1)) -1.616601 1.341164 -1.205371 0.2495 ecm(-1) -1.682663 0.617255 -2.726040 0.0173 r-squared 0.679901 mean dependent var 6.596522 adjusted r-squared 0.458293 s.d. dependent var 125.0413 s.e. of regression 92.03131 akaike info criterion 12.18116 sum squared resid 110106.9 schwarz criterion 12.67485 log likelihood -130.0833 hannan-quinn criter. 12.30532 f-statistic 3.068043 durbin-watson stat 2.270015 prob(f-statistic) 0.032935 source: extracts from e-view information from the unit root tests, and the estimated co-integrating relationship were used to specify the short-run error correction dynamic model. the test was conducted to reconcile the short-run and long run dynamism. the result obtained for the model is explained in table v above. the coefficient of the error correction model for the estimated roe equations is statistically significant and negative. specifically, if the actual equilibrium value is too high, the error correction term will bring it down, while if it is too low, the error correction term will raise it. the value of the coefficient however implies that when roe is out of its long run trend, 116% of the error is corrected at each level to restore equilibrium but with a stronger and significant effect. statistically, the fit is good for roe with r2 indicating 67.9% of the total variation as explained by the included variables. the remaining 32.1 percent of the total variation in roe is unaccounted for by the regression line and is attributed to the factors included in the disturbance term (μ). the presence of unit root in the residual series usually drive durbin-watson test towards zero, but the value of this statistic (2.27), which is approximately 2, is within the acceptable limit for zero autocorrelation and it is considered interesting because it reinforces the acceptance of the null hypothesis of no serial correlation in the residual of the model. table 7: pairwise granger causality tests null hypothesis: obs f-statistic prob. tbr does not granger cause roe 25 0.51402 0.6058 roe does not granger cause tbr 4.30244 0.0279 mpr does not granger cause roe 25 0.45448 0.6412 roe does not granger cause mpr 2.54165 0.1039 intr does not granger cause roe 25 0.56170 0.5790 roe does not granger cause intr 0.18347 0.8338 g_m2 does not granger cause roe 25 0.28828 0.7526 roe does not granger cause g_m2 0.84385 0.4448 exr does not granger cause roe 25 2.32850 0.1233 roe does not granger cause exr 0.66066 0.5274 source: extracts from e-view the results above show causality between private return on equity and monetary policy rate as well as their independent variables as used in this study. the null hypothesis in case of return on equity and monetary policy rate is not accepted. as stated in the methodology, null hypothesis is rejected if fcal>ftab; accept otherwise, at 5% level of significance. from result presented we say likewise, all other variables exhibit no causal relationship, therefore we accept the null hypothesis. 4.2 test of hypotheses treasury bill rate and return on equity: t-cal -0.710 < 2.080 t-critical, probability value 0.4854 > 0.05, accept null hypothesis monetary policy rate and return on equity: t-cal 0.107 < 2.080 t-critical, probability value 0.9157 > 0.05, accept null hypothesis interest rate and return on equity: t-cal 0.429 < 2.080 t-critical, probability value 0.6720 > 0.05, accept null hypothesis growth of money supply and return on equity: t-cal 1.123 < 2.080 t-critical, probability value 0.2740 > 0.05, accept null hypothesis. www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 76 exchange rate and return on equity: t-cal 2.688 > 2.080 t-critical, probability value 0.0138 > 0.05, accept alternate hypothesis. 4.3 discussion of findings apart from the monetary policy objectives of achieving economic grows, full employment, price stability and external balance, one of the objective of monetary policy is to ensure financial market stability. according to the imf report 1990 on financial stability index, profitability is a measure of financial stability. a profitable company is able to withstand monetary and macro economic shocks in the operating environment and maximize shareholders wealth. again apart from the internal factors that determines profitability of the insurance firms, the monetary policy have been found to significantly impact on the performance of the financial institutions, this is because the financial market is a transmission mechanisms of the monetary policy. the findings of this study revealed that monetary policy examined in this study have positive relationship with the performance of the insurance companies in nigeria. this finding confirms the objective of monetary policy in ensuring financial system stability. the findings confirm the findings of okoye (2014) on the positive impact of the monetary policy in investment of insurance companies in nigeria, the findings in contrary with the finding of jiwan (2012) on the negative relation between monetary variable and the performance of commercial bank in nigeria. the positive relationship of the monetary policy variables can be trace to the fact that insurance company does not transit much of the monetary policies compared to the commercial banks. 5. conclusion the objective of this study was to establish the relationship between monetary policy and performance of insurance companies in nigeria. time series data were source from central bank of nigeria statistical bulletin. the study modeled return on capital employed as the function of interest rate, monetary policy rate, treasury bill rate, growth of money supply and exchange rate. from the findings 43.4% and 30.0% variation on return on equity of the insurance firms can be traced to the monetary policy variable examined in the study. from the above the study concludes that there is significant relationship between monetary policy and the performance of insurance companies in nigeria. 6. recommendations the management of the insurance companies should device measures of managing the negative effect of monetary policy instrument on the performance of the insurance companies and the monetary authorities should harmonize the profitability objectives of the insurance companies with that of monetary policy to avert the negative effect. interest policies should be revisited or fully deregulated to allow market forces of demand and supply to avert the negative effect on the performance of the insurance firms and there should be expansionary monetary policy that enhances the investment of the insurance companies for better performance. the operating environment of the insurance companies should be overhauled to enhance effective management of the monetary environment and there should also be measures to effectively manage the monetary policy shocks that occur in the process of administering monetary policy. references abate gashaw. 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(2010), factors that determined firm performance of new zealand listed companies, mbus thesis yugi, l, (2007). determinates of banks profitability and its implication on risk management practices panel evidence from the uk, the university of nottingham. yuvaraj and abate g. (2013). performance of insurance companies in ethiopia, international journal of marketing. financial services and management research ,3(1),12-31. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). american finance & banking review vol. 5, no. 2; 2020 issn 2576-1226 e-issn 2576-1234 published by cribfb, usa 5 comparison of financial performance of private commercial banks in pakistan muhammad baqir mba student business administration, art & social sciences university of education lahore, pakistan e-mail: baqiralisiddique@gmail.com sajid hussain mba student department of business administration bahauddin zakariya university multan, pakistan e-mail: sajid.hussain6441@gmail.com k. m. anwarul islam associate professor department of business administration the millennium university, dhaka, bangladesh phd candidate university of selangor, malaysia e-mail: ai419bankingdu@gmail.com rashid waseem lecturer business administration, art & social sciences university of education lahore, pakistan e-mail: rashid.waseem@ue.edu.pk abstract commercial banks play an important role for the purpose of sustainable economic development in a country. this paper main theme to presents the comparison of financial performance between private commercial banks in pakistan during the period of 2015–2019 by using the method of ratio analysis and some other financial indicators. fourteen commercial banks out of fifteen banks are selected for comparison of financial analysis. due to the unavailability of data, the remaining one bank is not chosen for study because, yet they did not publish their final report in 2019. the data of ratio analysis was captured by using the final report of commercial banks, which are available on the bank's official websites. this study provides information about the different ratios which directly impact on bank performance. keywords: financial performance, commercial bank, pakistan, spread ratio, roa, roe. mailto:baqiralisiddique@gmail.com mailto:sajid.hussain6441@gmail.com https://www.cribfb.com/journal/index.php/amfbramerican finance & banking reviewvol. 5, no. 2; 2020 6 introduction the financial system is important for business development and economic development of country, as it provides easy access to finance. commercial banks are the main part of financial system. commercial banks are financial institutions which work on the base of facility like funds, crafts as their basic. they act as an intermediary between capital and investment. and borrower money from the investor who have access amount to invest (daiff, 1995). they institution that accept deposit at any time from public and financial institution are known as commercial bank (shehab, 1987).financial institution is those institution which works its major operation to collect money to meet the needs of the public and institution in excess for the purpose of lending it to the investor who wants this money (qazwini, 1989). the objective of this study is to analyze the comparison between private commercial banks performance in pakistan during the period (2015-2019) on the basis of financial indicators and others measure which have direct relation with banks performance and this study also provide a proper guidelines to investors for the purpose of investment in future. the financial indicator include different types of financial ratio for evaluate the performance such are include return on asset (roa), return on equity (roe), earning per share (eps), spread ratio, investment to total asset ratio , total debt to total asset ratio and other measured also include. the financial ratio is computed through the source of annual final report which are available on banks official website. commercial banks in pakistan pakistan commercial banking has grown exponentially over the years. in the first years of after independence commercial banks has control by foreign banks. after the period, the situation has changed markedly as a result of both conscious policies to boost the growth of pakistani banks and structural changes in the economy. now the banking industry in pakistan occupy the good position in the form of banking service operation and number of branches .the commercial banking system in pakistan is play a key role to act as intermediator between investor(who want required money for investment for projects) or saver (who not want to invest money in market and required interest)like the other countries the commercial banks in pakistan given different offers in the form of saving scheme to attract the saver and also provide different type of facilities discount trade bills, services render miscellaneous agency, provide remittance facilities and issue guarantees etc. literature review recent year increase the attention, on the topic of measurement especially commercial bank performance (seiford&zhu,1999). the performance of commercial bank has been empirical study all over the world (tarawneh, 2006; halkos&salamouris, 2004; webb, 2003; lacewell, 2003; yeh, 1996) but unfortunately not much study conduct comparison of banks performance in pakistan. few years ago, generally observe the performance of banks on the base of company size and asset but tarawneh(2006) says that his study high profitability of banks, that’s does not mean always means banks have high total asset, credit, deposit and total capital. finical performance of the banks also depends on efficiency in operation and asset management. normally, different ways to measure the performance of commercial banks one of them accounting method. (ncube,2009) says that accounting method, mainly based on the use of financial ratio which are used to assess the banks performance. sum of different financial ratio https://www.cribfb.com/journal/index.php/amfbramerican finance & banking reviewvol. 5, no. 2; 2020 7 has been used to analyze the performance of banks and other financial institution against benchmark and budget or combination of both methodologies (avkiran,1995). financial ratio analysis (fra) are used different purpose, these are including check the bank’s profitability, indication of business liquidity that’s means company ability to cover its debt and check the leverage performance etc. the financial ratio helps to determine the success or comparison between past and recent year result (lukam,1982).recent year ago research in australia that’s show the return on asset, interest margin, and capital adequacy ratio are directly impact on customer service (duncan & elliott,2004). methodology to complete the research purpose, the data was collected from the private commercial banks annual financial report as published in the bank’s official website. the data was collected for private commercial banks which are listed by state bank of pakistan during (2015-2019) which are used to collect the financial ratio and other financial measure. fra are used to help the comparison between banks performance. financial ratio can be divided in three parts. profitability ratio/efficiency ratio return on equity (roe return on asset (roa) earnings per share (eps) spread ratio liquidity ratio investment to total asset ratio solvency ratio total debt to total asset ratio other financial measures are: total owner equity institution size the sample of this study was 14 private commercial banks in pakistan out of 15 banks and that’s representation 93.3% of population. one commercial bank is not taken as sample because they do not publish their final report in 2019. result and analysis table 1. return on equity (roe) value in percentage (%) banks years 2015 2016 2017 2018 2019 average abl 16.9 14.3 11.9 12.0 12.23 13.46 bal 15.48 13.86 13.22 15.33 15.65 14.70 bahl 19.5 19.09 18.5 16.9 18.15 18.42 fbl 17.63 15.60 14.44 13.43 14.57 15.13 https://www.cribfb.com/journal/index.php/amfbramerican finance & banking reviewvol. 5, no. 2; 2020 8 hbl 20.64 17.47 40.90 65.84 74.78 43.92 hbm 20.78 40.46 15.11 16.64 14.88 21.57 js 13.95 12.73 5.84 3.48 0.15 7.23 sbl 3.7 4.4 5.9 5.4 5.2 4.92 silk (14.83) 5.55 9.0 9.65 (31.42) (4.41) scb 15.1 15.6 13.3 17.3 22.9 16.84 snbl 12.56 10.30 9.02 9.78 9.98 10.32 ubl 25.7 24.9 20.6 11.6 13.8 19.32 mcb 23.21 18.94 17.65 15.48 16.84 18.42 asbk 24.54 22.14 19.97 14.98 20.10 20.34 source: data are collected from the final report of commercial banks official website during the period of (2015-2019). roe is basically collected for investors, the purpose of investment that’s show the how much level of profit generated against his investment. table 1 and figure 1 both represent the data of return of equity during the period of 2015 to 2019 and show the five-year average analysis. the average result of five-year analysis shows that hbl has the highest ratio (43.92%), and the lowest value of roe is silk (-4.41%). table 2. return on asset (roa) value in percentage (%) banks years 2015 2016 2017 2018 2019 average abl 1.5 1.3 1.0 0.9 0.9 1.12 bal 0.93 0.88 0.87 1.11 1.26 1.01 bahl 1.15 1.08 0.90 0.8 0.86 0.95 50 average of return on owner's equity 43.92 40 (% ) 30 21.57 20.34 18.42 19.32 18.42 20 14.7 15.13 16.84 r o e 13.46 10.32 7.23 10 4.92 0 -4.41 -10 abl bal bahl fbl hbl hbm js sbl silk scb snbl ubl mcb asbk name of pvt commercial banks figure 1. average of return on owner's equity https://www.cribfb.com/journal/index.php/amfbramerican finance & banking reviewvol. 5, no. 2; 2020 9 fbl 1.03 0.98 0.96 0.88 0.98 0.96 hbl 1.6 1.32 0.27 0.4 0.49 0.81 hbm 1.56 1.16 0.85 0.91 0.76 1.04 js 1.03 0.85 0.30 0.13 0.01 0.46 sbl 0.6 0.6 0.6 0.6 0.6 0.6 silk (1.45) 0.55 0.75 0.77 (2.07) (0.29) scb 2.2 2.1 1.7 2.1 2.7 2.16 snbl 0.94 0.70 0.55 0.50 0.46 0.63 ubl 2.0 1.8 1.4 0.8 1.0 1.4 mcb 2.63 2.16 1.86 1.50 1.59 1.94 asbk 1.03 0.90 0.83 0.65 0.91 0.86 source: data are collected from the final report of commercial banks official website during the period of (2015-2019). roa is basically collected for investors, the purpose of investment that’s how much level of profit generate the against the use of bank asset. table 2 and figure 2 both represent the data of return of asset during the period of 2015 to 2019 and show the five-year average analysis. the average result of five-year analysis shows that hbl has the highest ratio (2.16%), and the lowest value of roa is silk (-0.29%). table 3. earnings per share (eps) rs earnings per share (eps) rs banks years 2015 2016 2017 2018 2019 average abl 13.20 12.60 11.12 11.25 12.32 12.09 bal 4.73 12.60 11.12 5.99 7.15 8.31 average of return on assets 3 2.16 1.94 (% ) 2 1.4 1.12 1.01 0.95 0.96 0.81 1.04 0.86 a r o a 1 0.6 0.63 0.46 0 -0.29 abl bal bahl fbl hbl hbm js sbl silk scb snbl ubl mcb asbk -1 name of pvt commercial banks figure 2. average of return on assets https://www.cribfb.com/journal/index.php/amfbramerican finance & banking reviewvol. 5, no. 2; 2020 10 bahl 6.66 7.31 7.65 7.57 10.05 7.84 fbl 2.78 2.83 2.98 3.19 3.98 3.15 hbl 24.18 21.69 4.82 8.04 10.27 13.8 hbm 7.31 5.84 5.26 5.88 6.28 6.11 js 1.74 1.77 0.74 0.30 0.0004 0.91 sbl 0.43 0.54 0.73 0.68 0.68 0.61 silk (0.58) 0.09 0.13 0.15 (0.44) (0.13) scb 2.40 2.48 2.13 2.90 4.14 2.81 snbl 2.01 1.70 1.51 1.62 1.73 1.71 ubl 21.02 22.65 22.57 12.44 15.63 18.86 mcb 22.95 19.67 18.58 18.02 20.23 19.89 asbk 4.00 4.14 4.18 3.52 5.57 4.28 source: data are collected from the final report of commercial banks official website during the period of (2015-2019). eps means how much company generates profit in against of each share of its equity. table 3 and figure 3 both represent the data of earning per share during the period of 2015 to 2019 and show the five-year average analysis. the average result of five-year analysis shows that mcb has the highest ratio (19.89), and the lowest value of eps is silk (-0.13). table 4. spread ratio value in percentage (%) banks years 2015 2016 2017 2018 2019 average abl 50.11 51.47 48.06 43.88 33.84 45.47 bal 46.60 50.73 51.58 53.26 48.50 50.13 bahl 49.34 51.61 51.53 50.87 39.00 48.47 fbl 43.19 46.05 48.44 46.24 36.16 44.01 hbl 55.08 57.56 54.47 48.37 38.39 50.77 hbm 39.03 35.46 41.29 38.15 24.08 35.60 average of earning per share sh ar e 30 19.89 20 18.86 12.09 8.31 7.84 13.8 p er 10 6.11 4.28 3.15 2.81 0.91 0.61 -0.13 1.71 e ar n in g 0 -10 abl bal bahl fbl hbl hbm js sbl silk scb snbl ubl mcb asbk name of pvt commercial banks figure 3. average of earning per share https://www.cribfb.com/journal/index.php/amfbramerican finance & banking reviewvol. 5, no. 2; 2020 11 js 36.47 37.98 30.63 29.37 16.89 30.26 sbl 39.18 37.06 32.51 35.85 27.51 34.42 silk 34.70 43.67 47.01 42.35 9.67 35.48 scb 67.73 68.27 61.56 60.34 53.99 62.30 snbl 41.47 39.05 34.98 32.19 20.43 33.62 ubl 59.18 58.08 52.63 49.68 40.19 51.95 mcb 61.34 65.01 57.68 55.23 43.10 56.47 asbk 40.72 42.11 44.66 42.62 30.89 41.00 source: data are collected from the final report of commercial banks official website during the period of (2015-2019). spread ratio of banks obtained through the interest income divide by interest earned. table 4 and figure 4 both represent the data of spread ratio the period of 2015 to 2019 and show the fiver year average analysis. the average result of five-year analysis show that scb has the highest ratio (62.3%), and the lowest value of js (30.26%). table 5. investment to total asset ratio value in percentage (%) banks years 2015 2016 2017 2018 2019 average abl 54.89 55.18 55.86 49.70 51.71 53.46 bal 46.88 41.85 40.12 27.59 28.09 36.90 bahl 55.73 52.74 50.43 39.55 45.13 48.71 fbl 45.46 37.66 36.31 35.70 32.39 37.50 hbl 58.19 54.25 51.90 46.57 44.27 51.03 hbm 57.39 59.74 60.04 51.48 52.22 56.17 js 53.11 50.00 43.33 32.55 30.34 41.86 sbl 55.79 55.52 53.22 39.12 39.57 48.64 average of spread ratio (% ) 80 62.3 56.47 60 50.13 48.47 50.77 51.95 45.47 44.01 41 r a ti o 35.6 34.42 35.48 33.62 40 30.26 20 sp r e a d 0 abl bal bahl fbl hbl hbm js sbl silk scb snbl ubl mcb asbk name of pvt commercial banks figure 4. average of spread ratio https://www.cribfb.com/journal/index.php/amfbramerican finance & banking reviewvol. 5, no. 2; 2020 12 silk 26.68 27.76 22.93 16.65 17.62 22.32 scb 51.82 51.78 52.42 48.44 40.18 48.92 snbl 42.88 41.83 36.11 38.34 40.00 39.83 ubl 51.37 50.39 53.70 41.62 44.38 48.29 mcb 56.32 51.84 48.91 50.02 49.39 51.29 asbk 50.02 47.50 47.53 36.83 42.53 44.88 source: data are collected from the final report of commercial banks official website during the period of (2015-2019). investment to total asset ratio means how much investment contribution on total asset of banks. table 5 and figure 5 both represent the data of investment to total asset ratio during the period of 2015 to 2019 and show the five-year average analysis. the average result of five-year analysis shows that hbl has the highest ratio (56.17%), and the lowest value is silk (22.32 %). table 6. total debt to total assets ratio value in percentage (%) banks years 2015 2016 2017 2018 2019 average abl 90.99 90.58 91.43 92.05 92.21 91.59 bal 94.08 93.44 93.34 92.48 91.73 93.01 bahl 94.08 94.34 95.14 95.27 95.26 94.81 fbl 92.94 92.12 92.07 92.74 91.22 92.21 hbl 91.91 92.39 93.26 93.78 93.40 92.94 hbm 92.48 92.46 93.71 94.50 94.85 93.6 average of investment to total asset ratio i n v e s t m e n t t o t o t a l 60 53.46 48.71 51.03 56.17 41.86 48.64 48.92 39.83 48.29 51.29 44.88 36.9 37.5 40 a s s e t r a t io 22.32 20 0 abl bal bahl fbl hbl hbm js sbl silk scb snbl ubl mcb asbk name of pvt commercial banks figure 5. average of investment to total asset ratio https://www.cribfb.com/journal/index.php/amfbramerican finance & banking reviewvol. 5, no. 2; 2020 13 js 92.69 93.75 95.70 96.58 96.31 95.00 sbl 88.00 88.66 89.15 88.30 86.27 88.07 silk 89.05 91.07 92.10 91.85 94.76 91.76 scb 86.15 87.09 87.70 88.32 88.23 87.49 snbl 92.81 93.00 94.25 95.29 95.41 94.15 ubl 89.21 90.23 92.06 91.99 91.07 90.91 mcb 86.28 86.53 88.43 90.00 88.85 88.01 asbk 94.98 94.73 95.06 95.25 94.92 94.98 source: data are collected from the final report of commercial banks official website during the period of (2015-2019). that’s ratio show the which banks are stronger according pay its debt obligation. table 4 and figure 4 both represent the total debt to total asset during the period of 2015 to 2019 and also show the five-year average analysis. the average result of five year analysis show that asbk has the highest ratio (94.98%), and the lowest value scb (87.49%). table 7. total owners’ equity value in rs banks years 2015 2016 2017 2018 2019 average abl 89,256,457 1,006,738,28 106,716,353 107,304,833 115,350,833 103,860,460.8 bal 533,533,175 60,124,762 65,799,740 75,646,875 88,027,576 164,626,425.6 bahl 37,856,658 42,513,744 45,875,882 49,551,680 61,503,110 47,460,214.8 fbl 30,352,473 35,008,325 39,246,470 43,498,515 55,263,873 40,673,931.2 hbl 171,851,650 182,066,980 172,703,959 179,049,056 201,421,946 181,418,718.2 hbm 36,827,804 39,670,450 40,498,255 37,001,956 44,237,530 39,647,199 total debt to total assets ratio r a ti o 100 93.01 94.81 92.94 93.6 95 94.15 94.98 95 91.59 92.21 91.76 90.91 88.07 90 87.49 88.01 a ss ts 85 80 to abl bal bahl fbl hbl hbm js sbl silk scb snbl ubl mcb asbk lo a n name of pvt commercial banks figure 6. total debt to total assets ratio source: data are collected from the final report of commercial banks official website during the period of (2015-2019). https://www.cribfb.com/journal/index.php/amfbramerican finance & banking reviewvol. 5, no. 2; 2020 14 js 15,967,903 16,649,525 16,669,329 15,617,026 17,333,255 16,447,407.6 sbl 11,844,219 12,319,524 12,708,194 12,783,755 14,179,487 12,767,035.8 silk 14,576,662 12,054,588 13,181,346 14,386,747 10,771,887 12,994,246 scb 61,950,455 61,282,293 62,936,696 62,238,369 72,916,503 64,264,863.2 snbl 18,191,942 18,289,227 18,504,599 17,988,874 20,213,595 18,637,647.4 ubl 142,135,475 151,786,861 159,307,047 151,269,948 169,068,883 154,713,642.8 mcb 137,801,938 141,626,625 153,566,377 149,277,729 168,914,783 150,237,490.4 asbk 26,852,943 32,576,950 32,435,491 33,508,907 42,255,844 33,526,027 source: data are collected from the final report of commercial banks official website during the period of (2015-2019). figure 7. average of total owner's equity table 7 and figure 7 both represent the data of total owner equity during the period of 2015 to 2019 and show the five-year average analysis. the average result of five-year analysis shows that hbl has the highest value of owner equity, and the lowest value of owner equity is sbl. table 8. institution size or total assets value in rs banks years 2015 2016 2017 2018 2019 average abl 9,916,655,12 1,068,945,748 1,245,712,113 1,350,598,909 1,481,121,252 1,227,608,707 bal 902,607,521 917,457,053 988,828,828 1,006,217,843 1,064,672,085 813,956,666 bahl 639,712,468 751,395,816 944,133,780 1,048,239,003 1,298,682,111 936,432,635.6 fbl 430,072,860 444,464,661 494,933,882 5,999,914,183 629,852,657 1,599,847,649 hbl 2,124,899,508 2,392,699,251 2,563,059,113 2,879,494,859 3,053,733,753 2,602,777,297 hbm 489,879,108 526,606,417 644,553,779 673,395,781 859,574,522 638,801,921.4 js 218,475,663 264,700,493 388,308,876 456,754,076 469,820,794 359,611,980.64 sbl 80,166,336 101,414,491 117,151,047 122,764,587 129,577,407 110,214,773.6 silk 133,137,259 135,033,822 166,854,532 176,570,999 205,688,080 117,589,431.8 https://www.cribfb.com/journal/index.php/amfbramerican finance & banking reviewvol. 5, no. 2; 2020 15 scb 447,347,791 474,752,219 513,548,602 576,081,336 619,970,585 526,340,106.6 snbl 253,341,829 278,520,706 322,133,976 382,497,788 442,540,782 335,807,016.2 ubl 1,400,650,843 1,577,551,023 2,007,381,446 1,889,599,146 1,893,694,707 1,501,658,433 mcb 1,004,410,410 1,051,813,681 1,327,311,040 1,498,130,061 1,515,152,015 1,279,363,441 asbk 535,866,714 619,139,193 656,708,369 706,532,042 833,208,006 670,290,864.8 total asset means the how much banks have own asset. table 5 and figure 5 both represent the data of total asset during the period of 2015 to 2019 and show the five-year average analysis. the average result of fiver year analysis shows that hbl has the highest value of asset, and the lowest value of asset is sbl. limitations  as compare to other study this study also have limitation once of them data was not collected for all private commercial banks working in pakistan because summit banksdata 2019 were not yetupload.  accuracy of research depends on the secondary data only which are issued by commercialbanks. directions for further research  for the purpose of check the performance of commercial banks used the other methods.  to check the performance of banks the use of the other reaming ratio.  comparison between islamic and conventional research.  covid 19 how the impact of financial performance of banks. conclusion this study shows that each commercial bank result is change according to different ratio related to banksperformance.  according to financial ratio of five year analysis the result of return on equity, in first figure 8. average of institution size or total assets average of institution size or total assets 3,000,000,000 2,500,000,000 2,000,000,000 1,500,000,000 1,000,000,000 500,000,000 0 abl bal bahl fbl hbl hbm js sbl silk scb snbl ubl mcb asbk name of pvt commercial banks i n s t i t u t i o n s i z e https://www.cribfb.com/journal/index.php/amfbramerican finance & banking reviewvol. 5, no. 2; 2020 16 habib bank limited is at the top, habib metropolitan bank is the second, askari bank is the third, united bank limited is the fourth and bahl & mcb is the fifth.  according to financial ratio of five-year analysis the result of return on assets, scb is at the top, mcb is the second, ubl is the third, abl is the fourth and hbm is the fifth.  according to financial ratio of five-year analysis the result of earning per share, mcb is at the top, ubl is the second, hbl is the third, abl is the fourth and bal is the fifth.  according to financial ratio of five-year analysis the result of total debt to total asset ratio, js is at the top, asbk is the second, bahl is the third, snbl is the fourth and hbm is the fifth.  according to financial ratio of five-year analysis based on institution size or total assets, hbl is at the top, fbl is the second, ubl is the third, mcb is the fourth and abl is the fifth.  according to financial ratio of five-year analysis based on total owner’s equity, hbl is at the top, bal is the second, mcb is the third, ubl is the fourth and abl is the fifth.  according to financial ratio of five-year analysis based on investment to total asset ratio, hbm is at the top, abl is the second, mcb is the third, hbl is the fourth and bahl is the fifth.  according to financial ratio of five-year analysis based on spread ratio, scb is at the top, mcb is the second, ubl is the third, hbl is the fourth and bal is the fifth.  finally, we highlight the performance of all the private commercial banks that’s helpful for researcher, investor and managers. references avkiran, n. k. 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(2009). efficiency of the banking sector in south africa. university of the witwatersrand, 1-44. qazwini, s.(1989). lectures economy of banks, court of publications undergraduate, algeria, pp. 24. seiford, l. m., & zhu, j. (1999). profitability and marketability of the top 55 us commercial banks. management science, 45(9), 1270-1288. shehab, m. (1987). frozen money, banks and economy. (mars publishing house, riyadh), pp: 105. tarawneh, m. (2006). a comparison of financial performance in the banking sector: some evidence from omani commercial banks. international research journal of finance and economics, 3(3), 101-112. https://www.cribfb.com/journal/index.php/amfbramerican finance & banking reviewvol. 5, no. 2; 2020 17 webb, r. (2003). levels of efficiency in uk retail banks: a dea window analysis. int. j. of the economics of business, 10(3), 305-322. yeh, q. j. (1996). the application of data envelopment analysis in conjunction with financial ratios for bank performance evaluation. journal of the operational research society, 47(8), 980-988. appendices appendix a: list of private commercial banks name of private commercial banks abbreviations branches allied bank limited abl 1345 bank alfalah bal 699 bank al habib bahl 702 faysal bank fbl 555 habib bank limited hbl 1700 habib metropolitan bank hbm 400 js bank js 238 samba bank limited sbl 37 silk bank limited silk 123 standard chartered pakistan scb 61 soneri bank snbl 300 united bank limited ubl 1390 muslim commercial bank limited mcb 1400 askari bank asbk 350 copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/) copyright © cc-by-nc 2020, cribfb | amfbr american finance & banking review; vol. 5, no. 1; 2020 issn 2576-1226 e-issn 2576-1234 published by centre for research on islamic banking & finance and business, usa 62 financial conditions index and economic performance in nigeria chukwu agwu ejem phd senior lecturer department of banking and finance abia state university, uturu, nigeria e-mail: ecjah71@yahoo.com udochukwu godfrey ogbonna phd senior lecturer department of management science rhema university, aba, nigeria e-mail: kellyogbo2004@yahoo.com abstract the main aim of this study is to construct a financial conditions index for nigeria and analyze its predictive power for future growth rate and inflationary trend. the study is based on yearly time series data from 1985 to 2018. the variables included in the construction of the index are riskless interest rate, stock market index, exchange rate, credit to private sector and interest rate spread. the weights attached to these variables are derived from ardl coefficients, while the predictive power of the constructed index is examined within the var framework. the results from the ardl model shows that credit to private sector and stock market index are the most significant factors for nominal gdp, hence having a substantial weight in the resultant financial conditions index. however, the results from var impulse response function and forecast error variance decomposition suggest that the constructed financial conditions index contain very little predictive information about future growth rate and inflationary trend. keywords: financial conditions index, inflation, real gdp growth rate. 1. introduction understanding how monetary policy shocks transmit to the real economy is an age long issue, and has continued to attract scholarly debate in both developing and developed countries. traditionally, changes in monetary policy stance affect savings and investment behaviours of both households and firms through interest rates and exchange rate. hence, monetary conditions index, which reflects changes in monetary conditions related to interest rate and exchange, was used during the 1990s to track monetary policy stance. however, the rapidly growing complexities of financial systems all over the world have necessitated a more comprehensive index that accommodates the impact of financial markets in the monetary policy transmission mechanism (swiston, 2008). more specifically, since early 2000s, there is a growing body of evidence suggesting that financial conditions index provides a more useful tool for forecasting the performance of real economic variables, especially, where interest rates and exchange rate are found insufficient (angelopoulou, balfoussia& gibson, 2014).therefore, financial conditions index is,not only a natural extension of monetary conditions index, but also, a more comprehensive index that accommodates the importance of asset prices (equity and property prices) in the monetary policy transmission mechanism (angelopoulou, balfoussia& gibson, 2014). this study constructs a financial conditions index for nigeria and examining its predictive power for both inflation and growth rate in real gdp using yearly time series data from 1985 to 2018. while the financial conditions index was constructed based on ardl model which is novel in the literature, its predictive power for inflation is examined based on structural vector autoregressive model. the remainder of this study has the following structure: the next section reviews the extant literature on financegrowth relationship as well as financial conditions index. section 3 describes the data, models and methods; section 4 contains empirical analysis and discussion while the study is concluded in section 5. mailto:ecjah71@yahoo.com copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 63 2. literature review 2.1 financial conditions indicators and economic growth the relationship between financial conditions indicators and economic growth can be examined in the context of supply leading theory. the supply leading theory, which was initially due to schumpeter (1912), and popularized by levine and king (1997), states financial development is a precursor for and causes economic growth. if savings are efficiently mobilized and channelled into productive activities, there would be a significant increase in economic growth. although, numerous studies (both in nigeria and other developing and developed countries) have subjected this theoretical assertion to empirical tests, there is not yet a consensus. however, recent evidence reported in the empirical literature tends to support the view that financial sector development can trigger economic growth. these studies include ipeghan and marshall (2019), olaniyan(2019), ncanywa and mabusela(2019), olayungbo and quadri(2019) and okunlola, masade, folaranmi lukman and ajayi abiodun(2020). ibrahim, abdullahi, azman-saini and rahman (2017) employed the dynamic panel gmm method to investigate the effects of both banking sector and stock market developments on economic growth for 53 countries from 1988 to 2012. consistent with the supply-leading hypothesis, they found that both stock market and banking sector developments are necessary ingredients for economic growth. ipeghan and marshall (2019) contributed to the finance-growth literature by empirically testing the effects capital market and credit market on economic growth using nigerian data at yearly frequency spanning from 1981 to 2017. using the johansen cointegrating framework and pairwise granger causality test, they found that both capital market and banking sector development scan significantly affect, and are cointegrated with, economic growth. olaniyan(2019) used the instrumental generalized method of moment approach to examine the finance-growth relationship in nigeria from 1977 to 2017. he incorporated the interactive effect of remittances and financial development in the growth model and argues that it can improve growth estimate. fitting the resultant growth model to yearly data obtained from the world development indicators database reveals that although, both remittances and financial development (credit to private sector ratio to gdp) individually affect economic growth negatively, their interaction plays a positive and highly significant role in the growth model. ncanywa and mabusela(2019)employed the dynamic panel ardl framework to test the link between financial development and economic growth in five sub-saharan african countries; namely, ghana, kenya, botswana, nigeria and south africa, using yearly data from 1980 to 2014. they found the presence of both short run and long run relationship between financial development and economic growth, with credit to private sector and bank liquid liabilities both exerting a positive long run effect on economic growth, while domestic savings exerts a negative effect. olayungbo and quadri(2019)employed both the pooled mean group ardl framework to model the relationship between financial development and economic growth incorporating the both the direct and interaction effect of remittances. the study focuses on sub-saharan countries and is based on yearly data for 20 countries from 2000 to 2015 which were collected from the world development indicators data based. they found amongst others that both financial development and remittances exhibit a positive effect on economic growth. more recently, okunlola, masade, folaranmi lukman and ajayi abiodun(2020)examined the finance-growth nexus in nigeria using the causality framework developed by toda and yamamoto (1995) which is based on augmented var. based on yearly data from 1985 to 2015 collected from cbn, nbs and nse, they find evidence supporting the supply-leading theory which asserts that the level of financial development matters for economic growth. 2.2 financial conditions index and economic performance there is a growing body of literature on the relationship between financial conditions index and the behaviour of real economic variables. what appears to be the emerging consensus is that financial conditions index can usefully predict future direction of economic variables such as growth rate in real gdp and level of inflation. however, it appears that no recent empirical study has focused in line of inquiry in nigeria. swiston (2008) employs var based impulse-response functions to construct a financial conditions index for us. they found that credit availability is an important driver of the business cycle, and accounts for more than 20% of the typical contribution of financial variables to economic growth. they also found that the constructed financial conditions index is a precise predictor of real gdp growth. khundrakpam, kavediya and anthony (2017) constructed financial condition indices for india and evaluated their ability to predict business cycle. they examined whether financial conditions index constructed based on principal component analysis (pca) can predict economic growth rate better than financial conditions index constructed based on vector autoregressive (var) model. their results show that pca-based financial conditions index outperforms var-based financial conditions index. using a time-varying factor augmented vector autoregressive models with stochastic volatility wang, xu and chen (2018) constructed a financial conditions index for china and examine its relationship with future inflation. based on monthly copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 64 data spanning from january 2002 to january 2015, they found that financial conditions index is useful in predicting future inflation. kabundi and mbelu (2020) constructed a financial conditions index for south africa using monthly time series data january 2000 to april 2017. the index was constructed based on time-varying principal component factor model proposed by koop and korobilis (2014). they also specified and estimated a three-factor time-varying parameter factor-augmented vector autoregressive (tvp-favar) model incorporating financial conditions index, headline inflation and gdp growth rate. they found amongst others that tighter financial conditions reduce both economic growth rate and level of inflation. 3. empirical strategy 3.1 data description in this study, yearly time series data from 1985 to 2018 are used. the study variables are inflation, nominal gdp, real gdp growth rate, riskless interest rate (treasury bill rate), stock market index (all share indexes), average official exchange rate, credit to private sector and interest rate spread (prime lending rate minus monetary policy rate). all data were sourced from the annual statistical bulletin of the central bank of nigeria and are analyzed using the e-views software package. consistent with the extant literature, we construct the financial conditions index using the following formula. 𝐹𝐶𝐼 =∑𝑤𝑗 𝑛 𝑗=1 (𝑥𝑗,𝑡 − 𝑥�̅�) where fci = financial conditions index, 𝑥𝑗,𝑡 = financial conditions variable j at time t, 𝑥�̅� = mean of 𝑥𝑗 and 𝑤𝑗 is the weight attached to each 𝑥𝑗 . here, 𝑥𝑗 includes riskless interest rate (tbr), stock market index (asi), exchange rate (exr), credit to private sector (cps) and interest rate spread (spread). figure 1 shows the time series plot of the data. as this figure shows, while nominal gdp, average official exchange rate, stock market index and credit to private sector show an upward trend, real gdp growth rate, inflation, and interest rate spread appear to be stationary. riskless interest rate appears to follow a random walk with drift, increasing initially up to 1993 but showed a steady decline with observable fluctuations. however, it showed an upward trend from 2009. all these suggest that our variables have different levels of integration; hence there is good reason to model the relationship between financial conditions variables and economic growth within an ardl framework. -4 0 4 8 12 16 1985 1990 1995 2000 2005 2010 2015 gdpg 0 20 40 60 80 1985 1990 1995 2000 2005 2010 2015 infl 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 1985 1990 1995 2000 2005 2010 2015 gdp 0 5 10 15 20 25 30 1985 1990 1995 2000 2005 2010 2015 tbr 0 40 80 120 160 200 240 280 320 1985 1990 1995 2000 2005 2010 2015 aoexr 0 10,000 20,000 30,000 40,000 50,000 60,000 1985 1990 1995 2000 2005 2010 2015 asi 0 5,000 10,000 15,000 20,000 25,000 1985 1990 1995 2000 2005 2010 2015 cps -10 -5 0 5 10 15 1985 1990 1995 2000 2005 2010 2015 spread figure1. time series plot for the study variables copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 65 3.2 methods to the estimate the relative impact of each financial conditions variable on nominal gdp, we employ the autoregressive distributive lag (ardl) framework. compared with other dynamic time series frameworks, this dynamic estimation framework, which is novel in the literature in the context of constructing a financial conditions index, is employed basically because of its ability to accommodate time series variables that have different orders of integration in the same empirical model we specify our simple ardl models as follows: 𝐺𝐷𝑃𝑡 = 𝛼0 + 𝛼1𝐺𝐷𝑃𝑡−1 + 𝛼2𝑇𝐵𝑅𝑡 + 𝛼3𝑇𝐵𝑅𝑡−1 + 𝛼4𝐴𝑆𝐼𝑡 + 𝛼5𝐴𝑆𝐼𝑡−1 + 𝛼6𝐸𝑋𝑅𝑡 + 𝛼7𝐸𝑋𝑅𝑡−1 + 𝛼8𝐶𝑃𝑆𝑡 + 𝛼9𝐶𝑃𝑆𝑡−1 + 𝛼10𝑆𝑃𝑅𝐸𝐴𝐷𝑡 + 𝛼11𝑆𝑃𝑅𝐸𝐴𝐷𝑡−1 + 𝜖𝑡 where 𝛼0 is the regression intercept and 𝛼1 is the autoregressive coefficient capturing the effect of lagged nominal gdp. further, 𝛼2 and 𝛼3 are model coefficients that capture the concurrent and lagged effects of riskless interest rate, 𝛼4 and 𝛼5 are model coefficients that capture the concurrent and lagged effects of stock market index, 𝛼6 and 𝛼7 are model coefficients that capture the concurrent and lagged effects of exchange rate, 𝛼8 and 𝛼9 are model coefficients that capture the concurrent and lagged effects of credit to private sector, 𝛼10 and 𝛼11 are model coefficients that capture the concurrent and lagged effects of interest rate spread, and 𝜖𝑡 is the classical disturbance term. for each variable, we use the total effect (sum of the concurrent and lagged coefficients) on nominal gdp as its relative weight in the construction of financial conditions index. to examine whether financial conditions index can predict future economic performance, we employ the vector autoregressive (var) framework. the three variable reduced form var(1) financial conditions index, log of inflation and real gdp growth rate is specified as follows: 𝑅𝐺𝐷𝑃𝐷𝑡 = 𝛽01 + 𝛽11𝑅𝐺𝐷𝑃𝐺𝑡−1 + 𝛽21𝐿𝐼𝑁𝐹𝐿𝑡−1 + 𝛽31𝐹𝐶𝐼𝑡−1 + 𝜀1𝑡 𝐿𝐼𝑁𝐹𝐿𝑡 = 𝛽02 + 𝛽12𝑅𝐺𝐷𝑃𝐺𝑡−1 + 𝛽22𝐿𝐼𝑁𝐹𝐿𝑡−1 + 𝛽32𝐹𝐶𝐼𝑡−1 + 𝜀2𝑡 𝐹𝐶𝐼𝑡 = 𝛽03 + 𝛽13𝑅𝐺𝐷𝑃𝐺𝑡−1 + 𝛽23𝐿𝐼𝑁𝐹𝐿𝑡−1 + 𝛽33𝐹𝐶𝐼𝑡−1 + 𝜀3𝑡 although, var order is typically selected based on some information criteria, we selected order 1 on rule of thumb basis, particularly because of the frequency of our data. 4. empirical results and discussion 4.1 summary statistics the descriptive summary of the data is presented in table 1. exchange the descriptive statistics shows that apart from real gdp growth rate, exchange rate and stock market index, all other series have a distribution that significantly deviates from normal distribution. table 1. statistical summary of the variables variable �̅� max min 𝛔 𝐒 𝐊 jb stat growth rate 4.95 14.60 -1.58 3.81 0.38 2.63 1.0292(0.5977) inflation 19.69 76.76 0.22 18.92 1.68 4.68 19.9173(0.0000) nominal gdp 30794.20 127762.50 192.27 38661.73 1.13 2.94 7.1861(0.0275) treasury bills rate 12.44 26.90 3.72 4.59 0.84 4.52 7.2417(0.0268) exchange rate 101.96 306.92 0.96 90.14 0.74 2.96 3.1346(0.2086) stock market index 16298.33 57990.20 127.30 15238.20 0.68 2.71 2.7681(0.2506) credit to private sector 5391.61 22521.93 13.07 7650.56 1.17 2.81 7.7921(0.0203) spread 4.79 12.99 -7.68 3.95 -0.62 4.91 7.3185(0.0258) copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 66 4.1 financial conditions variables and economic growth table 2 shows the results of the estimated optimal ardl model for the relationship between financial conditions variables (treasury bill rate, stock market index, exchange rate, spread and credit to private sector) and nominal gross domestic product. the lag selection for each variable is based on schwarz information criterion. as stated in the previous section, the estimated betas would be used as weightings for the construction of financial conditions index. the estimation is based on newey-west standard errors which are consistent even in the presence of autocorrelation and heteroskedasticity. table 2. short run and long run results for finance and growth; p-values in ( ) variable short run coefficient long run coefficient total gdp(-1) 0.4294 (0.0180) – – tbr 0.0612 (0.0851) 0.1074(0.0979) 0.1687 asi 0.1908 (0.0035) 0.3345 (0.0000) 0.5253 exr 0.0504 (0.0563) 0.0884 (0.1537) 0.1389 cps 0.1166 (0.0690) 0.5549 (0.0000) 0.6715 spread -0.0374 (0.1103) -0.0656 (0.2060) -0.1031 cointeq(-1) -0.5705 (0.0025) – – constant – 2.0663 (0.0000) – as table 2 shows, our regression results are striking in many ways. first, the coefficient on gdp(-1)(beta = 0.4294, p-value = 0.0180) is positive and statistically different from zero at 5% significance level, indicating that lagged nominal gross domestic product is a positive determinant of current nominal gross domestic product. a 1% increase in the nominal gdp in the current period would lead to approximately 0.43% increase in the next period nominal gdp, holding the impact of financial conditions variables constant. thus, initial growth level affects the current growth. secondly, focusing on the short run results, we can see that nominal gdp is positively related to riskless interest rate (beta = 0.0612), stock market index (beta = 0.1908), exchange rate (beta = 0.0504) and credit to private sector (beta = 0.1166), while it is negatively related to interest rate spread (beta = -0.0374). further, while the effect of stock market index (p-value 0.0035) is highly statistically significant, the effects of riskless interest rate (p-value 0.0851), exchange rate (p-value 0.0563) and private sector credit (p-value 0.0690) all are significant at 10% level. however, the level of significance of the effect of interest rate spread (p-value 0.1103) exceeds all customary levels. these results suggest that relatively, capital market has the highest beneficial impact on nominal gdp, followed by private sector credit, and then by riskless interest rate, while exchange rate has the least beneficial impact. however, an increase in interest rate spread would marginally reduce nominal gdp. thirdly, the error correction term (cointeq(-1) = -0.5705, p-value = 0.0025) has the expected negative sign, and is also quite large and highly statistically significant, indicating that the estimated nominal gdp model can quickly attain equilibrium in the long run despite any short run disturbances, and the speed of adjustment is about 57% per annum. finally, the long run results are largely comparable with those of the short run, especially in terms of the signs of the coefficients . however, while the long run effects of stock market index (beta = 0.3345, p-value = 0.0000) and credit to private sector (beta = 0.5549, p-value = 0.0000) are the most significant in statistical sense, the beta associated with the latter is substantially higher in size than the former, suggesting that it has the largest long run beneficial impact. more, specifically, holding riskless interest rate, exchange rate and interest rate spread constant, a 1% increase in stock market index would concurrently increase nominal gdp by approximately 0.33%, while a 1% increase in credit to private sector would lead to approximately 0.55% increase in nominal gdp. however, the long run coefficients on riskless interest rate, exchange rate and interest rate spread are estimated at 0.1074, 0.0884 and -0.0636 with associated p-values of 0.0979, 0.1537 and 0.2060), suggesting that they are relatively small and their effects on nominal gdp are not statistically significant at 5% level. the long run effect of riskless interest rate is significant at 10% level. the long run intercept term (beta = 2.0663, p-value = 0.0000) is positive and highly significant, suggesting that on average, nigeria would record significant economic growth even when all included financial conditions indicators are kept dormant. overall, our results suggest that financial conditions variables have a significant effect on economic growth in nigeria both in the short run and in the long run. also, credit to private sector and stock market index are the most significant factors for nominal gdp, hence have the highest weights in the construction of the financial conditions index. this evidence is, therefore, consistent with both credit and asset price channels of monetary policy transmission mechanism. this finding also agrees with the supply leading theory of finance-growth relationship as well as several previous studies including acaravci,ozturk copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 67 and acaravci(2007), al-malkawi and abdullah(2011), ibrahim, abdullahi, azman-saini and rahman(2017) and oro and alagidede(2018), ipeghan and marshall(2019)and olaniyan (2019). 4.2 financial conditions index and economic performance figure 2 shows the financial conditions index for nigeria using the ardl coefficients as weights. as this figure shows, the constructed financial conditions index showed a steady upward trend from negative values to positive values over the sampled period. specifically, the negative values of the index were recorded ‘between’ 1985 to 1999, suggesting that before the advent of the current democracy, nigeria’s financial conditions were on average looser than the prevailing macroeconomic conditions. on the contrary, the positive values recorded from 2000 to 2018 shows that nigeria’s financial conditions gradually become tighter than the prevailing macroeconomic conditions in the post democracy period. -6 -4 -2 0 2 4 1985 1990 1995 2000 2005 2010 2015 fci figure 2. financial conditions index for nigeria table 3 shows the three variable var(1) results for the dynamic relationships between financial conditions index, inflation and real gdp growth rate. the p-values are obtained from the system equations estimated via ols method. figure 3shows the var inverted roots with respect to unit circle. figures 4 and 5 show the impulse response function and variance decomposition of real gdp growth rate, inflation and financial conditions index. from table 3, we can see that both the autocorrelation (p-value = 0.2646) and heteroskedasticity (p-value = 0.4620) test statistics are associated with a probability, hence not rejecting the null hypotheses of no serial correlation and heteroskedasticity. the inverted var roots in figure 3 are all inside the unit circle which shows that the estimated var model is stable and can be used for structural analysis. from figure 4, we can see that while real gdp growth rate responded positively to a one standard deviation shocks in financial conditions index, inflation rate responded negatively. however, for both real economic variables, the impact of financial conditions index is marginal throughout the impact period, hence, lacks economic significance. the forecast error variance decomposition of real gdp growth in figure 5 shows that financial conditions index contributed less than 0.02% of the variance of real gdp growth throughout the forecast period, while it contributed approximately 0.07% of the variance of inflation rate in the fourth period. these results imply that financial conditions index has a little or no predictive power for both economic growth and inflation in nigeria. our results, therefore, contradict the recent findings of wang, xu and chen (2018) and kabundi and mbelu (2020) for china and south africa respectively. we argue that the method of constructing the financial conditions index can plausibly explain these differing results. table 3. var results for fci and economic performance; p-value in ( ) variable rgdpg linfl fci gdpg(-1) 0.5053 (0.0222) -0.0220 (0.6469) -0.0060 (0.4396) linfl(-1) 0.4962 (0.3650) 0.1566 (0.3384) 0.0170 (0.5220) copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 68 fci(-1) 0.1597 (0.4673) -0.0894 (0.1745) 0.9602 (0.0000) constant 1.0476 (0.5646) 2.3245 (0.0000) 0.2493 (0.0059) lm (2) statistic 11.164 (0.2646) heteroskedasticity test 36.143 (0.4620) -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 inverse roots of ar characteristic polynomial figure 3. inverted ar characteristic roots -1 0 1 2 3 4 5 1 2 3 4 response of gdpg to gdpg -1 0 1 2 3 4 5 1 2 3 4 response of gdpg to linfl -1 0 1 2 3 4 5 1 2 3 4 response of gdpg to fci -0.5 0.0 0.5 1.0 1.5 1 2 3 4 response of linfl to gdpg -0.5 0.0 0.5 1.0 1.5 1 2 3 4 response of linfl to linfl -0.5 0.0 0.5 1.0 1.5 1 2 3 4 response of linfl to fci -.2 -.1 .0 .1 .2 .3 1 2 3 4 response of fci to gdpg -.2 -.1 .0 .1 .2 .3 1 2 3 4 response of fci to linfl -.2 -.1 .0 .1 .2 .3 1 2 3 4 response of fci to fci response to cholesky one s.d. innovations ± 2 s.e. figure 4. impulse response function copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 69 -40 0 40 80 120 1 2 3 4 percent gdpg variance due to gdpg -40 0 40 80 120 1 2 3 4 percent gdpg variance due to linfl -40 0 40 80 120 1 2 3 4 percent gdpg variance due to fci -40 0 40 80 120 1 2 3 4 percent linfl variance due to gdpg -40 0 40 80 120 1 2 3 4 percent linfl var iance due to linfl -40 0 40 80 120 1 2 3 4 percent linfl var iance due to fci -40 0 40 80 120 1 2 3 4 percent fci var iance due to gdpg -40 0 40 80 120 1 2 3 4 percent fci var iance due to linfl -40 0 40 80 120 1 2 3 4 percent fci var iance due to fci variance decomposition ± 2 s.e. figure 5. forecast error variance decomposition 5. conclusion in this paper, we constructed a financial conditions index for nigeria and examine its predicting power for both economic growth and inflation rate using yearly time series data from 1985 to 2018. the variables included in the construction of the index are riskless interest rate, stock market index, exchange rate, credit to private sector and interest rate spread. while the weights attached to these variables are ardl coefficients, the predictive power of the constructed index is examined within the var framework. we conclude as follows: first, the results from the ardl model shows that credit to private sector and stock market index are the most significant factors for nominal gdp, hence having a substantial weight in the resultant financial conditions index. however, the results from var impulse response function and forecast error variance decomposition suggest that the constructed financial conditions index contain very little information about future growth rate and inflationary trend. references acaravci, a., ozturk, i., & acaravci, s. k. (2007). finance-growth nexus: evidence from turkey. international research journal of finance and economics, 11, 30-40. al-malkawi, h. a. n., & abdullah, n. (2011). finance-growth nexus: evidence from a panel of mena countries. international research journal of finance and economics, 63(63). angelopoulou, e., balfoussia, h., & gibson, h. d. (2014). building a financial conditions index for the euro area and selected euro area countries: what does it tell us about the crisis?. economic modelling, 38, 392-403. ibrahim, s., abdullahi, a. b., azman-saini, w. n. w., & rahman, m. a. (2017). finance-growth nexus: evidence based on new measures of finance. international journal of economics & management, 11(1). ipeghan, i. y. o., & marshall, e. s. (2019). modeling capital market performance indicators, financial development and economic growth in nigeria: empirical evidence. copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 70 kabundi, a., & mbelu, a. (2020). estimating a time-varying financial conditions index for south africa. empirical economics, 1-28. khundrakpam, j. k., kavediya, r., & anthony, j. m. (2017). estimating financial conditions index for india. journal of emerging market finance, 16(1), 61-89. ncanywa, t., & mabusela, k. (2019). can financial development influence economic growth: the sub-saharan analysis. journal of economic and financial sciences, 12(1), 1-13. okunlola, o. a., masade, e. o., folaranmi lukman, a., & ajayi abiodun, s. (2020). investigating causal relationship between financial development indicators and economic growth: toda and yamamoto approach. iranian economic review, 24(1), 225-246. olaniyan, t. o. (2019). interactive effects of remittances and financial sector development on economic growth in nigeria. remittances review, 4(1), 19-39. olayungbo, d. o., & quadri, a. (2019). remittances, financial development and economic growth in sub-saharan african countries: evidence from a pmg-ardl approach. financial innovation, 5(1), 9. oro, o. u., & alagidede, p. (2018). the nature of finance–growth relationship: evidence from a panel of oil producing countries. economic analysis and policy. available at ssrn 3190069. schumpeter, j. a. (1912). 1934. the theory of economic development. swiston, a. (2008). a us financial conditions index: putting credit where credit is due (no. 8161). international monetary fund. wang, s., xu, f., & chen, s. (2018). constructing a dynamic financial conditions indexes by tvp-favar model. applied economics letters, 25(3), 183-186. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). copyright © cc-by-nc 2019, cribfb | amfbr american finance & banking review; vol. 4, no. 1; 2019 issn 2576-1226 e-issn 2576-1234 published by centre for research on islamic banking & finance and business, usa 39 it-based usury free financial innovations bijan bidabad b.a., m.sc., ph.d., post-doc. professor economics and chief islamic banking advisor bank melli, iran e-mail:bijan@bidabad.com mahmoud allahyarifard expert of r&d dept. bank melli iran e-mail: allahyarifard@gmail.com abstract despite development and extension of different ways of financing in financial markets, encompassing islamic and conventional financing, the mechanism of electronic funds transfer (eft) of project financing both as borrowed and non-borrowed methods has not been considered at most. moreover overall it infrastructures development namely real gross settlement system (rtgs), automatic clearing house (ach), scriptless security settlement system (ssss) and international bank account number (iban) for authentication process and the international meta bank network of single euro payment area (sepa) and also international integrated banking networks including the society for worldwide interbank financial telecommunication (swift) and interbank information transfer network (shetab), and other accomplished endeavors are not efficient in absorbing international contributions for project financing through foreign exchange funds in the different countries, satisfactory e-payment mechanism in informative portal systems for investment projects are weak. in this way, the role of applying e-payment systems for attracting foreign investment through retail resources mobilization and design of financial instruments with the capability of transacting in the secondary markets should be reconsidered. in this paper by having a glance at different types of investment project financing, we introduce a new project financing mechanism based on e-payment with non-usury financial instruments to complete investment project financing chain in the form of rastin profit and loss sharing (pls) banking.sharia compliance of financing instruments in one side and accessibility in absorbing international retail foreign exchange sources on other side are two fundamental discussible items in this paper. in this way by designing a new system of "non-usury scriptless security settlement system" (nssss) with non-usury mechanisms -avoiding legislative (sharia) circumventioncan provide the two cited goals in designing non-usury financing instruments through it-based non-usury financial innovations which includes of rastin certificates in rastin pls banking, and non-usury bonds namely rastin swap bonds. keywords: rastin banking, e-payment, rtgs, ach, nssss, pls, ssss. 1. introduction definitely, investment is a reliable method for accelerating economic growth and employment and could be applied as an accelerator for speeding up economic growth and development. the foreign investment will be able to improve management systems, exchange of the economic experiments, and importation, and applying of new technology. traditional financing methods for importation and injection of capital to investment projects do not suffice with respect to information and communication technology (ict) progresses and development of international financial networking. the extending number of countries as members of the world trade organization (wto) and tariff reduction policy, freedom of capital inflow and mailto:bijan@bidabad.com copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 40 outflow based on capital rate of return are some significant reasons for existing hard competency over the products of the investment project at global markets. in this way, the significant endeavor of the entrepreneurs of the investment projects is to how finance and to reduce mark-up prices of the products and services. the sharia-based financial instruments in investment project financing and the theosophy of usury prohibition for stability and health of the financial and other related real economy markets are some main reasons of the enthusiastic attraction of the non-usury financial innovations with known characteristics.1 on the other hand, increasing the volume of transactions obliges to trace financial transactions, the reality of transactions and avoiding from any circumvention, increasing speed, accuracy and decreasing of the mark-up prices and increasing financial efficiency are some main reasons for necessary role of information technology (it) in islamic financial markets. in conventional financing approaches, either local or global, some instruments are used. namely: local credit facilities, foreign exchange credit facilities, foreign exchange reserve fund, musharakah papers, convertible partnership bonds, specific long term investment deposit certificate, securitization and sukuk for local financing and foreign exchange bonds, foreign resources finance from foreign banks, foreign direct investment, public-private partnership (ppp), buyback contracts, financing from international institutions of world bank and development banks and export credit agencies (ecas) 2 are used for foreign financing. the investment project financing is performed as the borrowed method, namely: finance, refinance, usance, security and etc. and non-borrowed as a civil partnership and direct investment that we are discussing here. then we are going to introduce some it based new non-usury financial innovations. 2. borrowed financing in the borrowed financing method, the principle and interest of the resources are guaranteed by the government. the borrowed financing encompasses the whole sorts of short term, middle term and long term credit lines in form of finance and refinance loans which are provided by international banks, non-banking financial and monetary institutions, world bank (wb), development and regional banks namely islamic development bank (idb) and other financial institutions and even governments. issuance of the foreign exchange securities and musharakah papers are classified in borrowed financing category in case of the government guarantee of both principal and interest. in this method, buyers of bonds are not confronted with any risks and the paying back the principle, and interest in this kind of debt based financing is an obligation for the issuer of the bonds (government). the traditional financing methods in iran are as follows: securities or musharakah papers in iran, non-usury financing instruments in the form of musharakah bonds (rls) has been issued and taken into consideration in 1995 for the first time. lack of it-based supervision mechanism and lack of its development around the world are some constraints to this kind of financing approach. iran's foreign exchange bonds issuance for foreign countries, first time returns to early 2000. legal prohibition of the government to borrow from banking systems in order to make the balance of her budget according to the context of 2002 annual budget law and also looking for diversified financing aim and being present at global financial markets were some reasons for issuance of foreign exchange bonds in iran. certificate of deposit (cd) certificate of deposit as public or specific deposits is known as other financing instruments. the financing through cd was approved by the central bank of iran (cbi) in 2001 to encourage investors to make short term deposit with transaction capability in secondary markets. undeveloped secondary market with it-based mechanisms and also lack of required cultural and organizational development non-publicity requirements are some main reasons for not forming the secondary markets for this kind of securities. the foreign exchange cd also was considered on the basis of the cbi's back up in 2007 a foreign exchange financing instrument for absorbing the international resources particularly of iranians resident at foreign countries at a global financial crisis. 3. non-borrowed financing non-borrowed financing includes those foreign resources that principle and interest return and risk of the investment are to be transferred to investors, and the government has no commitments against any parties. acceptance of the whole risks by the investor, nom-increasing government commitments, application of new technology, managing improvement are some efficiency 1 see: http://bidabad.com/doc/pls-business-cycles.pdf اخالق اقتصاد و زيان و سود در مشاركت بانكداري با تجاري ادوار بيدآباد، بيژن، تثبيت 2 the development banks and export credit agencies (ecas) are private or semi-governmental institutions that are intermediates between government and exporters in export financing and can be as partner in financing, insurance and guarantee of project. http://bidabad.com/doc/pls-business-cycles.pdf http://bidabad.com/doc/pls-business-cycles.pdf copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 41 characteristics of the non-borrowed financing. although non-borrowed financing follows the debt market position since the financial resource provider has participated with both profit and risk of investment, so it complies with non-usury transactions characteristics and as a result the islamic countries interested in applying this method to finance the projects. generally, different types of non-borrowed financing methods in different islamic countries are as follows: sukuk debt markets are an inseparable part of the financial sector, but due to riba (usury) prohibition according to the jurisprudence of islam, the countries that are looking for applying non-usury transactions to meet their financial needs have planned to develop substitute financial instruments for debt market complying with non-usuric transactions criteria. in result, the last recent years, the islamic debt based bonds, namely sukuk has had significant growth, and plenty of them was issued by corporations and governments around the world. based on aaoifi standards (2004), over 14 types of sukuk have been recognized and introduced recently. the most popular types of sukuk are ijarah sukuk (in assets), estesna sukuk (in projects), murabaha sukuk (in ownership cases in debt), musharakah sukuk (in trade) and estesmar sukuk (in investment). some of this type of islamic bonds has been issued in huge volumes by some islamic countries and organizations, namely malaysia, bahrain, dubai, pakistan, idb and etc. marketability of these bonds in the secondary market depends on quality evaluation processes of the assets and existing it-based and e-payments transacting infrastructure. the sukuk issuance with marketable capabilities has been considered across stock markets of the islamic country markets. the significant point of sukuk issuance is that in spite of the prohibition of usury, in calculating profit the usury mechanism is used and the rate of return of this asset is the same as fixed interest rates of libor plus risk premium or similar margins that somehow instills usury-doubt into mind. the islamic zero coupon bond this kind of bonds has not any coupon for paying profit during the investment period from issuance time up to maturity, and the issuance is based on discount mechanism and is popular in malaysia. although up to maturity, no profit is paid the rate of return of these securities can be calculated through the difference of the par value and discounted price. the islamic zero coupon security is conducted on the basis of the transaction contract (bai' contract), and it is transacted on credit, then cash with discounting. this transaction is a kind of circumvention and enters to usury realm as some jurists protest. direct investment direct investment is another project financing method based on foreign exchange resources. in iran, the organization for investment and economic & technical assistance set up internet-based database software which brought the information from the government and private corporations projects proposed to this organization in a separate collection to encourage foreign investors and financiers. therefore, the foreign financers or investors can make the decision on each project profile through this internet-based portal, and it is possible to choose any project for financing or participate through them. this endeavor is just informative, and e-payment and financing processes through the foreign retail funds are not engaged in. lack of available financial instruments with convenient processes and marketable bonds transaction mechanism in primary and secondary markets based on information technology are of extant constraints alongside the projects financing through the foreign exchange resources in iran. indirect investment the different types of indirect investment for investment project financing considering the type of contracts are buyback, publicprivate partnership (ppp) and civil partnership as follows: buyback in manufacturing projects, finance of construction and equipping processes of enterprises could be conducted through buyback contracts. that is the buyer of machines and technology prepares required resources through pre-sales of the future goods and services to the producer of the equipment instead. in buyback contract, the entrepreneur of the projects make an agreement with financers on pre-sales of produced goods and services instead of a refund and will pay back the money in a particular duration with determined prices. this approach, due to preventing foreign exchange outflow from the country and preserving the balance of payment (bop) position is attractive for the governments. public-private partnership (ppp) public-private partnership (ppp) is an important financing method for infrastructural projects. in this method, the whole processes of design, construction, financing, and operation entirely are considered. the government donates the privilege of the operation of the project to the concessionaire for the duration. the concessionaire can be a corporation or consortiums of the corporation. the required guaranty and refund for this kind of financing will be based on the cash flow of the project outcomes. this type of financing entails limitedrecourse or non-recourse rights to the government. copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 42 civil partnership (musharekate madani) according to the non-usury banking law approved in 1982civil partnership is defined as "to merge cash or non-cash capitals that belong to different private or legal entities to get profit jointly complied with the contract". on the other words, musharekate madani is a contract that two or more persons who have a bilateral or multilateral agreement join their capitals for running a particular business to gain profit. in this financing, the bank is as a financer, and the entrepreneur is her counterpart, and the partners gain some proportions according to their shares. 4. it infrastructure requirements the payment process is a significant pillar for initiating and fulfillment of all commercial transactions among buyers and sellers. development and extending different types of e-commerce -particularly business to consumer (b2c) and business to business (b2b)is appropriate infrastructure for transactions of different asset-based securities (abs) either as sharia complied or conventional transactions. so it is necessary to review required information technology infrastructure before spelling out it based non-usury financial instruments transaction mechanisms in investment project financing. generally, prerequisites and infrastructures for initiating the transactions at the primary and secondary markets are as follows: electronic fund transfer (eft) automated clearing house (ach) automated clearing house (ach) is a system implemented for retail payment and whole interbank transferring processes in huge volume automatically. transactions settlements in this system are done by batch at a scheduled time (usually at 24 o'clock). the members' banks can issue direct credit transactions3 or direct debit transactions4 by submitting a batch file which contains different transactions order to the counterparty bank. in this system, the creditor or debtor accounts of the customers are transferred on the basis of international bank account number (iban). real gross settlement system (rtgs) the real gross settlement system (rtgs) is a system for payment and transferring high and time-based payments. the central banks mostly are the owner of this system. for transferring of money, it isn't compulsory to have an account in destination bank, and it is just enough to have an account in remittance bank for funds transfer. the rtgs is a non-cash transferring system. scriptless security settlement system (ssss) this system is designed for banks' liquidity management and transacting short term assets as securities, derivatives like futures and options to provide required liquidity. adding and saving of the records of the securities owners, transferring the ownership, transacting and repurchasing securities and bonds, authentication of securities owners, issuance of paperless digital securities in an integrated information system are some of the functionalities of this system. paying and withdrawing funds for the transaction of securities are done through rtgs. the banks at most, to prepare required liquidity, sell their bonds to the central bank at the early hours of working time and then repurchase the bonds in case of redundant funds automatically through the rtgs that is held beside the central bank. authentication mechanism international bank account number (iban) iban is an identifier that defines a unique specific banking account number over the world. this identifier is compatible with the international standard of iso 13616:2007. iban creates equal banking account number identification across the world for simplifying interbank transactions. basic bank account number (bban) bban is just the same ordinary customer account number. in other words, this identifier is an exclusive account number that specifies a specific account across a unique bank. in applying ach, it is necessary to transfer the account number of payer and payee across the banks on iban. so, up to spreading iban among the customers, it is not compulsory to know both own and payee account numbers on iban basis, but they will be able to use the services of this system through bban or generating the iban through the website of the customer's bank. 3 this is a payment method that the account holder permits the bank to withdraw the corresponding amounts from the owner's accounts in particular times then to credit other specific account in other banks. 4 it is a kind of funds transferring that account holder permits the bank to withdraw the considered amounts in particular times from other accounts in different banks and then credit them into the account number of the customer. performing this conduction depends on the multilateral agreements between debtors and creditors. copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 43 electronic funds transfer (eft) experiences the society for worldwide interbank financial telecommunication (swift) the swift electronic fund transfer in iranian banks is done in this way that the remitting bank after tracing the bank of the beneficiary and her swift number transfers the amount through the subsidiary branch or agent of the bank. in case of lack of subsidiaries or agents banks over the world, the transferring process is done through other agents that have a subsidiary or a second agent in the beneficiary's bank country. the high commission in this case in the beneficiary's bank country and then long duration remittance process are weak points of this kind of electronic fund transfer in iran. the authentication process would be possible in case of having a swift number. interbank information transfer network this network is known as interbank switch center, and it is called shetab in iran. this center has been running since the end of 1991. the card services center connects the whole iranian banks, including government and private banks and even non-bank financial institutions, and this network prepares authentication possibility for customers who want to transfer or pay. the cardholder of every member bank can utilize e-banking services and products of the other banks and non-banking financial institutions. hence the whole automatic teller machines (atm) and the eftpos devices of shetab member banks which connected to this center can offer the services to the customers of the other banks. in addition, it decreases the investment costs, and subsequently, the required expenditures of banks provide extensive services for customers. arab payments and securities settlement initiative (api) world bank in co-operation with the arab monetary fund and regional and international organizations established the arab payments and securities settlement initiative (api). this organization encompasses 22 countries who are members of the international arab fund and established with the purpose of evaluating and strengthening of the payment systems among arab countries to improve soundness, efficiency, integrity and creating long term organizational capacity in the region for supporting the development of security settlement and reimbursement systems. paypal paypal is a global and secure payment method known as peer to peer (p2p) system. this kind of global payment possesses the following advantages:  merchants pay low fees; individuals pay nothing  interest paid on deposits  mass (bulk) payment is possible  business model: fees + float  fdic5 pass-through insurance o against bankruptcy of paypal o different protection for fraud  mobile payments support  penetration in usd, cad, gbp, eur, jpy, aus  b2c and b2b support 5. non-usury scriptless security settlement system (nssss) this system is considered for the transaction of rastin certificates at the rastin profit and loss sharing (pls) banking system and the other non-usury financial innovations along with rastin pls banking namely, rastin swap bonds and other islamic securities. the significant difference between nssss and ssss is in securities transaction mechanism. somehow the transactions and processes of securities settlement at the nssss are based on usury-free transactions, while the scriptless security settlement system (ssss) is based on conventional usury transactions mechanism. a model of this system is developed by the bank melli iran titled by profit and loss sharing banking system and will be operational in the near future and is in the stage of computer program coding6. generally, the specifications and capabilities of this system are as follows:  performing e-payment processes through the banks' cards of the shetab network or through reputable global cards namely visa, master and american express (needs necessary agreements and connectivity to the card's ports of the e 5 federal deposit insurance corporation (fdic) 6 this system is supervised and controlled by the pls expert committee of bank melli iran and is designing by sadad co. for more information see the following links: http://89.235.64.138/fa/firstpage.aspx http://89.235.64.138/plsmanagerpanel/loginpage.aspx http://89.235.64.138/fa/firstpage.aspx http://89.235.64.138/plsmanagerpanel/loginpage.aspx copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 44 payment service providers).  multi-currency support  multi-language support  swift connectivity and connect to other e-payment service providers switch namely paypal (needs necessary agreements with cards issuer and eft service providers as well)  applying ach for retail payments and rtgs for bulk payments using iban and other integrated authentication facilities.7  publicity and designing different e-shelving rack for offering islamic securities  buyer and seller queues and offered prices monitoring  to dispose of the auction and doing a final transaction of non-usury bonds based on competitive prices  automatic refund and pay back after quitting the auction at the end of auction schedule or before the auction and admitting the offered upward prices for retake part for the new auction.  compatible with the other financial systems and subsystems and integrity with core banking.  accounting operations, input data records, customer desktop monitoring, record and processes tracing, accounting, and auditing.  management reports and decision support system (dss) for different management, experts, and customers levels and request by a parametric report generator system.  comparison of different business opportunities in view of expected profit, maturity date, capability, and capacity of the entrepreneurs and other effective specifications of risks and returns.  systematic risk management including liquidity, credit, operation and market risk  designing bulk and basket for defined financial certificates.  analytical and fundamental analysis features and financial engineering.  coding of the certificates based on international standards. transactions in this system are based on some of the non-usury financial innovations as follows: 6. it-based non-usury financial innovations in nssss the it role in the fulfillment of non-usury financial innovations is inevitable8. in other words, it infrastructures in different dimensions, namely ach, rtgs, nssss, and iban, give rise to the development of the markets of this kind for islamic financial innovations. generally, the designed non-usury financial innovations are divided into the following categories as follows: rastin certificates rastin certificates are a collection of designed certificates in rastin pls banking base system and its financial subsystems. these certificates can be anonymous or named papers, which are transferable and negotiable online through the website of the bank and are issued with a nominal price and for a certain period. the owners of these certificates share the results of the project proportional to nominal price and participation period of the certificate. various rastin certificates and their characteristics according to the kind of participation in the pls base system or its financial subsystems regarding the type of project and the asset used as:  pls base: musharakah (participation) and pazireh (subscripted) certificates.9  jfs: future certificate.10 7 the integrated authentication system is compiling at the organization and skills department of bank melli iran under supervision of the rastin pls banking experts. 8 for more information see: bidabad, bijan and mahmoud allahyarifard, "implementing it to fulfill the profit and loss sharing mechanism", islamic finance news (ifn) journals, vol. 3, issue 3, 6th february 2006. http://bidabad.com/doc/summery-pls-it-1.pdf bidabad, bijan and mahmoud allahyarifard, "it role in fulfillment of profit and loss sharing", proceeding of the 3 rd international islamic banking and finance conference, monash university, kuala lumpur, malaysia, 16 th and 17th november 2005. http://www.bidabad.com/doc/english-pls-5.pdf 9 bidabad, bijan, rastin profit and loss sharing (pls) base system, 2012. http://www.bidabad.com/doc/pls-base-en.pdf 10 joalah financial sharing (jfs): is a method in which, bank finances entrepreneur (producer) from depositor's resources or the provided sources by buyer. bidabad, bijan, joalah finance sharing (jfs), 2011. http://www.bidabad.com/doc/jfs-paper-en.pdf http://bidabad.com/doc/summery-pls-it-1.pdf http://www.bidabad.com/english-pls-5.pdf http://www.bidabad.com/doc/pls-base-en.pdf http://www.bidabad.com/doc/jfs-paper-en.pdf copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 45  mfs: mudarabah and periodic mudarabah certificates.11  ifs: ordinary mughasatah (installment), rental mughasatah, and musharakah mughasatah certificates.12  rfs: mortgage sharing, periodic mortgage sharing, mortgage mudarabah (commerce), periodic mortgage mudarabah, mortgage muzaraah (cultivating), periodic muzaraah, mortgage mugharasah (planting), periodic mortgage mugharasah, mortgage musaghah (irrigation), periodic mortgage musaghah, mortgage istisna (industrial/manufacturing), periodic mortgage istisna and rental certificates.13  bfs: bail certificate.14  rps: social security, personal security, and pension security certificates.15  rst: takaful and loan certificates.16 project financing through rastin certificates: the rastin profit and loss sharing (pls) financial instruments titled by rastin certificates and also the it-based prepared opportunities by it subsystem namely nssss anywhere and anytime will absorb foreign capital for investing on different musharakah projects. value-added creation, encouragement of creativity and innovation for running new projects, investment return based on real economy sector, no need to primary accomplished assets for issuance of the rastin certificates, anonym rastin certificates and transacting capability across the world and marketability of this kind of certificates before accomplishing the investment project are some specifications of this new financial innovation. ict and web-based services implementation for the purpose of tracing digital inflows and outflows of cash in form of multi-currencies funds for issuance of foreign exchange or local currency based rastin certificates and coordination with e-payment service providers all over the world are some solutions for going out from existing challenges of the project financing in both traditional usury-free and usury-bearing financing methods. by applying the new it-based systems namely, the investors (depositors) authentication and recognition system amid them iban and designing of e-payment services as same capabilities as paypal in the internet based secondary market portal in rastin pls banking can afford to apply and absorb retail foreign exchange funds across the world for the purpose of the introduced projects financing. this solution makes customer free from having a local account number whether in the operator bank or the whole set of banks that are members of the shetab network. in case of physical transferring of foreign exchange funds, it is possible to employ the ach or rtgs17 services as well. although in the short term due to the imposition of global sanctions against iran it is not possible to have necessary agreements with e-payment service providers namely paypal so in this respect, the it-based environment can be prepared by the defined mechanism, and it is possible to participate in investment projects all over the world. transacting of the securities through nssss is based on competitive price, and securities owners 11 mudarabah financial sharing (mfs): is a kind of mudarabah under rastin pls banking in which bank introduces the entrepreneur project proposal in the field of trade or transaction of commodities (commerce) to depositors. bidabad, bijan, mudarabah financial sharing (mfs). 2011. http://www.bidabad.com/doc/mfs-paper-en.pdf 12 installment financial sharing (ifs): in ifs, installer (depositor) will finance a portion of the needed fund of entrepreneur through the bank for a certain period of time (amortization period). the entrepreneur will pay back his share by installments and will own the total property of the project and ifs ends. bidabad, bijan, installment financial sharing (ifs), 2011. http://www.bidabad.com/doc/ifs-paper-en.pdf 13 rent financial sharing (rfs): entrepreneur temporarily donates the ownership of a part of his productive asset (assets of an operating firm), rental asset (those assets, which can be let) or dead asset (non-operating or suspended firms or uncultivated lands assets) to depositor who finances him but keeps it as mortgage. then pays back the fund received from the yields of the asset proportional to depositor's share to depositor at the end of contract, or periodically. the original deposit of depositor will be given back to him after the end of project. the profit of the project will be given to depositor periodically or in a lump. bidabad, bijan, rent financial sharing (rfs), 2012. http://www.bidabad.com/doc/rfs-paper-en.pdf 14 bail financial sharing (bfs): is the application of deposit of depositor by entrepreneur to produce a defined commodity and delivering the commodity or paying back its value in future specific time. bidabad, bijan, bail financial sharing (bfs), 2012. http://www.bidabad.com/doc/bfs-paper-en.pdf 15 rastin personal security (rps): to create competitive conditions and to increase the efficiency of social security insurance and diminishing antitrust of social security systems and pension funds, private and public pension funds are established according to rastin banking regulations. people and firms can allocate a portion of their obligatory (or optional) insurance premium payments (for himself or his employees) for social security to the funds that operate under rastin personal security (rps) and enjoy its benefits. therefore, they will be exempted from obligatory insurance premium payments equal to the payment they have paid to these funds. bidabad, bijan, rastin personal security (rps), 2012. http://www.bidabad.com/doc/rps-paper-en.pdf 16 rastin social takaful (rst): benevolent people can deposit their funds at banks for charity purposes, and bank will be allowed to pay profit (or the principal as well) of deposit to needy people, in form of loan or non-returnable payments (according to the depositor request). bidabad, bijan, rastin social takaful (rst), 2012. http://www.bidabad.com/doc/rst-paper-en.pdf 17 for more information see: bidabad, bijan and mahmoud allahyarifard, "it role in fulfillment of pls mechanism (islamic banking)", new economics and trade journal, no 3,winter 2005, pp 1-37. http://bidabad.com/doc/english-pls-5.pdf http://prd.moc.gov.ir/jnec/farsi/3rd/article2.pdf http://www.bidabad.com/doc/mfs-paper-en.pdf http://www.bidabad.com/doc/ifs-paper-en.pdf http://www.bidabad.com/doc/rfs-paper-en.pdf http://www.bidabad.com/doc/bfs-paper-en.pdf http://www.bidabad.com/doc/rps-paper-en.pdf http://www.bidabad.com/doc/rst-paper-en.pdf http://bidabad.com/doc/english-pls-5.pdf http://prd.moc.gov.ir/jnec/farsi/3rd/article2.pdf copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 46 (suppliers) and buyers (demanders) can offer competitive prices until auction time. the par value of this certificate is equal to the first time offer in the primary market, and up to the maturity, there will not be any payment as a predetermined profit to the certificates' holders.18 rastin swap bond (rsb) rastin swap bond (rsb) is based upon mubadala (swap) contract between mobadil (swapper) and motebadil (swapee) in which the durations and substances of swaps are equal for first and second swaps. motebadil (swapee) issues the bond and owes to mobadil equal to the nominal value of the bond, and should pay this amount (badal) to mobadil (swapper) at maturity. the issuer (motebadil) is obliged to give the mobaadal for the same amount and period as badal to mobadil. he can choose a combination of amount and period that the multiplication of amount by the period of mobaddal be equal to that of badal. at second maturity, mobadil is committed to returning mobaddal to motebadil. no interest rate is involved in these bonds, and they are of four kinds: central bank rastin swap bond, treasury rastin swap bond, bank rastin swap bond, and commercial rastin swap bond. they can be in domestic money or foreign exchange.19 usury doubt of bonds in conventional banking is the main reason for less development of islamic financial markets. by this new financial innovation, non-usury bonds are designed and issued. rastin swap bond (rsb) will be issued in par value and can be transacted through nssss. the market transaction of these bonds is based on auction, which is done by implementing the itbased system. riba prohibition is a substantial reason for eliminating conventional treasury bonds from monetary policy instruments in iran. it role with defined mechanisms in the non-usury scriptless securities settlement system (nssss) and with respect to defined transacting mechanism would revive treasury bonds with non-usury specification and be known as significant monetary instruments improvement.20 for implementing non-usury scriptless security settlement system (nssss), central bank establishes the integrated usury-free scriptless security settlement system with specific characteristics and capabilities and activates the registration portal for entrepreneurs of rastin pls banking. compliance with sharia is the necessary condition for the entrance of financial documents and instruments in this portal. portals of rastin certificate markets (rcm) of banks are to be designed in accordance with central bank’s standards so that the information concerning financing projects through rastin pls banking, entrepreneurs and rastin certificates will be updated online in nssss system. this system should be capable of online updating of information concerning rastin certificates and rastin swap bonds of bank’s portal for each transaction, settlement, capitalization or any other kinds of transaction and transition of rastin certificates and bond by registering them in the system. 18 for more information see: ژينا آقابيگي، مهستي نعيمي، آذرنگ اميراستوار، سعيد صالحيان، سعيد نفيسي بيدآباد، بيژن و پور، سعيد شيخاني، محمود الهياري فرد، محمد بري، بيژن حسين زيده سرايي، عليرضا مهديزاده چله اداره (، plsطرح تفصيلي بانكداري مشاركت در سود و زيان )خليلي والئي. پور، ناديا صفايي .1387ريزي، بانك ملي ايران، تحقيقات و برنامه محمد صفائي پور، چارچوب بازار الكترونيكي معامالت گواهي مشاركت/پذيره در بيدآباد، بيژن و ، وزارت 1387آذر 3-4الكترونيكي، (. پنجمين همايش تجارت plsقالب طرح مشاركت در سود و زيان ) بازرگاني، تهران. http://www.ecommerce.gov.ir/earchive/earchivef/item.asp?parentid=43&itemid=182 (. plsحسابداري مشاركت در سود و زيان )محمود الهياري فرد،بيژن بيدآباد و ( در بانكداري اسالمي.almمديريت دارائي و بدهي ) محمود الهياري فرد،بيژن بيدآباد و http://www.bidabad.com/doc/alm-farsi.pdf ( pls )بيدآباد، بيژن و محمود الهياري فرد، سازوكار عملياتي بانكداري مشاركت در سود و زيان گواهي مشاركت و گواهي پذيره با كارائي بين المللي، ارائه شده به معرفي ابزارهاي مالي ، بانك توسعه صادرات ايران، تهران، ايران 1387مهر 27دومين همايش خدمات بانكي و صادرات، http://bidabad.com/doc/pls-banking-7.pdf http://bidabad.com/doc/pls-banking-export-deveopment-bank-2.ppt بيدآباد، بيژن و محمود الهياري فرد، فناوري اطالعات و ارتباطات در تحقق سازوكار مشاركت در و تجارت نوين، سال اول، پژوهشي اقتصاد -)بانكداري اسالمي(، فصلنامة علمي( pls)سود و زيان 1 -37، صفحات 1384شمارة سوم، زمستان http://www.bidabad.com/doc/plsit-2 http://prd.moc.gov.ir/jnec/farsi/3rd/article2.pdf http://bidabad.com/doc/pls_it-fa.pdf 19 bidabad, bijan, abul hassan, ben ali mohamed sami, mahmoud allahyarifard. interest-free bonds and central banking monetary instruments. international journal of economics and finance. vol. 3, no. 3, august 2011, pp.234-241. http://www.ccsenet.org/journal/index.php/ijef/article/download/11665/8300 20 bidabad, bijan, mahmoud allahyarifard, mahnaz rabiei, "non-usury bonds", forthcoming. http://www.ecommerce.gov.ir/earchive/earchivef/item.asp?parentid=43&itemid=182 http://www.bidabad.com/doc/alm-farsi.pdf http://www.bidabad.com/doc/alm-farsi.pdf http://www.bidabad.com/doc/pls-%20it-2 http://prd.moc.gov.ir/jnec/farsi/3rd/article2.pdf http://www.ccsenet.org/journal/index.php/ijef/article/download/11665/8300 copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 47 7. conclusions and policy recommendations despite throughout extending islamic financial markets, particularly in malaysia, the current transacting practices and mechanisms of islamic financing instruments are protested by some jurists and islamic economists. by scrutinizing the transacting process of islamic securities, usury signs can be found in them easily. amid the investment project financing procedures, whatever compatible with non-usury transactions are known as non-borrowed financing approach. for participating of financer in driven risk and return of investment and for applying the debt-equity mobilization beyond the borders due to the scarcity of this significant investment factor, development of it infrastructures with giving priority to the theosophy of usury prohibition is inevitable. hence, actualizing of transactions while avoiding from any circumvention and also extending and development of islamic financial markets entail implementing it-based infrastructures, which encompasses ach, rtgs, nssss, and iban and also development of meta banks, integrated and global networks namely sepa, swift, shetab and accomplished endeavors for absorbing global participation to project financing through foreign exchange funds. sharia compliance-based transactions of financing instruments on one hand and accessibility to global retail foreign exchange funds on another hand will be two fundamental factors in the recent islamic financial instruments innovations. in this way, by designing a new system of nssss with non-usury transactions mechanism, it is possible to avoid from any circumventions by implementing new it-based non-usury financial innovations including rastin certificates in rastin pls banking, and non-usury bonds namely rastin swap bond (rsb) for liquidity financing and monetary policies. references bidabad, bijan. (2014). new operational islamic banking system, volume one, theoretical foundations, lap lambert academic publishing, omniscriptum gmbh & co. kg, isbn: 978-3-659-54463-7. bidabad, bijan. (2014). new operational islamic banking system, volume two, applicational issues, lap lambert academic publishing, omniscriptum gmbh & co. kg, isbn: 978-3-659-55210-6. bidabad, bijan (2018), general regulatory framework in rastin profit and loss sharing banking (part i-operational context). journal of business and finance in emerging markets, jbfem, [s.l.], v. 1, n. 1, p. 11-26, may. issn 2580-5568. https://doi.org/10.32770/jbfem.vol111-26 http://www.bidabad.com/doc/rastin-regulatory-en-i.pdf bidabad, bijan (2018), general regulatory framework in rastin profit and loss sharing banking (part ii-legal groundwork). journal of business and finance in emerging markets, jbfem, jbfem, [s.l.], v. 1, n. 2, p. 109-126, nov. issn 25805568. https://doi.org/10.32770/jbfem.vol1109-126 http://www.bidabad.com/doc/rastin-regulatory-en-ii.pdf bidabad, bijan (2019), general regulatory framework in rastin profit and loss sharing banking (part iii-auxiliary provisions). journal of business and finance in emerging markets, jbfem, may, vol 2, no. 1, pp. 51-65. issn 25805568. https://doi.org/10.32770/jbfem.vol251-66 http://www.bidabad.com/doc/rastin-regulatory-en-iii.pdf bidabad, bijan and mahmoud allahyarifard, "implementing it to fulfill the profit and loss sharing mechanism", islamic finance news (ifn) journals, vol. 3, issue 3, 6th february 2006. http://bidabad.com/doc/summery-pls-it-1.pdf bijan bidabad, mahmoud allahyarifard. it role in fulfillment of profit & loss sharing (pls) mechanism. proceeding of the 3rd international islamic banking and finance conference, the monash university, kl, malaysia, 16-17 november, 2005. international journal of islamic banking and finance research, 3(2), 44-59, 2019. https://www.cribfb.com/journal/index.php/ijibfr/article/view/274 http://www.bidabad.com/doc/english-pls-5.pdf http://www.bidabad.com/doc/pls-it-en.ppt bijan bidabad, mahmoud allahyarifard. assets and liabilities management in islamic banking. proceeding of the 3rd international conference on islamic banking and finance, risk management, regulation and supervision, bidakara, jakarta, indonesia, 23-26 february, 2010. pp. 396-413. international journal of islamic banking and finance research, 3(2), 32-43, 2019. https://doi.org/10.32770/jbfem.vol111-26 http://www.bidabad.com/doc/rastin-regulatory-en-i.pdf https://doi.org/10.32770/jbfem.vol1109-126 http://www.bidabad.com/doc/rastin-regulatory-en-ii.pdf https://doi.org/10.32770/jbfem.vol251-66 http://www.bidabad.com/doc/rastin-regulatory-en-iii.pdf http://bidabad.com/doc/summery-pls-it-1.pdf https://www.cribfb.com/journal/index.php/ijibfr/article/view/274 http://www.bidabad.com/doc/english-pls-5.pdf http://www.bidabad.com/doc/pls-it-en.ppt copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 48 https://www.cribfb.com/journal/index.php/ijibfr/article/view/272 http://www.bidabad.com/doc/alm-english.pdf bijan bidabad, rastin certificate market (rcm), complementary system of rastin banking, 2013. international journal of islamic business & management, 3(1), 35-43, 2019. https://www.cribfb.com/journal/index.php/ijibm/article/view/260 http://www.bidabad.com/doc/rastin-bank-rcm-en.pdf bidabad, bijan, abul hassan, ben ali mohamed sami, mahmoud allahyarifard (2011) interest-free bonds and central banking monetary instruments. international journal of business and management science. vol. 3, no. 3, august. bidabad, bijan, rastin profit and loss sharing (pls) base system. journal of islamic economics, banking and finance, pp. 3257, vol. 9 no. 4, oct dec 2013. http://ibtra.com/pdf/journal/v9_n4_article2.pdf http://www.bidabad.com/doc/pls-base-en.pdf bidabad, bijan, joalah finance sharing (jfs). journal of islamic economics, banking and finance, volume-12, no. 1, januarymarch, 2016, pp. 33-48. http://www.bidabad.com/doc/jfs-paper-en.pdf http://ibtra.com/pdf/journal/v12_n1_article2.pdf bidabad, bijan, mudarebah financial sharing (mfs). journal of islamic economics, banking and finance, jiebf, volume 10, number 1, january april 2014, pp. 56-68. http://www.bidabad.com/doc/mfs-paper-en.pdf http://ibtra.com/pdf/journal/v10_n1_article3.pdf bidabad, bijan, installment financial sharing (ifs): a financial subsystem of rastin pls banking. international journal of islamic banking and finance research, 3(1), 28-42, 2019 . https://www.cribfb.com/journal/index.php/ijibfr/article/view/267 http://www.bidabad.com/doc/ifs-paper-en.pdf bidabad, bijan, rent financial sharing (rfs). journal of islamic economics, banking and finance, vol. 10 no. 2, pp.: 38-53, april-june 2014. http://www.bidabad.com/doc/rfs-paper-en.pdf http://ibtra.com/pdf/journal/v10_n2_article2.pdf bidabad, bijan, bail financial sharing (bfs): a financial subsystem of rastin pls banking. bank melli iran, tehran, iran, 2014. international journal of islamic banking and finance research, 3(1), 21-27, 2019. https://www.cribfb.com/journal/index.php/ijibfr/article/view/266 http://www.bidabad.com/doc/bfs-paper-en.pdf bidabad, bijan, rastin personal security (rps). journal of islamic economics, banking and finance, jiebf, volume 11, number 2, april june 2015, pp. 47-61. http://www.bidabad.com/doc/rps-paper-en.pdf http://ibtra.com/pdf/journal/v11_n2_article3.pdf bidabad, bijan, rastin social takaful (rst). journal of islamic economics, banking and finance, jiebf, volume 11, number 1, january march 2015, pp.: 13-23. http://www.bidabad.com/doc/rst-paper-en.pdf http://ibtra.com/pdf/journal/v11_n1_article1.pdf bidabad, bijan, abul hassan, ben ali mohamed sami, mahmoud allahyarifard. interest-free bonds and central banking monetary instruments. international journal of economics and finance. vol. 3, no. 3, august 2011, pp.234-241. http://www.ccsenet.org/journal/index.php/ijef/article/download/11665/8300 https://www.cribfb.com/journal/index.php/ijibfr/article/view/272 http://www.bidabad.com/doc/alm-english.pdf https://www.cribfb.com/journal/index.php/ijibm/article/view/260 http://www.bidabad.com/doc/rastin-bank-rcm-en.pdf http://ibtra.com/pdf/journal/v9_n4_article2.pdf http://www.bidabad.com/doc/pls-base-en.pdf http://www.bidabad.com/doc/jfs-paper-en.pdf http://ibtra.com/pdf/journal/v12_n1_article2.pdf http://www.bidabad.com/doc/mfs-paper-en.pdf http://ibtra.com/pdf/journal/v10_n1_article3.pdf https://www.cribfb.com/journal/index.php/ijibfr/article/view/267 http://www.bidabad.com/doc/ifs-paper-en.pdf http://www.bidabad.com/doc/rfs-paper-en.pdf http://ibtra.com/pdf/journal/v10_n2_article2.pdf https://www.cribfb.com/journal/index.php/ijibfr/article/view/266 http://www.bidabad.com/doc/bfs-paper-en.pdf http://www.bidabad.com/doc/rps-paper-en.pdf http://www.bidabad.com/doc/rps-paper-en.pdf http://ibtra.com/pdf/journal/v11_n2_article3.pdf http://www.bidabad.com/doc/rst-paper-en.pdf http://ibtra.com/pdf/journal/v11_n1_article1.pdf http://www.ccsenet.org/journal/index.php/ijef/article/download/11665/8300 copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 1; 2019 49 bidabad, bijan, m allahyarifard, m sherafati, rastin partnership accounting part i: general procedure, journal of islamic accounting and business research, 2019. https://doi.org/10.1108/jiabr-04-2016-0049 copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). https://doi.org/10.1108/jiabr-04-2016-0049 copyright © cc-by-nc 2020, cribfb | amfbr american finance & banking review; vol. 5, no. 1; 2020 issn 2576-1226 e-issn 2576-1234 published by centre for research on islamic banking & finance and business, usa 50 do monetary policy instruments influence capital market returns in nigeria? udochukwu godfrey ogbonna phd senior lecturer department of management science rhema university, aba, nigeria e-mail: kellyogbo2004@yahoo.com chukwu agwu ejem phd senior lecturer department of banking and finance abia state university, uturu, nigeria e-mail: ecjah71@yahoo.com abstract this study concisely examined the relationship between monetary policy variables and performance of the nigerian capital market, analyzed with appropriate econometric tools. after the analysis, the outputs revealed the following; the entire monetary policy variables employed only monetary policy rate has significant relationship with the performance of the capital market in nigeria. it was also found that the previous information about the all share index has the capacity to predict future returns in capital market in nigeria. on this note, the researchers are of the opinion to embark on prompt disclosure of the daily all share indexes by regulatory authorities, thereby refurbishing the efficiency of the nigeria capital market. it is also suggested to adopt alternative means of disclosure apart from the national television stations and national daily newspapers because of our technological know-how in nigeria. keywords: capital market, monetary policy, ardl, nigeria. 1. introduction in broad terms, beside the service function, the central bank of nigeria (cbn) is saddled with monetary and development functions qua cbn decree no. 24 of 1991. on the monetary function the cbn in conjunction with the federal ministry of finance is statutorily obliged to advise the federal government of nigeria on suitable monetary policy. the essence of the collaboration is to harmonize monetary and fiscal policy to ensure the stability of the economy. on its development function, the cbn is a promoter of national economic development through, not limited to promoting the growth of financial institutions; power house of every nation and accelerator of a rapidly industrializing economy. an integral part of the financial system is the capital market. the capital market makes long term loans available to economic agents. it can also be recalled from foundations of finance that, the capital market comprises a number of institutions and intermediaries that facilitate the flow of fund to deficit units from the surplus units of the economy. as such developed capital market should be is sufficiently large and liquid, with inherent diverse market capitalization and exhibit enough linkage to the performance of the real economic sector (onoh, 2002; kamal, 2013). the analysis and transmission of monetary policy is aimed at facilitating the design of a suitable macroeconomic policy framework that triggers sustainable economic growth, domestic stability and external balance. a good number of instruments are employed in the design of macroeconomic policy. an indispensable role of monetary authorities qua central bank is to exercise a firm control over money supply, generally considered the nerve centre of the economy. it is worthy to note that good control over money supply is only feasible through information obtained from monetary analysis. the central bank must however sufficiently equip for monetary data collection, analysis, storage and retrieval for use when and where necessary. for investors, keeping abreast of changes in the monetary policy would strengthen their knowledge in measuring the intrinsic value of common shares, thereby advert mispricing (onoh, 2007; echekoba, ananwude and lateef, 2017). the global economic meltdown of 2007/2008 was a huge challenge to the cbn, hence had to tighten her seat belt on appropriate policy measure(s) to tackle such intractable hydra headed global mayhem. the incidence aroused the consciousness of finance, economic and political scholars to ascertain the role cbn played amidst the global economic catastrophes that averted the doom days prophesied by many analysts. these interventions were prominent in the money and capital markets. economic and financial literatures are awash with empirical studies on the relationship between central bank monetary policy mailto:ecjah71@yahoo.com copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 51 measures and capital market even before, and after the global crisis. though these studies presented mixed findings. most of the scholars are of the view that monetary policy variables have significant impact on stock market performance index (aliyu, 2009; godwin 2010; ajie and nenbee, 2010; okpara, 2010; aliyu, 2010; octavio, martin and george, 2011; babaak, navid, shabriar and rozar, 2012; ahmed and igbinovia, 2013; aliyu, 2013; yosino, 2014; nwakoby and alajekwu, 2016; onyeke, 2016; adekunle, alalade and okulenu, 2016; nkoro and uko, 2016; barakat, elgazzar and hanafy, 2016; bissoon, seetanah, bhattubabajee, gopy-ramdhany and seetah, 2016). others disagreed that monetary policy variables have significant impact on stock market performance (hasan and javed, 2009; abaenewe and ndugbu, 2012; rifat, 2015; onyeke, 2016). in the same vein, investors are also eager to know the happenings in the capital market, as well as the relationship between monetary policy and capital market. this has a theoretical underpinning; fama, in his efficient market hypothesis (emh) awakened the consciousness of investors to know all the necessary or relevant information concerning their investment. in addition, issues regarding profit maximization and the macroeconomic variables which might lead to an abnormal profit (supernatural earning). this succinctly informed investors that stock price really mirror images of reactions from monetary policy variables and other macroeconomic variables (fama, 1981). despite the plethora of empirical studies found on the subject matter, the relationship between monetary policy and capital market cannot easily be delineated in practice. this is due to incessant fluctuations in the prices of stock in the nigeria capital market notwithstanding the timely interventions of the regulatory authorities. this actually has incited the researchers to empirically add to existing body of knowledge by unearthing if capital market performance responds appropriately to the monetary policy variables in nigeria. however, the subsequent sections of this study are decomposed as follows; section two takes care of review of theoretical and empirical literature; section three is all about materials and methods; section four analyses and interprets the data, whereas section five addresses conclusion and recommendations for further studies. 2. literature review 2.1 theoretical literature from fundamental approach, there have been controversy among finance and economic scholars on how monetary policy influence stock price. on one side that restrictive monetary policy, it leads to lower stock prices, while on the side expansionary monetary policy, it leads to higher stock prices. researchers also are of the opinion that changes in monetary policy have the capacity to predict direction of the stock market. taking a clue from friedman’s money demand function, origin of the relationship between money supply, interest rates and stock prices; any increase in interest rates qua contraction or restrictive monetary policy offers investors the opportunity to raise funds, the equity market exclusively. in order to enhance the demand for investors stock, the price will fall to a level that will be attractive to an investor at least in the short run, perhaps through public offers (friedman, 1956; waud, 1970; mbutor 2007). an important concept underlying investment analysis is the idea of efficient capital market. from the dimension of investor, it is necessary to an efficient capital market to ensure that an investor is involved in a fair game, whereas from economic point of view, the efficient capital market is the essential vehicle for optimal allocation of resources. the efficient market hypothesis (emh), also called random walk theory (kendall, 1953), is the consideration that the equity value of a listed firm reflects all data regarding the business value. that means the market is efficient when stock prices instantaneously reflect supposed-to-know or available information in the market. “efficient market” was presented in 1965 by eugene fama. he suggested that stocks always trade at fair value. this makes it impossible for investors to buy undervalued stocks or to sell stocks at overestimated prices. a market is efficient if prices adjust rapidly and, on average, without bias to new info. thus, there isn’t a reason to believe that prices are excessively high or low (fama, 1970; brealey and myers, 2003; fisher and jordan, 2005; ibenta, 2005; ross, westerfield, jaffe and jodan, 2009; bhalla, 2011). 2.2 empirical literature as already identified, numerous empirical literature are available on the issue of monetary policy variables and capital market performance both in the developed, developing and emerging markets. previously noted are the mixed outputs in the empirical investigations. for instance, ajie and nenbee (2010) applied co-integration and error correction modeling (ecm) to x-ray if there is relationship between monetary policy and stock prices in the nigerian stock exchange market. money supply and interest rate were used as monetary policy variables on stock prices with time series data from 1986 to 2008. the output showed that money supply and interest rate have short run significant effect on stock prices. applying the generalized autoregressive conditional heteroscedasticity (garch) model, aliyu (2010) examined the impact of inflation on stock market returns and volatility, evidence from nigeria and ghana monthly data from 1998 to 2010. the result of the study revealed as follows; that in nigeria that bad news exerts more adverse effect on stock market volatility than good news of the same magnitude; while a strong opposite case holds for ghana. again, inflation rate has significant effect on stock market volatility in the nigeria and ghana. copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 52 employing augmented dickey fuller unit root test and cointegration test, vector error correction model and the forecast error decomposition analysis. okpara (2010) investigated the effect of monetary policy on the nigerian stock market returns between 1985 and 2006 using the two stage least squared method on a set of simultaneous equations on stock market return proxied by all share index with monetary policy variables (treasury bill rate, interest rate and monetary policy rate). the study revealed that stock market returns in nigeria respond significantly on monetary policy. with threshold regression model, cointegration test and an error correction model, chen & wu (2013) looked at the relationship between interest rate and stock prices. threshold regression model found that before and after a nonlinear relationship exists between interest rates and the stock index, also that stock index prices are significantly and positively related to the interest rates. the cointegration test and an error correction model revealed that there is a significant cointegration relationship before and after central banks cut interest rates. rifat (2015) engaged johansen co integration test, vector error correction, and vector autoregressive model to examine the relationship between monetary policy tools (inflation, real output, money supply, exchange rate) and stock market returns in bangladesh. the study showed that there is no significant relationship between monetary policy variables and stock market returns. barakat, elgazzar and hanafy (2016) used data spanning from january 1998 to january 2014 to investigate the relationship between the stock market and macroeconomic factors in two emerging economies of egypt and tunisia employing adf, johansson cointegration, var and granger causality tests. the results of the study found a causal relationship in egypt between market index and consumer price index (cpi), exchange rate, money supply, and interest rate. for tunisia the same result was applicable except for cpi that had no causal relationship with the market index. furthermore, it was found that the four macroeconomic variables are co-integrated with the stock market in both countries. employing simple and multiple regressions, adekunle etal (2016) investigated effect of macroeconomic pricing variables (interest rate, inflation rate, and exchange rate) on capital market growth (all share index). the result found that interest rates have an unfavorable effect on capital market growth. also that inflation rate and exchange rate insignificantly exert on capital market. a negative relationship was also found between interest rate and all share index. onyeke (2016) investigated the impact of monetary policy on stock returns in nigeria over a monthly time period covering january 2003 to june 2014. the explanatory variables employed are consumer price index, inter-bank rate, open buyback, treasury bill rate, and exchange rate while the all share index is the dependent variable. the dynamic interactions among the variables are based on variance decompositions and impulse response functions generated from the var. the estimated results revealed that monetary policy variables did not have a significant impact on the prices of stock in nigerian equity market. using johansen co-integration, ols and granger causality tests, nwakoby and alajekwu (2016) tried to unearth the effect of monetary policies(monetary policy rate, treasury bill rate, lending interest rate, liquidity ratio and deposit rate) on stock market volume performance (all share index) in nigeria from 1986 and 2013. first the result revealed that there is long run relationship between monetary policy and stock market performance. again, monetary policy was found to influence the stock market, though causality test found that monetary policy cannot influence stock market performance, instead stock market performance has influenced the direction of monetary policy via lending and deposit rates. with garch (1, 1) models, nkoro and uko (2016) examined the relationship between exchange rate and inflation volatility and stock prices volatility in nigeria and found a negative relationship between stock market prices volatility and exchange rate and inflation volatility in nigeria. bissoon etal (2016) studied the impact of monetary policies on stock markets with a panel data from five open countries from 2004 to 2014. in this study, interest rate and money supply stood for monetary policy regressed on mauritius, london, trinidad, australia and japan stock markets. the study employed random effect model for the panel regression and panel vector error correction model to know if short term and long term relationship exist between the variables. thereafter, it was found that a negative relationship exist between interest rate and stock return and a direct link between money supply and stock return. the output showed that both in the short run and long run monetary variables explain changes in stock return. applying mainly the autoregressive distributive lag (ardl), echekoba, ananwude and lateef (2017) examined effect of monetary policy tools on performance of the nigerian capital market. the monetary policy engaged are monetary policy rate, cash reserve ratio, liquidity ratio and loan to deposit ratio on the performance of the nigerian capital market. the results of the analysis revealed that nigerian capital market performance is not significantly affected by monetary policy announcement by the central bank of nigeria instead monetary policy rate that is significantly influenced by performance of the capital market. echekoba, okaro, ananwude and akuesodo (2018) employed ordinary least square (ols) regression technique and causality analysis to investigate the effect of monetary policy on the performance of nigerian capital market with time series data from 1986 to 2016. it was found that monetary policy rate negatively and significantly relate with capital market performance, whereas cash reserve ratio has positive and significant impact on performance of the capital market. nwokoye and otu (2018) used cointegration and vector error correction modelling (vecm) to examine if monetary authorities can stabilize the stock market and reduce its volatility culminating to examination of impact of monetary policy on copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 53 the development of the stock market in nigeria. the results found as follows; the cointegration test showed that there exist long run relationships among the variables of the model. vecm saw that monetary policy, through the growth rate of money supply has impacted positively and significantly on the development of the stock market in nigeria. again, prime lending rate has a negative impact on the development of the stock market in nigeria. osakwe and chukwunulu (2019) used ols regression technique to unravel if monetary policy (money supply, interest rate and exchange rate) influences stock market performance in nigeria from 1986 to 2015. the results of the study indicated that money supply and exchange rate have positive and significant effect on stock market price movement whereas interest rate has insignificant negative effect on stock market price movement. 3. method of study 3.1 sample data collection this study obtained annual data from the central bank of nigeria (cbn), nigerian stock exchange (nse) annual report books from 1989 to 2018 for capital market return as performance index proxied by all share index (asi) as dependent variables, while the independent variable is monetary policy variables (monetary policy rates (mpr), cash reserve ratio (crr), liquidity ratio (ldr) and savings deposit rate (sdr)). 3.2 trend analysis of data this estimation of the model specified in this study started with trend analysis of data. the time series plot of the data is shown in figure i below. the figures below indicated that all the variables recorded period of peaks and troughs suggesting nonstationarity of the variables as expected. 0 10,000 20,000 30,000 40,000 50,000 1990 1995 2000 2005 2010 2015 asi 5 10 15 20 25 30 1990 1995 2000 2005 2010 2015 mpr 0 4 8 12 16 20 24 28 1990 1995 2000 2005 2010 2015 crr 20 30 40 50 60 70 1990 1995 2000 2005 2010 2015 ldr 0 4 8 12 16 20 1990 1995 2000 2005 2010 2015 sdr figure 1. trend analysis of asi, mpr, crr, ldr and sdr copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 54 3.3 techniques to examine presence of multicollinearity, the correlation matrix is engaged in this study and ordinary least square (ols) technique to examine and determine the global utility of the specified model. to determine the stationarity of the data obtained, the augmented dickey fuller (adf) unit root test is employed. to estimate the model, the autoregressive distributive lags (ardl) is engaged. 3.4 model specification commencing with functional specification as seen below; stock market performance = f (monetary policy variables) (1) all share index= f (monetary policy rates, cash reserve ratio, liquidity ratio, savings deposit rate) (2) asi = f (mpr, crr, ldr, sdr) (3) next is the explicit form; asi = α0+ α1asi t-1 + α 2mpr + α 3mpr t-1+ α 4crr + α 5crr t-1 + α 6ldr + α 7ldr t-1 + α 8sdr + α 9sdr t-1 + et-1 (4) asi = α0+α1nlogasit-1+α2nlogmpr+α3nlogmprt-1+α4nlogcrr+α5nlogcrrt-1+α6nlogldr+ α7nlogldr t-1 + α8nlogsdr + α 9nlogsdr t-1 + et-1 (5) where et-1 are stochastic terms 3.5 operational form (apriori expectation) α1, α2, α3, and α4 are coefficient of mpr, crr, ldr, and sdr respectively. it is expected that monetary variables influence capital market returns both ways. 4. results and analysis next is descriptive statistical analysis. 4.1 description of variables table 1 below is a summary of statistics that describe the distributional features of all the data. the capital market has average price index of 17208.87, with 13.88%, 9.37%, 40.12% and 6.71% of mpr, crr, ldr and sdr respectively. asi, ldr and sdr exhibited kurtosis lower than 3 indicating platykurtic distributions while mpr and crr showed kurtosis greater than 3, suggesting a leptokurtic distribution. at 5% significant level jarque-bera p-value for asi, crr and ldr are 0.3937, 0.0531 and 0.4173 respectively; an evidence of normal distribution, whereas mpr and sdr recorded 0.0319 and 0.0460 indicating abnormal distribution. table 1. descriptive statistics for asi, mpr, crr, ldr and sdr asi mpr crr ldr sdr mean 17208.87 13.88133 9.373333 40.12667 6.711333 median 17702.59 13.50000 8.150000 40.10000 4.140000 maximum 45908.88 26.00000 27.50000 64.10000 18.80000 minimum 325.3000 6.130000 1.000000 25.00000 1.410000 std. dev. 13692.81 3.865720 6.891621 10.79955 5.318112 skewness 0.459073 0.711373 1.067086 0.425798 1.092443 kurtosis 2.194921 4.866871 3.375811 2.179709 2.613412 jarque-bera 1.863932 6.886764 5.869901 1.747618 6.153972 probability 0.393779 0.031956 0.053133 0.417359 0.046098 sum 516266.0 416.4400 281.2000 1203.800 201.3400 sum sq. dev. 5.44e+09 433.3699 1377.339 3382.279 820.1871 authors’ computation output using e-view 10. copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 55 4.2 global utility examination and determination in finametric analysis, determination of global utility or usefulness of the specified models gives a research confidence to making inference that can be referred for policy making. to achieve this, the researchers used correlation matrix and ordinary least square (ols) as shown below. 4.2.1 multicolinearity test table 2 below depicts the correlation matrix of the variables employed. the correlations between asi, mpr, crr, ldr and sdr are from -0.730474 to 0.635569; suggesting no linear correlation. hence, multicollinearity is not a concern in this model. table 2. correlation matrix variables asi mpr crr ldr sdr asi 1.000000 -0.601275 0.357605 -0.402143 -0.730474 mpr -0.601275 1.000000 0.072084 0.415718 0.635569 crr 0.357605 0.072084 1.000000 -0.177207 -0.376283 ldr -0.402143 0.415718 -0.177207 1.000000 0.118386 sdr -0.730474 0.635569 -0.376283 0.118386 1.000000 authors’ computation output using e-view 10. 4.2.2 ordinary least square (ols) method table 3 is an output of the ordinary least square (ols) estimate for the relationship between monetary policy and capital market return. though other indexes are satisfied both durbin-watson statistics is 0.970034, suggesting autocorrelation is found. this is an uncomfortable posture for further analysis and policy formulation, therefore ignored and subjected to stationarity test to choose an appropriate method for model estimation. table 3. ordinary least square (ols) method dependent variable: lnasi method: least squares variable coefficient std. error t-statistic prob. lnmpr -1.992927 0.793792 -2.510642 0.0189 lncrr 0.626251 0.194299 3.223131 0.0035 lnldr 0.425481 0.499423 0.851944 0.4023 lnsdr -1.061547 0.269908 -3.932994 0.0006 c 13.28905 1.699087 7.821284 0.0000 r-squared 0.835014 f-statistic 31.63196 adjusted r-squared 0.808616 prob(f-statistic) 0.000000 durbin-watson stat 0.970034 authors’ computation output using e-view 10. 4.3 stationarity/unit root test here, the researchers employed augmented dickey fuller (adf) unit root test as depicted below; table 4 below shows the stationary test for asi, mpr, crr, ldr and sdr variables. the results show mpr, crr, ldr and sdr are difference once to be stationary or integrated at order one, while asi is stationary at level. the variables have different orders of integration, justifying the adoption of ardl technique. copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 56 table 4. adf unit test variables lag sci adf statistic critical values remarks with prob. value 5% 10% stationarity lnasi 7 -3.280648 (0.0253) -2.967767 -2.622989 @1(0) lnmpr 7 -6.183067 (0.0000) -2.971853 -2.625121 @1(1) lncrr 7 -4.908116 (0.0005) -2.971853 -2.625121 @1(1) lnldr 7 -5.748665 (0.0001) -2.971853 -2.625121 @1(1) lsdr 7 -5.206266 (0.0002) -2.971853 -2.625121 @1(1) authors’ computation output using e-view 10. the researchers having certified adoption autoregressive distributive lag (ardl) for estimation of the specified model then moved to model selection using akaike information criterion (aic) as shown below in figure 2 below; 4.4 model selection figure 2 below depicts ardl model selection based on akaike information criterion (aic). information criteria select models that minimize their values. from figure 1 below, the best model, according to aic, is an ardl (1, 2, 0, 0, 1). this implies that a model that includes lagged value of the dependent variables as an additional regressor is the best description of researchers’ data. .32 .34 .36 .38 .40 .42 .44 .46 .48 ar dl (1 , 2 , 0 , 0 , 1 ) ar dl (1 , 2 , 1 , 0 , 1 ) ar dl (1 , 2 , 0 , 0 , 0 ) ar dl (1 , 2 , 0 , 0 , 2 ) ar dl (2 , 2 , 0 , 0 , 1 ) ar dl (1 , 2 , 0 , 1 , 1 ) ar dl (1 , 2 , 1 , 0 , 2 ) ar dl (2 , 2 , 1 , 0 , 1 ) ar dl (1 , 2 , 2 , 0 , 1 ) ar dl (1 , 2 , 1 , 1 , 1 ) ar dl (1 , 2 , 1 , 0 , 0 ) ar dl (1 , 0 , 0 , 0 , 0 ) ar dl (1 , 0 , 0 , 0 , 1 ) ar dl (2 , 2 , 0 , 0 , 0 ) ar dl (2 , 2 , 0 , 1 , 1 ) ar dl (1 , 2 , 0 , 1 , 0 ) ar dl (1 , 0 , 0 , 1 , 0 ) ar dl (2 , 2 , 0 , 0 , 2 ) ar dl (1 , 0 , 0 , 1 , 1 ) ar dl (1 , 2 , 0 , 1 , 2 ) akaike information criteria (top 20 models) figure 2. model selection based on aic authors’ computation output using e-view 10. the researchers now commence estimation of the models with ardl, aimed at proffering dynamic solution to the static problem of time series. this is shown in table 5 below. 4.5 model estimation and results having confirmed the preliminary finametric statistical test, the researchers confidently proceeded to estimating the relationship between stock market performance (asi) and monetary policy variables (mpr, crr, ldr and sdr) in nigeria with ardl framework. table 5 below found that asi has p-value of 0.0000 indicating that asi reinforces itself or is autoregressive. it is statistically confirmed evidence showing that asi in the past can predict future returns in capital market in nigeria. it was found that mpr has coefficient of 0.724611 with p-value of 0.0256 at lag 2 indicating that mpr has positive and significant copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 57 relationship with asi, while other monetary policy variables have insignificant relationship with asi. the adjusted r-square is 0.949880 revealing that the estimated ardl (1, 2, 0, 0, 1) model is moderately fitted, with the explanatory variable jointly accounting for 94.9% of total variation of asi. the probability of f-statistic is 0.000000, evidence that the estimated model is highly significant. durbin-watson statistics (dw) is 1.682484 suggesting absence of autocorrelation. table 5. ardl estimation results dependent variable: lnasi method: ardl model selection method: akaike info criterion (aic) dynamic regressors (2 lags, automatic): lnmpr lncrr lnldr lnsdr selected model: ardl(1, 2, 0, 0, 1) variable coefficient std. error t-statistic prob.* lnasi(-1) 0.852353 0.056070 15.20145 0.0000 lnmpr -0.158215 0.326985 -0.483859 0.6337 lnmpr(-1) -0.081640 0.329247 -0.247961 0.8067 lnmpr(-2) 0.724611 0.300541 2.411018 0.0256 lncrr 0.035349 0.089174 0.396401 0.6960 lnldr 0.143261 0.268741 0.533081 0.5999 lnsdr 0.144891 0.302112 0.479593 0.6367 lnsdr(-1) -0.353063 0.221791 -1.591870 0.1271 r-squared 0.962874 durbin-watson stat 1.682484 adjusted r-squared 0.949880 authors’ computation output using e-view 10. 4.5.1 test of long run relationships and cointegration between monetary policy variables and capital market to examining if there is long run relationship in the model, table 6 summarizes the output for long run effect and cointegration of the dependent and independent variables. mpr has p-value of 0.0256, the result confirms that mpr significantly relate with asi both in the short run and long run. table 6 also shows the ardl bound cointegration.. from the bound test, it can be seen that the f-statistics is 4.902550, which is greater than all the critical values at 1(0) and 1(1) bound at 1%, 5% and 10%. these reject the null hypothesis of no levels of relationship. with this result the researchers have sufficient evidence to declare a cointegration between capital market performance proxied by all share index (asi) and monetary policy variables (monetary policy rates (mpr), cash reserve ratio (crr), liquidity ratio (ldr) and savings deposit rate (sdr)) in nigeria within the scope of this study. table 6. ardl long run form and bounds test dependent variable: d(lnasi) selected model: ardl(1, 2, 0, 0, 1) long run test variable coefficient std. error t-statistic prob. lnasi(-1)* -0.147647 0.056070 -2.633241 0.0159 lnmpr(-1) 0.484756 0.560427 0.864977 0.3973 lncrr** 0.035349 0.089174 0.396401 0.6960 lnldr** 0.143261 0.268741 0.533081 0.5999 lnsdr(-1) -0.208172 0.228098 -0.912642 0.3723 d(lnmpr) -0.158215 0.326985 -0.483859 0.6337 d(lnmpr(-1)) -0.724611 0.300541 -2.411018 0.0256 d(lnsdr) 0.144891 0.302112 0.479593 0.6367 ec = lnasi (3.2832*lnmpr + 0.2394*lncrr + 0.9703*lnldr 1.4099 *lnsdr ) copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 58 f-bounds test null hypothesis: no levels relationship test statistic value signif. i(0) i(1) f-statistic 4.902550 10% 1.9 3.01 k 4 5% 2.26 3.48 2.5% 2.62 3.9 1% 3.07 4.44 4.5.2 correction short run error test table 7 below revealed that error correction equation, cointeq(-1) has expected negative sign of -0.147647 and p-value of 0.0000 suggesting the model is statistically significant. it can also be adduced that 14.7% of errors from the equilibrium can be corrected in the next period, and speed of adjustment is 14.7%. table 7. ardl error correction regression ardl error correction regression dependent variable: d(lnasi) selected model: ardl(1, 2, 0, 0, 1) variable coefficient std. error t-statistic prob. d(lnmpr) -0.158215 0.198721 -0.796166 0.4353 d(lnmpr(-1)) -0.724611 0.207990 -3.483876 0.0023 d(lnsdr) 0.144891 0.181716 0.797348 0.4346 cointeq(-1)* -0.147647 0.027223 -5.423587 0.0000 authors’ computation output using e-view 10. next is to run some residual diagnostic test; normality test, serial correlation test and heteroscedasticity test as seen tables 8, 9 and 10 below; 4.6 residual diagnostic test 4.6.1 normality test from table 88 below, it is seen that jarque-bera statistic is 0.6348817 with pvalue of 0.728033 clear evidence of normal distribution. table 9. normality distribution 0 1 2 3 4 5 6 7 8 9 -0.5 -0.4 -0.3 -0.2 -0.1 0.0 0.1 0.2 0.3 0.4 0.5 series: residuals sample 1991 2018 observations 28 mean 0.001765 median 0.041867 maximum 0.403183 minimum -0.496786 std. dev. 0.218765 skewness -0.366121 kurtosis 2.910837 jarque-bera 0.634817 probability 0.728033 authors’ computation output using e-view 10. copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 59 4.6.2 serial correlation test and heteroscedasticity test the table 9 below shows that heteroscedasticity test: arch f-statistic has p-value of 0.30888, suggesting no presence heteroscedasticity in the model. also, table 10 depicting breusch-godfrey serial correlation lm tests with f-statistic p-value of 0.4594, which shows of non-rejection of the null hypothesis, an indication of absence of serial correlation. table 9. heteroscedasticity heteroskedasticity test: arch f-statistic 1.079507 prob. f(1,25) 0.3088 obs*rsquared 1.117609 prob. chisquare(1) 0.2904 table 10. serial correlation tests breusch-godfrey serial correlation lm test: f-statistic 0.570331 prob. f(1,19) 0.4594 obs*r-squared 0.815994 prob. chisquare(1) 0.3664 authors’ computation output using e-view 10. 4.7 causality relationship from the table 11 below, asi granger cause mpr (f-statasi = 3.23061; probasi= 0.0580, significant at 10%), a unidirectional causality between asi and mpr. whereas, crr. ldr and sdr have no traceable causal relationship with asi since their pvalues are greater than the significant levels of 5% and 10%. table 11. pairwise granger causality test null hypothesis: obs f-statistic prob. mpr does not granger cause asi 28 0.08726 0.9167 asi does not granger cause mpr 3.23061 0.0580 crr does not granger cause asi 28 2.16887 0.1371 asi does not granger cause crr 0.53241 0.5943 ldr does not granger cause asi 28 0.11887 0.8885 asi does not granger cause ldr 2.16953 0.1370 sdr does not granger cause asi 28 2.51592 0.1028 asi does not granger cause sdr 0.01519 0.9849 authors’ computation output using e-view 10. 5. concluding remarks the concern on whether monetary policy tools could influence the performance of the nigerian capital market with suitable statistical tools made the following remarkable findings: that all the monetary policy variables employed in this study; only monetary policy rate has significant relationship with the performance of the capital market in nigeria. the veracity is not in doubt because economic and finance scholars have already confirmed that the efficacy of the monetary policy transmission from cbn is mainly conspicuous in the money market, mostly deposit money banks (onoh, 2007). this output collaborate the findings of okpara (2010) and echekoba etal, 2017, 2018, also with the fundamental hypothesis reviewed in the theoretical literature. it was all found that the previous information about the all share index has the capacity to predict future returns in capital market in nigeria. this makes the market efficient by adopting the efficient market hypothesis reviewed in this study. on this note, the researchers are of the opinion to embark on prompt disclosure of the daily all share indexes by regulatory authorities, thereby refurbishing the efficiency of the nigeria capital market. it is also suggested to adopt alternative means of disclosure apart from the national television stations and national daily newspapers because of our technological know-how in nigeria. again, having confirmed that monetary policy rate has significant relationship with the performance of the capital market in nigeria, the researchers are of the opinion that central bank of nigeria should revisit the issue of mpr rates and copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 60 grant a special mpr to commercial banks in relation to margin loans which must be applied mandatorily in the capital market to further boost the capital market performance. references abaenewe, z. c. & ndugbu, m. o. 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(2011). monetary policy and its impact on stock market liquidity: evidence from the euro zone. international journal of development and economic sustainability, 6(4), 2950. copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 61 okpara, g. c. (2010). monetary policy and stock market returns: evidence from nigeria. journal of economics, 1(1), 13-21. onoh, j. k. (2002). dynamics of money, banking and finance in nigeria: an emerging market. aba: astra meridian publishers. onoh, j.k. (2007). dimension of nigeria’s monetary and fiscal policies-domestic and external. lagos:astra meridian publishers. onyeka, c. e. (2016). impact of monetary policy on stock returns in nigeria. middle-east journal of scientific research, 24(5), 1778-1787. osakwe, a. c & chukwunulu, j. i. (2019). monetary policy and stock market performance in nigeria. epra international journal of research and development, 4(5), 58-65. rifat, a. (2015). impact of monetary policy on stock price: evidence from bangladesh. journal of investment and management, 4(5), 273-284. ross, s. a., westerfield, r. w., jaffe, j. & jordan, b. d. (2009). modern financial management (8th edition). new delhi: mcgraw hill. waud, r, (1970). public interpretation of federal reserve discount rate changes: evidence on the announcement effect. econometrica, 38, 231-250. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). copyright © cc-by-nc 2020, cribfb | amfbr american finance & banking review; vol. 5, no. 1; 2020 issn 2576-1226 e-issn 2576-1234 published by centre for research on islamic banking & finance and business, usa 17 nigeria’s fiscal performance: exploring the role of exchange rate fisayo fagbemi independent researcher, nigeria e-mail: fisay4real@yahoo.com olufemi solomon olatunde graduate student of the department of economics obafemi awolowo university, ile-ife, nigeria e-mail: olufemi.olatunde@gmail.com abstract the paper offers empirical justifications for the instrumentality of external sector in influencing the fiscal position of a country through the exchange rate. in the study, ardl bounds test approach to cointegration analysis is adopted to examine the long run and short run relationship between exchange rate and fiscal performance in nigeria. the validity of the findings is based on time series data between 1981 and 2017. the emerging evidence reveals that the exchange rate movement has a substantial influence on the fiscal performance, as there exists a significant adverse relationship between exchange rate and fiscal deficit in the long run as well as in the short run, while the association between exchange rate and public debt is found to be significantly positive in both periods. empirical elucidations posit that an appreciation of the exchange rate could lead to decreasing fiscal deficits. however, the exchange rate appreciation might not induce a reduction in public debt, as it could stimulate demand for loanable funds by the government, although such effect could be mitigated through strategic investment policy and subsidized funding schemes to aid domestic production. given that fiscal performance is considerably driven or constrained by the exchange rate movement, the study suggests that developing a strategic framework for ensuring a realistic exchange rate and the mitigation of regular fluctuations or correcting inappropriate exchange rate is crucial. keywords: exchange rate, fiscal deficit, public debt, fiscal performance, ardl, nigeria. 1. introduction over the years, the significant role of the exchange rate in any economy has been pretty uniform. many economic analysts widely emphasize that macroeconomic aggregates (such as inflation rate, fiscal deficits and economic growth) often trend with the exchange rate movement (bacha, 1990; miteza, 2006; sek, ooi, & ismail, 2012). exchange rate, which is the price of the domestic currency in relation to foreign currencies, directly influences domestic price level, trading activities, allocation of resources, real income and investment decision. while an increasing divergence in exchange rates can create “a complex scheme of implicit subsidies and distorting national accounting,” ensuring the stability of the exchange rates is critical for attaining substantial improvements in economic performance (premium times, 2018). the formidable bedrock of all macroeconomic variables is keeping the exchange rates stable. hence, in most developing countries, including nigeria, one of the most central measures of growth enhancement is the drive (policy initiatives) towards mitigating regular exchange rate fluctuations or correcting for its inappropriateness. following the weak state of nigeria’s economy between 1982 and 1985, various forms of floating regimes have been adopted since the introduction of the structural adjustment programme (sap) in 1986. compared to the fixed/pegged regimes of 1960s to mid-1980s, floating exchange rate has been viewed to have a considerable salutary influence due to the responsiveness of the rates to the foreign exchange market (nwankwo, 1980). the persistent depreciation and instability of the naira exchange rate (figure 1) necessitated the perennial efforts by the monetary authorities to stipulate the standard requirements for the economic and political conditions underpinning the structural evolution of the economy. despite these policy stances, exchange rates have been frequently depreciating and unstable vis-à-vis the fledgling fiscal state, which has remained unabated. for instance, although slightly better than 2017 (2.8 %), nigeria's consolidated fiscal balance recorded a deficit equal to 2.7 % of its nominal gdp in dec 2018, while nigeria's national government debt stood at 63.3 billion (usd) in mar 2018 (ceic, 2018). copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 18 figure 1. trend of monthly average official exchange rate of the naira and fiscal deficit (% of gdp) source: authors’ estimates based on data from central bank of nigeria (cbn), 2018. in 2017, nigeria’s fiscal deficit was put at 4.3%. this deteriorating fiscal position has been mainly ascribed to the increased eurobond issuances which has led to the growth in the public debt stock between the first half of 2017 and the first half of 2018 (proshare, 2018). accordingly, ensuing arguments have pointed to the substantial role exchange rate plays in most developing economies, as some scholars stressed that there exists a relationship between the exchange rate movements and macroeconomic aggregates (hausmann, pritchett, & rodrik, 2005; rodrik, 2008). however, most of these studies center on the effect of exchange rate on economic growth, in spite of its potential influence on fiscal performance. most studies on nigeria also follow the same direction, as they largely espouse to the significance of floating exchange rate in the quest for sustainable growth (akinlo & odusola, 2003; asher, 2012; obansa, okoroafor, aluko, & millicent, 2013). limited consideration given to the relationship between exchange rate and public sector performance has given rise to the growing uncertainty and agitation on the tenability of any veritable link between these economic indicators regarding nigeria. in a nutshell, addressing the question as to whether nigerian fiscal performance is considerably driven or constrained by the exchange rate movement is critical for ascertaining the possibility of fiscal modification through such effect. the importance of sufficient empirical evidence on this crucial fiscal issue cannot be overemphasized. hence, assessing the effect of exchange rate on fiscal performance exclusively in nigeria’s context is paramount to identify whether it substantially influences the country’s fiscal position, which has been profoundly fundamental in public discourse. as a consequence, the study’s main objective is to examine the long –run and short run relationship between exchange rate and fiscal deficits in nigeria using auto-regressive distributed lag (ardl) bounds test approach to cointegration analysis with a view to offering a reasonable framework for ensuring a realistic exchange rate that could enhance fiscal sustainability. the rest of the paper is sectioned as follows: section two centers on theoretical and empirical review. section three deals with methodology. section four contains the presentation and discussion of results, while the last section (five) gives the concluding remarks. 2. literature review 2.1theoretical discussion elucidations on the interplay between external sector and internal economic performance are based on divergent interrelated theories. for instance, portfolio crowding –out hypothesis underscores the relationship between exchange rate and fiscal performance. this theory stresses that a huge budget deficit (public debt) incurred by the government will have direct effect on assets prices, and in turn lowers the level of aggregate demand in the economy (friedman, 1978). on the other hand, in a closed -50 0 50 100 150 200 250 300 350 fiscal deficit (% of gdp) monthly average official exchange rate of the naira copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 19 economy, this hypothesis could mean a significant positive association between budget deficits and real interest rates. in fleming (1962); mundell (1961) studies, both assert that in a flexible exchange rate regime system, a fiscal policy framework funded through a huge debt obligation is completely crowded-out in an open economy operating under static exchange rate expectation that is usually accompanied with fixed asset prices. in contrast, following barro (1974), the taxpayers’ expectation will usually alter the level of savings. this implies that if the taxpayers perceive that current deficits ought to be paid through future taxes, their savings will be increased by an amount equal to the current value of next generation (future) tax liabilities due to present deficits1. in view of the branch linked to political issues, it is posited that given the inflationary implication for the fiscal authority, fiscal discipline can be better promoted by flexible regimes (tornell & velasco, 1994). the inter-temporal distribution of the costs associated with regimes often accounts for the difference in fiscal behavior. following the balance of payments restrained growth model, thirlwall (1979) opines that the growth rate of any economy is constrained by the balance of payments, as no country can grow faster than the consistent level of the balance of payments equilibrium, unless it can fund ever-increasing deficits, which is commonly perceived to be somewhat difficult. the model is anchored on the assumption that the long-term effect of export performance and import behavior on the economy shapes growth rate. corroborating this assertion, ferreira, canuto, and lima (2003) argue that the main components of aggregate demand are export growth and investment growth in import substitution, which have a positive influence on the growth of gdp, as well as to neutralize balance of payments constraints, the relevance of this model is linked to the role of export performance and import level in balance of payments and exchange rates. hence, the significant effect on the economy, and in particular macroeconomic stability. however, the antagonist of the theory states that it fails to take into account the fiscal gap, savings-investment gap and monetary implication of the balance of payments (darku, 2013). in another way, calvo, izquierdo, and talvi (2003) posit that heavily dollarized countries in terms of liabilities can be wrecked by the disturbances associated with abrupt stops that mostly accompanied by a substantial rise in the real exchange rate. they argue that this could turn seemingly sustainable fiscal and corporate sector states into unsustainable positions. also, according to hausmann and panizza (2003), balance sheets can be exposed to grave risks connected with a positive feedback between large real exchange rate depreciations and perceptions of public debt or deficits by the exchange rate mismatches linked with liability dollarization. on the contrary, the crux of the argument is that explicit government liabilities have been centered on the currency composition. the point of emphasis is on the increasing expected fiscal vulnerability of the state (country) following the presence of external currency denominated liabilities that gives rise to the cost of debt service or an adverse real shock resulting to a real depreciation. 2.2 empirical evidence in the wake of fledgling fiscal state in most developing economies, there has been burgeoning interest in identifying the relationship between exchange rate and fiscal performance in countries. many scholars have evaluated the cause of fiscal outcomes in diverse ways, yet probable inconsistencies in policy measures across economies. empirical evidence indicates that external debt and exchange rate crises are strongly related in emerging economies (guyot, lagoarde-segot, & neaime, 2014; neaime & gaysset, 2017; neaime, gaysset, & badra, 2018). these studies mainly center on the impact of public debt on exchange rate. on the other hand, expositions on the link between fiscal deficit and external sector are mixed. in the work of piersanti (2000) using the granger-sims causality technique, while focusing on seventeen oecd countries over the period 1970-1997, indicates that external sector performance is adversely related with budget deficits. studies that also support this line of argument are; al-khedair (1996); islam (1998). however, based on the sample of developing countries with data between 1950 and 1994, khalid and teo (1999), as measured by the current account deficit, establish that no relationship exists between fiscal deficit and external sector performance. bachman (1992) findings are also consistent with this view. further evidence on this mechanism remains unsettled (kim & roubini, 2008; ravn, schmitt-grohé, & uribe, 2012). the effect of real exchange rate on the aggregate output has been extensively explored. mitchell and pentecost (2001) using selected transition economies in the central or eastern european countries reveal that devaluations are contractionary in the long run as well as in the short run, while real appreciation could have a positive, adverse or neutral effect on output in different economies in the long run. in another study, devaluations are viewed to be contractionary in the long run (miteza, 2006). on the contrary, bahmani-oskooee and kutan (2008) posit that the effect of real depreciation on output may be contractionary, expansionary or neutral in different countries in the short run whereas it has no long-term effect on the level of output. bahmani-oskooee and miteza (2003) stress that the net effect of real depreciation on aggregate output is somewhat uncertain depending on the countries under study, sample periods, methodology employed, model specifications, and other factors. with the adoption of a model wherein the relationship of foreign public debt with budget deficit, current account deficit and exchange rate depreciation is empirically explored for debt trap countries (dtc) and non debt trap countries 1 in the author’s further study, the underlying literature draws from the barro (1990) model, in essence, the optimal size of the state is determined by barro such that public spending that maximizes the rate of economic growth. the issue of budget deficit allocated to public expenditure is not taken into account in the simple growth model. thus, it is intuitively crucial to propose a model that incorporates foreign sector destined to enhance fiscal performance. copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 20 (ndtc) of asian pacific development countries, alam and taib (2013) reveal that external public debt are positively related with these variables. nonetheless, in dtc and ndtc, the strength of the relationship varies. these studies focus on economies that have attributes that could be differed from nigerian features. thus, their findings might not be tenable in the country’s context. working on the effect of exchange rate on debt, debt services and public debt management in thailand, patrawimolporn (2007), with the use of simple differentiation approach, shows that exchange rate volatility affects debt services. the author argument is premised on the assumption that a significant amount of debt services is saved when the exchange rate is adjusted. regarding nigeria, ijeoma (2013), using linear regression model assesses the effect of debt variables (external debt stock and external debt service payment) on selected macroeconomic variables, including gross domestic product and gross capital formation. findings confirm a significant association between nigerian debt service payment and gross fixed capital formation, while exchange rate fluctuations have an influence on external debt shock, external debt service payment and economic growth. by and large, most studies on internal – external economic performance nexus center on the effect of fiscal policy shocks or public spending on real exchange rates and the trade balance. basically, they focus on the response of the real exchange rate to government spending (monacelli & perotti, 2010; kim, 2015; auerbach & gorodnichenko, 2016). more specifically, ubok-udom (1999) examines the issues surrounding the implementation of sap in nigeria between 1971 and 1995. the author posits that the efficacy of currency depreciation in producing desirable impacts is restricted by the peculiar features of nigeria’s economy. in another study, david, umeh and ameh (2010) assess the effect of exchange rate fluctuations on nigerian manufacturing industry using multiple regression technique. they find an adverse correlation between exchange rate volatility and manufacturing sector performance. other studies on nigeria show that exchange rate has a strong influence on gross domestic product (gdp) (asher, 2012; azeez, kolapo & ajayi, 2012; obansa et al., 2013). however, with the use of error correction model (ecm), adebiyi and dauda (2009) argue that trade liberalization does not promote the growth of the industrial sector in nigeria, neither enhances the stability of the exchange rate market over the period of 1970 to 2006. also, lawal, atunde, ahmed, and asaleye. (2016) using the autoregressive distributed lag (ardl) indicate that exchange rate fluctuations have no effect on economic growth in the long run between 2003 and 2013. in light of these findings, systematic analysis on the effect of exchange rate on fiscal performance is limited in the context of nigeria. thus, this study is mainly driven by the scarcely reported empirical evidence coupled with the significance of offering comprehensive analysis essential for broadening the literature. 3. data and methodology 3.1 data underscoring the significance of the study’s objective, time series data spanning through 1981 to 2017 are employed. the choice of scope is basically shaped by the drive to cover the floating exchange rate regimes in nigeria. in the study, two fiscal indicators (as dependent variables) are used: fiscal deficit (% of gdp) and public debt (% of gdp). while fiscal deficit is defined as the excess of public spending over fiscal revenue, public debt represents the ratio of a country’s public debt to its gross domestic product (gdp). other variables (explanatory variables) used include: exchange rate, which is defined as the price of the domestic currency in relation to foreign currencies (in particular n/us$1.00); inflation rate, consumer prices (annual %), trade openness (the sum of exports and imports of goods and services measured as a share of gdp); and nominal gdp which represents the economic growth. stemming from theoretical stance, in the process of linking exchange rate to fiscal performance , the inclusion of economic growth, inflation and trade openness are central (thirlwall,1979; tornell & velasco, 1994; miteza, 2006). the data for the study were obtained from central bank of nigeria and national bureau of statistics (nbs) statistical bulletin (2018). 3.2 methodology following the work of bacha (1990); mwega, mwangi, and olewe-ochilo (1994) on the theoretical link between macroeconomic and fiscal variables, the functional relationship between exchange rate and fiscal performance is specified as: 𝑍𝑡 = 𝑓(𝐸𝑋𝐻𝑡, 𝐺𝐷𝑃𝑡, 𝐼𝑁𝐹𝑡,𝑇𝑅𝑃𝑡) (1) z represents fiscal performance (fiscal deficits and public debt) where t is the time period. exh indicates the exchange rate. economic growth is represented by gdp. inf is defined as the inflation, while trade openness is given as trp. with a view to avoid the problem of reverse causality and non-stationarity of variables, autoregressive distributed lag (ardl) model which is a dynamic framework is adopted. the key significance of this approach is that it can simultaneously account for long run and short run relationship within the same framework irrespective of the order of integration of the variables, that is, whether there is combination of i(1) and i(0) or variables are i(1) or i(0). moreover, the adoption of ardl technique is influenced by its advantage over other estimation methods such as engle and granger (1987); johansen and juselius copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 21 (1990); johansen (1991); gregory and hansen (1996) that are mainly applicable when the variables in the model are of the same order of integration, besides their requirement for large data size for ensuring the validity and robustness of results. overall, ardl procedure is suitable for small sample size, which implies that it can circumvent the problem of biasness that often arises from small sample size (pesaran & shin, 1997; narayan, 2005). hence, the ardl model for the study is stated as: ∆𝑙𝑛𝑍𝑡 = 𝛿𝑜 + ∑ 𝛿1 𝑝 𝑖=1 ∆𝑙𝑛𝑍𝑡−𝑖 + ∑ 𝛿2 𝑝 𝑖=0 ∆𝐸𝑋𝐻𝑡−𝑖 + ∑ 𝛿3∆𝑙𝑛 𝑝 𝑖=0 𝐺𝐷𝑃𝑡−𝑖 + ∑ 𝛿4 𝑝 𝑖=0 ∆𝐼𝑁𝐹𝑡−𝑖 + ∑ 𝛿5 𝑝 𝑖=0 ∆𝑙𝑛𝑇𝑅𝑃𝑡−𝑖 + 𝜃1𝑙𝑛𝑍𝑡−1 + 𝜃2𝐸𝑋𝐻𝑡−1 + 𝜃3𝑙𝑛𝐺𝐷𝑃𝑡−1 + 𝜃4𝐼𝑁𝐹𝑡−1 𝜃5𝑙𝑛 𝑇𝑅𝑃𝑡−1 + 𝜇𝑡 (2) the log of the variables is represented by 𝑙𝑛. 𝜇 is the white noise error while ∆ is defined as the difference operator. the cointegration relationship between the dependent variable (𝑍) and the explanatory variables can be traced by placing restriction on all estimated parameters of lagged level variables to be equal to zero. that is, null hypothesis; 𝐻𝑜 : 𝜃𝑖 = 0 (where 𝑖 = 1, 2, ……., 5), against the alternative hypothesis: 𝐻1: 𝜃𝑖 ≠ 0. in this case, the null hypothesis implies that there is no long run relationship among the variables, whereas the alternative hypothesis states that there is existence of long run relationship among the variables. decision rule: if the computed f – statistics is less than lower bound critical value, we do not reject the null hypothesis of no integration. but the null hypothesis is rejected, if computed f – statistics is greater than upper bound critical value; indicating that steady state equilibrium is said to exist among the estimated variables. however, if the computed value falls within the bound, the decision will be termed inconclusive. when there is presence of long run relationship among the variables, error correction representation is established (pesaran, shin, & smith, 2001). hence, the eq. (2) in the ardl form of the error correction model can be stated as: ∆𝑙𝑛𝑍𝑡 = 𝛿𝑜 + ∑ 𝛿1 𝑝 𝑖=1 ∆𝑙𝑛𝑍𝑡−𝑖 + ∑ 𝛿2 𝑝 𝑖=0 ∆𝐸𝑋𝐻𝑡−𝑖 + ∑ 𝛿3∆𝑙𝑛 𝑝 𝑖=0 𝐺𝐷𝑃𝑡−𝑖 + ∑ 𝛿4 𝑝 𝑖=0 ∆𝐼𝑁𝐹𝑡−𝑖 + ∑ 𝛿5 𝑝 𝑖=0 ∆𝑙𝑛𝑇𝑅𝑃𝑡−𝑖 + 𝛾𝐸𝑅𝑡−1 + 𝜇𝑡 (3) where 𝐸𝑅 represents the residuals that obtained from estimated eq. (2), while 𝛾 is the speed of adjustment parameter. the parameter of error correction term (𝐸𝑅) in the model, after a short-run shock, implies the speed of adjustment back to long-run equilibrium. 4. empirical results and discussion it is worth mentioning that both augmented dickey fuller (adf) and phillip peron (pp) are applied to ascertain the level of stationarity of the series. in table 1, the results presented reveal that none of the estimated variables is found to be 1(2) or above. the order of integration is confirmed to be i (0) and i (1). this implies that autoregressive distributed lag (ardl) model is mostly applicable in this study. thus, the computed f-statistic, based on pesaran et al. (2001), is compared with upper and lower critical bounds as presented in table 2. accordingly, the null hypothesis of no cointegration with clear specification was rejected at 1% significant level in both models — (i) & (ii). the stability of the models is tested through cumulative sum of recursive residuals (cusum) and cumulative sum of squares of recursive residuals (cusumsq). in figure 2, the test establishes that in each model, the ardl model parameters are stable, as cusum and cusumsq lie within the critical boundaries. other tests (diagnostic tests) were also checked for in order to ensure that the results obtained are valid and robust. in the study, model (i) represents the inclusion of fiscal deficit as fiscal performance indicator, whereas model (ii) is taken for public debt. table 1. augmented dickey fuller (adf) and phillips-perron (pp) unit root test results variable augmented dickey fuller phillips-perron level first difference level first difference fiscal deficit -2.92 (0)* -3.38 (2)** 2.99** -8.26*** public debt -1.22 (1) -4.54 (0)*** -1.62 -4.54** exchange rate 1.28 (1) -3.30 (0)** 1.83 -3.30** gdp -0.79 (0) -3.15 (0)** -0.64 -3.07** copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 22 inflation -2.85 (0)* -3.71 (3)** -2.73 -9.40*** trade openness -2.06 (2) -6.19 (0)*** -1.26 -6.23*** ***, **, & * indicates the level of significance at 1%, 5% & 10% respectively. figures in bracket represent lag length selected by aic criterion. the pp length was selected by newey-west band width. table 2. bounds f-tests for cointegration relationship model fstatistics level of significance lower critical value upper critical value asymptotic (n =1000) finite sample (n = 35) asymptotic (n =1000) finite sample (n = 35) model (i) (2, 2, 1, 0, 4) 8.12*** 1% 5% 10% 3.74 2.86 2.45 4.59 3.28 2.70 5.06 4.01 3.52 6.37 4.63 3.90 model (ii) (4, 4, 1, 3, 4) 12.95*** *** represents statistical significance at 1% level. beginning with the main variable of interest, in table 3, exchange rate is statistically significant and adversely related to fiscal deficits, suggesting that exchange rate has a strong influence on fiscal performance. the adverse relationship between exchange rate and fiscal deficits could mean that an appreciation of the domestic currency against the foreign currencies would lead to decreasing fiscal deficits, and thus strengthens the fiscal position in the long run. this relationship holds in the short run as well in the same model (i). the empirical postulation that macroeconomic aggregates (including fiscal performance) often trend with exchange rate movement is consolidated by these findings (bacha, 1990; sek et al., 2012). on the other hand, an appreciation of the exchange rate may not lead to a reduction in public debt, as exchange rate is found to be positively and significantly associated with public debt in the long run as well in the short run in model (ii). a plausible explanation for these findings is that when the exchange rate appreciates, it will cause the demand for the country’s produce (exports) in abroad to fall as they become more expensive in foreign countries. this could lead to a decrease in fiscal revenue. hence, the government would need to borrow more to run its budget, which might turn seemingly sustainable fiscal and corporate sector states into unsustainable positions. in contrast, a weaker exchange rate may cause the demand for loanable funds to reduce. these expositions are in line with the assertion of calvo et al. (2003); hausmann and panizza (2003). regarding the effect of the economic growth, gdp is significant in the long run as well as in the short run in model (i), but it is only significant in the short run in model (ii). the insignificance in this context could be warranted by the constrained effect of pervasive injudicious use of economic resources in the public sector. decreasing fiscal deficits and public debt reduction could be better enhanced when a sustained increase in gdp is properly channeled and efficiently utilized (proshare, 2018). moreover, in model (i) & (ii), the estimated parameters of inflation are positive and significant in the long run as well in the short run. these results marry up with the conjecture that high inflation usually increases the size of public spending, and in turn undermines the likelihood of reducing fiscal deficits (talvi & vegh, 2005). on the effect of trade openness, the estimated coefficients are significant in both long run and short run, but only significant in the short run in model (ii). this endorses the relevance of a liberal trade regime to enhance fiscal performance. nonetheless, compared to import, the low level of export could account for the insignificance in the long run. it points to the fact that overdependence on import vis-à-vis weak domestic production may lead to sustained shortfalls in fiscal revenue, and as a consequence, poor fiscal performance. table 3. ardl long run and short run estimates variable fiscal deficit model (i) public debt model (ii) long run short run long run short run constant -3.74** [-5.06] 1.60** [3.00] exchange rate -0.09** [-2.43] -0.04*** [-5.37] 0.06** [2.25] 0.01*** [5.87] gdp 10.92** [2.44] 12.11*** [6.38] -10.20 [-1.14] -3.89** [-3.09] copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 23 inflation 0.10** [2.14] 0.21* [1.80] 0.15* [1.73] 0.02** [2.65] trade openness -6.42** [-2.23] 0.70* [1.88] 8.23 [1.25] 0.66** [3.40] er (-1) -0.39*** [-4.89] -0.31*** [-12.93] diagnostic tests d.w 2.03 2.15 ramsey reset test 0.12 0.84 normality test 0.20 0.19 serial correlation 0.25 0.72 *, ** & *** indicate statistical significance at 10%, 5% and 1% respectively, whilst figures in (-) are t-values. furthermore, the estimated parameters of the error correction term (𝐸𝑅𝑡−1) depict the speed of adjustment of fiscal performance to shocks in exogenous variables across models. the negative sign and statistical significance of the estimated coefficients of error correction term (ect), in both model (i) & (ii), imply a stable process of adjustment to the long run equilibrium, and the respective values of the estimates confirm the validity of the error–correction term (𝐸𝑅𝑡−1). in general, ardl procedure demonstrates that exchange rate has a strong effect on nigerian fiscal performance. it is noted that the country’s fiscal position is vulnerable to exchange rate movement. the divergence in exchange rates could constrain fiscal measures, and thereby engendering resistance to the development of sustainable fiscal position. model (i) — fiscal deficit -15 -10 -5 0 5 10 15 2000 2002 2004 2006 2008 2010 2012 2014 2016 cusum 5% significance -0.4 0.0 0.4 0.8 1.2 1.6 2000 2002 2004 2006 2008 2010 2012 2014 2016 cusum of squares 5% significance model (ii) — public debt -6 -4 -2 0 2 4 6 2016 2017 cusum 5% significance 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 2016 2017 cusum of squares 5% significance figure 2. cusum (left) & cusumsq (right) copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 24 5. concluding remarks the paper offers empirical justifications for the instrumentality of external sector in influencing the fiscal position of a country through the exchange rate. in the study, ardl procedure is adopted to examine the long run and short run relationship between exchange rate and fiscal performance in nigeria. the validity of the findings is based on time series data between 1981 and 2017. given the main goal of the study, two fiscal measures are employed (fiscal deficit and public debt). the analysis is conducted with the use of different models on the respective fiscal indicators to ensure the validity and robustness of results or outcomes across specifications and in consistence with the theoretical postulations. the emerging evidence arising from the findings reveals that, in nigeria’s context, the exchange rate movement has a substantial influence on the fiscal performance. the key conclusion reached is that there exists a significant adverse relationship between exchange rate and fiscal deficit in the long run as well as in short run, while the association between exchange rate and public debt is found to be significantly positive in both periods. the empirical elucidations suggest that an appreciation of the exchange rate could result to decreasing fiscal deficits, and thus engenders improved fiscal position in the long run. however, the exchange rate appreciation might not induce a reduction in public debt, as such could lead to a significant decrease in demand for the country’s produce (exports) in abroad. this may have negative effect on the fiscal revenue, and in turn stimulates demand for loanable funds by the government, although such effect could be mitigated through strategic investment policy and subsidized funding schemes to boost domestic production. in a nutshell, further evidence posits that decreasing fiscal deficits and public debt reduction could be better enhanced when a sustained increase in gdp is properly channeled and judiciously utilized. on the other hand, continued overdependence on import vis-à-vis weak domestic production may lead to sustained shortfalls in fiscal revenue, and thus undermines fiscal performance potential. following the assertion that fiscal performance is considerably driven or constrained by the exchange rate movement, developing a strategic framework for ensuring a realistic exchange rate and the mitigation of regular fluctuations or correcting inappropriate exchange rate is crucial. references adebiyi, m.a & dauda, r.o. 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(1999). currency depreciation and domestic output growth in nigeria: 1971-1995. the nigerian journal of economics and social studies, 41(1), 31-44. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). american finance & banking review 7(1) (2022), 1-6 1 finance & banking review afbr vol 7 no 1 (2022) p-issn 2576-1226 e-issn 2576-1234 available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/amfbr published by cribfb, usa the nexus of trade liberalization and unemployment in the context of afghanistan abdul wahid naderi (a)1 ata mohammad nikzad (b) eralappa thippeswamy (c) jayavantha nayak (d) (a) ph.d., research scholar, department of pg studies in economics, university college, mangalore-575001, india; e-mail: wahidnaderi5105@gmail.com (b) ph.d., research scholar, mangalore university, mangalore, d.k, karnataka, india; e-mail: ajmer.nikzad@gmail.com (c) ph.d.; associate professor, department of economics, field marshal k m ,cariappa college madikeri, karnataka, india; e-mail: ethippeswamy@yahoo.com (d) ph.d.; associate professor & coordinator, department of pg studies in economics, university college, mangalore – 575001, india; e-mail: jayavantha_nayak@yahoo.com a r t i c l e i n f o article history: received: 30th june 2022 accepted: 29th august 2022 online publication: 4th september 2022 keywords: unemployment, trade liberalization afghanistan jel classification codes: e24, f1 a b s t r a c t despite this, there have been conducted outnumber of studies on the relationship between trade and unemployment around the world. the purpose of this study is to investigate the nexus between trade and unemployment, and whether trade creates or destroys jobs in the context of afghanistan. to answer this question, the data was gathered from various sources including the world bank, and the national statistics and information authority of afghanistan, from 1990 to 2018. using adf (augmented dicky fuller) stationarity test, ardl bound test, and causality test. the empirical evidence showed only shortrun consequences in one variable which is gross domestic products per capita. further, the study employed diagnostic and stability tests to understand the fitness of the model. hence, this study surely answers the questions and shows that there is no link between trade and unemployment. finally, the study evinced only the influence of gdp per capita on unemployment. besides, there is a unilateral causality running from gdp per capita toward unemployment and also the study analyzed that gdp per capita has a negative and significant impact on unemployment in the short run. eventually, the study suggests that the government needs to reform policy in regard to tackling unemployment through domestic investment. © 2022 by the authors. licensee cribfb, usa. this article is an open access article distributed under the terms and conditions of the creative commons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0/). introduction globalization is the act of interaction and integration, which has different economic, political, and social aspects. the increase in interactions and integrations causes growth in international trade and cultural exchange as well. meanwhile, foreign trade is one of the main components of globalization. the most debatable issue over the impact of trade on unemployment has always been discussed, whether the trade is the creator or the destroyer of jobs “does opening up to international trade create or destroy jobs?” (dividson et al., 1999; felbermayr, 2011). in this logic, there are many controversial studies that show the contrast between different authors. for instance, brecher (1974) and helpman (2010) found a positive relationship between trade and unemployment. in another study, a negative relationship between both trade and unemployment has been shown (felbermayr, 2011). therefore, there is a huge public concern about the effect of trade and unemployment, some argue that free trade can increase the export market, which leads to a higher demand for the products, expanding domestic production, and finally creating more jobs. afghanistan has suffered 4 decades of civil unrest which affected various government and private sectors, the unfortunate situation of the country raised the lack of jobs, stagnation of industries, and increased unemployment (ashrafi & kalaiah, 2021). a lot of people especially the young generation lost their jobs. according to the world bank, the unemployment rate was increased by 11.20 percent in 2020 in afghanistan. unemployment is one of the most socioeconomic complications for economists and social welfare. the international labour organization (ilo) defines 1corresponding author: orcid id: 0000-0001-8479-8715 © 2022 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/amfbr.v7i1.1793 to cite this article: naderi, a. w., nikzad, a. m., thippeswamy, e., & nayak, j. (2022). the nexus of trade liberalization and unemployment in the context of afghanistan. american finance & banking review, 7(1), 1-6. https://doi.org/10.46281/amfbr.v7i1.1793 mailto:ajmer.nikzad@gmail.com mailto:ethippeswamy@yahoo.com http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://orcid.org/0000-0001-8479-8715 https://doi.org/10.46281/amfbr.v7i1.1793 https://orcid.org/0000-0001-8479-8715 https://orcid.org/0000-0001-5948-0940 https://orcid.org/0000-0003-4540-0019 https://orcid.org/0000-0002-7430-2453 naderi et al., american finance & banking review 7(1) (2022), 1-6 2 “unemployment” as the number of people who are unemployed but available for doing work, including those who lost a job or voluntarily left work. thus, we tried to present the relationship between trade and unemployment, and the current study was undertaken to examine trade liberalization and unemployment in the context of afghanistan. literature review in this section, the review of research articles has been undertaken for understanding the concepts, objectives, and methodology adopted and the results of those studies. based on past research, it is possible to identify the research gap and hence the review of articles has been undertaken which is explained in this particular part of the study. there are numerous studies on the relationship between trade and unemployment, we try to go through both theoretical and empirical surveys. historically, the relationship between trade liberalization and unemployment was studied using the hecksher-ohlin and stolper-samuelson theorems. the h-o theorem predicts that countries will export goods produced with the rigorous that are abundantly available. many of the trade models consider full employment of labor and all factors at all times and, accordingly, there is no recognition of any effect of trade and employment. the four employment theories are minimum wage theory (brecher, 1974; davis, 1998), implicit contract theory matusz (1996), efficiency wage theory matusz (1996), and job search theory (davidson, martin, & matusz, 1999), (moore & ranjan 2005) incorporated with traditional models of (h-o and ricardo-viner). the latest theoretical developments presented two new forms of trade models-heterogeneity of firms (helpman & itskhoki, 2010; helpman, itskhoki, & redding, 2010; egger & kreickemeier, 2009) and offshoring or trade-in tasks (batra & beladi, 2010; mithra & ranjan, 2010; ranjan, 2012 & 2013). the result of these studies showed the contradictory, complex and vague relationship between trade and aggregate employment. hence, there is a need for empirical evaluation of how trade changes the level of equilibrium employment (davidson and matusz, 2004). most cases of empirical studies observed the impact of trade openness/trade liberalization. for example, felbermayr et al. (2011) empirically analyzed 20 organization for economic co-operation and development (oecd) and the result is based on the consequence of panel and cross-sectional data. this study showed that over the long term; larger trade openness is related to a lower structural rate. as a result, the investigation into the relationship between trade openness and unemployment in developing economies has yielded conflicting results. in their intensive study of malaysia, nanthakumar et al. (2011) found out that the increase in trade balance had negative granger non-causality effects on the severity of unemployment dynamics. thus, trade liberalization is capable of increasing aggregate productivity in several sectors. subsequently, the efficiency and performance of the economy raise the rate of labor utilization. alawin (2013) assessment of trade balance and unemployment in jordon, exploits quarterly data from 2000 to 2012. the findings of this study highlighted the lack of a long-run relationship between the balance of trade and the unemployment rate. according to these findings, the trade balance deficit causes unemployment in the short term and vice versa. kim and sun (2009) found that trade openness factors play a significant role in the labor market churning most industries like automobile, chemicals, and apparel sectors affected by the north american free trade agreement (nafta). the results of these studies are that trade openness reduces aggregate unemployment in the inflexible labor market and conversely increases aggregate unemployment in the inflexible labor market. hasan et al. (2012) studied the rate of unemployment and trade liberalization with the consideration of both urban and rural areas of the state. there was no sign of any decrease in the unemployment rate because of trade reform. on the other hand, trade openness declined the unemployment rate in urban areas. the findings of dutt et al. (2009) study for 90 developing countries even removing control variables is a negative result for trade openness and unemployment rate. in addition, they pointed out weak support for the hecksher-ohlin theorem. materials and methods the data required for this study was collected from various sources including world bank open data source, national statistics, and information authority which encompass from 1990 till 2018, moreover dependent variable in this study is unemployment which is explained by independent variables including trade openness, term of trade, capital formation, and gdp per capita income. variables used in this study unemployment: unemployment is the sum of the population involved in the labour force of a country which the labor force generally encompasses a population aged from 15-64, further the unemployment population is a layer of a society that is actively looking for employment opportunities. hence, this study analysis trade and its impact on unemployment. trade openness: measured as the sum of total imports and exports as a ratio of the gdp. further trade openness indicates the country’s involvement in global trade, (literature). terms of trade: measured as the percentage ratio of the export unit value indexes to the import unit value indexes, calculated relative to the base year 2000. in another word, the term of trade represents how much of a countries’ export unit can purchase units of import or export prices divided by import prices and multiplied by 100 (tot). domestic investment: this variable is proxied by real gross capital formation measured as a percent of the gdp, moreover capital formation is the accumulation or aggregate of net capital of a country during a year. (dominvs). naderi et al., american finance & banking review 7(1) (2022), 1-6 3 the study employed the ardl approach which is a proper model to estimate fewer data. further, the study is calculating the short-run and long-run relationship among variables through the ardl model. however, the bound ardl test is applicable on stationarity order i(0) level and stationarity order i(1) or first different and also can be employed on a mixture of both stationarity orders (level and first different). moreover, the ardl test can crash and gives misleading result when the stationarity order i(2) arises. therefore, to avoid the spurious result it’s necessary to check the unit root test. in addition, to find out the unit root test, the study used adf (augmented dicky fuller) stationarity test to point out the stationarity of the variables (ashrafi & kaliah, 2020). the result from adf (augmented dickey-fuller) test revealed that all the variables signalized at first difference stationarity order. therefore, it is fit to run the ardl test due to the small data size and stationarity at 1st difference. in addition, variables in the table are described as follows lun: unemployment, lgdpc: gross domestic products per capita, lop: openness, ltot: term of trade, lcf: capital formation. results and discussion ardl bound test the ardl test developed by pesaran et al. (1999) is a comprehensive test for different stationarity levels (level, first difference) as well as a small sample size. table 1. ardl bound test c 0.0106 0.0050 2.1141 0.0479 lun 1.5509 0.1751 5.6451 0.0000 lcf -0.0017 0.0042 -0.3518 0.7288 lgdpc -0.0001 0.00117 -2.3116 0.0322 lop -0.0156 0.0099 -0.3518 0.7644 ltot -0.0111 0.04568 -0.1852 0.8550 r-squared 0.7560 adjusted rsquared 0.6790 f-statistic 9.8164 f-probability 0.0000 durbinwatson stat 1.9017 test statistic value significant lower bound upper bound f-statistic 2.7604 10% 2.45 3.5 k 4 5% 2.88 4.01 2.5% 3.25 4.49 1% 3.74 5.06 source: authors computation using eviews11 the above table shows that the dependent variable: unemployment is positive and probable. hence, it indicates that the lagged period of unemployment, itself has a positive influence on the current period. besides, gdp per capita is negative, and probable it illustrated that gdp per capita is influencing unemployment negatively. further to understand the long-run association we apply the bound test. moreover, the result from the bound test and f-statistic is 2.77 and this value should be compared to the pesaran critical value of 5%. nevertheless, to find out about the exitance of the long-run relationship of variables we compare the f-statistic to the bound table: lower bound at 5% is 2.88 and the upper bound at 5% is 4.1. moreover, the guideline is, that if the f-statistic is greater than the upper bound then there is a long-run association among variables but if the f-statistic is lower than the lower bound then there is no long-run relationship among variables. thus, the result evinces that there is no long-run relationship among variables as per the guideline of the bound table. similarly, if the bound test ruled out the presence of a long-run relationship, then we continue with the ardl to find out the short-run causality relationship. table 3. ardl test variables coefficient std. error t-statistic prob. dun (-1) 0.9889 0.1751 5.6451 0.0000 dun (-2) -0.3053 0.1700 -1.7958 0.0884 dop -0.0030 0.0099 5.6451 0.7644 dgdpc -0.0270 0.0117 -2.3116 0.032 dcf -0.0015 0.0042 -0.3518 0.7288 dtot -0.0008 0.0045 -0.1852 0.8550 c 0.0106 0.0050 2.1141 0.0479 r-squared 0.7560 f-stat 9.8164 0.0000 durbin-watson stat 1.9017 source: authors computation using eviews11 naderi et al., american finance & banking review 7(1) (2022), 1-6 4 the table above shows the dynamic short run, in the short run only gross domestic product per capita has a negative and significant effect on unemployment. further, it revealed that there is a short-run causality running from gross domestic products per capita toward unemployment, and the result of table 3 indicated that if the gdp per capita changes by 0.01 units it changes unemployment by -0.02 units. moreover, the model passed the diagnostic and stability tests which have shown in tables4 and 5 and figures 1 and 2 respectively. the model is run against the serial correlation of (breusch-godfrey serial correlation lm test) to point out the exitance of serial correlation on the model. table 4. breusch-godfrey serial correlation lm test source: authors computation using eviews11 the result from the above table shows that there is no serial correlation in the model and as the probability value is more than 0.05 significant value then we accept the null hypothesis. moreover, the model run against heteroskedasticity test of breusch-pagan-godfrey to obtain the presence of homoskedasticity of variables table 5. heteroskedasticity test breusch-pagan-godfrey source: authors computation using eviews11 the result from the table-5 pointed out the existence of homoskedasticity, as the p-value is greater than 0.05 significant value. therefore, we accept the null hypothesis. similarly, the model tested against jarque-bera’s normality test and the result indicated that the p-value is greater than 0.05 and we accept null hypothesis that the data is normally distributed. the study plotted cusum and cusumq to see the stability of the model. figure 1. cusum test source: authors computation using eviews11 figure 2. cusumq test source: authors computation using eviews11 cusum and cusumq figures from the stability test indicated that the model is fit as in the figure it shows that cusum of squares and cusum is significant. similarly, the null hypothesis tells us that the model is not stable while the breusch-godfrey serial correlation lm test null hypothesis: no serial correlation at up to 2 lags f-statistic 1.9529 prob. 0.1724 obs r-squared 4.8577 prob. chi-square 0.0881 heteroskedasticity test breusch-pagan-godfrey null hypothesis: homoskedasticity f-statistic 1.1366 prob. f 0.3793 obs. r-squared 6.8672 prob. chi-squared 0.3333 scaled explained ss 2.5070 prob. chi-squared 0.8677 naderi et al., american finance & banking review 7(1) (2022), 1-6 5 residual test shows that the cusum and cusum of square are significant at 5%. thus, the model used in this study is stable. conclusions the article has referenced many studies that were carried out to understand the relationship between trade liberalization and unemployment around the world. hence, the purpose of this study focused on understanding the connection between trade liberalization and unemployment in afghanistan. data were gathered from various sources including world bank, national statistic, and information authority of afghanistan encompassed from 1990 to 2018. consequently, adf (augmented dicky fuller) stationarity test evinced the first-order stationarity of the data. similarly, ardl bound test depicted the absence of a long-run relationship and the presence of a short-run. further, the empirical evidence showed short-run consequences in one variable which is gross domestic products per capita. furthermore, the study pointed out that there is a unidirectional causality running from gdp per capita toward unemployment, and gdp per capita has indicated a negative and significant impact on unemployment in the short run. moreover, this study calculated the result and found that there is no relationship between trade and unemployment in afghanistan which neither rejects nor accepts the question raised “does opening up to international trade create or destroy jobs”. finally, the study suggested that the government needs to reform policy regarding tackle down unemployment through domestic investment. author contributions: conceptualization, a.w.n. and a.m.n.; methodology, a.w.n. and a.m.n.; software, a.m.n.; validation, a.w.n. and a.m.n.; formal analysis, a.w.n. and a.m.n.; investigation, a.w.n. and a.m.n.; resources, a.w.n.; data curation, a.w.n. and a.m.n.; writing – original draft preparation, a.w.n.; writing – review & editing, a.m.n.; visualization, a.m.n.; supervision, e.t., and j.n.; project administration, a.m.n.; funding acquisition, .w.n. and a.m.n. authors have read and agreed to the published version of the manuscript. institutional review board statement: ethical review and approval were waived for this study, due to that the research does not deal with vulnerable groups or sensitive issues. funding: the authors received no direct funding for this research. acknowledgments: n/a informed consent statement: informed consent was obtained from all subjects involved in the study. data availability statement: the data presented in this study are available on request from the corresponding author. the data are not publicly available due to restrictions. conflicts of interest: the authors declare no conflict of interest. references ashrafi, s. a. r., & kalaiah, v. 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(1999). pooled mean group estimation and dynamic heterogeneous panels. journal of the american statistical association, 94(446), 621–634. https://doi.org/10.1080/01621459.1999.10474156 publisher’s note: cribfb stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. © 2022 by the authors. licensee cribfb, usa. this article is an open access article distributed under the terms and conditions of the creative commons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0/). american finance & banking review (p-issn: 2576-1226; e-issn: 2576-1234) by cribfb is licensed under a creative commons attribution 4.0 international license. https://doi.org/10.2307/2527246 https://doi.org/10.1016/j.jinteco.2010.04.001 https://doi.org/10.1111/j.1468-0297.2005.00994.x https://doi.org/10.1002/jae.616 https://doi.org/10.1080/01621459.1999.10474156 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ copyright © cc-by-nc 2019, cribfb | amfbr american finance & banking review; vol. 4, no. 2; 2019 issn 2576-1226 e-issn 2576-1234 published by centre for research on islamic banking & finance and business, usa 11 usa income distribution counter-business-cyclical trend (estimating lorenz curve using continuous l1 norm estimation) bijan bidabad professor economics and chief economic advisor bank melli iran e-mail: bijan@bidabad.com abstract in this paper, the l1 norm of continuous functions and corresponding continuous estimation of regression parameters are defined. the continuous l1 norm estimation problems of linear one and two parameters models are solved. we proceed to use the functional form and parameters of the probability distribution function of income to exactly determine the l 1 norm approximation of the corresponding lorenz curve of the statistical population under consideration. u.s. economic data used to estimate income distribution. an interesting finding of these calculations is that the distribution of income obeys counter-wise business cycles fluctuations. this finding is a new area for research in the realm of the theory and application of income distribution and business cycles interrelationship. keywords: income distribution, lorenz curve, l1 norm statistics, business cycle jel: c63 1. introduction the skewness of income distribution is persistently exhibited for different populations and at different times. it is discussed that pearsonian family distributions are rival functions to explain income distribution. lorenz curve is a method to analyze the skew distributions. there is a relation between the area under the lorenz curve and the corresponding probability distribution function of the statistical population (see, kendall and stuart (1977)). that is, when the probability distribution function is known, we may find the corresponding gini index as the measure of inequality. estimation of the lorenz curve is confronted with some difficulties. for this estimation, we should define an appropriate functional form which can accept different curvatures (see, bidabad and bidabad (1989a,b)). there is another problem, that is , to create the necessary data set for estimating the corresponding parameters of the lorenz curve, a large amount of computation on raw sample income data is inevitable. obviously, these problems, despite their computational difficulties, make the significance of the estimated parameters poor (see, bidabad and bidabad (1989a,b)). to avoid this, we try to estimate the functional form of the lorenz curve by using continuous information. in this paper, we use the probability density function of population income to estimate the lorenz function parameters. the continuous l1 norm smoothing method, which will be developed for estimating the regression parameters, is used to solve this problem. however, we concentrate on two rival probability density functions of pareto and log-normal. since the former is simply integrable, there is no general problem to derive the corresponding lorenz function, and the function is uniquely derived. but in the latter case, the log-normal density function (which has better performance for full income range) than pareto distribution (which better fits to higher income range, (see, cramer (1973), singh and maddala (1976), salem and mount (1974)), is not integrable and we can not determine its corresponding lorenz function. in this regard, we should solve the problem by defining a general lorenz curve functional form and applying the l1 norm smoothing to estimate the corresponding parameters. in this paper, continuous l1 norm estimation is developed by using a similar method proposed in bidabad (1987a,88a,89a,b) for the discrete case. then the method is applied to the estimation of the lorenz curve functional forms which have been proposed by gupta (1984) and bidabad and bidabad (1989,92). in the end, we use our formulation to estimate gini index and kakwani length indices of inequality for the united states for the period of 1971-1990, based on the assumption that income is distributed log-normally. 2. l1 norm of continuous functions generally, lp norm of a function f(x) (see, rice and white (1964)) is defined by, ||f(x)||p = ∫ xεi (|f(x)|pdx)1/p (1) mailto:bijan@bidabad.com copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 2; 2019 12 where, "i" is a closed bounded set. the l1 norm of f(x) is simply written as, ||f(x)||1 = ∫ xεi |f(x)|dx (2) suppose that the non-stochastic function f(x,β) of "x", is combined with stochastic disturbance term "u" to form y(x) as follows, y(x) = f(x, β) + u (3) where, β is unknown parameters vector. rewriting u as the residual of y(x)-f(x,β), for l1 norm approximation of "β" we should find "β" vector such that the l1 norm of "u" is minimum. that is, min: s=||u||1=||y(x)-f(x,β)||1=∫ xεi |y(x)-f(x,β)|dx (4) β 3. linear one parameter l1 norm continuous smoothing redefine f(x,β) as βx and y(x) as the following linear function, y(x) = βx + u (5) where, "β" is a single (non-vector) parameter. expression (4) reduces to: min: s = ||u||1 = ||y(x)βx||1 = ∫ xεi |y(x)-f(x,β)|dx (6) β the discrete analog of (6) is solved by bidabad (1987a,88a,89a,b). in these papers, we proposed applying discrete and regular derivatives to the discrete problem by using a slack variable "t" as a point to distinguish negative and positive residuals. a similar approach is used here to minimize (6). to do so in this case, certain lipschitz conditions are imposed on the functions involved (see, usow (1967a)). rewrite (6) as follows, min: s = ∫ xεi |x||y(x)/x – β|dx (7) β for convenience, define "i" as a closed interval [0,1]. the procedure may be applied to other intervals with no major problem (see, usow (1967a), hobby and rice (1965), kripke and rivlin (1965)). to minimize this function, we should first remove the absolute value sign of the expression after the integral sign. since "x" belongs to closed interval "i", y(x) (which is a linear function of "x") and also y(x)/x are smooth and continuous. thus, since y(x)/x is uniformly increasing or decreasing function of "x", a value of tεi can be found to have the following properties, y(x)/x < β if x < t y(x)/x = β if x = t (8) y(x)/x > β if x > t value of the slack variable "t" actually is the border of negative and positive residuals. if the value of "t" were known, from (8) (middle equation), we could calculate the optimal value of "β" or inversely. but nor "t" neither "β" are known. to solve this problem, according to (8), we can rewrite (7) as two separate definite integrals with different upper and lower bounds. ⌠t ⌠1 min: s = ⌡0 |x| (y(x)/x β)dx +⌡t |x| (y(x)/x β)dx (9) β decomposition of (7) into (8) has been done by use of the slack variable "t". since both "β" and "t" are unknown, to solve (9), we partially differentiate it with respect to "t" and "β" variables. δs ⌠t ⌠1 ─── = ⌡0 |x|dx ⌡t |x|dx = 0 (10) δβ and using liebniz' rule to differentiate the integrals with respect to their variable bounds "t", yields, δs y(t) y(t) ─── = -|t| [─── β] |t| [─── β] = 0 (11) δt t t since "x" belongs to [0,1], equation (10) can be written as, ⌠t ⌠1 ⌡0 xdx ⌡t xdx = 0 (12) or, ½ t2 ½ + ½t2 = 0 (13) which yields, t = √2/2 (14) substitute for "t" in equation (11), yields, copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 2; 2019 13 y(√2/2) β = ───── (15) √2/2 remember that y(t) is function y(x) evaluated at x=t. value of "β" given by (15) is the optimal solution of (6). the above procedure actually is a generalization of laplace weighted median for the continuous case. before applying this procedure to the lorenz curve, let us develop the procedure for the two parameters linear model. 4. linear two parameters l1 norm continuous smoothing now, we try to apply the above technique to the linear two parameters model. rewrite (4) as, min: s=||u||1=||y(x)-α-βx||1=∫ xεi |y(x)-α-βx|dx (16) α,β where, "α" and "β" are two single (non-vector) unknown parameters and y(x) and "x" are as before. according to rice (1964c), let f(α*,β*,x) interpolates y(x) at the set of canonical points {xi;i=1,2}, if y(x) is such that y(x)-f(α*,β*,x) changes sign at these xi's and at no other points in [0,1], then f(α*,β*,x) is the best l1 norm approximation to y(x) (see also, usow (1967a)). with the help of this rule, if we denote these two points to t1 and t2 we can rewrite (16) for i=[0,1] as, ⌠t1 ⌠t2 ⌠1 s = ⌡0 [y(x)-α-βx]dx ⌡t1 [y(x)-α-βx]dx + ⌡t2 [y(x)-α-βx]dx (17) since t1 and t2 are also unknowns, we should minimize s with respect to α, β, t1 and t2. taking partial derivative of (17) using liebniz' rule with respect to these variables and equating them to zero, we will have, δs ⌠t1 ⌠t2 ⌠t1 ─── = ⌡0 dx + ⌡t1 dx ⌡t2 dx = 0 (18) δα δs ⌠t1 ⌠t2 ⌠t1 ─── = ⌡0 dx + ⌡t1 dx ⌡t2 dx = 0 (19) δβ δs ─── = 2[y(t1) -α-βt1] = 0 (20) δt1 δs ─── = 2[y(t2) -α βt2] = 0 (21) δt2 equations (18) through (21) may be solved simultaneously for α, β, t1 and t2. thus, we have the following system of equations, 2t2 2t1 1 = 0 (22) t2 2 t1 2 ½ = 0 (23) y(t1) α βt1 = 0 (24) y(t2) α βt2 = 0 (25) the solutions are, t1=1/4 (26) t2=3/4 (27) α = y(3/4)-(3/4)β = y(1/4)-(1/4)β (28) β = 2[y(3/4)-y(1/4)] (29) this procedure, similar to that of multiple regression model for discrete case may be expanded to include "m" unknown parameters which is not discussed here. some computational methods for solving the different cases of m parameters model are investigated by ptak (1958), rice and white (1964), rice (1964a,b,c,69,85), usow (1967a), lazarski (1975a,b,c,77) (see also, hobby and rice (1965), kripke and rivlin (1965), watson (1981)). now, let us have a look at lorenz curve and its proposed functional forms. 5. lorenz curve the lorenz curve for a random variable with probability density function f(v) may be defined as the ordered pair1, e(v|v ≤ v) (p(v|v ≤ v), ──────) vεr (30) 1 taguchi (1972a,b,c,73,81,83,87,88) multiplies the second element of (30) by p(v|v≤v) which is not correct; his definition of (31) is equivalent to ours. copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 2; 2019 14 e(v) where "p" and "e" stand for probability and expected value operators. for a continuous density function f(v), (30) can be written as, ⌠v ⌠v ⌡-∞ wf(w)dw (⌡-∞ f(w)dw, ────────) ≡ (x(v),y(x(v))) (31) ⌠+∞ ⌡-∞ wf(w)dw we denote (31) by (x(v),y(x(v))) where x(v) and y(x(v)) are its elements. therefore, "x" is a function which maps "v" to x(v) and "y" is a function which maps x(v) to y(x(v)). the function y(x(v)) is simply the lorenz curve function. in recent years some functional forms for the lorenz curve have been introduced. among different proposed functions, we use the forms of gupta (1984) and bidabad and bidabad (1989,92) which benefits from certain properties (see the papers for more explanations). gupta (1984) proposed the functional form, y=xax-1 a>1 (32) bidabad and bidabad (1989,92) suggest the following functional form: y=xbax-1 b≥ 1, a≥ 1 (33) to estimate the above functions by regular estimating method, we should gather discrete data from the statistical population, and manipulate them to construct relevant x and y vectors to estimate "a" of (32) or "a" and "b" of (33). if the probability distribution of income is known, instead of gathering discrete observations, we can estimate the lorenz curve by using the continuous l1 norm smoothing method for continuous functions. in the following section, we proceed to apply this method to estimate the parameters "a" of (32) and "a" and "b" of (33) by using the information of probability density function of income. 6. continuous l1 norm smoothing of lorenz curve to estimate the lorenz curve parameters when income probability density function is known, we cannot always take straightforward steps. when the probability density function is easily integrable, there is no major problem in advance. we can find the functional relationship between the two elements of (31) by simple mathematical derivation. but, when integrals of (31) are not obtainable, another procedure should be adopted. suppose that income of a society is distributed with probability density function f(w). this density function may be a skewed function such as pareto or log-normal, as follows f(w)=θkθw-θ-1, w,k>0, θ>0 (34) f(w)=[1/wσ√(2π)]exp{-[ln(w)-μ]2/2σ2}, wε(0,∞), με(-∞,+∞), σ>0 (35) these two distributions have been known as good candidates for presenting distribution of personal income. in the case of pareto density function of (34), we can simply derive the lorenz curve function as follows. let f(w) denote the pareto distribution function: f(w)=1-(k/w)θ (36) with mean equal to, e(w)= θk/(θ-1), θ>1 (37) if we find the function y as stated by (31) as a function of x, the lorenz function will be derived. now, proceed as follows. rearrange the terms of (31) as, ⌠v x(v) = ⌡-∞ f(w)dw (38) ⌠ tv y(x(v)) = [1/e(x)]⌡-∞ wf(w)dw (39) substitute pareto distribution function, x(v) = f(v) = 1-(k/v)θ (40) ⌠v y(x(v)) = [(θ-1)/θk]⌡k wθkθw-θ-1dw (41) or, y(x(v)) = 1-(k/v)θ-1 (42) now, by solving (40) for "v" and substituting in (42), the lorenz curve for pareto distribution is derived as, y = 1-(1-x)(θ-1)/θ (43) copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 2; 2019 15 as it was shown in the case of pareto distribution, formula of lorenz curve is easily obtained. but, if we select the log-normal density function (35), the procedure may not be the same. because the integral of log-normal function has not been derived yet. in the following pages, the l1 norm smoothing technique will be developed to estimate the parameters of given functional forms (32) and (33) by using the continuous probability density function. according to (30) and (31) independent and dependent variables of (32) and (33) may be written as, ⌠v x(v) = ⌡0 f(w)dw (44) ⌠v y(x(v)) = [1/e(x)] ⌡0 wf(w)dw (45) substitute (44) and (45) inside (32) and define random error term u as, ⌠v ⌠v ⌠v ⌡0 f(w)dw-1 [1/e(w)]⌡0 wf(w)dw = ⌡0 f(w)dw.a . eu (46) or briefly, y(x)=xax-1eu (47) similarly for the model (35), ⌠v ⌠v ⌠v b ⌡0 f(w)dw-1 [1/e(w)]⌡0 wf(w)dw={⌡0 f(w)dw} . a . eu (48) or briefly, y(x)=xbax-1eu (49) taking natural logarithm of (47) and (49), gives, ln y(x)=ln x + (x-1)ln a + u (50) ln y(x)=b.ln x + (x-1)ln a + u (51) with respect to properties of lorenz curve and probability density function of f(w) and equations (46) to (49), it is obvious that x belongs to the interval [0,1]. thus the l1 norm objective function for minimizing (50) or (51) is given by, ⌠1 min: s = ⌡0 |u|dx (52) now, let us deal with l1 norm estimation of "a" of lorenz curve functional form (32) (redefined by (50)). the corresponding l1 norm objective function will be, ⌠1 min: s = ⌡0 |ln y(x) ln x (x-1) ln a|dx (53) a or, ⌠1 min: s = ⌡0 |x-1||[ln y(x)-ln x]/(x-1) ln a|dx (54) a by a similar technique used by (9), we can rewrite (54) as, ⌠t ⌠1 min: s = ⌡0 |x-1|{[ln y(x)-ln x]/(x-1)-ln a}dx ⌡t |x-1|{[ln y(x)-ln x]/(x-1)-ln a}dx (55) a since, 0≤ x ≤ 1 we have, ⌠t ⌠1 min: s = ⌡0 [ln y(x) ln x (x-1) ln a]dx +⌡t [ln y(x) ln x (x-1) ln a]dx (56) a differentiate (56) partially with respect to "t" and "a" and equate them to zero; δs ⌠t ⌠1 −−−− = + ⌡0 [(x-1)/a]dx ut [(x-1)/a]dx = 0 (57) δa δs −−−− = 2[ln y(t) ln t (t-1)ln a] = 0 (58) δt copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 2; 2019 16 from equation (57), we have, t = 1±√2/2 (59) since "t" should belong to the interval [0,1], we accept, t = 1-√2/2 (60) substitute (60) in (58), and solve for "a", gives the l1 norm estimation for "a" equal to, 1-√2/2 a = [−−−−−−−−]√2 (61) y(1-√2/2) now, let us apply this procedure to another lorenz curve functional form of (33) (redefined by (51)). rewrite l1 norm objective function (52) for the model (51), ⌠1 min: s = ⌡0 |ln y(x) b ln x (x-1) ln a|dx (62) a,b or, ⌠1 min: s=⌡0 |x-1||[lny(x)]/(x-1)-(lnx)/(x-1)-lna|dx (63) a,b the objective function (63) by some changing on variables is similar to (16). thus, by a similar procedure to those of (17) through (29) we can write "s" as, ⌠t1 min: s = ⌡0 |x-1|{[lny(x)]/(x-1)-(lnx)/(x-1)-lna}dx a,b ⌠t2 ⌡t1|x-1|{[lny(x)]/(x-1)-(lnx)/(x-1)-lna}dx ⌠1 + ⌡t1|x-1|{[lny(x)]/(x-1)-(lnx)/(x-1)-lna}dx (64) since 0≤x≤1, then (64) reduces to, ⌠t1 ⌠t2 min: s = ⌡0 [ln y(x) b ln x (x-1) ln a]dx + ⌡t1 [ln y(x) b ln x (x-1) ln a]dx a,b ⌠1 ⌡t2 [ln y(x) b ln x (x-1) ln a]dx (65) differentiate "s" partially with respect to "a", "b", t1 and t2 and equate them to zero, δs 1 ⌠t1 ⌠t2 ⌠1 −−− = − [ ⌡0 (x-1)dx -⌡t1 (x-1)dx + ⌡t2 (x-1)dx ] = 0 (66) δa a δs ⌠t1 ⌠t2 ⌠1 −−−− = ⌡0 ln(x)dx ⌡t1 ln(x)dx + ⌡t2 ln(x)dx = 0 (67) δb δs −−−− = -2{ln[y(t1)] bln(t1) (t1-1)ln(a)} = 0 (68) δt1 δs −−−− = 2{ln[y(t2)] bln(t2) (t2-1)ln(a)} = 0 (69) δt2 the above system of simultaneous equations can be solved for the unknowns t1, t2, "a" and "b". equation (66) is reduced to, t1 2-t2 2-2(t1-t2)-1/2 = 0 (70) equation (67) can be written as, t1(ln t1-1) t2(ln t2-1) – 1/2 = 0 (71) calculate t1 from (70) as, t1 = 1 ±√ q (t2 2-2t2+3/2) (72) since 0st1s1, we accept, copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 2; 2019 17 t1 = 1 √ (t2 2-2t2+3/2) (73) substitute t1 from (73) into (71), and rearrange the terms, gives; [1-√ (t2 2-2t2+3/2)] [1-√ (t2 2-2t2+3/2)] ln −−−−−−−−−−−−−−−−−−−−− + t2-3/2+√(t2 2-2t2+3/2) = 0 (74) t2 t2 the root of equation (74) may be computed by a suitable numerical algorithm. however, it has been computed and rounded for five digits decimal point as, t2 = 0.40442 (75) value of t1 is derived by substituting t2 into (73); t1 = 0.07549 (76) values of "b" and "a" are computed from (68) and (69) using t2 and t1 given by (75) and (76). thus, (t2-1)lny(t1) (t1-1)lny(t2) b = −−−−−−−−−−−−−−−−−− (77) (t2-1)ln(t1) (t1-1)ln(t2) or, b = -0.84857ln[y(0.07549)] + 1.31722ln[y(0.40442)] (78) and, a = [y(0.07549)]1.28986[y(0.40442)]-3.68126 (79) now, let us describe how equation (61) for the model (32) and equations (78) and (79) for the model (33) can be used to estimate the parameters of the lorenz curve when the probability distribution function is known. in the model (32) we should solve (44) for x(v)=1-√2/2. on the other hand, we should find value of "v" such that, ⌠v x(v) = ⌡0 f(w)dw = 1-√2/2 (80) by substituting this value of "v" into (45), value of y(1-√2/2) is computed. the value y(1-√2/2) is used to compute the parameter "a" given by (61) for model (32). the procedure for the model (33) is also similar, with the difference that two values of "v" should be computed. once two different values of "v" are computed as follow, ⌠v x(v) = ⌡0 f(w)dw = 0.07549 (81) ⌠v x(v) = ⌡0 f(w)dw = 0.40442 (82) values of "v" are substituted in (45) to find y(0.07549) and y(0.40442). these values of "y" are used to compute the parameters of the model (33) by substituting them into (78) and (79). the only problem remains is computation of related definite integrals of x(v) defined by (80), (81) and (82) which can be done by appropriate numerical methods such as the enclosed sample computer program coded for mathcad 11 for a complete example. 7. income distribution in the united states of america in order to compute the lorenz curve for the united states, we try to apply the above procedure for both (32) and (33) propositions and using log-normal distribution function assumption. the source of data is "the u.s. economic report of the president to parliament, different years". median income and disposable personal income per family report by table 1. the amount of mean and median of income were used to derive the log-normal density function parameters μ and δ. the explained procedure of estimation then applied to the series of data for 1977-2002, and corresponding results are reported in next table 2. the results of slottje (1989), which are based on quintile data calculations, confirm our finding figures partially. comparisons show the high compatibility of both procedures. an interesting finding of these calculations is that the distribution of income obeys counter-wise business cycles fluctuations. this finding is a new area for research in the realm of the theory and application of income distribution and business cycles interrelationship. a sample computer program is also enclosed at the end of these pages. copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 2; 2019 18 table 1. year population millions no. of famili es millio ns disposable personal income, billions of current $ per capita disposabl e income $ per family disposabl e income $ family median income current $ gross domestic product billions of $ real gross domestic product billions of chained (2000) $ 1977 220.3 57.2 1435.7 6,517 25,098 16009.0 2,030.9 4,750.5 1978 222.6 57.8 1608.3 7,224 27,825 17639.9 2,294.7 5,015.0 1979 225.1 59.6 1793.5 7,967 30,091 19587.2 2,563.3 5,173.4 1980 227.7 60.3 2009.0 8,822 33,317 21023.2 2,789.5 5,161.7 1981 230.0 61.0 2246.1 9,765 36,820 22387.8 3,128.4 5,291.7 1982 232.2 61.4 2421.2 10,426 39,432 23433.3 3,255.0 5,189.3 1983 234.3 62.0 2608.4 11,131 42,070 24673.9 3,536.7 5,423.8 1984 236.4 62.7 2912.0 12,319 46,446 26433.1 3,933.2 5,813.6 1985 238.5 63.6 3109.3 13,037 48,890 27735.2 4,220.3 6,053.7 1986 240.7 64.5 3285.1 13,649 50,932 29458.2 4,462.8 6,263.6 1987 242.8 65.2 3458.3 14,241 53,042 30970.2 4,739.5 6,475.1 1988 245.1 65.8 3748.7 15,297 56,971 32191.0 5,103.8 6,742.7 1989 247.4 66.1 4021.7 16,257 60,844 34213.1 5,484.4 6,981.4 1990 250.2 66.3 4285.8 17,131 64,643 35353.3 5,803.1 7,112.5 1991 253.5 67.2 4464.3 17,609 66,435 35938.7 5,995.9 7,100.5 1992 256.9 68.2 4751.4 18,494 69,670 36573.1 6,337.7 7,336.6 1993 260.3 68.5 4911.9 18,872 71,709 36929.5 6,657.4 7,532.7 1994 263.5 69.3 5151.8 19,555 74,341 38781.9 7,072.2 7,835.5 1995 266.6 69.6 5408.2 20,287 77,705 40610.6 7,397.7 8,031.7 1996 269.7 70.2 5688.5 21,091 81,033 42300.2 7,816.9 8,328.9 1997 273.0 70.9 5988.8 21,940 84,467 44568.2 8,304.3 8,703.5 1998 276.2 71.6 6395.9 23,161 89,330 46736.8 8,747.0 9,066.9 1999 279.3 73.2 6695.0 23,968 91,461 48789.3 9,268.4 9,470.3 2000 282.5 73.8 7194.0 25,467 97,478 50731.7 9,817.0 9,817.0 2001 285.6 74.3 7469.4 26,156 100,531 51407.4 10,100.8 9,866.6 2002 288.6 75.6 7857.2 27,223 103,932 51680.0 10,480.8 10,083.0 2003 290.5 8039.2 27,675 10,735.8 10,210.4 http://www.gpoaccess.gov/eop/ 10,000 30,000 50,000 70,000 90,000 110,000 $ year family median and mean income per family disposable income $ family median income current $ http://www.gpoaccess.gov/eop/ copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 2; 2019 19 table 2 year gupta model bidabad model slottje figures a gini kakwani a b gini kakwani gini kakwani 1977 7.938 0.442 0.172 5.798 1.214 0.438 0.170 0.426 0.109 1978 8.080 0.444 0.173 5.899 1.214 0.441 0.172 0.427 0.108 1979 7.484 0.434 0.166 5.475 1.212 0.430 0.164 0.427 0.111 1980 8.189 0.446 0.175 5.978 1.215 0.442 0.173 0.428 0.112 1981 9.095 0.456 0.185 6.631 1.218 0.546 0.183 0.435 0.114 1982 9.693 0.467 0.191 7.064 1.220 0.464 0.190 0.447 0.118 1983 10.051 0.471 0.194 7.324 1.221 0.469 0.193 0.447 0.120 1984 10.909 0.481 0.202 7.952 1.222 0.479 0.201 0.449 0.121 1985 11.004 0.482 0.203 8.021 1.223 0.480 0.202 1986 10.442 0.476 0.198 7.609 1.222 0.473 0.197 1987 10.175 0.473 0.196 7.416 1.221 0.470 0.194 1988 11.123 0.483 0.204 8.110 1.223 0.481 0.203 1989 11.269 0.485 0.205 8.216 1.223 0.482 0.204 1990 12.137 0.493 0.212 8.858 1.224 0.491 0.211 1991 12.493 0.496 0.215 9.122 1.225 0.494 0.214 1992 13.518 0.505 0.222 9.886 1.226 0.503 0.221 1993 14.207 0.510 0.226 10.403 1.226 0.509 0.226 1994 13.741 0.507 0.223 10.052 1.226 0.505 0.223 1995 13.676 0.506 0.223 10.004 1.223 0.504 0.222 1996 13.717 0.507 0.223 10.034 1.226 0.505 0.222 1997 13.339 0.504 0.221 9.751 1.226 0.502 0.220 1998 13.637 0.506 0.223 9.973 1.226 0.504 0.222 1999 12.962 0.500 0.218 9.472 1.225 0.499 0.217 2000 13.825 0.507 0.224 10.115 1.226 0.506 0.223 2001 14.470 0.512 0.229 10.600 1.226 0.511 0.227 2002 15.759 0.521 0.235 11.573 1.227 0.520 0.235 0.42 0.44 0.46 0.48 0.5 0.52 0.54 g in i in d e x year comparision of gini indices gupta bidabad copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 2; 2019 20 the following graph compares the calculated gini index with real gdp for the period of 1977-2002. dependent variable: gini method: least squares date: 06/23/19 time: 17:44 sample (adjusted): 1979 2002 included observations: 24 after adjustments variable coefficient std. error t-statistic prob. c 0.472788 0.009894 47.78343 0.0000 @trend 0.002299 0.000535 4.298753 0.0003 gdpgrowth(-1) -0.432267 0.191001 -2.263167 0.0343 r-squared 0.521663 mean dependent var 0.490375 adjusted r-squared 0.476107 s.d. dependent var 0.025039 s.e. of regression 0.018123 akaike info criterion 5.066782 sum squared resid 0.006897 schwarz criterion 4.919525 log likelihood 63.80138 hannan-quinn criter. 5.027714 f-statistic 11.45105 durbin-watson stat 2.298751 prob(f-statistic) 0.000434 as the countercyclical movement of gini index and gdp is understandable from the above graph, the above simple regression between gini index and the growth of gdp of usa with one lag also proves this phenomenon. the parameters are meaningful and the t statistics and other statistics are all significant. 0.42 0.44 0.46 0.48 0.50 0.52 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 11,000 1 9 7 7 1 9 7 9 1 9 8 1 1 9 8 3 1 9 8 5 1 9 8 7 1 9 8 9 1 9 9 1 1 9 9 3 1 9 9 5 1 9 9 7 1 9 9 9 2 0 0 1 2 0 0 3 $ year income distribution and gdp gdp gini copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 2; 2019 21 (using sample mean and median) calculations for 2002 usa data continuous l norm estimation of lorenz curve bijan bidabad this program has been coded for mathcad 11 mean = sample mean of income distribution: med = sample median of income distribution: calculation of log-normal density function parameters m and s according to sample mean and median log-normal probability_density function selective range for_log-normal plot, values of_increment and upper bound_may be changed log-normal plot precision tolerance level tol value should be_ changed for more_ accurate solutions,_(less tol = higher precision) (45) (44) mean 103932 med 51680  2 ln mean med         1.18209  ln m ed( )  10.85283 f w( ) 1 w  2        exp ln w( )  2 2  2           w 10 5 m ean 200  2 m ean f w( ) w tol 0.00001 y v( ) 1 m ean       0 v ww f w( )    d x v( ) 0.00001 v wf w( )    d copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 2; 2019 22 calculation for gupta model initial guess for v. this value should be changed for faster convergence and less iterations (60) calculating v for (80) calculated v y(t )_ 0 (61), estimated a: (53) sum of absolute residuals range variable for plotting the lorenz curves gupta lorenz curve: calculation of gini index calculation of kakwani length of lorenz curve v 20000 t 0 1 2 2  v root x v( ) t 0  v  v 27136.6437 y v( ) 0.04208 z 0 y v( ) a t 0 z 0         2  a 15.54768 s 0 1 xln z 0  ln t 0  t 0 1  ln a( )    d s 0 x 0 0.005 1 y x( ) x a x 1  y x( ) x x gini 1 2 0 1 xy x( )    d gini 0.51967 length 0 1 x1 a x 1 1 x ln a( )( )  2      d copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 2; 2019 23 length of lorenz curve kakwani index of length calculation for bidabad model (76) initial guess for v. this value should be changed for faster convergence and less iterations calculating v for (81) calculated v y(0.07549) (75) initial guess for v. this value should be changed for faster convergence and less iterations calculatig v for (82) calculated v y(0.40442) (79) (78) estimated a and b: (62) sum of absolute residuals range variable for plotting the lorenz curves bidabad lorenz curve length 1.5515 kakwani length 2 2 2  kakwani 0.23437 t 1 0.07549 v 8000 v root x v( ) t 1  v  v 9464.04318 y v( ) 0.00442 z 1 y v( ) t 2 0.40442 v 27000 v root x v( ) t 2  v  v 38826.25803 y v( ) 0.07722 z 2 y v( ) a z 1  1.28986 z 2  3.68126  b 0.84857 ln z 1  1.31722ln z 2  a 11.41481 b 1.22709 s 0 1 xln z 1  b ln t 1  t 1 1  ln a( )    d s 0.00002 x 0 0.005 1 y x( ) x b a x 1  copyright © cc-by-nc 2019, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 4, no. 2; 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(1981) an algorithm for linear l1 approximation of continuous functions. ima j. num. anal., 1, 157-167. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). american finance & banking review vol. 6, no. 1; 2021 issn 2576-1226 e-issn 2576-1234 published by cribfb, usa 56 analyzing the uses of different brand management strategies of bank: a study on public bank shamim fakir master of business administration department of marketing bangabandhu sheikh mujibur rahman science & technology university gopalgonj-8100, bangladesh e-mail: shimimfakir185@gmail.com abdullah al naeem master of business administration department of marketing bangabandhu sheikh mujibur rahman science & technology university gopalgonj-8100, bangladesh e-mail: naeem.mkt88@gmail.com syed manzurul karim master of business administration department of marketing bangabandhu sheikh mujibur rahman science & technology university gopalgonj-8100, bangladesh e-mail: syedmanzu@gmail.com received: october 24, 2021 accepted: november 12, 2021 online published: december 31, 2021 doi: 10.46281/amfbr.v6i1.1626 url: https://doi.org/10.46281/amfbr.v6i1.1626 abstract brand management strategies are a series of techniques used to increase the perceived value of a product or service. brand management strategies are a series of techniques used to increase the perceived values of all products or services. the objective of the report is to analyze the uses of different brand management strategies of a public bank in bangladesh. the paper is more important for marketers to know the significance of the uses of different brand management strategies of the public banks. this paper is most significant for the executives to gain a lot of customers by the use of brand management strategies. this is descriptive when the data is analyzed through a structured questionnaire and it is exploratory when the data is analyzed through in-depth interviews. this study is quantitative and qualitative in nature. the quantitative strategy will be utilized on account of the potential for speculation of discoveries. the targeted population of this study was the clients of public banking in bangladesh. data was collected https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 57 using depth interview questionnaire and survey questionnaire. data were analyzed quantitatively using spss, which was a statistical method for analyzing numerical data. the researcher distributed the questionnaires to 50 executives and employees of the public bank who has been asked through questionnaire and non-probability judgmental sampling was taken from an indepth interviews w with the customers and also use the survey questionnaire to the 100 customers. keywords: brand management, public bank, emotional connection. jel classification codes: m38. introduction brand management strategies are a series of techniques used to increase the perceived value of a product or service. that helps to increase of organization’s brand equity, brand recognition & brand loyalty. banks don’t manufacture products or natural resources from the earth but they sell financial services like providing different types of loans, checking accounts, credit card services, and individual retirement accounts. bank industries play a crucial role to develop the economy of any country (karim, 2020; latif et al., 2019; karim et al., 2015; karim et al., 2014; rehman et al., 2014; asheq et al., 2021; tu et al., 2021; akther et al., 2021; akhter et., 2020; islam, 2017). brands are significant resources for an organization. brand management strategies are a series of techniques used to increase the perceived values of all products or services. brand value is the differential impact that realizing the brand name has on client reaction to the item or it’s showcasing (aaker, 1996). the methods of brand management strategies are to promote their products to the market helps to increase brand equity, brand recognition & brand loyalty. the brand is a name or symbol that represents a product. brand management is a branding component that involves maintaining and bettering products, services and brand perception. brand management, when practiced correctly, gives cost leverage, increases customer loyalty and establishes meaningful brand awareness. the paper is more important for marketers to know the significance of the uses of different brand management strategies of bank: a study on public bank in bangladesh context. at present, competition is high in the market. so, if a company want to position on the customer mind than they have to follow some unique or crucial strategy in business. that’s why marketers know about the uses of different brand management strategies of a bank. brands are important resources for an organization (ara et al., 2015; ali et al., 2021; ali et al., 2020; baqir et al., 2020; batool et al., 2021; islam & barghouthi, 2017; islam et al., 2014; islam & miajee, 2018; islam, 2016a; islam, 2016b; islam, 2016c; islam et al., 2015; hossain et al., 2017; islam, 2015; islam & barghouthi, 2017; islam et al., 2021). so finally, this paper is most significant for the executives to gain a lots of customers by the uses of brand management strategies .the objective of this study to analyze the uses of different brand management strategies of rupali bank. some scarce reseach has been conducted on brand management in banking sector especially in public bank in bangladesh. literature review market orientation puts the customer at the center of the overall activities of the organization and is regarded as a pivotal factor in securing and maintaining market leadership in today’s competitive environment (pulendran et al., 2000). besides, brand management strategies are marketing strategies giving marketers a new option how to differentiate through surprise and diffusion effect from the other services (france et al., 2018). on the other hand, a brand image is https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 58 a mental image that reflects the way a brand is perceived, including all the identifying elements, the product or company personality, and the emotions and associations evoked in the consumer’s mind (porter, 1985). it can be defined as a unique bundle of associations within the minds of target customers. brand management helps to create intention among the customers to adopt banking services (latif et al., 2021). customer satisfaction basically depends on the brand image of the organization (karim et al., 2021; hasan & islam, 2020). positive employees’ perceptions of brand identity and its management lead to stronger bonds with the organization and a greater sense of pride and belonging to the firm (dukerich et al., 2002). previous studies describe that, higher levels of employees’ brand knowledge and a deeper understanding of brand strategies and decisions, as well as the brand values and promises (king & grace 2010). specifically, previous internal branding literature has demonstrated the positive link between some of the dimensions that underlie the brand image construct and employees’ commitment (burmann et al., 2009). according to mcdonald et al. (2001), as well as providing an interrelated and comprehensive network of consumer perceptions, the brand also plays an important behavior a central focus for all employees. organizations, according to harris and de chernatony (2001), need to clearly communicate the brand’s purpose to employees to inspire and assist them to understand their role in relation to the brand. in other words, the brand message needs to be conveyed internally so that employee behavior is guided. methodology the objective of research suggests that the paper is both qualitative and quantitative in nature. a quantitative study is one that uses interviews to gather data, whereas a more structured study is one that uses a questionnaire. the targeted population of this study was bank clients of public bank in bangladesh. results & discussion table 1. gender status of respondents name frequency percent male 55 55.0 female 45 45.0 total 100 100.0 the table at above shows that 55.00% (n=55) of the respondents are male and the rest 45.00% (n=45) of the respondents are female. table 2. an organization largely depends on its ability to attract consumers towards its brands. frequency percent strongly agree 47 47.0 agree 38 38.0 neutral 7 7.0 disagree 3 3.0 strongly disagree 5 5.0 total 100 100.0 this table above shows that 47% (n=47) of the respondents strongly agreed and 38 %(n=38) of the respondents are agreed that an organization largely depends on its ability to https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 59 attract consumers towards its brands than other advertising strategy because it can grasp customer attention than other marketing strategy. by the information of this table, this is the evidence that an organization largely depends on its ability to attract consumers towards its brands. table 3. strong brand management strategies in case of better services to attract customers. frequency percent strongly agree 36 36.0 agree 43 43.0 neutral 13 13.0 disagree 5 5.0 strongly disagree 3 3.0 total 100 100.0 this table above shows that 36% (n=36) of the respondents strongly agreed and also 43% (n=43) of the respondents agreed that using strong brand management strategies in case of better services to attract customers than another strategy because it can grasp customer attention than another marketing strategy. by the information of this table, this is the evidence that strong brand management strategies in case of better services to attract customers. table 4. public bank assures better services that create an emotional connection between the brand and its customers. frequency percent strongly agree 35 35.0 agree 29 29.0 neutral 28 28.0 disagree 4 4.0 strongly disagree 4 4.0 total 100 100.0 this table above shows that 35% (n=35) of the respondents strongly agreed and also 29% (n=29) of the respondents agreed that better services that create an emotional connection between the brand and its customers than other marketing strategy because it can grasp customer attention. by the information of this table, this is the evidence that public banks assures better services that create an emotional connection between the brand and its customers is beneficial. table 5. customer loyalty play a vital role as a brand management strategies in my bank frequency percent strongly agree 54 54.0 strongly agree 42 42.0 agree 41 41.0 neutral 10 10.0 disagree 3 3.0 strongly disagree 4 4.0 https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 60 this table above shows that 42.0% (n=42) of the respondents strongly agreed and also 41.0% (n=41) of the respondents agreed that customer loyalty play a vital role as a brand management strategies in my bank. by the information of this table, this is the evidence that customer loyalty play a vital role as a brand management strategies in my bank. table 6. public banks’ services for customers shape it as a unique brand from other banks frequency percent strongly agree 33 33.0 agree 47 47.0 neutral 10 10.0 disagree 8 8.0 strongly disagree 2 2.0 total 100 100.0 this table above shows that 33.0% (n=33) of the respondents strongly agreed and also 47.0% (n=47) of the respondents agreed that public banks services for customers shape it as a unique brand from other banks. by the information of this table, this is the evidence that public banks services for customers shape it as a unique brand from other banks. table 7. sure-cash is a brand extension of public banks’ frequency percent strongly agree 37 37.0 agree 38 38.0 neutral 18 18.0 disagree 4 4.0 strongly disagree 3 3.0 total 100 100.0 this table above shows that 37.0% (n=37) of the respondents strongly agreed and also 38.0% (n=38) of the respondents agreed that sure-cash is a brand extension of public banks. by the information of this table, this is the evidence that sure-cash is a brand extension of public banks’. table 8. customers are more satisfied because they are loyal to public banks. frequency percent strongly agree 41 41.0 agree 39 39.0 neutral 12 12.0 disagree 5 5.0 strongly disagree 3 3.0 total 100 100.0 https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 61 this table above shows that 41.0% (n=41) of the respondents strongly agreed and also 39.0% (n=39) of the respondents agreed that customers are more satisfied because they are loyal to public banks’ brands than others because in that way banks can easily promote products within a very low cost and also can reach within a big range of target customer. by the information of this table, this is the evidence that customers are more satisfied because they are loyal to public banks discussion at present, brand management strategies have come to play a more important role. every bank has its own brand management strategies. the report tried to analyze the uses of different brand management strategies of public banks and also tried to recommend some guidelines for executives who implement the strategies. based on findings the primary objective of the report is to analyze the uses of different brand management strategies of the public. through observational research method the researcher found that brand management strategies in bangladesh is not new and but some terms are totally new and some banking company is used brand management strategies effectively. according to the findings, it can say that an organization largely depends on its ability to attract consumers towards its brands because it can easily grasp customer’s attention and increase brand equity, brand recognition & brand equity as well as brand image . most of the customers & executives express their opinion that an organization largely depends on its ability to attract consumers towards its brands. maximum bankers did know about analyzing the uses of different brand management strategies of public banks in bangladesh. there are very few people who knew about analyzing the uses of different brand management strategies of public banks. most of the respondent said that “brand management strategies are a series of techniques used to increase the perceived value of a product or service. 80% respondent of bank executives said that brand extension impact with the parent brand they said that brand extension is the practice of a well-known brand name in new product classes (zohaib et al., 2021; tu et al., 2021; rahaman et al., 2021). they think that brand extension is a significant concern in the feat of a brand and if not done accurately, can cause serious impairment to the brand being extended. but other 20% of the respondents said that brand extension is depending on the fitness of parent complete and extended brand. if new brand is on the point of the present brand, then there's tons of chances that new product is also selfmade and survive. if new product is at distance of the parent brand, then the probabilities of failure are inflated (rahaman et al., 2021). more than 80% of firms resort to brand extensions as a way of marketing goods and services. when firms develop brands under the name of the parent brand the marketers believe that the consumers evaluate brand extensions as favorable because the consumers transfer their positive attitude or effect to the extension made. overall 60 %of the executives who are said that make a strong brand management strategies are possible through some stages that is brand positioning, implementation of brand marketing, measuring brand performance and the brand value. on the other hand, (rahaman et al., 2021) other 35% of the respondents means that making a strong brand management strategies needed some strategies that is consider overall business strategy, target clients, target client group, develop your brand positioning, develop messaging strategy, develop name, logo and tagline, develop marketing strategy, implement .the rest 5 % does know not how to make a strong brand management strategies. almost 70% executives who faced brand management strategies, said that brand management strategies are interesting (rahaman et al., 2021). but 20% executives who faced brand management strategies, said that brand management strategies are not only helps boost the https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 62 value of a product but also build positive customer interaction and think about customer sentiment. it helps to (rahaman et al., 2021) differentiation from competitors and consistency of all communications are important factors in successfully building and maintaining brand management strategies (rahaman et al., 2021). the rest 10% executives are neural about brand management strategies because they said that sometime brand management strategies are interesting and sometimes not. 85% executives said yes to this question. they said (rahaman et al., 2021) that brand is another marketing strategy much effective for any organization as well as public banks in bangladesh. but the rest 15% said that sometimes it may not be effective. as indicated by them, brand management strategies can empower undeniable degrees of client mindfulness, commitment and maintenance, which converts into huge authoritative worth. conclusion from the study it can also said that most of the people of bangladesh have now tend to see something which is brand management strategies. if it will used in banking goods that will be really benefited for the people & organization. so, the uses of brand management strategies in banking goods have potentiality and some banking organizations already used to with this strategy because it can easily attract customer’s attention, and increase brand equity, brand recognition & brand loyalty. most of the customer didn’t know how the company uses brand management strategies with them to promote or position their products. this report helps the customer and also the bank executives to understand the brand management strategies. basically, brand management is a series of techniques used to increase the perceived value of a product or service. overall, brand management strategies is promoting product and the uses of brand management strategies are successfully attracting the customer’s attention, and increase brand equity, brand recognition & brand loyalty. author contributions conceptualization: shamim fakir, abdullah al naeem, syed manzurul karim formal analysis: shamim fakir, abdullah al naeem, syed manzurul karim funding acquisition: shamim fakir, abdullah al naeem, syed manzurul karim investigation: shamim fakir, abdullah al naeem, syed manzurul karim methodology: shamim fakir project administration: shamim fakir, abdullah al naeem resources: shamim fakir, abdullah al naeem, syed manzurul karim software: shamim fakir, syed manzurul karim supervision: shamim fakir, abdullah al naeem, syed manzurul karim validation: shamim fakir, abdullah al naeem, syed manzurul karim visualization: shamim fakir, abdullah al naeem, syed manzurul karim writing – original draft: shamim fakir, abdullah al naeem, syed manzurul karim writing – review & editing: shamim fakir, abdullah al naeem, syed manzurul karim conflict of interest statement the authors declare that they have no competing interests. acknowledgement all authors contributed equally to the conception and design of the study. https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 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(2021). the innovative financial product development with its functional performance. american international journal of economics and finance research, 3(1), 1-15. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (https://creativecommons.org/licenses/by/4.0). american finance & banking review vol. 6, no. 1; 2021 issn 2576-1226 e-issn 2576-1234 published by cribfb, usa 14 customers’ assessment on e-banking service quality in bangladesh: challenges and strategies dhiman barua assistant professor faculty of business administration bgc trust university bangladesh m.phil researcher department of finance, jagannath university, bangladesh e-mail: dhiman@bgctub.ac.bd s. m. akber lecturer department of business administration ranada prasad shaha university, bangladesh m.phil researcher department of finance, jagannath university, bangladesh e-mail: akber@rpsu.edu.bd https://orcid.org/0000-0002-0267-3626 received: october 04, 2021 accepted: october 31, 2021 online published: november 26, 2021 doi: 10.46281/amfbr.v6i1.1456 url: https://doi.org/10.46281/amfbr.v6i1.1456 abstract this paper attempts to investigate to understand customers’ evaluation regarding service quality of e-banking in bangladesh. it also examines the major challenges and required strategies for promoting e-banking. to conduct the study, a total number of 205 respondents were taken as sample from chittagong region by using simple judgmental sampling technique. a face-to-face interview method was followed by using a structured questionnaire to collect the data. five points likert scale was used to examine the customers’ evaluation on the service quality and through statistical measures it analyze the problem. garret’s ranking technique was applied to rank the qualitative data for analyzing challenges and required strategies of e-banking. the study reveals that from the customers’ assessment, e-banking saves time and hazard, facilitates quick and easier access to information, speedy transaction, receiving service easily, ensures accuracy, effectiveness and security, provides versatile service, anytime, anywhere banking facility. the study also found that technological disturbance, insufficient infrastructure, unavailability of service in rural areas, high service charge are the major challenges of ebanking service in bangladesh. the customers suggests to develop infrastructure, upgrade mailto:akber@rpsu.edu.bd https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 15 technology, increase security measure, enhance promotion for developing customers’ awareness, introduce innovative initiative of bangladesh bank, extend service across the country etc. keywords: e-banking, service quality, customers’ assessment. jel classification codes: g21, l15. introduction there has been a significant change in the banking operation for the last few decades across the world due to quick change of technology. banks are receiving updated technology for rendering new and better service and meeting competition in the market. e-banking is one of the methods of banking that rely on the best use of technology. the improvement of information technology and the accessibility of the internet have made it possible that one can take banking service from a remote area without stepping into a physical financial structure (bruene, 2002). e-banking provides different information to customer through computer, telephone or mobile phone (daniel, 1999). it allows customers to perform different transactions including account transfers, balance inquiries, online loan and credit card applications, bill payments staying away from banks. comparing with traditional banking system, e-banking facilitates customers to receive 24-hour services, transactions at low cost, more secured transactions, higher volume of transactions at minimum time, more accurate transaction (nasri, 2011). in bangladesh, e-banking service is expanding rapidly as the people intension to adopt new technology is growing day by day. it has got massive prospective to open up new window of opportunity to the existing banks and financial institutions in our country. the initiative of bangladesh bank encourages bank financial institutions to promote e-banking. the e-banking service of foreign and local private commercial bank is better in consideration with state-owned commercial banks (huda & chowdhury, 2017). banks are trying to render new and updated ebanking service to attract and retain customers. having huge demand from retail customers and business community e-banking is still at a budding state due to some constraints like inadequacy of reliable and secure information infrastructure, poor network connectivity, high internet charge, lack of it literacy of customers, insufficient legal and regulatory framework, huge investment requirement for adopting new technology etc. (sadekin & shaikh, 2016). bangladesh bank needs to take several innovative initiatives to boost e-banking service across the country. commercial banks should also come forward to introduce new technology in their banking operation for ensuring customers’ satisfaction and meeting global challenge. there were very few studies conducted on e-banking practices in bangladesh particularly no comprehensive study has yet been conducted regarding customers’ assessment. besides, the challenges of adopting e-banking along with the required strategies to be followed were not covered in the previous studies. the focus of this study is to fulfill the gap. literature review e-banking is the latest development in financial services by bank financial institutions through taking the benefits of the internet’s power and access to cope with the accelerating pace of changing global business (mia et al., 2007). the term “e-banking” refers to a banking system in which customers are able to conduct their banking operation electronically without visiting a bank branch (simpson, 2002). burr (1996) defines e-banking as a banking system that connect https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 16 the bank and customer digitally for preparing, managing and controlling financial transactions. it is not a product or service of a bank; rather it indicates the way of managing banking operation. e-banking offers better banking experience to customers and provide new and updated banking services for greater satisfaction. e-banking ensures convenience and flexibility in banking transaction. it also provides transaction related benefits like easy transfer, quick transaction, saves cost and time (ahmed et al., 2012). sadekin and shaikh (2016) studied on effect of e-banking on banking sector of bangladesh and observed that e-banking requires less human resource, reduces carrying cash, provides shopping and other facilities by using cards, demands less documents in banking operation. e-banking services allow banks to reduce infrastructure cost. it is believed that the e-banking increases the profitability of banks through reducing the cost and provides additional benefits to customers as well (halperin, 2001). howcroft and durkin (2003) decorated that online banking technology assist to build a good relationship between bank and customers. they revealed that successful adoption of modern technology in banking sector can increase average productivity, efficiency and profitability of banks. al-amin and rahman (2010) stated that better it infrastructure, internal network and country domain are the major issues for the promotion of online banking in bangladesh. sadekin et al. (2019) found that customers trust on e-banking depends on security system, customers awareness, academic qualification, authentication of e-transaction, service quality of banks, bankers behavior etc. liao and cheung (2002) revealed that customers expectation regarding accuracy, security, quick transaction, flexibility, user friendliness, convenience were the most important quality attributes that perceived usefulness of internet based e-retail banking. banking sector in bangladesh have been facing a number of challenges such as lack of technological skill of both bankers and customers, absence of centralized country wide data based system, high cost of adoption of new technology in banking system, absence of integrated e-banking service plan among banks, lack of proper initiatives of bangladesh bank, different software for different banks, legal bindings and inappropriate policy frameworks (uddin et al., 2016). baten and kamil (2010) argued that bangladeshi customers of do not have enough knowledge of e-banking which restrict to extend e-banking in bangladesh. sadekin and shaikh (2016) observed that customers feel insecurity from hijacker to withdraw and deposit money from atm booths and it risks; market risks; and liquidity risks. rahman (2008) observed that online banking in bangladesh faces several constraints like lack of safe telecommunication infrastructure, poor network facility, lack of skilled human resource and training facilities, absence of supportive policies, guidelines, rules and regulations relating to e-transactions and the like. alam et al. (2007) assessed the development and prospects of internet banking in bangladesh and observed that lack of necessary infrastructure is the key challenge for adopting internet based banking system in the country. they also found that nationalized commercial banks still failed to implement modern internet banking system due to lack of proper initiative from bangladesh bank. mattila and mattila (2005) also claimed that security system is the main barrier to adopt e-banking and introduce new technology in the banking operation. they also observed some other social and psychological factors influence customers to receive digital banking system. akber (2020) made a research on comparing the performance of traditional private commercial banks and islamic banks in bangladesh. he used a sample of five traditional commercial private banks and five islamic banks. he came with an outcome that private commercial private banks perform better in providing e banking services compared islamic banks in bangladesh. https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 17 uddin et al. (2016) recommended to increase promotion through advertisement, reduce charge on e-banking products or services, improve security counter measures, introducing new technology in the banking operation, and provide training to employees by the commercial banks. khanam and alam (2018) studied on factors affecting the adoption of internet banking and stated that banking sector of bangladesh should focus on improving ict infrastructure, strengthening security system, improving customer awareness, developing long term strategic plan to promote e-banking system. they also mentioned the participation of government to improve legal framework and policy guideline. nelubiri and sinti (2006) argued that banks should different initiatives for increasing awareness of customers and building positive perception and mindset to accept internet technology in conducting banking activities. objectives of the study the objectives of the study are: i) to present the customers’ evaluation on the e-banking service quality. ii) to identify the major challenges and required strategies for promoting e-banking from customers’ perspective. research methodology this is particularly a descriptive study based on collected data from primary sources. data were collected from a sample of 205 respondents and a simple judgmental sampling technique was used to detect the respondents. a structured questionnaire was developed and a face to face interview method was followed to collect the data. the questionnaire contained two parts. part i contained customers’ evaluation on the e-banking service quality. five points likert scale (from 1strongly disagree to 5strongly agree) was used to assess the perceptions. in part ii, major challenges and required strategies for promoting e-banking were assessed by using garret table rating scale to rank qualitative data in a higher priority entitling 1 to lowest priority. customers’ evaluation on e-banking service quality were analyzed in a descriptive, multidimensional manner using spss 16.0 software and frequencies, percentage, mean, standard deviation were computed to analyze the problem. to analyze the challenges and strategies of ebanking, garret’s ranking technique (masukujjamam et al., 2016) was used. it was calculated as percentage score and the scale value was obtained by employing scale conversion table given by henry garrett. the percentage score was calculated as follows percentage score = 100(rij-0.5)/ nij) where rij is the rank given for ith item jth individual nij is the number of items ranked by jth individual. using scale conversion table of henry garrett, the percentage score was obtained for all ranks. the score value (fx) was calculated for each factor by multiplying number of respondents (f) with respective scale value (x). the total scores were computed by adding the score value (fx) of each rank for every factor. the mean score was then calculated to know the order of perception given by the respondents. data analysis customers’ assessment on e-banking service quality saving time and hazard: table 1 shows the customers’ assessment on “e-banking saves time and hazard”. in response to the statement, majority of the respondents (52.2%) agreed on the https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 18 statement and a good percentage of respondents (22.4%) strongly agreed on the issue. the mean of the responses is also high (3.8878). standard deviation is relatively low (0.88123) which indicates a greater consistency in the response to the statement. table 1. savings time and hazard source: field survey quick and easier access to information: customers’ assessment on “e-banking facilitates quick and easier access to information of clients” is shown in table 2. highest 44.4 percent of the respondents agreed on the statement followed by 24.9 percent felt neutral. the mean of the responses is not much high (3.4829) and the value of standard deviation (1.08734) indicates comparatively less consistency in the response. table 2. quick and easier access to information source: field survey versatile service facility: the response of the customers’ assessment on “e-banking offers versatile service facility” is shown in table 3. majority of the respondents (45.4 percent) support the issue whereas a high portion (28.8 percent) of respondents felt neutral. the average response (3.4439) on the statement is not much high. table 3. versatile service facility responses frequency percent strongly disagree – 1 6 2.9 disagree – 2 5 2.4 mean 3.8878 neutral – 3 41 20.0 std. deviation .88123 agree – 4 107 52.2 strongly agree – 5 46 22.4 total 205 100.0 responses frequency percent strongly disagree – 1 16 7.8 disagree – 2 18 8.8 mean 3.4829 neutral – 3 51 24.9 std. deviation 1.08734 agree – 4 91 44.4 strongly agree – 5 29 14.1 total 205 100.0 responses frequency percent strongly disagree – 1 6 2.9 https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 19 source: field survey speedy transaction: customers’ evaluation on “e-banking facilitates speedy transaction” is shown in table 2. on the issue, 50.02 percent respondents agreed on the statement and 28.3 percent highly strongly agreed on it. the mean score is also high (4.0439) which represent customers’ confidence on the facility. table 4. speedy transaction source: field survey security system: table 5 shows the customers’ evaluation on “security system of e-banking is high.” in response to the statement, 40 percent respondents felt secured on e-banking system followed by 24.9 percent felt neutral on the statement. a good number of respondents (18.5 percent) disagreed on the security system of online banking. the mean of the response is comparatively low (3.1756). table 5. security system source: field survey easy to receive banking service: table 6 shows the customers’ perception on “e-banking services are easy to receive”. in response to the statement, highest 45.4 percent of the respondents agreed on the statement followed by 23.9 percent felt neutral. the mean of the disagree – 2 28 13.7 mean 3.4439 neutral – 3 59 28.8 std. deviation .94091 agree – 4 93 45.4 strongly agree – 5 19 9.3 total 205 100.0 responses frequency percent strongly disagree – 1 0 0.0 disagree – 2 5 2.4 mean 4.0439 neutral – 3 39 19.0 std. deviation .75604 agree – 4 103 50.2 strongly agree – 5 58 28.3 total 205 100.0 responses frequency percent strongly disagree – 1 19 9.3 disagree – 2 38 18.5 mean 3.1756 neutral – 3 51 24.9 std. deviation 1.08734 agree – 4 82 40.0 strongly agree 5 15 7.3 total 205 100.0 https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 20 responses is also high (3.8878). standard deviation is relatively low (0.88123) which indicates a greater consistency in the response to the statement. table 6. easy to receive banking service source: field survey anytime, anywhere banking facility: table 7 shows the customers’ assessment on “e-banking offers anytime, anywhere banking facility”. in response to the statement, majority of the respondents (45.4%) agreed on the statement and a high percentage of respondents (22.4%) felt neutral on the issue though a good percentage of respondents disagreed (13.2%) on it. the mean of the responses is also high (3.9659). table 7. anytime, anywhere banking facility source: field survey accuracy and effectiveness of banking system: customers’ perception on “e-banking provides accurate and effective banking system” is shown in table 8. highest 42 percent of the respondents agreed on the statement followed by 27.3 percent felt neutral. besides, 18 percent respondents strongly agreed on it. the man score is average (3.6049) but standard deviation is little bit higher (1.02660). table 8. accuracy and effectiveness of banking system responses frequency percent strongly disagree – 1 11 5.4 disagree – 2 27 13.2 mean 3.4585 neutral – 3 49 23.9 std. deviation 1.04059 agree – 4 93 45.4 strongly agree – 5 25 12.2 total 205 100.0 responses frequency percent strongly disagree – 1 3 1.5 disagree – 2 16 7.8 mean 3.9659 neutral – 3 29 14.1 std. deviation .94651 agree – 4 94 45.9 strongly agree – 5 63 30.7 total 205 100.0 responses frequency percent strongly disagree – 1 10 4.9 disagree – 2 16 7.8 mean 3.6049 neutral – 3 56 27.3 std. deviation 1.02660 https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 21 source: field survey challenges of e-banking e-banking facilitates customers to access their accounts, obtain information, and transfer money between different accounts and making payment via online channel. customers can enjoy anytime, anywhere banking facilities and receive wide range of service across the country. despite the different attractive issues, adoption of e-banking faces a number of challenges in bangladesh. the challenges of e-banking from the realization of customers are shown in table 9. table 9. challenges of e-banking source: field survey agree – 4 86 42.0 strongly agree 5 37 18.0 total 205 100.0 challenges of ebanking 1 2 3 4 5 6 7 total total garrett score mean score rank system complexity f 18 36 13 40 42 27 29 205 9872 48.16 5 fx 1422 2376 741 2000 1806 918 609 high service charge f 27 20 38 35 45 29 11 205 10521 51.32 4 fx 2133 1320 2166 1750 1935 986 231 insufficient infrastructure f 39 48 26 27 15 29 21 205 11153 54.40 2 fx 3081 3168 1482 1350 645 986 441 lack of knowledge of customers f 13 29 37 31 13 36 46 205 9349 45.60 6 fx 1027 1914 2109 1550 559 1224 966 technological disturbance f 44 38 31 29 20 20 23 205 11224 54.75 1 fx 3476 2508 1767 1450 860 680 483 unavailability of service in rural areas f 40 24 32 27 28 30 24 205 10652 51.96 3 fx 3160 1584 1824 1350 1204 1020 504 high investment in automation & maintenance f 24 10 28 16 42 34 51 205 8985 43.83 7 fx 1896 660 1596 800 1806 1156 1071 79 66 57 50 43 34 21 https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 22 customers perceived the technological disturbance as the first challenge (mean score 54.75) to implement e-banking system. insufficient infrastructure (mean value 54.40) is placed at the second position in the table followed by unavailability of service in rural areas (mean value 51.96). slow response of internet connection and sometimes internet connection break down which make interrupt the e-banking system. e-banking system in bangladesh is still suffering from lack of updated and innovative it resources and power backup for running the operation smoothly. high charge of services and different hidden cost in addition with complexity in operational system discourage customers to accept online banking. thus customers considered high service charge and system complexity as the fourth and fifth challenge respectively. customers also realized that their lack of knowledge and high investment in automation & maintenance are least important challenges to implement e-banking system. strategies required to improve e-banking: to meet the challenges and provide better banking service banks need to develop strategic plan for promoting e-banking system. the required strategies from the assessment of customers are showed in table 10. table 10. strategies strategies 1 2 3 4 5 6 7 8 total total garrett score mean score rank increasing promotion to build customers’ awareness f 24 29 42 33 20 19 15 23 205 10787 52.62 4 fx 1920 1943 2520 1749 940 760 495 460 offering cheap and attractive ebanking product f 11 15 16 29 28 37 40 39 205 9278 45.26 7 fx 800 1005 960 1537 1316 1480 1320 780 development of infrastructure f 51 32 30 22 18 16 21 15 205 11669 56.92 1 fx 4080 2144 1800 1166 846 640 693 300 upgrading technology f 23 27 44 35 26 30 13 07 205 11135 54.32 2 fx 1840 1809 2640 1855 1222 1200 429 140 innovative initiative of bangladesh bank f 20 17 26 30 39 29 28 16 205 10126 49.40 5 fx 1600 1139 1560 1590 1833 1160 924 320 training bank officials on online banking f 16 19 21 21 23 29 30 46 205 9077 44.27 8 fx 1280 1273 1260 1113 1081 1160 990 920 increasing security f 37 41 16 24 14 22 23 28 https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 23 source: field survey customers perceived that the infrastructure of e-banking should be developed and placed at first position on the needed strategy (mean value 56.92) followed by upgrading technology with a mean value of 54.32. commercial banks need to be updated with race of the innovative world and introduce new technology in rendering service. besides the commercial banks, government has to take initiative to improve infrastructure including power supply. customers have fear about the security of their fund, transaction, information. thus they placed increasing security system in third position and expect that bank will take different measures to improve security system and customers’ confident. customers are not conscious about different e-banking service and feel doubt to receive innovative products. customers perceived that banks should focus on building customers awareness by arranging several promotional campaign. innovative initiative of bangladesh bank and extension of service across the country are also considered as important strategy from the view point of customers. still rural areas in bangladesh are not under the shadow of modern banking service where a large portion of total population lives in village. conclusion e-banking is now a global phenomenon. it is an invaluable and powerful tool driving development, supporting growth, promoting innovation and enhancing competitiveness bangladesh has a good prospect of e-banking as the number of internet and modern technology users are increasing rapidly in the country. e-banking makes banking system easier, faster and accurate and extends banking service into a wide range. this paper assessed the customers’ evaluation on the service quality of e-banking. this paper also studied the major challenges and required strategies for promoting e-banking in bangladesh. there are a number of limitations which might influence the result of the study. the sample size of the study was not necessarily representative of the country’s population as a whole as samples are taken from chittagong district and ignored the other region of the country. the size of the sample is small. the research would have been more reliable if a greater size of sample had been used. it highly recommends future research to address all these concerns. references akber, s. m. & dey, a. 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(2016). electronic banking products and service of private commercial banks in bangladesh: present status and challenges. international journal of business and management review, 4(8), 44-55. author contributions conceptualization: dhiman barua, s. m. akber data curation: dhiman barua, s. m. akber formal analysis: dhiman barua, s. m. akber funding acquisition: dhiman barua, s. m. akber project administration: dhiman barua software: s. m. akber validation: dhiman barua, s. m. akber writing – original draft: dhiman barua, s. m. akber writing – review & editing: dhiman barua, s. m. akber conflict of interest statement the authors declare that they have no competing interests. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (https://creativecommons.org/licenses/by/4.0). american finance & banking review vol. 6, no. 1; 2021 issn 2576-1226 e-issn 2576-1234 published by cribfb, usa 1 a comparative analysis of financial performance of non-bank financial institutions in bangladesh s. m. akber lecturer department of business administration ranada prasad shaha university, bangladesh m.phil researcher department of finance, jagannath university, bangladesh e-mail: akber@rpsu.edu.bd https://orcid.org/0000-0002-0267-3626 dhiman barua assistant professor faculty of business administration bgc trust university bangladesh, bangladesh m.phil researcher department of finance, jagannath university, bangladesh e-mail: dhiman@bgctub.ac.bd received: october 01, 2021 accepted: october 30, 2021 online published: november 26, 2021 doi: 10.46281/amfbr.v6i1.1455 url: https://doi.org/10.46281/amfbr.v6i1.1455 abstract nbfis play an important role in economic development through ensuring proper mobilization of funds in bangladesh. this study represents a comparison of nine nbfis operating their business in bangladesh within the period from 2016 to 2019 through using financial ratios and other measures. to analyze the financial performance this study has used ratio analysis, such as roa, roe, roce, institutional size/ total assets and total equity etc. the outcome of this study says that for generating return the nbfis performance based on efficiency ratio is different from the performance based on liquidity ratio, capital ratio and other financial measures. this study suggests to nbfis to be more conscious about loan selection and establish a brand image through providing more efficient services. it also suggests the nbfis to finds more income generating areas to be more competitive. in the coming years nbfis will have more prospects that will ensure the economic development of our country. keywords: nbfis, financial performance, efficiency, liquidity, profitability, roa, roe, roce. jel classification codes: f36, l25, g23. mailto:akber@rpsu.edu.bd https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 2 introduction an efficient financial system is essential to ensure economic development for any nation because it ensures a smooth transfer of fund from the surplus to deficit unit. to ensure an interruption free production, keeping the market competitive and assist the economic transaction properly a well-functioning financial system has no substitute. an efficient financial system means allocating the resources efficiently. it is the foundation of enhancing the performance of the organizations. non-bank financial institutions are a part of the financial system. through serving the economy, it ensures the economic development of a country. nbfi supports the economy through investment in the capital market, entrepreneurs’ by giving short term or long term loans and through providing many other activities. asset management (am), institution size (is), and operating efficiency three principal factors are important for enhancing the financial performance (miskhin, 2019). non-bank financial institutions (nbfi) plays an important role in the financial sector of a country. there could be various institutions that act a nbfi but this paper works with finance companies. finance companies are a part of nbfi. they don’t collect a deposit like banks. they raised funds through selling their shares and invest the funds through providing direct and indirect loans. they also invest a portion of the funds in the capital market. that’s why finance companies play a significant role in the performance of capital markets. most of the finance companies are vertically integrated organizations. they are incorporated with various services such as merger and acquisition, advisory services, capital raising services, securities trading services, and research coverage (madura, 2018). the purpose of this study is to analyze the financial performance of the selected nbfi in bangladesh within the period of 2016-2019. to measure the performance, financial ratios and financial measures that have an impact over the performance of nbfi are used as a basis. so evaluating the financial performance of nbfi and comparing the relative market position of the selected nbfi in bangladesh is the prime objective of this study. to measure the financial performance several ratios such as return on equity (roe), return on assets (roa), institution size/ total assets & total equity, earnings per share (eps), current ratio, capital ratio, return on capital employed (roce), and interest coverage ratio are used. this study will analyze the financial performance of selected finance companies (nbfi) in bangladesh. then, based on the result it will identify their competitive position in bangladesh. it also involves the managers and investors with important information about operating efficiency of finance companies so that it would be helpful for them to take decision for future development and investment. literature review usually financial ratios, measuring performance against budget, benchmarking are used to measure the financial performance of any financial institutions (avkiran, 1995). through published financial statement one can get different types of ratios and it helps to determine the financial performance of that company. in pakistan to classify financial institutions based on their performance different types of financial ratios such as return on equity (roe), return on assets (roa), total assets, total equity, earnings per share (eps), current ratio, capital ratio, return on capital employed (roce), and administration expenses to profit before tax ratio are used (ali reza, 2011). several studies have been conducted that are relevant to analyzing the company’s performance that focus the operational effectiveness and efficiency to ensure the development of the company. https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 3 tarawneh (2006) conduct a research and came with an outcome that having better efficiency a company may not have a better effectiveness always. elizabeth. d (2004) suggested through his study that the financial measures of performance, such as return on equity (roe), capital adequacy ratio (car) and net interest margins (nim) should be calculated positively with scores of customer service quality. alsamaree (2013) worked in the same area within the period from 20072010 based on the commercial banks of kuwait. in his study he showed that because of distributing the profits properly banks in kuwait were able to overcome the crisis and was able to draw the attention of national bank of kuwait. almumani (2014) made a research to analyze and compare the performance of saudi banks listed in their stock market for the period 2007-2011. he measured the financial performance by two approaches such as trend analysis and inter-firm analysis. he came up with an outcome that saudi banks’ profitability increase, due to increase of their operating income and their profitability decrease due to increase their assets, operating expense and cost of income. he also came up with an outcome that saudi joint venture banks are more efficient to generate profits, absorb loan losses and to dominate in roe. but the saudi established banks are more capable to absorb asset losses and to dominate in roa. akber (2019) conducted a research on the relationship between profitability and nonperforming loan on sharia based banks of bangladesh. he used a sample of five sharia based banks in bangladesh where return on equity was used as a proxy for profitability. he came up with an outcome that a consciousness of the authority on loan disbursement will lead to reduce the non-performing loan and increase the bank’s profitability. akber (2020) conducted another research on comparing the performance of traditional private commercial banks and islamic banks in bangladesh. he used a sample of five traditional commercial private banks and five islamic banks and the performance were measured based on camels. he came with an outcome that in term of management quality private commercial banks perform better while in term of capital adequacy and liquidity position islamic banks perform better. fukuyama (1995) researched among countries in asia, to employ dea and to analyze banking efficiency. in his research, he considered the efficiency of 143 japanese banks as a sample. he came up with an outcome that the pure technical efficiency to average around 86% and scale efficiency around 98%. it means that the major source of overall technical inefficiency is pure technical inefficiency. he said that the scale inefficiency is because of increasing returns to scale. he also said that banks with different organizational status perform differently and the scale efficiency is positively but weakly associated with bank size. tandon et al. (2019) conducted a research in the same field. in his research he showed non-performing loans and their impact on bank profitability. he focused on banks' specific macroeconomic determinants. finally, he came with an outcome that to increase the profitability more attention is required for npl management. an efficient financial system reduces liquidity risk and it is done through a proper combination of different types of illiquid assets and proper securitization. usually the presence of financial intermediary reduces information asymmetries and transaction cost. through investment banks convert their liquid short-term assets to long-term illiquid investments (diamond, 1983). here the financial comparison of nbfis in bangladesh is based on return on equity (roe), return on asset (roa), institution size (is) and many other activities. based on the above discussion, it can be said that most of the research worked with the banks or investment banks. a very few works have done with nbfis which contributes a significant portion to the economic development of our country. so a research gap has created. https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 4 that’s why this study deals with the nbfis and tries to analyze a comparative financial position of nbfis in bangladesh. objectives of the study the prime objective of this study is to analyze the financial performance of the finance companies (nbfi) in bangladesh to ensure growth and prosperity of this sector. so the specific objectives of this study are to provide the insights of performance of the selected finance companies (nbfi) in bangladesh. based on the performance their competitive position will be analyzed. so that it will be helpful for the investor as well the management for taking the right decisions. rationale of the study this study is important because it will improve the nbfis financial performance in bangladesh. so it will contribute to the economic growth of bangladesh. the worldwide growth of nbfis and its impact over the economy gives is a clear indication how much it is important in bangladesh economy. the reasons inspires to analyze this issue in bangladesh. methodology this study followed a quantitative research method to bring the best outcome. most of the data used to analyze the performances are secondary data. it also used a comparative study of the nbfis based on their individual financial performances. sample size & sources of data: the data used in this study consists of nine finance companies (nbfi) that are listed on the dhaka stock exchange. so the sample size is nine. the duration for analyzing the data is the period from 2016-2019. these data are collected from the company’s annual report as well from their websites. indicators for performance measurement: to measure the financial performance the following ratios are used:  profitability ratios: return on equity (roe), return on assets (roa), admin expenses to profit before tax ratio, earnings per share (eps), and return on capital employed (roce).  liquidity ratio: current ratio  leverage ratio: capital ratio  institution size: total assets, total equity results and discussions to get a sound outcome of the financial performance analysis this study used time series data analysis for different types of ratios such as roa, roe, roce, interest coverage ratio, current ratio, and capital ratio and measures their result. the results with discussion are as follows. return on asset (roa): the term return on asset means how much return is generated from using one unit of assets. it denotes the earning capacity of the nbfi by using its assets (rose, 2016). it is calculated dividing net income by total assets. the calculated results for roa shows idlc generates the highest roa (13.46) and plfsl generates the lowest roa (3.57) for their https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 5 shareholders and overall it has an increasing trend from 2016 to 2019. it indicates a good earning capacity for nbfis [see appendix table-01]. return on equity (roe): return on equity is an indicator to measure the financial performance of a company (rose, 2016). it is calculated dividing net income by shareholders' equity. here the calculated result for roe shows idlc generates the highest roe (14.22) and plfsl generates the lowest roe (4.63) for their shareholders and overall it has an increasing trend from 2016 to 2019. it indicates a good sign for nbfis. [see appendix table-02]. return on capital employed (roce): the term return on capital employed is a financial ratio used to assess a company's profitability and efficiency of using capital (rose, 2016). it helps to understand how well a company is generating profits from its using capital. here the calculated result for roce shows that idlc generates the highest roe (17.04) and plfsl generates the lowest roe (7.15) and overall it has an increasing trend from 2016 to 2019. it is a good indication for nbfis. [see appendix table-03]. earnings per share (eps): the term earnings per share means how much earning the company is generating against each share. it measures the operating efficiency of a company (besley, 2017). here the calculated result for eps shows that gspfin generates the highest eps (5.20) and nhfil generates the lowest eps (1.71) and overall it has an increasing trend from 2016 to 2019. it is a good sign for nbfis. [see appendix table-04]. institution size/ total assets: the term asset means anything that can generate business for a company. but for any financial institution’s assets means financial assets. it shows the financial strength of a company (gitman, 2020). here the calculated result of total assets shows that lbfl maintains the highest level of total assets (5850.75 million) and ipdc maintains the lowest level of total assets (2459.75 million). but for the growth rate dbh is in the highest position (55%) whereas plfsl is in lowest the position (-12%) during the selected period. [see appendix table-05]. institution size/ total owners’ equity: equity is essentially the owner's interest in the company's assets. it is what remains for the owner once he has deducted all liabilities from the assets (gitman, 2020). here the calculated result of total equity shows that lbfl maintains the highest level of total equity (1393 million) and plfsl maintains the lowest level of total equity (1126.75 million). but for the growth rate icb is in the highest position (24.86%) whereas plfsl is in lowest the position (-9.46) during the selected period. [see appendix table-06]. current ratio: current ratio is an indicator that specifies the firm’s ability to pay its current liability with its current assets. it measures the financial health of a company based on its liquidity (besley, 2017). here the calculated result for current ratio shows lbfl has the highest current ratio (12.76) and plfsl has the lowest current ratio (2.92) and overall it shows a fluctuation trend from 2016 to 2019. it is not a good sign for nbfis. [see appendix table-07]. capital ratio: the term capital ratio means the extent of using the equities and retaining profits for a financial institution to its operations. it represents the percentage of owners’ equity in the total assets of any financial institutions (besley, 2017). here the calculated result for capital ratio https://www.investopedia.com/ask/answers/062215/what-are-financial-risk-ratios-and-how-are-they-used-measure-risk.asp https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 6 shows dbh has the highest capital ratio (70.34) and idlc has the lowest capital ratio (22.05) and overall it shows a fluctuation trend from 2016 to 2019 which is not a good sign for nbfis [see appendix table-08]. non-preforming loan (npl): a non-performing loan (npl) is a loan where the borrower is in default and has not paid the monthly payment of principal and interest for a certain amount. nonperforming loans arise when borrowers lack the money to make repayments or are in situations that make it difficult for them to continue to make repayments (rose, 2016). here the calculated result for non-performing loan shows lbfl has the highest npl (166.75 million) and ipdc has the lowest npl (88.25 million) and overall it shows an increasing trend from 2016 to 2019 which is an alarming sign for nbfis [see appendix table-09]. interest coverage ratio (icr): the term interest coverage ratio is a debt and the profitability ratio. it is used to determine the capacity of a company to pay interest on its outstanding debt. interest coverage ratio is calculated by dividing a company's ebit by its interest expense during a given period (besley, 2017). here the calculated result of interest coverage ratio shows that most of the companies are financially capable to pay their financial obligation. here lbfl has the highest interest coverage ratio (2.12) and gspfin has the lowest interest coverage ratio (1.09) [see appendix table-10]. comparison of financial performance of investment bank to evaluate the market position of nbfis scores is assigned on the basis of financial ratio of different nbfis in bangladesh. the scoring system is based on the performance of different ratios. the best performer will scored from 1 and the worst performer will be scored with 9. here the score is given by 1 = best performer 2 . . 9 = worst performer if any value not available, in that case it will be scored by 9 for undesirable performance. the comparison table is available in the appendix section. [see appendix table-11]. recommendations as nbfis are one of the major sources of funds for the corporations so it contributes a lot to the economic development of the country. in bangladesh the operation of sector is developing gradually. based on the calculated result, it can be said that the performance for most of nbfis in bangladesh in continuously improving and they are playing a significant role in the market. based on roa, roe and roce the financial performance of the nbfis shows an increasing trend which is a good sign for this industry. based on eps the financial performance of nbfis also shows an increasing trend but for current ratio, capital ratio it shows a fluctuating trend which means that at any time it can go downward. so to overcome this situation they have to be more efficient to utilize their funds. one of the major findings of this study is the non-performing (npl) shows an increasing trend of nbfis. npl creates obstacle for the development both for the company and also for the economy. selecting the adverse loan was the main reason to increase the nonhttps://www.investopedia.com/terms/i/interest.asp https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 7 performing loan. so to reduce the amount they have to be careful in loan distribution and take proper initiative to collect the existing loans. in bangladesh the main sources of generating earning for nbfis is to provide loans and investing in capital market. although in recent time performance of capital market is good but still it follows a huge fluctuations. so to be more competitive and to compete with banks they have to identify others options to invest funds and generate more secured income. conclusion this study focuses to analyze the efficiency of nbfis in bangladesh within the period from 2019 to 2019. for this it has applied different types of performance measurement tools and techniques. different types of ratios are used to analyze the performance of nbfis in bangladesh. finally, based on their performances a rank has been created. this study says that nbfis in bangladesh are doing well for some ratios while for others it has to improve their performance. the main area where they have to improve is the loan selection. they have to reduce the number of adverse loan selection. at the same time they have to identify other income generating areas to be more competitive. although there are a lot of obstacle nbfis has a huge scope to develop themselves. bangladesh is moving to a developing country from under developed country and it has become possible for the economic revolution. so nbfis can take the advantage of this revolution. for this they need to build a strong brand image by providing efficient services to their customers. so in the coming years they have a huge potential to perform. due to the unavailability of data this study compiles the results of using only nine nbfis which is a major limitation of this study. in future, by incorporating other nbfis and other financial measure more accurate results can be created and that is the scope for future research of this study. this study will help the managers to take more accurate decisions related to their operations and the investors to take their investment decision in the capital market. references akber, s. m. (2019). relationship between profitability and non-performing loan and a comparative financial performance analysis of shari’ah based banks of bangladesh. indian journal of finance and banking, 3(2), 32-42. akber, s. m. & dey, a. (2020). evaluation of the financial performance between traditional private commercial banks and islamic banks in bangladesh. international journal of islamic banking and finance research, 4(2), 1-10. almumani, m. a. (2014). a comparison of financial performance of saudi banks. asian journal of research in banking and finance, 4(2), 20-29. alsamaree, a. h. (2013). financial ratios and performance of banks. journal of research on international business and management, 3(1), 17-19. avkiran, n. (1995). developing an instrument to measure customer service quality in branch banking. international journal of bank’s marketing, 12(6), 10-18. https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 8 besley, s. & bringham, e.f. (2017). essentials of managerial finance.14th edition, southwestern: thomson higher education. diamond, d. d. p. (1983). bank runs, deposit insurance and liquidity. journal of political economy, 91(3), 41-49. elizabeth, d. e. g. (2004). efficiency customer service and financial performance among australian financial institutions. international journal of bank marketing, 22(5), 31-42. fukuyama, h. (1995). measuring efficiency and productivity growth in japanese banking: a nonparametric approach. journal of applied financial economics, 3(2), 95-107. gitman,l.j., zutter, c.h., & smart, s.b. (2020). principles of managerial finance. 15th edition, new york: pearson plc. madura, j. (2018). financial institutions and markets, 11th edition, new york: pearson plc. miskhin, f. (2019). the economics of money, banking and financial markets. 11th edition, new york: pearson plc. raza, a., & farhan, m. (2011). a comparison of financial performance in investment banking sector in pakistan. international journal of business and social science, 2(9), 35-45. rose, p. (2016). commercial bank management. 4th edition. new york: mcgraw-hill. tarawneh, m. (2006). a comparison of financial performance in the banking sector: some evidence from omani commercial banks. international research journal of finance and economics, 3(1), 21-31. tandon, d., chaturvedi, a., & vidyarthi, h. (2019). non-performing assets and profitability of indian banks: an econometric study. international journal of business competition and growth, 6(1), 60-76. appendices appendix a: table 1. return on asset (roa) banks/year 2016 (%) 2017 (%) 2018 (%) 2019 (%) average (%) lbfl 11.31 12.91 13.06 13.30 12.65 idlc 14.54 10.68 13.68 14.95 13.46 bifc 11.12 12.85 10.86 5.70 10.13 gspfin 2.41 6.02 5.64 6.72 5.20 dbh 4.01 3.25 5.71 5.89 4.72 icb 2.47 4.28 4.32 5.53 4.15 nhfil 2.44 3.93 4.68 5.79 4.21 https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 9 plfsl 2.98 3.77 3.46 4.06 3.57 ipdc 4.96 6.30 6.11 7.30 6.17 average 6.25 7.11 7.50 7.69 7.14 source: annual report of nbfis’ (2016-2019) appendix b: table 2. return on equity (roe) banks/year 2016 (%) 2017 (%) 2018 (%) 2019 (%) average (%) lbfl 12.29 13.89 14.04 14.28 13.63 idlc 15.3 11.44 14.44 15.71 14.22 bifc 12.12 13.85 11.86 6.7 11.13 gspfin 3.91 7.52 7.14 8.22 6.70 dbh 5.11 4.35 6.81 6.99 5.82 icb 3.29 5.1 5.14 6.35 4.97 nhfil 3.79 5.28 6.03 7.14 5.56 plfsl 4.04 4.83 4.52 5.12 4.63 ipdc 6.31 7.65 7.46 8.65 7.52 average 7.35 8.21 8.60 8.80 8.24 source: annual report of nbfis’ (2016-2019) appendix c: table 3. return on capital employed (roce) banks/year 2016 (%) 2017 (%) 2018 (%) 2019 (%) average (%) lbfl 14.79 6.39 6.54 7.18 8.73 idlc 18.02 14.16 17.16 18.83 17.04 bifc 14.6 16.33 14.34 9.58 13.71 gspfin 5.89 9.5 9.12 10.6 8.78 dbh 7.49 6.73 9.19 9.77 8.30 icb 5.95 7.76 7.8 9.41 7.73 nhfil 5.92 7.41 8.16 9.67 7.79 plfsl 6.46 7.25 6.94 7.94 7.15 ipdc 8.44 9.78 9.59 11.18 9.75 average 9.73 9.48 9.87 10.46 9.89 source: annual report of nbfis’ (2016-2019) appendix d: table 4. earnings per share (eps) banks/year 2016 (%) 2017 (%) 2018 (%) 2019 (%) trend average (%) lbfl 3.3 3.35 3.5 4.05 22.73 3.55 idlc 3.54 3.68 3.75 3.95 11.58 3.73 bifc 2.12 2.85 2.86 3.20 50.94 2.76 gspfin 2.41 6.02 5.64 6.72 178.84 5.20 https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 10 dbh 2.51 2.75 3.21 3.39 35.06 2.97 icb 1.47 1.28 1.32 2.53 72.11 1.65 nhfil 1.44 1.93 1.68 1.79 24.31 1.71 plfsl 1.98 1.77 1.46 1.06 -46.46 1.57 ipdc 3.76 3.10 2.91 3.10 -17.55 3.22 average 2.50 2.97 2.93 3.31 2.93 source: annual report of nbfis’ (2016-2019) appendix e: table 5. institution size/ total assets banks/year 2016 tk(million) 2017 tk(million) 2018 tk(million) 2019 tk(million) average growth % average tk(million) lbfl 5576 5477 6245 6105 9.49 5850.75 idlc 5719 5521 5599 6068 6.10 5726.75 bifc 4533 4953 4912 5295 16.81 4923.25 gspfin 5709 5511 5589 6058 6.11 5716.75 dbh 2915 3032 4414 4537 55.64 3724.50 icb 33624 4004 4458 4604 27.04 4172.50 nhfil 2324 2327 2739 2990 28.66 2595.00 plfsl 2647 3050 2847 2328 -12.05 2718.00 ipdc 2446 2462 2464 2467 2459.75 source: annual report of nbfis’ (2016-2019) appendix f: table 6. institution size/ total owners’ equity banks/year 2016 tk(million) 2017 tk(million) 2018 tk(million) 2019 tk(million) average growth % average tk (million) lbfl 1337 1310 1435 1490 11.44 1393.00 idlc 1260 1303 1289 1343 6.59 1298.75 bifc 1287 1326 1266 1240 -3.65 1279.75 gspfin 993 1115 1289 1059 6.65 1114.00 dbh 1098 1112 1250 1257 14.48 1179.25 icb 1633 1767 1947 2039 24.86 1846.50 nhfil 1023 1202 1252 1273 24.44 1187.50 plfsl 1152 1086 1226 1043 -9.46 1126.75 ipdc 1324 1342 1319 1315 -0.68 1325.00 source: annual report of nbfis’ (2016-2019) appendix g: table 7. current ratio banks/year 2016 (%) 2017 (%) 2018 (%) 2019 (%) average(times) lbfl 11.75 16.50 11.95 10.83 12.76 idlc 11.33 12.30 12.62 13.45 12.43 https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 11 bifc 1.53 1.58 1.50 1.73 1.59 gspfin 2.48 2.55 2.50 2.61 2.54 dbh 19.93 13.80 5.71 3.78 10.81 icb 1.31 2.85 2.85 3.10 2.53 nhfil 7.95 10.88 7.57 8.73 8.78 plfsl 2.93 2.85 2.82 3.07 2.92 ipdc 12.93 13.59 16.67 16.82 15.00 average 8.02 8.54 7.13 7.12 7.70 source: annual report of nbfis’ (2016-2019) appendix h: table 8. capital ratio banks/year 2016 (%) 2017 (%) 2018 (%) 2019 (%) average(times) lbfl 9.74 18.45 33.99 30.00 23.05 idlc 11.50 12.24 9.70 54.76 22.05 bifc 35.57 35.65 30.77 29.17 32.79 gspfin 23.73 27.46 30.86 23.53 26.40 dbh 56.42 71.54 77.92 75.47 70.34 icb 50.76 46.33 45.80 46.45 47.34 nhfil 57.92 57.63 56.30 56.77 57.16 plfsl 43.99 41.05 43.84 44.32 43.30 ipdc 60.91 59.50 59.20 58.40 59.50 average 38.95 41.09 43.15 46.54 42.43 source: annual report of nbfis’ (2016-2019) appendix i: table 9. non-preforming loan banks/year 2016 tk(million) 2017 tk(million) 2018 tk(million) 2019 tk(million) average tk(million) lbfl 140 158 185 184 166.75 idlc 127 115 188 150 145.00 bifc 98 116 114 118 111.50 gspfin 95 98 102 106 100.25 dbh 86 88 92 98 91.00 icb 130 138 144 151 140.75 nhfil 95 102 108 116 105.25 plfsl 187 206 202 198 198.25 ipdc 84 86 89 94 88.25 average 116.00 123.00 136.00 135.00 127.00 source: annual report of nbfis’ (2016-2019) appendix j: table 10: interest coverage ratio banks/year 2016 (%) 2017 (%) 2018 (%) 2019 (%) average(times) lbfl 1.85 1.97 2.28 2.39 2.12 https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 12 idlc 1.41 1.39 1.68 1.94 1.61 bifc 1.58 2.01 1.73 1.89 1.80 gspfin 1.01 1.26 1.55 0.55 1.09 dbh 1.13 1.25 1.39 1.48 1.31 icb 1.42 1.60 1.94 1.86 1.71 nhfil 1.67 1.74 1.05 1.06 1.38 plfsl 1.79 1.84 1.32 1.28 1.56 ipdc 1.87 2.89 2.95 3.14 2.71 average 1.53 1.77 1.77 1.73 1.70 source: annual report of nbfis’ (2016-2019) appendix k: table 11: ranks of investment banks based on financial performance performance indicators investment banks lbfl idlc bifc gspfin dbh icb nhfil plfsl ipdc financial measures roa 2 1 3 5 6 8 7 9 3 roe 2 1 3 5 6 8 7 9 4 roce 4 1 2 3 5 7 6 8 9 eps 3 2 6 1 5 8 7 9 4 total assets 2 3 5 4 4 1 8 7 9 total equity 2 4 5 9 7 1 6 8 3 current ratio 2 3 9 7 4 8 5 6 1 capital ratio 8 9 6 7 1 4 3 5 2 npl 8 7 5 3 2 6 4 9 1 interest coverage 2 5 3 9 8 4 7 6 1 source: authors own contribution appendix l: table 12: samples used in the study sl. symbol full name 1 lbfl lankabangla finance ltd. 2 idlc idlc finance ltd. 3 bifc bangladesh industrial fin. co. ltd. 4 gspfin gsp finance company (bangladesh) limited 5 dbh delat brac housing finance corp. ltd. 6 icb investment corporation of bangladesh 7 nhfil national housing fin. and inv. ltd. 8 plfsl peoples leasing and fin. services ltd. 9 ipdc ipdc finance limited. https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 13 author contributions conceptualization: s. m. akber, dhiman barua data curation: s. m. akber, dhiman barua formal analysis: s. m. akber funding acquisition: s. m. akber, dhiman barua project administration: s. m. akber software: s. m. akber validation: s. m. akber, dhiman barua writing – original draft: s. m. akber, dhiman barua writing – review & editing: s. m. akber, dhiman barua conflict of interest statement the authors declare that they have no competing interests. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (https://creativecommons.org/licenses/by/4.0). american finance & banking review vol. 6, no. 1; 2021 issn 2576-1226 e-issn 2576-1234 published by cribfb, usa 42 impact of artificial intelligence and digital economy on industrial revolution 4: evidence from bangladesh dr. mohammed masum iqbal professor & dean faculty of business & entrepreneurship daffodil international university, dhaka, bangladesh e-mail: deanfbe@daffodilvarsity.edu.bd https://orcid.org/0000-0001-9414-0773 k. m. anwarul islam associate professor department of business administration the millennium university, dhaka, bangladesh e-mail: anwarul@themillenniumuniversity.edu.bd https://orcid.org/0000-0002-5305-6724 nurul mohammad zayed assistant professor department of business administration daffodil international university, dhaka, bangladesh e-mail: zayed.bba@daffodilvarsity.edu.bd https://orcid.org/0000-0001-7519-6552 tahrima haque beg assistant professor department of management and finance sher-e-bangla agricultural university, dhaka, bangladesh e-mail: sau.finance1@gmail.com shahiduzzaman khan shahi independent researcher department of real estate daffodil international university, dhaka, bangladesh e-mail: shahi27-334@diu.edu.bd https://orcid.org/0000-0003-4669-9104 received: september 23, 2021 accepted: november 12, 2021 online published: december 13, 2021 doi: 10.46281/amfbr.v6i1.1489 url: https://doi.org/10.46281/amfbr.v6i1.1489 mailto:deanfbe@daffodilvarsity.edu.bd mailto:zayed.bba@daffodilvarsity.edu.bd mailto:sau.finance1@gmail.com mailto:shahi27-334@diu.edu.bd https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 43 abstract this research investigates effects of artificial intelligence and digital economy on the 4th industry revolution from the perspective of bangladesh. artificial intelligence affecting the labor market both positively and negatively. because of artificial intelligence, few existing jobs have been demolished and few new jobs have been emerged as well. digital economy in bangladesh is now an emerging issues with the blessings of artificial intelligence. few employment opportunities will be created in bangladesh because of emerging digital economy. the objective of this research is to analyze these opportunities and come out with few policy recommendations to implement towards industry revolution 4. secondary data have been used along with recent relevant literatures to achieve the above stated objective as this is an empirical research. ideas regarding revised national plan, financial tools, emerging digital economy in bangladesh are the prominent outcome of this research. the policy recommendations of managing the gap between digital economy and industry revolution 4 regarding artificial intelligence could be helpful to the government of the peoples’ republic of bangladesh to implement policies. keywords: artificial intelligence, digital economy, industry revolution 4, bangladesh, labor market, policy. jel classification codes: l0, d74. introduction the fourth industrial revolution (fir) has become a trendy word. bangladesh is being compelled by globalization to adopt 4.0 industrial revolution technologies (fir). in the 4.0 industrial revolution, artificial intelligence is starting to deliver on that promise of delivering actual value, which is necessary based on currently available data, processing capabilities, and algorithms. the success of this modern technology in a given country is determined by the country's culture, customs, moral codes, legal, and financial condition. both developed and underdeveloped countries will have significant hurdles in dealing with fir technology. because of their advanced technologies and competent people resources, rich countries may be at a lower danger than poor countries (zhaltyrbayeva et al., 2021). fir developments can be a basic power in helping bangladesh in accomplishing its objectives. in any case, the public authority faces a stupendous test in standardizing fir. to manage the fir's specialized development, the public authority should embrace legitimate arrangements. something else, the fir will be a revile for bangladesh instead of a gift from heaven. this review will figure the political-monetary circumstance in bangladesh under the fir and dissect the progressions and difficulties that the execution of the fir has achieved. in 2019, the world bank anticipated that increased automation would threaten around 57 per cent of jobs in oecd countries, 77 per cent of jobs in china, and 47 per cent of jobs in the united states. to deal with fir innovations, the government will need to change existing rules and strategies. with the innovation and implementation of numerous new advances in artificial intelligence, nanotechnology, and the automation process, the volume of work and occupations will have increased. automation, on the other hand, has some drawbacks. https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 44 the expansion of digital platforms in bangladesh has been fueled by improvements in internet connectivity as well as an increase in the availability of smartphones. in metropolitan areas, particularly in dhaka, ride-sharing apps and food deliveries have grown commonplace. bangladesh has surpassed india as the world's second-largest source of internet labour. as a result, there are several chances to investigate the potential of the digital platform economy to generate employment for a large number of bangladeshi youngsters. many third world countries, such as bangladesh, are focused on the digital economy: a worldwide market for digital freelancing, as a result of growing digitization. the computerization of a country's economy cultivates not just assistance industry advancement but then likewise homegrown business creation, taking into account quicker monetary development. many enormous firms in created nations like the united states, the united kingdom, and australia are falling back on it rethinking from nations like bangladesh to save expenses and dangers, bringing about a new flood in outsourcing. literature review man-made consciousness, advanced mechanics, computer-generated reality, biotechnology, 3d printing, blockchain and the iot are uprooting individuals in a few enterprises (park, 2018). as indicated by a late exploration, by 2030, robotization would have supplanted 800 million incompetent representatives throughout the planet (world economic forum, 2020). many academics have projected that the effective transition of mechanization under the fir will improve the quality and efficiency of industry products (ghobakhloo & fathi, 2019; zhong et al., 2017). india, pakistan, nepal, and sri lanka, all developing countries in south asia, are moving toward fir. they are endeavouring to fuse fir progressions into their nearby ventures to upgrade them (adhikari, 2020; rashid, 2020). bangladesh is anticipated to leave the least developed country (ldc) class by 2024 if its present advancement pace proceeds (kim, 2018). the first industrial revolution began in the late 18th century in the united kingdom, with mechanical manufacture (frey & osborne, 2017). men controlled the workplace at that point, and females were pushed out of creation occupations (philbeck & davis, 2018). as indicated by macpherson (1962), this upheaval has brought about quick development underway limit, which has prompted industrialization, the foundation of homegrown and worldwide economies, the significance of majority rule governments, and an increment in the northwestern side of the equator's working class. the second mechanical insurgency was a specialized change that happened between the late nineteenth and mid-twentieth hundred years because of abundant regular assets, solid government strategies, and ample work supply (frey & osborne, 2017; smil, 2005). business visionaries and money managers utilized innovation to further develop creation cycles, and time saw a flood in things that were the immediate outcome of science and designing (hughes, 2004). new advancements (steamships, phones, gas turbines, fake manures, rail lines, electric light, and typewriters, among others) were presented at that point, bringing about mass quick industrialization, quality control, the arrangement of metropolitan media communications developments, accuracy fabricating, and the rise of mass travel dependent on inner ignition (philbeck & davis, 2018). even though the third industrial revolution was dispatched in 1960, it started vigorously after world war ii (frey & osborne, 2017). this wellknown uprising had presented the pc, and the web prompted the vote based administration of data, the value decreases, and quick quality improvement, which was all introduced as another https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 45 period of the industrialist framework; change the monetary design for a conflict-torn world, making calculation simpler for organizations and governments (philbeck & davis, 2018). the fir or 4.0, which is portrayed by applying new ideas like hereditary variables, computerized reasoning, cordless advancements progress, digital actual structure, cloud administrations, web of things, nanotechnology, biotechnology, and 3-d printing into the world's biggest workplace, is now and again portrayed (schwab, 2017). to adjust to 4.0, governments ought to energize proficient tutoring in new advances, set up a solid connection between schooling and the work market, and stress stem (science, technology, engineering, and mathematics) preparing for youngsters. besides, fir has brought about a critical pay difference, with just 8% of the total populace acquiring half of the world's income and the rest 92% procuring the other half (arntz et al., 2016). india, indonesia, brazil, pakistan, thailand, nigeria, and malaysia are among the created and creating economies that have endeavoured to take on the fir (bahrin et al., 2016; iyer, 2018; ezenwa et al., 2018; berawi, 2018). bangladesh is far from the fir's offices. in any case, due to the accessibility of specialized imports and new settings, the nation will have no trouble zeroing in on infrastructural innovation and advancement ingestion (gilchrist, 2016; walcott, 2017). bangladesh has seen a remarkable expansion in internet connectivity in recent years, as well as certain supportive policies for digital entrepreneurs (fintech bd, 2019). access to capital, on the other hand, is a big stumbling block for digital startups. furthermore, to promote digital platforms, it is vital to make online transactions as simple as possible (fintech bd, 2019). online technologies connect those who need it with people who can supply it (deloitte, 2018). the majority of customers see advantages in terms of convenience, choice, and openness. additionally, online platforms allow new providers to enter the market, increasing competition. users are more willing to locate cheaper products using a comparison platform in this manner, which may also allow the customer to access more knowledge so that they are fully educated about the product, service, or content they want (oxera, 2015). businesses can use digital platforms to get help with fundraising, recruiting, marketing, and e-commerce. according to analysis, digital platform companies lower regional barriers, lower marketing costs, and increase the market size (oxera, 2015). according to estimates, over 39 million individuals in bangladesh use facebook (statista.com, 2020). as the internet becomes more widely available, many entrepreneurs in bangladesh are turning to digital channels to expand their businesses. while the proportion of persons who do not have access to credit cards, digital money and cash-on-delivery have become widely accepted methods of payment (boostdot, 2020). objectives the major objective of this paper is to discover the impact of artificial intelligence and the digital economy on industry revolution 4 in the context of bangladesh. the specific objectives are to discover the current view of the world digital economy for the next few decades based on artificial intelligence which is going to play a tremendous role in the industrial revolution 4.0. the consequences from the world will create an impact on developing countries like bangladesh. finding the prospect of the scenario of bangladesh is one of the major goals of this paper. this paper identifies the challenges and recommendations for bangladesh. https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 46 methodology this article is based on subjective investigation and is qualitative. the evolution looked into the effects of artificial intelligence as well as the digital economy on the fourth industrial revolution in bangladesh. the majority of the citations used to achieve this goal were optional. secondary data and information were gathered from a variety of online sources, including scholastic diaries and manuscripts of various types, college diaries, and other online sources, among others. the article critically assessed the current global situation and examined bangladesh's prospects. as a result, a statistical test known as the volatility test was used in this investigation. in any case, the secondary sources of data were cautiously validated before being included in this analysis. to assess the current condition, various graphs have been used. results & discussion revenues from ai for enterprise solutions are expected to expand from $1.62 billion in 2018 to $31.2 billion in 2025, representing a 52.59 per cent compound annual growth rate (cagr). recognition software and tagging, patient data handling, global positioning systems ( gps, predictive maintenance, the use of methodologies and machine intelligence to predict and thwart potential threats, smart recruitment, and hr systems are just a few of the many enterprise application use instances predicted to fuel ai's massive development. figure 1. enterprise artificial intelligence market revenue worldwide 2016-2025 (in million u.s. dollars) source: statista 84 per cent of businesses feel that investing in ai will help them get a competitive edge. seventy-five per cent say ai will create new enterprises while also giving competitors new methods to enter their markets. sixty-three per cent feel that they need to save costs will necessitate the employment of ai. https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 47 figure 2. reasons for adopting ai worldwide (as of 2017) source: statista ai is being used or considered by 87 per cent of existing ai adopters for sales forecasting and boosting e-mail marketing. sixty-one per cent of respondents stated they were using or intending to use ai for sales forecasting. the graph below compares the adoption rates of existing ai adopters to the overall response rate. figure 3. ai use case adoption worldwide (as of 2017) source: statista https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 48 there are numerous infrastructure issues in bangladesh, including weak communication and transportation facilities, insufficient broadband internet connectivity, and the regular occurrence of floods and other natural catastrophes, all of which are posing challenges to the automation of the country. this also makes it difficult for the country to profit from industry 4.0. another fact is that bangladesh has a lot of cheap labour. because bangladesh is indeed a developing country, a large percentage of the population is uneducated. that is why these folks can be found at a low price. as a result, industry owners have no plans to abandon this low-cost labour and investing in infrastructure structures and machinery to adopt industry 4.0. infrastructure that is poor or non-existent is likewise a major impediment. industry 4.0 necessitates more adaptable buildings with cutting-edge technology. however, practically all factories in bangladesh are built on a low-cost basis. another element to consider is the expense of implementing new technologies. even though the components of industry 4.0 are incredibly efficient and valuable for all industries, the initial cost is a major worry. another crucial fact is that industry owners and associates are unwilling to help. many of them believe that everything should remain as it is. in this scenario, government assistance and action would be extremely beneficial. if the government deems it necessary to follow industry 4.0 rules, each industry will be required to do so. figure 4. factors hinders the industry source: author's compilation several obstacles are preventing the country from reaping the full benefits of the digital platform economy. this included, among other things, inaccessibility to computers and the 0 2 4 6 8 10 12 factors hinders the industry lack of knowledge availability of cheaper labour poor infrastructure expensive installation of technologies lack of government support lack of willingness https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 49 internet, insufficient worker skills, difficulty in receiving money from overseas, and financial uncertainties, all of which pose a threat to the sector's long-term viability. several policy recommendations are suggested to address these difficulties, including equipping individuals with market-relevant skills, researching new financial tools, and developing a 5-year national digital platform economy growth plan. developing a based practice for the use of information provided by digital platforms, modifying consumer protections to include digital platforms, going to attract capital inflow in digital platforms in bangladesh, bringing workers and consumers in the digital platform under the tax net, and so on. increasing digital awareness among the general public, offering tax breaks for new companies entering the digital platform economy, and using economic incentives to encourage brick-and-mortar businesses to move digital. bangladesh's increasing digitalization, which includes simple internet connectivity in urban areas and governmental and non-government programs to promote freelancing, has aided this mode of work's recent expansion. as a consequence, according to the oxford internet institute, bangladesh has already surpassed india as the second-largest source of online labour (oii). as per the ict division of bangladesh, out of 650,000 authorized freelancers in the country, about 500,000 active freelancing work every month, producing $100 million annually. figure 5. outsourcing world rank source: the online labour index, by country india is the leading provider of online labour, accounting for over 24% of all global freelancers, followed by bangladesh (16%) and the united states (12%). (12 per cent). different https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 50 countries concentrate on different aspects of freelancing. for example, indian freelancers monopolize technology and software development, while bangladesh is the leading provider of advertising & distribution support services. according to adb assessment, bangladesh would achieve a 7.5 per cent rise in the gdp in the fiscal year 2020-21, the second-highest amongst south-east asian countries. when most industries, whether large or small, were fighting for survival in 2020, the situation for the ict industry was radically different. the ict industry has long been thought to have the potential to disrupt and reshape bangladesh's economy. software development, on the other hand, falls under the it services umbrella. it is classified as engineering services in the it services category and is highly sought after by international companies wishing to outsource this aspect of their operations to another country. platform and software development, testing, specialist software design, and more are all possibilities in this category. this industry is the driving force behind global digital growth, and world-class knowledge in this subject is always in demand. bangladeshi enterprises have been exporting these services for some time, and freelancers from all around bangladesh have recently joined them, sourcing work from online platforms such as upwork and freelancer on their own. the interconnected and multidimensional character of software development, on the other hand, necessitates the support of multi-talented teams that can only be found in corporations. figure 6. share in total ict sector (bangladesh) source: statista blessings of covid-19 on advancing towards artificial intelligence e-learning, distance classes, telemedicine, and online activities have all witnessed a huge increase in demand as a result of the pandemic. bangladeshis have become increasingly accustomed to online purchasing as a result of the lockdown. year-round, individuals continued to buy more expensive things such as mobile phones, laptop computers, televisions, freezers, and other technological gadgets than they had previously. as for the outcome, there was over tk 30,000 crore in e-commerce business during the pandemic, with over 2,000 e-commerce business stores across the country. one area that will grow in importance in the coming years is https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 51 e-learning. although schools, colleges, and institutions remain closed, the administration has made an optimistic effort to maintain education through various platforms and even sangsad tv. another area that has seen great growth in telemedicine. people in bangladesh could never have imagined consulting with doctors via virtual platforms. people from remote areas are now receiving treatment from dhaka-based doctors. telemedicine, e-commerce, and e-learning are in high demand all around the world, not only in bangladesh. ai may help with digitalization in a variety of ways, including digital relationship management, digital channel adoption, digital identity verification, digital onboarding, digital fraud protection, and more. the mujib year is in full swing with the implementation of over 100 online citizen services. bangladesh, as well as the rest of the world, will now place a greater emphasis on digitizing government services. bhutan, the maldives, and afghanistan, as well as nigeria, kenya, rwanda, and cameroon, are putting a greater emphasis. all of these factors have raised global demand, presenting a huge opportunity for bangladesh's ict industry to advance to the next level and become a prominent provider of ict solutions. bangladesh should target both developed and developing countries while delivering modern technologies such as ai, blockchain, big data, and iot services. in the coming decade, africa, as well as some nations in southeast and middle asia, will be key markets for egovernance services. bangladesh is adequately equipped to assist these nations. conclusion and policy recommendations bangladesh is a prospective industrial revolution country. bangladesh will experience great economic growth over a period if industry 4.0 can be implemented due to the country's large human resources and environmental support. using cps, iot, and ios in conjunction with erp, plm, scm, mes, sap, and other software systems, industry 4.0 will lead to digitization and enhancement of the production and manufacturing process as well as the supply chain, resulting in production flexibility and smartness. industry 4.0 encourages the integration of big data, cps iot, and artificial intelligence (ai). the importance of digital platforms in the economy is growing all the time. in this digital platform economy, which has risen to prominence as a result of the covid-19 pandemic, business opportunities are also expanding. however, in the coming days, gaining consumer trust and confidence would be a big task for the digital platform economy in bangladesh. even though a large number of mobile applications are being released, there are no policies in place to govern their monetization. bangladeshi workers in the digital platform economy work because they want to, rather than because they have been properly trained by the educational system. as a result, they've barely scratched the surface of the digital platform economy's potential. the enormous young population of bangladesh may gain greatly from the digital platform economy if they were adequately trained and equipped with market-relevant skills. as a result, the government must move quickly and place a high priority on the digital platform economy in its policy agenda to avoid falling behind other nations during the 4th industrial revolution. https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 52 by lowering transaction costs, assisting in the validation of supplier quality and trustworthiness, and matching suppliers with prospective international customers, digital platform firms enable actors to participate in the global value chain. in addition to facilitating collaboration and integration into global value chains, digital platforms use tools like customer ratings to eliminate information frictions and help businesses build a reputable reputation (world bank, 2020). because of bangladesh's expanding relevance in the digital platform industry, the following policies are advocated to help the sector grow:  individuals with market-relevant skills, particularly technical and english language abilities, are empowered to engage in and benefit from the digital platform economy through specialized training.  investigate new financial tools and models for assuring the long-term viability of bangladesh's digital platforms.  create a 5-year national plan for the development of the digital platform economy.  develop a national standard for the use of data collected through digital platforms.  amend consumer protection legislation to include digital platforms in their scope.  encourage international investors to invest in digital platforms in bangladesh.  bring the digital platform economy's businesses and workers into the tax net.  raising digital literacy among the general public.  allow new enterprises entering the digital platform economy to take advantage of tax breaks.  use tax incentives to encourage brick-and-mortar businesses to go digital. to close the demand and supply gap between industry and academics and meet the industrial need, a tri-partite collaboration between industry, government, and academia should be formed. this will assist meet global and local demands, increase foreign reserves, and increase job prospects. a nation's destiny is determined by its visionaries. prime minister sheikh hasina has set the goal of transforming bangladesh into a digital bangladesh. bangladesh is on its path to becoming one of the world's leading ict solution providers, thanks to her strong leadership and the combined efforts of the government and industry. author contributions conceptualization: mohammed masum iqbal, nurul mohammad zayed data curation: mohammed masum iqbal, nurul mohammad zayed formal analysis: mohammed masum iqbal, nurul mohammad zayed funding acquisition: k. m. anwarul islam, nurul mohammad zayed project administration: mohammed masum iqbal, nurul mohammad zayed, software: mohammed masum iqbal, shahiduzzaman khan shahi, tahrima haque beg validation: mohammed masum iqbal, tahrima haque beg, nurul mohammad zayed writing – original draft: mohammed masum iqbal, nurul mohammad zayed writing – review & editing: k. m. anwarul islam, nurul mohammad zayed conflict of interest statement the authors declare that they have no competing interests. https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 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(2021). the legal status of the designation of artificial intelligence in a system of modern law. journal of legal, ethical and regulatory issues, 24(4), 1-8. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (https://creativecommons.org/licenses/by/4.0). american finance & banking review vol. 6, no. 1; 2021 issn 2576-1226 e-issn 2576-1234 published by cribfb, usa 26 relative standing of roe and roce in effective liquidity management: evidence from bangladeshi commercial banks dr. nazneen jahan chaudhury associate professor department of business administration international islamic university chittagong, chattogram, bangladesh e-mail: nazneenchy@yahoo.com https://orcid.org/0000-0002-1172-3576 received: september 23, 2021 accepted: november 12, 2021 online published: november 27, 2021 doi: 10.46281/amfbr.v6i1.1459 url: https://doi.org/10.46281/amfbr.v6i1.1459 abstract this study has been designed for examining the effectiveness of liquidity management through the relative standing of roe and roce of nationalized commercial banks in bangladesh for the duration of 2008–2018. six ncbs are selected purposively as sample. the study relies on a balanced panel data set of 66 observations which are gathered from the annual reports of banks and analyzed by random effects regression model. however, the research only examined a few variables. the empirical results reveal that the selected ncbs have been portraying better standing in case of roe than roce in effective liquidity management. the value of r2 of roe is 75.25%; it signifies that the explanatory measures could clarify 75.25% of the variations in roe. among the liquidity measures, assets/shareholders equity has highly significant negative effect; tier 1 capital/risk weighted assets has highly significant positive effect; deposits/assets have some significant positive and bank size in terms of deposits has some significant negative effect on roe of the selected ncbs. keywords: bangladesh, commercial bank, effective liquidity management, roe, roce. jel classification codes: e44, g14, g21, o16. prelude banking system is one of the major components of financial system for ensuring its continued existence. according to wilner (2000), efficient banking system acts as a means for the accumulation of deposit funds and investing those funds in a productive manner. without effective liquidity management, banks with intense foundation and bright future may not be profitable (jose et al., 1996). therefore liquidity management involves the strategic administration of inflows and outflows of banks’ funds that will concurrently maintain liquidity, profitability and solvency of banks. agbada and osuji (2013) articulated that with a view to achieving these conflicting objectives, liquidity management requires to be efficient in the https://orcid.org/0000-0002-1172-3576 https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 27 circulation of liquidity compatible with a preferred level of cash without twisting the profitability and functions of the bank. banking structure of bangladesh bangladesh has an assorted banking sector of 60 scheduled banks consisting of 06 nationalized commercial banks, 03 specialized banks, 42 private commercial banks and 09 foreign commercial banks. out of 42 private commercial banks, 32 banks are interest based whereas 8 are interest free (www.bb.org.bd/fnansys/bankfi.php). literature review basel committee on banking supervision (2008) explained that bank’s sustainability is dependent on the liquidity position as it measures the role of bank in maintaining cash flow. according to central bank of barbados (2008), liquidity problem may usually influence a bank’s profits and capital and exceptional circumstance, due to liquidity problem a solvent bank may become insolvent. jenkinson (2008) found that liquidity problem simultaneously affects both the performance and reputation of a bank. according to aspachs et al. (2005), banks can use three methods to indemnify against liquidity risks. such as (i) seizing bumper of liquid assets (ii) relying on interbank market (iii) relying on central bank-a lender of last resort. hirigoyen (1985) agreed that low liquidity leads to low profitability. chandra (2001) claimed that usually high liquidity acts as a signal of financial strength. assafneto (2003) argued that both high and low liquidity are undesirable. according to goddard et al. (2004), holding liquidity causes an opportunity cost and thereby having a negative consequence on profit making ability of banks. gup and kolari (2004) claimed that bank management should extend a liquidity plan that makes a balance between risks and returns. koch (1992); sufian and chong (2008) believed that as maintenance of liquidity bears both risk and return, a trade-off between liquidity and profit base can minimize the conflict. repullo (2003) found that liquidity management depends on hybrids of theories that are typically employed to obtain optimality. considering shiftability theory, dodds (1982) suggested that assets must meet three conditions-“shiftability, marketability or transferability” in order to ensure convertibility of the assets. based on anticipated income theory, nzotta (1997) identified two fundamental factors-earning capability and creditworthiness of a borrower which can be regarded as the undertaking for assuring sufficient liquidity. according to liability management theory, emmanuel (1997) suggested that the central bank or sister banks can come forward to lend money if other banks urgently require funds. he also propagated a very conservative outlook when he asserted that the banks do not lend money for long term, due to the long payback period. hence commercial loan theory is only applicable for short period, selfliquidating loans. agbada and osuji (2013) experienced that the soundness of banks can be enhanced by efficient liquidity management. according to kurawa and abubakar (2014); obida and owolabi (2012), liquidity management measures the growth and financial performance of a bank. as per nwankwo (1991), liquidity management requires assessing liquidity needs and meeting up those needs at all times without incurring any significant costs. it is asserted that adequate liquidity at normal market interest rate is crucial for both large and small banks to meet all types of liabilities. it is also said that adequate liquidity may help a bank to face three kinds of liquidity risks: (i) risk of funding (ii) default risk (iii) risk of failure to honor maturity obligations of customers. http://www.bb.org.bd/fnansys/bankfi.php https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 28 according to lartey et al. (2013), there is a very insignificant but positive association between optimum levels of liquidity and profit base. according to osborne et al. (2012), the association between liquidity and profit base becomes more positive in the distress of banking sector. arif and anees (2012); datta et al. (2011); adebayo et al. (2011) observed that profit base is significantly influenced by liquidity in the form of deposits. rauch et al. (2010) found that profit base is negatively associated with liquidity. other things held constant, adequate liquidity can improve profit base of banks (bernanke, 2008). flannery and rangan (2008) asserted that due to sudden shock or regulatory requirements, if liquidity of banks exceeds their optimum level reduces profit base only. jahangir et al. (2007) argued that loan deposit ratio works as an important determinant of banks’ profitability. hossain (2000) indicated that high percentage of fixed to total deposits influence the profitability performance of ncbs. lucy et al. (2018) found that liquidity has significant positive effect on roce. agbada and osuji (2013) explored that adequate capital is a must for maximizing roce. raza, farhan, and akram (2011) affirmed that roce is one of the major measures to measure profitability. alshatti (2015) recommended that quick ratio and investment ratio are positively associated with roe whereas capital ratio and liquid asset ratios are negatively associated with roe. according to bassey (2015), cash ratio, loan to deposit ratio, current ratio, loan to asset ratio and liquid ratio are significantly related with roe. olarewaju and adeyemi (2015) stated that there is no causal relationship between loan deposit ratio and roe. according to abdullah and jahan (2014), all other things held constant, the more liquid bank tends to have lower roe. tabari, ahmadi, and emami (2013) acknowledge that roe is one of the substitutes to measure profit base of a bank. ramadan et al. (2011) showed that there is an association between roe and the efficacy of credit management. according to ahmed et al. (2006), in order to fortify the economic conditions of a country, ncbs must improve their performance evaluation metrics such as npl, roa and roe. siddique (2004) recognized that npl is one of the outcomes of poor bank fund management. in the above sections the researcher has conducted an extensive review of literatures over banks’ liquidity management nationally and internationally. it is found that maximum studies have been conducted over management of liquidity and banking performance, liquidityprofitability relationship, and role of liquidity on banks’ profitability. however, relative standing of profitability measures in effective liquidity management in bangladesh remains an unexplored area. hence, the present study has been carried out to evaluate the relative standing of roe and roce of ncbs in efficient liquidity management. objectives of the study the key objective of this study is to analyze the relative prominence of roe and roce in effective liquidity management of ncbs. this objective basically attempts:  to evaluate the descriptive features of both liquidity and profitability measures of respective banks;  to analyze the liquidity measures that influence both the roe and roce;  to measure the association between liquidity measures and selected profitability measures;  to appraise the comparative position of roe and roce in ensuring effective liquidity management of selected ncbs; https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 29 theoretical framework independent variables (liquidity indicators) dependent variables (profitability indicators) figure 1. theoretical framework methodology of the study research design the study is descriptive as well as analytical in nature. it is descriptive as it demonstrated the effectiveness of liquidity management of ncbs in bangladesh through the measures of relative standing of its roe and roce. this study is analytical in the sense that it carried out a panel data analysis for testing hypothesis and interpreting relationship by analyzing available information. basically, the study intends to provide an appropriate strategy for the effective liquidity management of ncbs in bangladesh. hypotheses of the study 𝐻01: there is no statistically significant relationship between liquidity and roe of ncbs 𝐻11: there is a statistically significant relationship between liquidity and roe of ncbs 𝐻02: there is no statistically significant relationship between liquidity and roce of ncbs market rate of interest tas/se t1c/rwa a lqa/tas rrp/tls roe & roce lqas/tds bdo/tas tds/tas npl/gla bank size https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 30 𝐻12: there is a statistically significant relationship between liquidity and roce of ncbs specification of the model model 1: roe= a+ β1 (tas/se) + β2 (t1c/rwa) + β3 (lqa/tas) + β4 (rrp/tls) + β5 (lqa/tds) + β6 (bdo/tas) + β7 (tds/tas) + β8 (npl/gla) + β9 (mri) + β10 (bsz) + e model 2: roce= a+ β1 (tas/se) + β2 (t1c/rwa) + β3 (lqa/tas) + β4 (rrp/tls) + β5 (lqa/tds) + β6 (bdo/tas) + β7 (tds/tas) + β8 (npl/gla) + β9 (mri) + β10 (bsz) + e where, roe and roce are the dependent variables, a is the constant term, β’s measures the coefficient of explanatory variables, variables in the parenthesis are the explanatory variables and ‘e’ denotes the stochastic disturbance term. table 1. elucidation of dependent and independent variables and their replacements source: compiled by the researcher from the annual reports of banks choice of population, sample size and sampling method according to bangladesh bank, the no. of scheduled ncbs in bangladesh is 06. accordingly the researcher opted for 06 ncbs purposively. collection and analysis of data the study is mainly dependent on secondary data that have been gathered from yearly published information of selected ncbs. this balanced panel data sets of 66 observations throughout the period of 2008-2018 have been evaluated by some descriptive statistics, pairwise correlation, ratio analysis and ultimately, random effects regression model. variables formula/ definition unit dependent variables roe net income/ shareholders equity % roce ebit/(total assets-current liabilities) % independent variables tas/se total assets/shareholders equity % tic/rwa tier 1 capital/risk weighted assets % lqa/tas liquid asset/total assets % rrp/tls reverse repo purchase/total liabilities % lqa/td liquid asset/total deposits % bdo/tas balance due other banks/total assets % tds/tas total deposits/total assets % npl/gla nonperforming loan/gross loan & advances % mri market rate of interest % bsz bank size in terms of total deposits natural logarithm of total deposit https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 31 findings and discussions analysis of features of liquidity indicators and profitability indicators of selected ncbs table 2. descriptive analysis of related variables measu res roe roc e tas / se tic / rw a lq a/ tas rr p/ tls lq a/ td bd o/ tas tds / tas npl/ gla mri bsz mean 0.18 1.99 17.4 4 5.14 9.22 5.30 12.7 4 1.20 80.3 2 18.90 11.7 8 5.54 range 301.1 8 19.77 68.6 0 30.9 5 12.6 6 5.98 18.8 7 5.44 15.5 2 29.98 4.19 1.19 max. 41.28 9.85 52.8 7 9.78 17.2 5 9.64 26.1 7 5.44 85.9 3 35.28 13.7 5 6.04 min. 259.9 0 -9.92 15.7 3 21.1 7 4.59 3.66 7.30 0.00 70.4 1 5.30 9.56 4.85 std. dev. 43.70 2.83 10.2 8 5.52 2.87 1.08 4.27 1.29 3.78 7.60 1.32 0.30 cv 247.4 5 1.42 0.59 1.07 0.31 0.20 0.34 1.08 0.05 0.40 0.11 0.05 notes: i) data have been compiled by the researcher ii) analysis mode: spss (version 24.0) from the above analysis the study has found that the selected banks have maintained the highest average liquidity ratio i.e 80.32% in terms of tds/tas which is authenticated by standard deviation of 3.78%, and range of 15.52%; and the lowest average liquidity ratio i.e 1.20% in terms bdo/tas which is authenticated by standard deviation of 1.29%, and range of 5.44% during study periods. between these two liquidity ratios, tds/tas indicates minimum risk in terms of cv i.e 0.05%. it has been observed that average rate of profitability in terms of roe and roce is 0.18% and 1.99% respectively. between two profitability indicators, the maximum & minimum ratio of roe has shown maximum fluctuation during the study periods. this situation is authenticated by standard deviation of 43.70%, and range of 301.18%. it indicates that selected banks are exposed to more risk in generating profit in terms of roe than roce while managing liquidity. this signifies that selected ncbs should give due consideration to roe particularly in making profit while constructing liquidity management policies & implementing thereof. regression analytical tests normality test https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 32 table 3. shapiro-wilk test for normality variable p value roe/roce 0.12 / 0.08 tas/se 0.08 tic/rwa 0.43 lqa/tas 0.06 rrp/tls 0.20 lqa/td 0.22 bdo/tas 0.11 tds/tas 0.06 npl/gla 0.58 mri 0.18 bsz 0.21 notes: i) data have been compiled by the researcher ii) analysis mode: stata (version 12.0) from table 3, it is clear that the data used in this study is normally distributed as p value > 0.05. multicollinearity test table 4. analysis of correlation between liquidity indicators and profit base of selected ncbs roe ro ce tas/ se tic/ rwa lqa/ tas rrp/ tls lqa/ td bdo/ tas tds/ tas npl/ gla mri bsz roe 1 roc e .101 1 tas/ se .572** .352* 1 tic/ rwa .378* -.178 .312* 1 lqa/ tas .037 -.165 .160 .157 1 rrp/ tls .079 -.173 -.055 .136 .356* 1 lqa/ td .099 -.077 .098 .268 .788** .226 1 bdo/ tas .065 .237 .394* * .483** .105 .043 -.023 1 tds/ tas .126 -.192 .006 -.073 .435** .235 .196 .347* 1 npl/ -.258 -.144 .144 -.190 .038 .205 -.004 -.113 .017 1 https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 33 gla mri -.237 .201 .057 -.219 -.348* -.181 .481** .182 -.212 -.067 1 bsz -.047 .464* * .287 .488** .184 .409** .222 .490** .168 .333* .324* 1 notes: i) data have been compiled by the researcher ii) analysis mode: spss (version 24.0) iii) *correlation is significant at the 5% level ** correlation is significant at the 1% level from table 04, it is observed that as the correlation between the variables is below the maximum limit of 0.80, so the variables are beyond multicollinearity problem which is supported by kennedy (2008). another important method of identifying multicollinearity is the variance inflation factor (vif). according to gujarati and sangeetha (2008), if the vif value exceeds 10, the variable is considered to be highly collinear. the vif test result for all the explanatory variables are shown in appendix 1a where there is no existence of multicollinearity problem as the vif value of the variables is less than 10. heteroskedasticity test white’s heteroskedasticity test is applied to measure the difficulty of heteroskedasticity in a linear regression model (gujarati, 1995). the outcomes of both analysis indicate that there is no evidence for the existence of heteroskedasticity, as the calculated values 44.00 < the critical value 79.49 as shown in appendix 1b and 1c. test of autocorrelation one of the most popular tests for the detection of autocorrelation is wooldridge (2002) statistic which signifies that there is no autocorrelation, as presented below: table 5. wooldridge test for autocorrelation roe roce ho: no first –order autocorrelation f (1, 3) = 4.733 prob > f = 0.1178 ho: no first –order autocorrelation f (1, 3) = 1.736 prob > f = 0.2792 notes: i) data have been compiled by researcher ii) analysis mode: stata (version 12.0) hausman specification test a hausman test (1978) has been applied to measure the appropriateness of random versus fixed effects model which is reported in appendix 1d and 1e. after running the hausman test, both prob>chi2 value of roe and roce are 0.3881 and .8494 respectively, which are greater https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 34 than 0.05. therefore the random effects model is statistically appropriate for both the model of the study. random effect (re) tests on model 1 (roe) and model 2 (roce) table 6. position of roe and roce in the effectiveness of liquidity management variables model 1 (roe) model 2 (roce) constant 79.3944 23.9873* tas/se -3.2398*** -.0787 tic/rwa 6.0589*** .0709 lqa/tas .1159 -.1708 rrp/tls -.4326 .0154 lqa/td -.5235 .1532 bdo/tas -3.5083 -.0177 tds/tas 3.1273** -.032 npl/gla .5269 .0333 mri -2.5484 .3275 bsz -49.2252** -4.2098* f 10.03 1.271 r2 .7525 .2493 adjusted r2 .5925 .0530 no. of observations 66 66 notes: i) data have been compiled by researcher ii) analysis mode: stata (version 12.0) iii) standard errors in parentheses p* < 0.10, p** < 0.05, p*** < 0.01 from re regression model 1, it has been observed that the variables tas/se & tic/rwa are significant at 1% level and tds/tas & bsz at 5% level. the rest of the variables are found insignificant. the value of r2 is 75.25%; it signifies that the explanatory variables could clarify 75.25% of the variations in roe. f value of statistics is also found significant. f value of statistics is also found significant. from re regression model 2, it has been observed that almost all the explanatory variables are found insignificant even bsz as it is significant at 10% level. the value of r2 is 24.93%; it signifies that the explanatory variables could clarify only 24.93% of the variations in roce. f value of statistics is also found insignificant. these imply that standing of roe compared to roce is more significant in the effectiveness of liquidity management of selected ncbs in bangladesh. accordingly, in case of model 1 the null hypothesis is rejected and alternative hypothesis is accepted. that is, there is a statistically significant association between roe and liquidity of ncbs. on the other hand, the null hypothesis of model 2 is accepted indicating that there is no statistically significant association between roce and liquidity of ncbs. https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 35 conclusion and recommendations the study is attempted to figure out the relative standing of roe and roce in the effectiveness of liquidity management of ncbs in bangladesh. it is found that roe represents better standing than roce in case of effective liquidity management. the roe is mainly influenced by tas/se, tic/rwa, tds/tas and bsz liquidity measures. among the explanatory measures, tas/se has highly significant negative and tic/rwa has highly significant positive effect on roe; tds/tas has some significant positive and bsz has some significant negative effect on roe of the selected ncbs. the conclusion recommends that ncbs that can increase its core capital will act as a defender in protecting consumers against unexpected losses and to exude financial strength. papa (2012) said that banks can simply drive up roe by holding relatively higher levels of tier 1 capital. according to abugamea (2018); ramadan et al. (2011), profitability in terms of roe tends to be associated with well capitalized banks. abugamea (2018) also asserted that roe is inversely related to deposits which is supported by the ratio bsz in terms of total deposits. but higher deposits to assets ratio is linked with improved financial sufficiency, as deposits are the stable sources of fund for funding assets (mwangi et al., 2015). there is a common phenomenon that banks’ profitability is extensively affected by its higher total assets provided the assets are financed by stock rather than debt. ramadan et al. (2011) showed that there is an association between roe and the efficacy of credit management. based on the empirical assessment, the researcher recommends that ncbs should accept a more professional liquidity management strategy to insure such conflicting objectives of banksliquidity, profitability and solvency. agbada and osuji (2013) articulated that with a view to achieving these conflicting objectives, liquidity management requires to be efficient in the circulation of liquidity compatible with a preferred level of cash without twisting the profitability and functions of the bank. without effective liquidity management, banks with intense foundation and bright future may not be profitable (jose et al., 1996). limitations of the study the study has considered a limited no. of variables and only four selected ncbs in bangladesh as sample. therefore the size of the sample might be increased for measuring the actual effect of exogenous variables on the dependent variable. new research could be suggested for measuring the relative standing of other profitability measures not only on ncbs but also on other banking structure in bangladesh to appraise whether the liquidity is effectively managed or not. references abdullah, m. n., & jahan, n. 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(2000). competitive conditions in european banking. journal of banking and finance, 18. wooldridge, j. m. (2002). econometric analysis of cross sectional and panel data. cambridge, ma: mit press. appendices appendix-1 a: vif results variable vif value tolerance lqa/tas 3.92 0.26 lqa/tds 3.57 0.28 bsz 2.64 0.38 bdo/tas 2.28 0.44 tic/trw 1.97 0.51 tds/tas 1.83 0.55 mri 1.57 0.64 rrp/tls 1.53 0.65 tas/se 1.47 0.68 npl/gla 1.46 0.68 mean vif 2.22 notes: i) data have been compiled by researcher ii) analysis mode: stata (version 12.0) appendix-1 b: white’s heteroskedasticity test on roe source chi2 df p heteroscedasticity 66.00 43 0.4290 skewness 31.78 10 0.0004 curtosis 0.89 1 0.3460 total 76.67 54 0.0229 notes: i) data have been compiled by researcher ii) analysis mode: stata (version 12.0) appendix-1c: white’s heteroskedasticity test on roce source chi2 df p heteroscedasticity 66.00 43 0.4290 skewness 8.99 10 0.5330 curtosis 1.50 1 0.2212 total 54.49 54 0.4559 notes: i) data have been compiled by researcher ii) analysis mode: stata (version 12.0) https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 40 appendix-1d: hausman test on roe roe coefficients b fixed b random b-b differences sqrt (diag(v_bv_b)) se x1: tas/se -3.2444 -3.2398 -.0047 .1409 x2: tic/trw 5.8043 6.0589 -.2546 .2472 x3: lqa/tas 1.9815 .1159 1.8656 1.1810 x4: rrp/tls .2120 -.4326 .6446 1.7642 x5: lqa/td .3758 -.5235 .8993 .6923 x6: bdo/tas -6.4881 -3.5083 -2.9798 2.2446 x7: tds/tas 3.5190 3.1273 .3917 .4181 x8: npl/gla .6512 .5269 .1242 .8021 x9: mri -2.9912 -2.5484 -.4428 .8258 x10: bsz -102.4167 -49.2252 -53.1915 31.7284 notes: i) data have been compiled by the researcher ii) analysis mode: stata (version 12.0) iii) b = consistent under ho and ha; obtained from xtreg b= inconsistent under ha, efficient under ho; obtained from xtreg iv) test: ho: difference in coefficients not systematic chi2 (3) = (b-b)1[(v_b-v_b)^(-1)] (b-b)=3.02 prob>chi2 = 0.3881 appendix-1e: hausman test on roce roce coefficients b fixed b random b-b differences sqrt (diag(v_b-v_b)) se x1: tas/se -.0784 -.0787 .0002 .0153 x2: tic/trw .0804 .0709 .0095 .0269 x3: lqa/tas -.1229 -.1708 .0480 .1283 x4: rrp/tls .0717 .0154 .0563 .1917 x5: lqa/td .1267 .1532 -.0264 .0752 x6: bdo/tas .1107 -.0177 .1284 .2439 x7: tds/tas -.0016 -.0320 .0304 .0454 x8: npl/gla .0108 .0333 -.0225 .0872 x9: mri .3137 .3275 -.0138 .0897 x10: bsz -4.3824 -4.2098 -.1726 3.4475 notes: i) data have been compiled by the researcher ii) analysis mode: stata (version 12.0) iii) b = consistent under ho and ha; obtained from xtreg b= inconsistent under ha, efficient under ho; obtained from xtreg iv) test: ho: difference in coefficients not systematic chi2 (3) = (b-b)1[(v_b-v_b)^(-1)] (b-b)=0.80 prob>chi2 = 0.8494 https://www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 6, no. 1; 2021 41 author contributions conceptualization: nazneen jahan chaudhury data curation: nazneen jahan chaudhury formal analysis: nazneen jahan chaudhury funding acquisition: nazneen jahan chaudhury project administration: nazneen jahan chaudhury software: nazneen jahan chaudhury validation: nazneen jahan chaudhury writing – original draft: nazneen jahan chaudhury writing – review & editing: nazneen jahan chaudhury conflict of interest statement the authors declare that they have no competing interests. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (https://creativecommons.org/licenses/by/4.0). american finance & banking review 8(1) (2023), 14-20 14 finance & banking review afbr vol 8 no 1 (2023) p-issn 2576-1226 e-issn 2576-1234 available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/amfbr published by cribfb, usa what drives movements in the income velocity of money? a case study of the u.s. mahfuza khatun (a) sikandar siddiqui (b)1 (a) associate professor, department of finance & banking, jahangirnagar university, dhaka, bangladesh; e-mail: mahfuza02@juniv.edu (b) head of quantitative methods, deloitte audit analytics gmbh, d-60486 frankfurt, germany; e-mail: siddiqui@web.de a r t i c l e i n f o article history: received: 5th august 2023 revised: 2nd december 2023 accepted: 15th december 2023 published: 17th december 2023 keywords: income velocity of money, financialization, interest rates jel classification codes: e41, e43, e51 a b s t r a c t in their efforts to stabilize the price level, central banks often rely on the growth rate in the stock of money as an intermediate target variable. usually, the premise underlying this approach is that the income velocity of money, defined as the ratio of nominal gdp to the stock of money, either randomly fluctuates around a constant mean or can, at least, be predicted with sufficient accuracy. the purpose of this paper is to put this assumption to the test. we do so by applying a first-order autoregressive model, supplemented by a set of lagged exogenous regressors, to the quarterly changes in velocity in the u.s. our results confirm previous findings that dynamic dependencies exist between changes in the income velocity of money over successive periods of time. they also support the assertion that rising long-term interest rates lower the demand for money. perhaps most importantly, however, we find that all else being equal, the degree of financialization in the economy, measured by the ratio of financial assets to gdp, has a positive and statistically significant effect on velocity. a possible explanation of this finding is the increasing availability of tradable, non-monetary financial instruments that are close substitutes for bank deposits. © 2023 by the authors. licensee cribfb, usa. this article is an open access article distributed under the terms and conditions of the creative commons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0/). introduction in most countries of the global west, a key objective of monetary policy is to control inflation (see, e.g., teles, uhlig, and valle e azevedo, 2016). in their efforts to keep the rates of change of the relevant price index within its specified target range, decision-makers at central banks often consider the growth rate of a commonly used monetary aggregate an important intermediate target indicator of the strength of the inflationary pressures prevailing in the economy, as stated by in european central bank (2001) and bernanke (2006). the idea underlying this way of proceeding is that if the income velocity of money, i.e. the ratio of nominal gdp to the money stock, is either constant or predictable, expectations of future inflation rates can be based on projected growth rates of the money supply and potential output. yet from today’s perspective, the perception that the changes in income velocity over time can be reasonably modeled as short-term random fluctuations around a constant mean, which formed the basis of friedman’s (1956) adaptation of the quantity theory of money and its interpretation by lucas (1980), can no longer be regarded as tenable. figure 1 shows this, using the us monetary aggregate m2 as an example. the income velocity of money serves as a critical indicator within economic frameworks, reflecting the frequency with which a unit of currency is used for transactions in a given period. understanding the dynamics behind movements in the income velocity of money is essential for policymakers, economists, and investors alike, as it provides insights into the overall health and efficiency of an economy. this study delves into the intricacies of income velocity, with a specific focus on the united states, aiming to unravel the multifaceted factors that drive fluctuations in this pivotal economic metric. 1corresponding author: orcid id: 0000-0002-8595-9119 © 2023 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/amfbr.v8i1.2149 to cite this article: khatun, m., & siddiqui, s. (2023). what drives movements in the income velocity of money? a case study of the u.s. american finance & banking review, 8(1), 14-20. https://doi.org/10.46281/amfbr.v8i1.2149 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/amfbr.v8i1.2149 https://orcid.org/0000-0002-3487-1045 https://orcid.org/0000-0002-8595-9119 khatun & siddiqui, american finance & banking review 8(1) (2023), 14-20 15 figure 1. shows this, using the us monetary aggregate m2 source: federal reserve bank of st. louis, 2023a this gives rise to the question of whether it is possible, at least in retrospect, to find economically plausible and empirically substantiated explanations of the fluctuations in the income velocity of money observed in the past. the current paper examines this topic using the income velocity of the monetary aggregate m2 in the usa, abbreviated as m2v in the following, as an example. the monetary aggregate m2 was chosen because, unlike the narrower measure m1, it includes savings deposits, small time deposits, and shares in retail money market mutual funds (source: federal reserve bank of st. louis, 2023b), and can thus be expected to have a higher informational content regarding the liquidity position of the economy. the even broader monetary aggregate m3, is not used because the federal reserve system ceased its publication in 2006; see board of governors of the federal reserve system (2006). literature review the theoretical basis of the assumed connection between money circulation, income, and prices was laid by the quantity theory of money. this theory states that, at any given level of real income, the general price level of goods and services is directly proportional to the amount of money in circulation. according to the historical records blaug et al. (1995) examined, its origins can be traced back to the 16th century. aubin (2021) argues that fisher’s (1911) equation of exchange was a decisive step towards formalizing this approach. this equation expresses the hypothesis that the mathematical product of the amount of money and its speed of circulation, or velocity, equals the sum of the volumes of all transactions. the latter, in turn, can be expressed as the product of the price level and the aggregated transaction volume. however, the originator of this theory already recognized that a rigorous verification of this hypothesis would require information about the prices and volumes of transactions in all goods, services, and assets, which would be an impossibility under the conditions that existed then and now (see fisher, 1911, pp 218 and 215). hence, since the seminal works by pigou (1917) and marshall (1923), it has become more common to model the demand for money as the mathematical product of aggregate nominal income and a proportionality factor that can be interpreted as the inverse of the income velocity of money. from there it is only a tiny step further to the highly influential work of friedman (1956, 1970), who not only assumed a long-term stable relationship between the money supply and nominal gdp but also maintained that in the long run, changes in the growth rate of the money supply only affect the rate of inflation, rather than having a lasting impact on real income. the corresponding theoretical school of thought, monetarism, arguably enjoyed the peak of its popularity in the inflationary period of the 1970s and 1980s, during which the federal reserve system and many other central banks in the global west attempted to contain inflation by setting target corridors for monetary growth (see bernanke and mishkin, 1992). looking back, however, several authors, including isard and rojas-suarez (1986), ford and mullineux (1996), and anderson, bordo, and duca (2017), have concluded that the assumption of a constant long-term velocity of money cannot be held empirically. attempts to explain these observations in a theoretically and empirically plausible way often rely on the idea that the opportunity costs of holding money increase with the (nominal) rates of return on highly liquid, interest-bearing bonds from fail-safe issuers. hence, many earlier studies of the factors influencing the velocity of money have almost consistently khatun & siddiqui, american finance & banking review 8(1) (2023), 14-20 16 included interest rates in the set of explanatory variables; see, e.g. chow (1966), latané (1954), meltzer (1963), brunner and meltzer (1963), teigen (1964) and tobin (1965). further empirical evidence in favor of this idea has been found, inter alia, by lucas (1988), katsimbris and miller (1993) as well as basu and dua (2010). moreover, several studies have highlighted the likely importance of financial deregulation and innovation for the demand for money. examples include but are by no means limited to, the contributions by akhtar (1983), arrau and de gregorio (1991), ireland (1995), and glennon and lane (1996). however, since “financial innovation” is an umbrella term comprising a variety of instruments, technologies, institutions, and markets, the above sources do not allow a clear conclusion to be drawn as to whether the overall effect of these innovations on money demand is positive or negative in the long term. on one hand, it could be argued that increasing issuance and trading volumes for numerous new investment and hedging products are likely to prompt an increase in the transaction demand for monetary balances, mirrored by a decline in the income velocity of money, as argued by aubin (2021). yet at the same time, increases in the variety and popularity of financial products having money-like properties without being included in the usual monetary aggregates can reduce the demand for money, which, viewed in isolation, would translate into an increase in velocity (see, e.g. boughton, 1981). in both cases, it is reasonable to suspect that the behavioral changes resulting from such innovations are neither precisely nor fully measurable. materials and methods this paper aims to explain, at least in retrospect, the observed variation in the quarterly changes in m2v with the help of a linear, autoregressive model with additional explanatory variables. since the present work aims to identify variables that could have functioned as early indicators of future changes in m2v in the past, all explanatory variables used here are lagged by one quarter. regarding the storage-of-value function of money, treasury bills and bonds are arguably the closest substitutes for cash and cash equivalents, and the return on these virtually failsafe investments can be interpreted as the opportunity cost of holding money. therefore, we include the lagged quarterly changes in the ten-year u.s. treasury bill rate and the threemonth u.s. treasury bond yield in the set of candidate regressors. since the monetary aggregate m2 includes some interestbearing instruments, we also examine whether lagged changes in the slope of the yield curve (referred to as “slope” below), as measured by the difference between the two above quantities, had a statistically significant predictive power for m2v in the past. moreover, it must be considered that cash and cash equivalents are not only needed for the purchase of goods and services but also required for trading in financial instruments. against this background, recent research by aubin (2021) suggests that all else being equal, rising trading volumes of marketable financial assets will increase the demand for money and, hence, tend to lower velocity. however, the presumption of a positive correlation between the demand for money and the aggregate value of tradeable, nonmonetary financial instruments is not self-evident. it could just as well be argued that increasing amounts of non-monetary financial instruments that can be exchanged for cash equivalents easily and at minimal cost tend to diminish the extent to which the public still needs to hold money as a store of value. if taken by itself, this viewpoint suggests that an increased financialization of the economy tends to increase, rather than decrease, velocity. therefore, another question addressed in this paper is whether these two countervailing effects cancel out, or whether one of them outweighs the other if the effects of the remaining explanatory variables are accounted for. truly comprehensive and accurate data on trading volumes in dollar-denominated financial assets does not appear to be readily available; however, the board of governors of the federal reserve system (2023c) has published historical data on the level of total u.s. financial assets that can be re-expressed as multiples of gdp; see figure 2. given the absence of a better indicator of changes in the degree of financialization of the us economy, the lagged first differences of this ratio have also been included in the set of explanatory variables. figure 2. total financial assets, level/( gross domestic product*1000) khatun & siddiqui, american finance & banking review 8(1) (2023), 14-20 17 finally, there are good reasons to assume that dynamic dependencies exist between changes in m2v over successive periods of time. for example, the time it takes for a change in the stock of money to fully unfold its effects on prices and real aggregate income may very well extend over several quarters, as has been assumed, for example, in the partial adjustment models by feige (1967), darby (1972) and santomero and seater (1981). moreover, financial innovations in the form of near-monies like, e.g., asset-backed commercial papers, which are close substitutes for short-term bank deposits but not included in existing monetary aggregates, may fundamentally alter the money holding practices of the public but need time to be established on the market. by including one or more lagged differences of m2v in the set of candidate regressors, such dynamic dependencies can be captured, at least in an approximate manner. the sampling period extends over the time period from the 1st quarter of 1959 up to and including the 1st quarter of 2023. descriptive statistics of the variables in use are given in table 1. table 1. descriptive statistics (““ meaning “quarterly change in”)  m2v  3m t-bill yield  10y t-bond yield  slope  [fin. assets / (1000  gdp)] mean -0.00200 0.00672 -0.00191 -0.00863 0.01324 standard deviation 0.02641 0.77438 0.52501 0.62236 0.07868 minimum -0.26800 -5.14000 -3.04000 -2.58000 -0.37241 1% quantile -0.16766 -4.27000 -2.37300 -2.27840 -0.36565 5% quantile -0.03850 -1.28500 -0.85800 -0.88200 -0.06747 10% quantile -0.02500 -0.94200 -0.67000 -0.66600 -0.04240 25% quantile -0.01300 -0.15000 -0.27000 -0.33000 -0.00923 median 0.00000 0.01000 0.05000 -0.03000 0.01262 75% quantile 0.01250 0.32000 0.27000 0.25000 0.03737 90% quantile 0.02300 0.70400 0.57200 0.68000 0.06892 95% quantile 0.02710 0.92500 0.86100 0.91500 0.09213 99% quantile 0.05110 2.85480 1.27460 2.34720 0.15568 maximum 0.06700 3.56000 1.50000 3.92000 0.85228 results we estimated a number of different model variants, four of which are summarized in table 2 below. the decision on how many lagged values m2v (i.e. the quarterly change in m2v) to include is based on the outcome of the ljung and box (1978) test statistic for autocorrelation, applied to the regression residuals, with the number of lags to be tested being set to 12. (choosing a smaller or larger value for this number did not have a substantial impact on the results obtained). table 2. ordinary least squares estimation results ordinary least squares estimation results (heteroskedasticity-consistent t-statistics in parentheses) dependent variable: quarterly change in m2 velocity model variant explanatory variables in use i ii iii iv constant -0.002463 -0.002398 -0.002496 -0.006006 (-1.556385) (-1.505406) (-1.597132) (-1.917207)  m2vt-1 0.361876 0.402645 0.355358 0.323766 (2.570113) (3.129243) (2.595790) (2.503005)  3m treasury yieldt-1 0.002994 0.000812 (0.837306) (1.419020) 10y treasury yieldt-1 0.006631 0.006199 (1.984825) (1.780469)  slopet-1 0.000300 (0.094431)  [fin. assets / (1000 ´ gdp)]t-1 0.090146 0.092846 0.092480 0.085727 (2.343519) (2.329366) (2.412222) (2.269984) r² 0.116 0.110 0.125 0.134 p-value of ljung/box statistic 0.766807 0.696551 0.759002 0.607110 discussions in each of the four variants of which the results are shown, including a single, one-quarter lag of the dependent variable was sufficient to remove the autocorrelation that would otherwise have prevailed in the regression residuals. the coefficient estimate referring to the lagged value of m2vt-1 is positive and statistically significant on a 95% confidence level, which is compatible with the perception that in the past, the level of m2v showed trend-following behavior at times. the idea that the slope of the yield curve, as measured as the difference between the ten-year and the three-month treasury yields, might have some predictive power with respect to future changes in m2v is not supported by our results, as the low absolute value of the associated t-statistic in model variant ii indicates. in contrast, at least the size and direction of the changes in the yield on the ten-year t-bill do appear to have had some prognostic value with regard to the change in khatun & siddiqui, american finance & banking review 8(1) (2023), 14-20 18 velocity, as the associated t-statistic exceeds the critical value for the two-sided 95% confidence interval in model variant iii. with respect to the lagged difference in the three-month treasury yield, the results obtained are somewhat more ambiguous. if this is the only interest-related measure included in the set of regressors, as in variant i, the related coefficient bears the expected positive sign but turns out to be statistically insignificant. yet if this variable is added to a set of regressors that already includes the lagged difference of the ten-year treasury yield, as in the case of model variant iv, this further improves the fit of the model. however, a comparison of two competing specifications iii and iv based on an f-test reveals that the more restrictive of these two variants (i.e. iii) cannot be rejected on a 90% confidence level (with the associated pvalue standing at 0.11637). so, although it cannot be ruled out that both the three-month and the ten-year treasury rate, taken in combination, impact future changes in velocity, model variant iii apparently represents a slightly better compromise between the conflicting goals of parsimony and goodness-of-fit. as far as the financialization indicator is concerned, our results indicate that in the sampling period, the overall impact of the growth in financial assets relative to gdp on the demand for money was negative, if seen in isolation, which translates into a higher income velocity of m2. a possible explanation of this finding is that the process of financialization experienced in the past four decades has been accompanied by an increasing availability of tradable, non-monetary financial instruments that are comparable to bank deposits in terms of nominal value retention while offering higher returns or, at least in some cases, even improved protection against inflation. examples of such instruments include high-grade floating rate or inflation-linked bonds, commercial paper, and – more recently – privately issued quasi-monies backed by pools of reference assets with a pre-defined composition. (an overview of the technical and legal issues associated with the lastmentioned class of instruments is given in garcia-teruel and simòn-moreno, 2021). given the still high pace of innovation in the financial markets and the near-constant change in the macroeconomic environment, it is not possible to assess at this point whether the relationships observed here will continue to prevail in future. a somewhat sobering realization is that despite the purely retrospective nature of the present study, none of the model variants examined can explain more than 15 percent of the total variation of the dependent variable. apparently, the predictability of money demand growth is far too limited to justify the idea that a stable growth rate of the money supply alone is sufficient to effectively prevent the inflation rate from missing its target range. conclusions in their efforts to stabilize the price level, many central banks rely on the growth rate in the stock of money as an intermediate target variable. this approach is often based on the idea that the velocity of money, defined as the ratio of nominal gdp to the stock of money, can be predicted with sufficient accuracy. by applying a linear time series model to the velocity of the monetary aggregate m2 in the usa, the current paper seeks to identify factors that can retrospectively contribute to an explanation of the observed fluctuations in this quantity. in line with earlier research, we find that past changes in both longterm interest rates are positively related to current changes in the income velocity of money. our results are also compatible with the perception that random “shocks” affecting velocity may take several quarters to fully unfold their economic effect, which is captured by the positive correlation observed between subsequent realizations of the dependent variable. perhaps most importantly, we find that past changes in the degree of financialization of the economy, as captured by the ratio of financial assets outstanding to gdp, have a significant impact on current changes in velocity. however, it needs to be admitted that the last-mentioned financialization indicator only is a very imperfect measure of the way in which events on the financial market affect aggregate money demand. seeking to identify or develop metrics that enable a far more differentiated view of different instrument classes and their respective characteristics is therefore a promising challenge for future research. author contributions: conceptualization, m.k. and s.s.; methodology, m.k.; software, m.k.; validation, m.k.; formal analysis, m.k. and s.s.; investigation, m.k.; resources, m.k.; data curation, m.k.; writing – original draft preparation, m.k. and s.s.; writing – review & editing, m.k. and s.s.; visualization, m.k.; supervision, m.k.; project administration, m.k.; funding acquisition, m.k. and s.s. authors have read and agreed to the published version of the manuscript. institutional review board statement: ethical review and approval were waived for this study, due to that the research does not deal with vulnerable groups or sensitive issues. funding: the authors received no direct funding for this research. acknowledgments: not applicable. informed consent statement: informed consent was obtained from all subjects involved in the study. data availability statement: the data presented in this study are available on request from the corresponding author. the data are not publicly available due to restrictions. conflicts of interest: the authors declare no conflict of interest. references akhtar, m. a. 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(1965). the monetary interpretation of history (a review article). american economic review, 55, 464-85. retrieved from https://www.jstor.org/stable/1814559 publisher’s note: cribfb stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. © 2023 by the authors. licensee cribfb, usa. this article is an open access article distributed under the terms and conditions of the creative commons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0/). american finance & banking review (p-issn: 2576-1226; e-issn: 2576-1234) by cribfb is licensed under a creative commons attribution 4.0 international license. http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ contents american finance & banking review; vol. 2, no. 1; 2018 issn 2576-1226 e-issn 2576-1234 published by centre for research on islamic banking & finance and business 12 monetary policy and commercial bank lending to the real sector in nigeria: a time series study ogolo1 & tamunotonye magnus 1 1 rivers state university, port harcourt, nigeria correspondence: ogolo, rivers state university, port harcourt, nigeria received: november 23, 2017 accepted: november 29, 2017 online published: january 16, 2018 abstract this study empirically examined the effects of monetary policy on commercial banks lending to the real sector from 1981 – 2014. the objective was to examine the effectiveness of monetary policy in channeling bank credit to the real sector. annual time series data were sourced from central bank of nigeria statistical bulletin. two multiple regression models were specifically estimated with the aid of software package for social sciences. the study modeled commercial banks credit to agricultural and manufacturing sector as the function of interest rate, monetary policy rate, treasury bill rate, exchange rate, broad money supply and liquidity ratio. the result shows collinearity that corresponds with the eigen value condition index, and variance constant are less than the required value. the durbin watson statistics shows the absence of multiple auto correlation and negative autocorrelation, while the variance inflation factors indicate the absence of auto-correlation. the regression results from model one found that interest rate, monetary policy rate have positive relationship with commercial banks lending to the agricultural sector while treasury bill rate, exchange rate, broad money supply and liquidity ratio have negative effect on the dependent variable. model two found that interest rate, treasury bill rate, exchange rate, broad money supply and liquidity ratio have negative effect on commercial banks lending the manufacturing sector while monetary policy rate have positive relationship with the dependent variable. we recommend that monetary policy should be harmonize with bank lending objectives to enhance commercial banks lending to the real sector of the economy and that management of commercial banks should formulate policies of managing the negative effect of monetary policy variables on its lending. keywords: monetary policy, commercial bank lending, real sector, nigeria economy, time series study. 1. introduction commercial banks are immediate financial institutions empowered law to undertake the business of lending and borrowing in the economy. banking laws such as bank and other financial institutions decree act 1990 as amended (bofia) empowered defined the business of banking as an institution that accepts deposit and grant loans. this function bridges the savings-investment gap and restores equilibrium in the financial disequilibrium that exists among the economic agents and enhances the allocation efficiency of the economy (ezirim, 2005). it also transmits the government monetary policy and facilitates the realization of macroeconomic goal of growth in output, full employment, price stability and external balance. monetary policy is a classical instrument of fine-tuning the economy to achieve desired macroeconomic goals. in nigeria, the central bank of nigeria decree 1969 empowered central bank the monetary policy function. monetary policy is the deliberate use of monetary instruments (direct and indirect) at the disposal of monetary www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 13 authorities such as the central bank in order to achieve macroeconomic stability (toby & peterside, 2014). the application of monetary policy depends on the desired macroeconomic goals, this monetary policy can be expansionary or contractionary. contractionary monetary policy aimed at moderating the anticipated inflationary pressures, expected to be triggered by the pre-election spending and the high liquidity injections into the banking system through the purchase of non-performing loans (npls) by the asset management corporation of nigeria (amcon) while expansionary monetary policy aimed at stimulating the economy. bank credit is a financial market activity where banks extend credit to deficit economic units to meet their financing needs (ezirim, 2005). the monetary transmission mechanism describes how policy induced changes in the nominal money stock or the short-term nominal interest rates impact real variables such as aggregate output and employment (ireland, 2005). specific channels of monetary transmission operate through the effects that monetary policy has on interest rates, exchange rates, equity and real estate prices, bank lending and firm balance sheets (toby & peterside, 2014). the analysis of the monetary policy transmission proved how monetary policy changes affect the real economy, is one of the most researched areas in macroeconomic literature and a special focus for central bankers. bank credit constitute the most economic important of bank functions. bank credit aids in generating employment, maintain a business, take advantage of economies of scale and help to prevent economic disaster (nwanyanwu, 2011). it helps in reactivating, expanding and modernizing all types of manufacturing enterprises through different structure of credit such as overdraft, short, long-term credit depending on the purpose of the loans. the objective of stimulating bank credit to the real sector by the monetary authority is to achieve sectoral growth. the real sector is recognized by the monetary policy of the economy. the importance cannot be over emphasized in the economic growth of the country. its output is measure quantitatively as the contribution of the sector to total gross domestic product (gdp). the sector is important for variety of reasons, it produces and distributes tangible goods required to satisfy aggregate demand and aggregate supply in the economy (adegbite, 2010). second performance of the sector can be used to measure the effectiveness of monetary and macroeconomic policies (adediran & obasan, 2010). third a vibrant industrial sector is capable of generating income, create employment absorb idle resources and increase capacity utilization which is prerequisite for economic growth (mike, 2010) the manufacturing sector act as a catalyst that accelerates the pace of structural transformation and diversification of the economy, this enabling the country to utilize its factor endowments and to depend less on the foreign supply of finished goods or raw materials (adediran and obasam, 2010), the sector also creates investment capital at faster rate than other sector of the economy while promoting wider and more effective linkages among different sectors and facilitate the formation capital (tobby and thompson, 2013). theoretically, two leading hypotheses have been formulated in relationship to banking sector and the growth of an economy. the supply leading development to economic growth, this implies that bank credit will increase the productive capacity of the economy while the demand leading hypothesis persist a passive to economic growth (olokyo, 2011), (ogen, 2007) (okwo et al, 2012). adediran and obasam (2010) opined that a well functioning and efficient financial sector with sophisticated banking institutions and regulatory system will foster economic growth and development through efficient credit allocation to the various sectors of the economy. the objectives of banking sector reforms over the years has been to achieve an effective and efficient banking industry that will function to realize the macroeconomic goals, for instance the deregulation of the financial sector in 1986 was designed to reduce cost of obtaining fund (oputu, 2010).the consolidation and realization reform in 2004 was motivated to reposition the nigerian banking industry to be an active player and not a spectator in the global financial market (toby, 2006). these are monetary policy operational framework; hence the effect of monetary policy variables on bank lending to the real sector of the economy needs to be examined www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 14 in relationship with the various monetary policy reforms in the past decades. the belief and assumption that an efficient and well structured financial system can facilitate the realization of monetary and macroeconomic goals dates back to the classical theories of monetary policy and schumpeter in 1912 which noted that services provided by the financial intermediaries are the essential driven for innovation and growth (akani et al, 2016). bank credit to the real sector is required if the monetary and the macroeconomic goals are to be achieved. the effects of monetary policy on the supply of bank loans depend on the characteristics of the banking sector. the size of banks, market concentration, capitalization and liquidity are among the commonly mentioned factors (konstantins, 2008). this no doubt necessitated the various monetary policy reforms through the banking sector. however, nigerian banks have gone through various phases of reforms through the monetary policy instruments and the monetary authorities. phase 1 bordered on definition of banking business and prescription of minimum capital requirements, phase ii regulates the banking activities with the enactment of cbn act 1958, phase iii is the deregulation of the banking industry, the iv phase is the re-introduction of regulations as a result of bank failure that affected the economy, the v phase is the democratic regime with the liberalization of the financial sector while the vi phase in the banking sector consolidation and recapitalization (akani et al., 2016). the effect of these reforms on bank lending to the real sector remains a matter of fact and a knowledge gap. an examination of central bank of nigerian publication (cbn, 2015) shows that the quantity of commercial banks credit to the real sector of the economy continues to decrease over the periods, for instance, in 2010 percentage of commercial banks lending in agriculture sector is 1.67% to total sectoral credit while that of manufacturing sector is 12.8%, in 2013 it was 3.98% and 2.6% in 2014. the low commercial banks lending to the real sector of the economy contributed to the low performance of the economy at large. the effect of monetary policy on commercial banks performance has long been a research interest and documented in literature. the relationship between monetary policy and bank lending to the real sector of the economy is lacking in literature. similar studies such as ajayi and atanda (2012), ubi et al., (2012) examined the relationship between monetary policy and commercial banks lending behaviour, the study of (konstantins, 2008), (shuzhang et al., 2010) examined commercial banks and the transmission channel of monetary policy in turkey. this study therefore intends to examine the effect of monetary policy on commercial banks to the real sector in nigeria. 2. literature review 2.1monetary policy in nigeria a monetary policy shift tends, generally, to transmit a change for the future in the expected behavior of macroeconomic variables (toby & peterside, 2014). the central bank of nigeria (cbn) is mandated by the cbn act of 1958 to promote and maintain monetary stability and a sound financial system in nigeria. just like other central banks, the cbn has the ―end‖ of achieving price stability and sustainable economic growth through the ―means‖ of monetary policy. embedded in this twin objectives are (1) the attainment of full employment, (2) maintaining stability in the long-term interest rates and (3) pursuing optimal exchange rate targets. to achieve these multiplex objectives, the cbn operates through a system of targets. these are; the operational targets, the intermediate targets and the ultimate target (ibeabuchi, 2007). the central bank uses its operational target over which it has deterministic control to influence the intermediate target (broad money) which eventually affects the ultimate targets (inflation and output). in setting its targets, the cbn considers an information set that is feed into by contemporaneous and lagged values of real gross domestic product (gdp), real investment prices, real wages, labour productivity, fiscal operations and balance of payments performance, among others. depending on the relative importance attached to the various information elements, the cbn sets its target parameters for its www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 15 quantity-based nominal anchor and its price-based anchors. the bank generally implements its monetary policy programmes using the market-based and rule-based techniques. when implementing monetary policy using the rule-based technique, the cbn uses direct instruments like selective credit controls, direct regulation of interest rates and moral suasion. while indirect instruments like the open market operation (omo), discount rate and the reserve requirements are used when implementing monetary policy programmes using the market-based approach. since its inception, the cbn has implemented monetary policy using various combinations of these two techniques with more or less emphasis on the one. depending on the emphasis that is placed on either of the techniques, the evolution of monetary policy in nigeria can be classified into two phases: (1) the era of direct controls (19591986) and (2) the era of market-based controls (1986-date). the era of direct controls was a remarkable period in monetary policy management in nigeria, because it coincided with several structural changes in the economy; including the shift in the economic base from agriculture to petroleum, the execution of the civil war, the oil boom and crash of the 1970s and early 1980s respectively and the introduction of the structural adjustment programme (sap). during this period cbns monetary policies focused on fixing and controlling interest rates and exchange rates, selective sectoral credit allocation, manipulation of the discount rate and involving in moral suasion. reviewing this period, omotor (2007) observe that monetary policy was ineffective particularly because the cbn lacked instrument autonomy and goal determination, being heavily influenced by the political considerations conveyed through the ministry of finance. progressively, the implementation of the sap programme which commenced in 1986 ushered in a new era of monetary policy implementation with market-friendly techniques in nigeria. the capacity of the cbn to carry out monetary policy using market friendly techniques was letter reinforced by the amendments made to the cbn act in 1991 which specifically granted the cbn full instrument and goal autonomy. using this technique, the cbn indirectly influences economic parameters through its open market operations (omo). these operations are conducted wholly on nigerian treasury bills (tbs) and repurchase agreements (repos), and are being complimented with the use of reserve requirements, the cash reserve ratio (crr) and the liquidity ratio (lr). these set of instruments are used to influence the quantity-based nominal anchor (monetary aggregates) used for monetary programming. on the other hand, the minimum rediscount rate (mrr) is being used as the price-based nominal anchor to influence the direction of the cost of funds in the economy. changes in this rate give indication about the monetary disposition of the bank, whether it is pursuing a concessionary or expansionary monetary policy. this rate has generally been kept within the range of 26 and 8 percent since 1986. as a companion to the use of the mrr, the cbn latter introduced the monetary policy rate (mpr) in 2006 which establishes an interest rate corridor of plus or minus two percentage points of the prevailing mpr. since 2007, this rate has been held within the band of 10.25 and 6 percent. 2.2 monetary policy and credit channel monetary policy models describe an economy in which there is an excess supply; hence, aggregate output is demand-determined in the short to medium run. the agents in this macro model include the (a) households, (b) domestic firms, (c) the government; (d) the rest of the world provides capital, goods and services demanded by the domestic economy and a market for domestic production and (e) the central bank. in the model, the central bank has the task of anchoring the nominal side of the economy. the central bank adopts an inflation targeting framework (it) and is a flexible inflation targeted and sets a short-term interest rate to achieve an inflation target, and, consequently provides nominal stability. there are lags and delays between a change in interest rate and inflation. given these lags and price and wage rigidities, the use of a simple interest rate rule is required to anchor inflation in the long run. meanwhile, asset markets are imperfect. the nominal exchange rate is allowed www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 16 to transitorily deviate from purchasing power parity (ppp) so that movements occur in the real exchange rate. in addition, the nominal short-term interest rates play the leading role as the instrument of monetary policy. the transmission mechanism starts with the domestic interest rate policy. the overnight reverse repurchase rate (rrp) is prescribed as the nominal interest rate which follows a behavioral equation required to anchor inflation in the long run (clarida, gali and gertler, 2000). the overnight rrp adjusts to inflationary pressure measured by the difference between the inflation forecast and the inflation target announced by the government and the output gap. this is seen as, ,)()(    ttt p t qqr (1) where rp‘ is the rrp,  connotes the neutral monetary policy stance, f is the one-quarter ahead inflation forecast, * is the medium-term inflation target announced by the government, q is real output, q* is potential real output, and an error term, the rrp rate is transmitted to the benchmark interest rate rd through the natural arbitrage condition. in the model, the benchmark interest rate is the 91-day treasury bill rate. as seen in equation 2, rd is also affected by other variables, such as the overnight rrp rp, inflation expectations e, foreign interest rate ru, real money supply m and an error term. .  t u t e t p t d t mrrr (2) treasury bill rate is higher, the higher the overnight rrp rate, the higher the inflation expectations, the higher the foreign interest rate, and the lower the level of money supply. in this equation, there is a direct channel from the bsp‘s policy rate to the 91-day treasury bill rate. changes in the 91-day treasury bill rate rd are then carried over to the changes in the other market interest rates, such as lending rates is the natural arbitrage condition. .  d t l t rr (3) it is also assumed that the short-run domestic inflation is relatively sticky, indicating that inflation expectations for the short term are similarly sticky. this further implies that by controlling the nominal overnight rrp rate, the bsp can also affect the short-term real rrp rate or the difference between the short-term rep rate and short-term inflation expectations. the overnight rrp is expected to lower short and longer real interest rates, and consequently affect economic activity. changes in the overnight rrp rate also affect bank credits as seen in equation 4 below ,)(   nkmrqc tt e t l tt p t (4) where cp is private credit, q is real output, r1 is bank lending rate, is inflation expectations, m is money supply, k is the bank regulatory capital to risk-weighted assets (in excess of the required bsp capital to asset ratio), fl is banks‘ non-performing loan ratio and an error term. meanwhile, k is expected to have a positive coefficient as higher capital buffer (relative to the regulatory capital) to absorb losses helps banks to expand credit. in bayoumi and melander (2008), the balance sheets of firms and households are included. in the absence of a longer and consistent series for the philippines, the model is limited to the consolidated balance sheets of commercial/universal banks, thrift and rural banks. in the case of n, a negative coefficient is expected, as higher shares of non-performing loans to total loans are riskier, hence, www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 17 banks are expected to be prudent in extending new loans. meanwhile, the presence of q in model 4 reflects the feedback look from income to bank credit via the financial accelerator effect. bank credit together with net other items determine the level of money supply from the asset side. it should be noted that in the model, money supply is an indicator of the quantity of money that the economy requires, without the bsp setting any target for it. from the liability side, the impact of changes in the real market interest rates )( e t d tr  affects currency in circulation in the monetary system as in equation 5: .)(   e t d tt c t rqc (5) equation 5 is then added to deposit liabilities to arrive at the total money supply level (m) from the liabilities side and feeds back into model 4. to determine the impact of bank credit on spending, real personal consumption c and real investment spending i are re-specified. real consumption c in model 6 follows the permanent income and life-cycle hypothesis. in the long run, it is assumed to depend on real disposable income di and real wealth m. the presence of di implies that a proportion of households are ―liquidity constrained‖ while cp implies that households are ―credit constrained‖ in the short-run (bayoumi and melander, 2008; greenlaw et al., 2008). the remaining households‘ consumption, however, is determined by their wealth positions. in this model, real wealth m includes real financial aspects (including the market value of domestic equity). .)(   e t d t p tttt rcmdic (6) meanwhile, the inclusion of the long-term real interest rate e t d tr  in equation 6 captures the direct substitution effect between consumption and savings. in addition, the presence of accounts for the time lag before consumption responds to changes in the real interest rate.the desired investment spending by domestic firms it in equation 7 uses the accelerator principle linking the desired fixed capital with output qt, real lending rate e t l tr  and the exchange rate e (montiel 2003) .  t u t e t p ti mrr t (7) the impact of bank credit is seen as directly affecting investment in equation 7. in this model, technology is fixed. moreover, firms hold inventories which represent insurance against demand surprises. however, this is taken as exogenous in the model, implying that firms make their decisions regarding capital, labor and prices first, and then make decisions about the desired level of inventories. the choice of investment demand model stems from the ease of identifying the policy instruments (in this model interest rate and exchange rates) available to monetary authorities to influence the aggregate supply resulting from investment behavior. however, in the empirical estimation, an attempt is made to produce a complete and detailed estimation of investment in terms of capital stock and employment. this is essential in determining the link between investment and production capacity and consequently the output gap in sum, changes in interest rates and bank credits lead to changes in the real sector through consumption and investment. all the changes in spending behavior, when added up across the whole economy, generate changes in aggregate spending. total domestic expenditure plus the balance of trade in goods and services reflects the aggregate demand in the economy, and is equal to gross domestic product (gdp). gdp (demand) feeds into the gdp (production) side which consists of two sectors: the primary sector (agriculture) and the advanced sector www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 18 (industry and services). the output of the agriculture sector is exogenous in the model. this leaves us with the industry and services sectors which are assumed to have excess capacity. hence, supply responds to the level of aggregate demand. gdp feeds into banks‘ capital to asset ratio k in equation 8 below. .  tk q t (8) from bayoumi and melander (2008), bank lending standards determine changes in banks‘ capital to asset ratio. a limitation of equation 8 is the absence of bank lending standards. in bayoumi and melander (2008), bank lending standards are based on answers from the quarterly federal reserve bank‘s survey of bank loan officers. in the initial specification, there was an attempt to include the overnight rrp rate (equation 1) in equation 8 to examine the impact of monetary policy actions on changes in bank capital. however, in the empirical estimation, the overnight rrp rate was dropped as it yielded insignificant coefficient. moving forward, there are two distinct and mutually reinforcing feedback channels in bayoumi and melander (2008) framework. the first channel is that as spending and income fall, loan losses increase and thus there are further negative effects on bank capital. the second feedback channel is that a deterioration of incomes (and balance sheets for households and firms) has a further negative financial-accelerator effect on credit and spending. this model allows for these two feedback channels through equations 4 and 8.   tty qqg t (9) potential output and the resulting gap as measure of future inflationary pressures have regained importance under the it framework. as indicated in equation 9, output gap in this model is estimated based on dakila (2001) in which it is expressed as the difference between the log of a one quarter moving average of supply side (industry and services) gdp (depersonalized series) q and potential output q . .  tt m t g tp wmpyw t (10) the output gap yg then feeds into the wholesale price index pw in equation 10. the whole price index in this model is affected by the average prices of merchandise imports in pesos pm the excess liquidity as indicated by real money supply m relative to gross domestic product and the average compensation (or wages) for industry and services sectors w. this specification makes the pricing decision based on a flexible mark up. changes in the wholesale price drives prices of the industry and services sectors, and finally the final demand prices, final demand prices are dependent on the relative weights of industry and services sector prices and are contained in the implicit gdp deflator. this then is the basis of headline inflation. because of the forward-looking nature of inflation targeting, the role of inflation expectations in this transmission mechanism becomes crucial. indicators of inflation expectations include the two-year ahead inflation forecast. .1   ttt e t v (11) the estimation of long-run inflation expectations e t in equation 11 follows a hybrid structure that contains both forward-looking and backward-looking expectations. the structure includes rational component of inflation, indicated by the medium-term (three to five years) inflation target announced by the government  t , and www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 19 contemporaneous and inertial components indicated by current t , and past inflation rate 1t the rational component is based on demertzis‘ and viegi‘s (2005) work on inflation targets as focal points for long run inflation expectations. the idea is that in the absence of concrete information of inflation expectations, the only information that agents have is the quantitative inflation target announced by the government. 2.3 the monetarist and transmission of monetary policy  the traditional textbook (keynesian) channel is known as the interest rate or the intertemporal substitution channel:  yycim d)1()( (12)  expanding ‗money‘ (m) reduces interest rates (i), reduces the cost of borrowing for firms (and consumers), leads to increased consumption (c) as well as investment (i) and therefore higher demand (y d ), a bigger output gap (y) and finally higher prices and inflation (π) the monetary transmission mechanism 2.4 the interest rate channel and policy responses  but bernanke and gertler (1989) pointed out that the macroeconomic response to policy-induced interest rate changes was considerably larger than implied by conventional estimates of interest elasticity‘s of consumption and investment • this suggests that mechanisms other than the interest rate channel may also be at work in the transmission of monetary policy 2.5 the exchange rate channel: net exports  the exchange-rate channel  ynxei (13)  lower interest rates (i) lead to a depreciation of the exchange rate (e), an increase in competitiveness, an improved trade balance (due to higher net exports, nx) and increased demand, a larger output gap and finally higher inflation  moreover. the monetary transmission mechanism 2.6 the exchange rate channel: import prices  the exchange-rate channel:  mpei (14)  an exchange rate (e) depreciation also raises import prices (pm), which are important determinants of firms‘ costs and the retail price of many goods and services: this directly affects the price level and (temporarily) inflation  an appreciation should reduce inflation (with a longer lag if prices are sticky on the downside). the monetary transmission mechanism. www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 20 2.7 the exchange rate channel: net wealth  the exchange-rate channel:   ynwei (15)  an exchange rate depreciation increases the relative value of foreign-denominated assets and liabilities and therefore net wealth (nw), affecting demand  the sign of the effect depends on the make-up of balance sheets the monetary transmission mechanism 2.8 other asset price effects: investment (tobin’s q)  the investment channel (tobin‘s q):  yqepi 1  consider two ways of increasing the size of a firm:  buy another firm (and acquire ‗old‘ capital); or  invest in new capital  the ratio of the market value of a firm to the replacement cost of its assets is known as tobin‘s q  tobin (1969) argued that a firm should invest in new buildings and equipment if the stock market will value the project at more than its cost (that is, if the project‘s q is greater than 1)  increased equity prices (pe) mean that new investment projects have become relatively cheaper to finance and therefore more attractive. the monetary transmission mechanism. 2.9 other asset price effects: consumption other asset price effects: consumption  yctwpei (16)  the permanent income hypothesis postulates that consumers‘ spending is related to (total) wealth  increased wealth (as a result of higher equity prices, pe, say) if it is perceived to be permanent leads to a (much smaller) increase in (desired) consumption. the monetary transmission mechanism. 2.10 other asset price effects: housing wealth  other asset price effects: housing wealth  yctwpi h ? (17)  increased house prices (rh) are often associated with increased private consumption in the uk/us  housing wealth represents greater wealth for some (but for the economy as a whole?);  housing wealth increases available collateral and therefore reduces credit constraints; and  people may be more likely to change house or spend on improvements/consumer durables (in a process www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 21 called mortgage equity withdrawal) the monetary transmission mechanism 2.11 bank lending channel of monetary policy transmission the monetary policy transmission mechanism refers to the routes through which monetary impulses are communicated to the real sector of the economy. mishkin, (1995), argued that to be successful in conducting monetary policy, the monetary authorities must have an accurate assessment of the timing and effect of their policies on the economy, thus requiring an understanding of the mechanism through which monetary policy affects the economy. the bank lending channel represents the credit view of this mechanism. according to this view, monetary policy works by affecting bank assets (loans) as well as banks‘ liabilities (deposits). the key point is that monetary policy besides shifting the supply of deposits also shifts the supply of bank loans. for instance, an expansionary monetary policy that increases bank reserves and bank deposits increase the quantity of bank loans available. where many borrowers are dependent on bank loans to finance their activities, this increase in bank loans will cause a rise in investment (and also consumer) spending, leading ultimately to an increase in aggregate output, (y). the schematic presentation of the resulting monetary policy effects is given by the following: m ↑ → bank deposits ↑ → bank loans ↑ →i ↑ → y ↑ (18) (note: m= indicates an expansionary monetary policy leading to an increase in bank deposits and bank loans, thereby raising the level of aggregate investment spending, i, and aggregate demand and output, y, ). in this context, the crucial response of banks to monetary policy is their lending response and not their role as deposit creators. the two key conditions necessary for a lending channel to operate are: (a) banks cannot shield their loan portfolios from changes in monetary policy; and (b) borrowers cannot fully insulate their real spending from changes in the availability of bank credit. the importance of the credit channel depends on the extent to which banks rely on deposit financing and adjust their loan supply schedules following changes in bank reserves; and also the relative importance of bank loans to borrowers. consequently, monetary policy will have a greater effect on expenditure by smaller firms that are more dependent on bank loans, than on large firms that can access the credit market directly through stock and bond markets (and not necessarily through the banks). 2.12 monetary transmission mechanism, credit frictions and macro prudential regulation the monetary transmission mechanism describes how policy induced changes in the nominal money stock or the short-term nominal interest rates impact real variables such as aggregate output and employment (ireland, 2005). specific channels of monetary transmission operate through the effects that monetary policy has on interest rates, exchange rates, equity and real estate prices, bank lending, and firm balance sheets. recent research shows how these channels work in the context of dynamic, stochastic general equilibrium models. bernanke and gertler (1995) classify three channels of monetary policy as the balance sheet channel, the bank-lending channel and the credit channel. the balance sheet channel focuses on monetary policy effects on the liability side of the borrowers‘ balance sheet and income statement, including variables such as borrowers‘ networth, cash flow and liquid assets whilst the bank lending channel centres on the possible effect of monetary policy actions on the supply of loans by depository institutions. however, most of the previous empirical literature on the effects of credit aims to distinguish between different transmission mechanisms, such as the balance sheet channel, the bank lending channel and the bank capital channel (see oliner and rudebusch, 1996; van den heuve, 2002). since these different channels have similar predictions for aggregate quantities, many empirical studies use micro-level data from banks and/or firms rather than the aggregate data (bayoumi and melander, 2009). one consequence of these empirical studies is that the www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 22 general conditions of the banking sector and the specific characteristics of individual banks can have predictable impacts on the monetary transmission mechanism. in fact, recent studies have emphasised a risk-taking channel of monetary policy that places more emphasis on the willingness of banks to expand their balance sheet (borio and zhu, 2012; adrian and shin, 2011). the works of adrian and shin (2011) provide an overview of how changes in risk appetite, which is partly a function of monetary policy, generates a critical link between monetary policy changes, the actions of financial intermediaries, and the impact on the real economy. boivin et al (2010) have argued that the monetary transmission mechanism is one of the most studied areas of monetary economics for two reasons. first, understanding how monetary policy affects the economy is essential to evaluating what the stance of monetary policy is at a particular point in time. second, in order to decide on how to set policy instruments, monetary policy makers must have an accurate assessment of the timing and effects of their policies on the economy. over the last two decades, beginning with the pioneering works of bernanke and gertler (1989), economists began to introduce credit frictions into models that allowed for borrowing and lending in equilibrium. a number of studies have shown that these credit frictions could amplify the macroeconomic fluctuations introduced by certain shocks, hence the credit frictions are often referred to as the ―financial accelerator‖ (kiyotaki and moore, 1997, carlstrom and fuersto, 1997 and bernanke, et al, 1999). the recent papers have contributed to this literature by adding a relatively simple realistic, and well-defined financial intermediation sector into a large-scale dynamic stochastic general equilibrium (dsge) model (gertler and kiyotaki, 2009; curdia and woodford, 2010). these works analyze the relationship between the financial intermediation sector and macroeconomic volatility by examining both the indirect effect of the sector on the propagation of non-financial shocks and the direct effects of financial shocks that inhibit financial intermediation. tayler and zilberman (2014) examine the macro prudential roles of bank capital regulation and monetary policy in a dynamic stochastic general equilibrium (dsge) model with endogenous financial frictions and a borrowing cost channel. the model identifies various transmission channels through which credit risk, commercial bank losses; monetary policy and bank capital requirements affect the real economy. these mechanisms generate significant financial accelerator effects, thus providing a rationale for a macro prudential toolkit. following credit shocks, counter cyclical bank capital regulation is more effective than monetary policy in promoting financial, price and overall macroeconomic stability. for supply shocks, macro prudential regulation combined with a strong response to inflation in the central bank policy rule yield the lowest welfare losses. the findings emphasize the importance of the basel iii regulatory accords and cast doubts on the desirability of conventional taylor rules during periods of financial stress. 2.13 banks and the transmission of monetary policy the traditional interest rate, or money, view of the transmission of monetary policy focuses on the liability side of bank balance sheets. the important role played by banks in this transmission mechanism arises from the reserve requirement constraint faced by banks. because banks rarely hold significant excess reserves, the reserve requirement constraint is typically considered to be binding at all times. thus, shifts in monetary policy that change the quantity of outside money result in changes in the quantity of inside money in the form of the reservable deposits that can be created by the banking system. the transmission mechanism functions as follows. when the monetary authority undertakes open-market operations in order to tighten monetary policy (by selling securities), the banking industry experiences a decline in reserves. the fractional reserve system then forces banks (as a whole) to reduce reservable deposits in order to continue to meet the reserve requirement. this shock, which is exogenous to the banking sector, thus constrains www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 23 bank behavior. to induce households to hold smaller amounts of reservable deposits (transactions accounts), interest rates on other deposits and non-deposit alternatives must rise. that is, since the supply of transactions deposits has declined relative to the supply of alternative assets, interest rates on these alternative assets would have to rise to clear the market for transactions deposits. while that accurately describes non-crisis times, two recent notable exceptions are the episodes of quantitative easing policies undertaken by the bank of japan in response to the crises experienced by japan in the 1990s and, in response to the most recent financial crisis, also by the federal reserve, the bank of england, and the european central bank. rate is transmitted to longer term interest rates, aggregate demand declines. however, an important characteristic of the recent financial crisis has been the substantial expansion of excess reserves in the u.s. banking system. consequently, with the reserve requirement failing to serve as a binding constraint on most institutions, an increasing focus has been placed on the important role of alternative transmission mechanisms. 2.14 the broad credit channel the broad credit channel, also referred to as the balance sheet effect or financial accelerator, does not require that a distinction be drawn among the alternative sources of credit. instead, it is predicated on credit market imperfections associated with asymmetric information and moral hazard problems. research on the credit channel was motivated, in large part, by the puzzle that monetary policy shocks that had had relatively small effects on long-term real interest rates appeared to have had substantial effects on aggregate demand. this literature attributes the magnification, or propagation, of monetary policy shocks to frictions in the credit markets because of the information asymmetries between borrowers and lenders, external finance is an imperfect substitute for a firm's internal funds. the broad credit channel posits that an increase in interest rates associated with a tightening of monetary policy causes deterioration in firm health, in terms of both net income and net worth. a firm's net income is impaired both because its interest costs rise and because its revenues deteriorate as the tighter monetary policy slows the economy. a firm's net worth is adversely impacted as the lower cash flows emanating from the firm's assets are discounted using the higher interest rates associated with the tightening of monetary policy. the deterioration in the firm's net income and the reduction in the collateral value of the firm's assets, in turn, cause an increase in the external finance premium that must be paid by the firm for all sources of external finance. this increase in the cost of external funds for borrowers over and above the risk-free interest rate then results in a reduction in aggregate demand in addition to that due to the increase in the risk-free interest rate associated with the interest rate channel of the transmission of monetary policy. 2.15 the bank lending channel with the bank lending, or credit, view, in contrast to the money view, the focus of the transmission mechanism operating through bank balance sheets shifts from bank liabilities to bank assets. when monetary policy tightens, the reduction in available bank reserves forces banks to create fewer reservable deposits, banks must then either replace the lost reservable deposits with non-reservable liabilities, or shrink their assets, such as loans and securities, in order to keep total assets in line with the reduced volume of liabilities. typically, one would expect to observe some combination of these responses, although romer and romer (1990) question the extent to which banks, in an age of managed liabilities, are unable to easily replace reservable deposits. however, to the extent that banks are unable or unwilling to fully insulate their loan portfolio, the interest rate effect on aggregate demand is supplemented with an additional effect stemming from a reduction in the www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 24 availability of bank loans that further slows aggregate demand. in a simple world with three assets money, government bonds, and bank loans—three conditions must be satisfied for the bank lending channel to be operational in the transmission of monetary policy (see, for example, bernanke and blinder 1988; and kashyap and stein 1994). first, as with the interest rate view, prices must not adjust fully and instantaneously to a change in the money supply. that is, money is not neutral, at least in the short run. second, open-market operations must affect the supply of bank loans. third, loans and bonds must not be perfect substitutes as a source of credit for at least some borrowers. of course, the set of assets can be expanded to include private sector bonds and nonbank intermediated loans, in which case the narrower bank lending channel is distinguished from the broad credit channel by requiring that private sector bonds and nonbank intermediated loans not be perfect substitutes for bank loans as a source of credit for at least some borrowers. because only the second and third conditions distinguish the bank lending view from the money view, and because substantial evidence exists that wages and prices are not perfectly flexible, it will be assumed for the purposes of this discussion that the first condition holds. 2.16 bank lending and the transmission of monetary policy empirical researchers investigating the bank lending view face several challenges. first, they need to determine whether a change in monetary policy does affect bank lending. then, if bank lending is affected, the issue becomes the extent to which shifts in bank loan supply do, in fact, affect aggregate demand. the difficulties in establishing the first point are twofold. first, to what extent are banks able to insulate their loan portfolios from monetary policy shocks by adjusting other components of their balance sheet? the second difficulty concerns identifying a bank-loan supply shock, insofar as a decline in bank loans following a tightening of monetary policy may simply reflect a decline in loan demand rather than a decline in the supply of loans. 2.17 monetary policy and bank loan supply while the theoretical conditions required for bank loan supply to be affected by changes in monetary policy are clear, it is not straightforward empirically to disentangle shifts in loan supply from shifts in loan demand. at an aggregate level, bernanke and blinder (1992), among others, show that bank lending does contract when monetary policy becomes tighter. however, such an observed correlation may reflect a reduction in loan demand as the economy weakens in response to the tighter monetary policy, rather than reflecting a reduction in bank loan supply. furthermore, even if one observed an initial increase in bank loans or a notable delay in the decline in bank loans following a tightening of monetary policy, such evidence would not necessarily conflict with an inward shift in bank loan supply in response to a tightening of monetary policy. for example, the initial response of firms to a tightening of monetary policy may be an increase in loan demand resulting from the need to finance the buildup of inventories, as aggregate demand initially declines faster than production. even though banks may decrease loan supply immediately to borrowers without loan commitments, the total amount of bank loans may temporarily increase, as banks are forced to honor existing loan commitments (morgan 1998). thus, the endogeneity issues associated with using aggregate data for total loans make it impossible to obtain a clear answer. kashyap, stein, and wilcox (1993) provide an alternative approach for identifying an effect of monetary policy on bank loan supply, although the analysis is still based on aggregated data. they investigate the change in the mix of bank loans and commercial paper in the composition of firms‘ external finance, with the argument being that if the decline in loans is due to a general decline in credit demand associated with a slowing of the real economy, then demand for other types of credit should decline similarly. finding that a tightening of monetary www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 25 policy is associated with an increase in commercial paper issuance and a decline in bank loans, they conclude that a tightening of monetary policy does reduce bank loan supply rather than the decline in bank loans simply reflecting a reduction in credit demand as the economy slows. in the same vein, ludvigson (1998) investigates the composition of automobile finance between bank and nonbank providers of credit. she finds that, in fact, a tightening of monetary policy reduces the relative supply of bank loans, consistent with the bank lending channel. in contrast, oliner and rudebusch (1996b) revisit the kashyap, stein, and wilcox (1993) approach using a different measure of the mix of external finance and disaggregating the data into two separate components, one for small firms and one for large firms. they argue that their evidence is consistent with the broad credit channel rather than with the more narrowly defined bank lending channel. however, this only highlights the weaknesses associated with attempting to isolate bank loan supply shocks from shifts in credit demand using aggregate data. in fact, in their reply, kashyap, stein, and wilcox (1996) close by suggesting that a more definitive answer will have to rely on an analysis using micro data at the individual bank and firm levels. by advancing the analysis to focus on panel data, the literature has been able to obtain more definitive results about the impact of changes in monetary policy on bank loan supply. the key has turned out to be relating cross-sectional differences in bank, or banking organization, characteristics to differences in the extent to which banks were able to insulate their loan portfolios from a tightening of monetary policy. two aspects of bank characteristics appear to have been the primary focus. first, the ability of banks to raise nonreservable liabilities to replace the lost reservable deposits is a key factor in determining the extent to which a bank must adjust its loan portfolio when monetary policy is tightened. because these funds are, for the most part, uninsured liabilities, bank characteristics related to banks‘ access to external funds—for example, size, health, and direct access to capital markets—play an important role in determining the ability of banks to insulate their loan portfolios from the effects of changes in monetary policy. second, because banks face a capital requirement constraint in addition to the reserve requirement constraint on their activities, banks may differ in their response to a change in the stance of monetary policy, depending on which constraint is more binding. if the capital ratio requirement is the binding constraint, easing the reserve requirement constraint through open market operations should have little, if any, effect on bank lending. that is, because the binding constraint has not been eased, expansionary monetary policy, at least if operating through the bank lending channel, would be like ‗pushing on a string.‘ kashyap and stein (1995) note that with a tightening of monetary policy and the associated loss in reservable deposits, it is costly for banks to raise uninsured deposits, however, banks differ in the degree to which they have access to external funds. kashyap and stein hypothesize that bank size is a reasonable proxy for the degree of access to uninsured liabilities, with smaller banks having more limited access, and thus having their loan portfolio impacted more by a tightening of monetary policy. indeed, they find empirical support for the proposition that small banks are more responsive (shrink their loan portfolios by more) than large banks to a monetary policy tightening. kashyap and stein (2000) extend their analysis of the relative ease with which banks can raise uninsured deposits following a monetary policy tightening, noting that the bank loan response will also differ depending on the liquidity position of the bank. a bank that finds it relatively costly to raise uninsured deposits but that has large securities holdings has the option of adjusting to the shrinkage of reservable deposits by selling some of its securities, while a less liquid bank may be forced to shrink its loan portfolio by a greater degree. in a large cross-section of banks, they find evidence that the loan portfolios of smaller, more illiquid banks are the most responsive to monetary policy shocks. campello (2002) distinguishes among these smaller banks based on whether the bank is affiliated with a large www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 26 multibank holding company, finding that the lending of small banks that are affiliated with large multibank holding companies reacts less to a tightening of monetary policy than does the lending of similar small (standalone) banks that are not affiliated with multibank holding companies. although this evidence indicates that small banks affiliated with multibank holding companies are better able to insulate their lending from a tightening of monetary policy, the extent to which this is due to the channeling of internal holding company funds to bank subsidiaries rather than due to the fact that large multibank holding companies have easier access to external funds is not clear. campello tries to address this issue by using capital-to-asset ratios to distinguish among bank holding companies. kishan and opiela (2000) use the capital-to-asset ratio as the proxy for a bank's ability to raise uninsured deposits, finding that the loan portfolios of well-capitalized banks are less sensitive to monetary policy shocks than are those of poorly capitalized banks of the same size. however, for reasons discussed below, capital-constrained banks may behave differently for reasons other than their ability to raise uninsured deposits. holod and peek (2007) utilize the distinction between publicly traded and non-publicly traded banks to classify banks by the ease with which they can access external funds. they find that after controlling for size, capitalization, and other factors, the loan portfolios of publicly traded banks shrink less than those of non-publicly traded banks when monetary policy tightens due to the banks' ability to raise external funds, including by issuing large time deposits. furthermore, as one would expect, when a distinction is made between tightening and easing monetary policy, the estimated effect can be attributed to the effects of monetary policy tightening (tightening a binding constraint) rather than to monetary policy easing (possibly pushing on a string). loutskina and strahan (2009) argue that growth in loan securitization, in particular the expansion of the secondary mortgage market, has weakened the transmission of monetary policy through the lending channel by increasing bank balance sheet liquidity. cetorelli and goldberg (2012) argue that the domestic amplification of monetary policy through the lending channel has been mitigated by the increasing globalization of banking. banking organizations with international operations are able, at least partially, to insulate themselves from domestic liquidity shocks, such as from a monetary policy tightening, though the cross-border operation of their internal capital markets. that is, multinational banks can react to a tightening of monetary policy by using internal flows of funds to offset the impact on their domestic banks. on the other hand, this mechanism also suggests that the total effect of the lending channel has been understated by focusing only on domestic lending, insofar as changes in monetary policy are propagated internationally through the internal capital markets of global banks. peek and rosengren (1995b) focus on the direct impact of the enforcement of capital regulations by bank supervisors on the ability of capital-constrained banks to lend, and thus to be able to increase loans in response to an easing of monetary policy. they examine the impact on bank lending of formal regulatory actions (cease and desist orders and written agreements) imposed on banks that experienced asset quality problems. they find that the enforcement actions by bank regulators included explicit capital targets that needed to be achieved over a short time frame. the result was an immediate and significant reduction in bank loan portfolios associated with the imposition of the enforcement action that persisted for some time thereafter while the bank continued to operate under the enforcement action. hall (1993) found that the introduction of the basel i accord had a significant impact on bank portfolios. hancock and wilcox (1994) also find that the implementation of the basel i accord affected banks' willingness to lend. however, berger and udell (1994) do not find evidence that the basel i accord created a bank capital crunch. more recently, a concern raised with the proposed basel ii accord has been that the new capital www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 27 regulations would magnify potential capital constraints during recessions (for example, kashyap and stein 2004), making banks less responsive to an easing of monetary policy. thus, a very real concern with the effectiveness of the bank lending channel, and thus the overall effectiveness of monetary policy, is whether banks are capital constrained at the time of an easing of monetary policy. 2.18 real effects of shifts in bank loan supply given that the empirical evidence generally supports the proposition that banks, particularly those that may find it relatively expensive to raise uninsured liabilities, respond to a monetary policy tightening by reducing loans, we turn to the next link in the bank lending channel mechanism. for the reduction in bank loans to have an impact on economic activity, firms must not be able to easily substitute other sources of external finance when bank loan supply is cut back. gertler and gilchrist (1994) find, at a somewhat aggregated level, that the investment of an aggregate of small firms is more responsive to changes in monetary policy than is the investment of an aggregate of large firms, a set of firms that presumably is less bank dependent. ludvigson (1998), comparing bank and nonbank sources of automobile loans, finds that the composition of automobile credit impacts automobile sales, even after controlling for the standard factors that probably impact automobile demand. additional evidence at an aggregate level is provided by driscoll (2004), who uses a panel of state-level data to investigate the extent to which shocks to bank loan supply affect output. using state-specific shocks to money demand as an instrumental variable to address the endogeneity problem, he does not find a meaningful effect of loan supply shocks on economic activity at the state level. ashcraft (2006), similarly basing his analysis on state-level data, attempts to exploit differences between standalone banks and banks affiliated with multibank holding companies in their degree of access to external funds in order to identify loan supply shocks related to changes in monetary policy. while he does find a difference between the two types of banks in their lending response to changes in monetary policy, he does not find a significant effect of these bank loan supply shocks on state income growth. ashcraft (2005), using the cross-guarantees of two failed texas bank holding companies as his identification mechanism to address the endogeneity problems, finds that the failures of healthy banks forced by the cross-guarantee provisions were associated with reduced local economic activity. this suggests that bank lending is special, insofar as it appears that other lenders (even other banks) did not fill the gap created by the sharp reduction in lending by the failed banks, and is consistent with an operative lending channel. another approach that provides direct evidence that a reduction in bank loan supply adversely affects macroeconomic activity is provided by peek and rosengren (2000). using the banking problems in japan as the source of an exogenous loan supply shock in the united states, they are able to avoid the common endogeneity problem faced by studies that rely on domestic shocks to bank loan supply. furthermore, by focusing on commercial real estate loans that tend to have local or regional markets, they are able to exploit cross-sectional differences across geographic regions to show that the decline in loans had real effects. that is, the pull-back by japanese banks in local u.s. markets was not fully offset by other lenders stepping in to fill the void. taking still a different tack, peek, rosengren, and tootell (2003) obtain evidence of a macroeconomic effect of shifts in bank loan supply. they find that adverse shocks to bank health weaken economic activity in the major gdp components that one would expect to be most affected by bank loan supply shocks for example, the change in business inventory investmentwhile not impacting other major components of gdp whose fluctuations would be correlated with demand shocks. slovin, sushka, and poloncheck (1993) observe that the failure of continental illinois bank adversely impacted www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 28 borrowers that had a close banking relationship with that bank. however, this outcome did not hold if the continental illinois loan was part of loan participation unless continental illinois was the lead underwriter of the loan. in terms of the strength of the banking relationship, petersen and rajan (1995) note that a firm's banking relationship often involves both a deposit and a lending relationship. they find that the strength of lending relationships, as indicated by a firm holding deposits at the bank, is indicative of how extensively the firm relies on bank lending. fields et al. (2006) argue that the value of lending relationships has diminished substantially over time, due in part to the further development of financial markets and the increased availability of information about borrowers. however, their sample includes only publicly traded firms, precisely those firms that are the least likely to be bank dependent. consistent with the view of fields et al. (2006), gande and saunders (2012) argue that the development of the secondary loan market has reduced to some extent the ‗specialness‘ of banks due to the weakening of banks‘ incentives to monitor borrowers. 2.19 adverse real-side effects of contractionary monetary policy one important problem with monetary policies that constrains domestic credit is that they may have substantial adverse supply effects. the conventional view is that tight monetary policy that results in credit contraction causes private expenditures (especially durable goods and investment) to decline, causing a decline in aggregate demand, which reduces inflation. the decline in credit is also supposed to cause a reduction in the demand for imports, which ameliorates the current account deficit and reduces (imported) inflation. if credit contraction had only aggregate demand effects, then central banks could indeed control inflation by using contractionary monetary policy. however, availability of credit determines the ability of firms to accumulate capital and hire labor. thus, credit contraction causes a decline in capacity utilization, employment, and production. tight monetary policy, which is usually associated with high interest rates and a strong currency, particularly hurts export-oriented sectors by undermining international competitiveness. the decline in production and exports causes upward pressure on the price level and deteriorates the current account, causing inflation to accelerate. the increase in the price level results in a decline in real credit, which causes investment and employment to decline further. if these supply effects are significant, contractionary monetary policy will fail to reduce and contain inflation. the inability of monetary policy to control inflation has long been recognized even in the real business cycle school of thought. sargent and wallace (1981) pointed out that ―even in an economy that satisfies monetarist assumptions, friedman‘s list of things that monetary policy cannot permanently control may have to be expanded to include inflation.‖ friedman had argued that monetary policy could not permanently influence real output, employment, and real returns on assets, but that it could definitively influence inflation (friedman, 1968). in practice, however, because monetary policy has both supply and demand effects, especially through the credit channel, contractionary monetary policy may be ineffective in controlling inflation while it has substantial adverse real effects. blinder (1987) offers a simple theoretical framework to illustrate that the supply side effects of tight monetary policy through credit contraction may outweigh the demand effects on the price level. in blinder‘s model, supply (y) is determined by factor utilization (f), which in turn depends on real credit (c/p) (c is nominal credit and p is the price level): yt = γ ft-1;ft = α(c/p)t; yt = γα (c/p)t-1; where γ < 1; α < 1 aggregate demand (d) is determined by income: www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 29 dt = a + byt ; where 0 < b <1 (19) equations 18 and 19 can be combined to yield aggregate demand as a function of real factor utilization and real domestic credit: 𝑑t = 𝑎 + 𝑏𝛾𝐹t-1 = 𝑎 + 𝑏(𝑐/𝑝)t-1 (20) the price adjustment process is summarized in the following equation: pt+1 = λ(dt – yt) (21) it follows from the above relations that credit contraction decreases demand (d), which causes the price level to decrease, but it also decreases supply (y) which causes the price level to increase. from equations 1 and 3, the effects of a one percent decrease in credit may have a larger effect on supply than on demand under reasonable assumptions about the values of the parameters b,γ , and α : as long as b,γ ,α < 1, it follows that b, γ, α < γ α , so that | dy / d(c / p) | > |dx/d(c / p) |, implying that p! > 0. under these conditions, tight monetary policy is stagflationary as it causes output to decline while inflation accelerates. contractionary monetary policy arguably reduces inflation by reducing domestic aggregate demand. however, low aggregate demand may be a constraint to output expansion. in the case of ssa countries, domestic markets for goods and services are thin, which is a constraint to production. a contraction in bank credit to the private sector therefore depresses production. under such circumstances, even if price stability were achieved, the economy may incur a high cost in terms of reduced investment, employment, and output. therefore, the monetarist orientation espoused by central banks in ssa countries to control inflation may constrain domestic credit, which exacerbates credit rationing arising from market imperfections. in the context of ssa countries, the negative effects of contractionary monetary policy on private credit are exacerbated by pressure from deficit financing. contractionary monetary policy in the context of chronic budget deficits automatically creates a captive market for government debt. given that government borrowing is outside of the control of the monetary authority, tight domestic credit amounts to squeezing credit to the private sector, which has negative effects on domestic investment. 2.20 bank credit and domestic investment there is a large and well established literature on the determinants of investment and methodologies for empirical investigation of investment behavior. a selected list includes baddeley (2003), chirinko (1993), jorgenson (1971), junankar (1973), and nickell (1978). fazzari et al. (1988) provide theoretical motivation and empirical evidence on the importance of credit constraints for investment at the firm level. this study focuses on the implications of the links between monetary policy and bank credit for investment at the aggregate level. here, we derive a testable relationship between investment and monetary policy to illustrate the effects of monetary policy on domestic investment through bank credit to the private sector. this relationship goes beyond the standard situations of credit rationing (stiglitz and weiss, 1981) and financial repression typically examined in the development finance literature (mckinnon, 1973). in the case presented here, the monetary policy stance can be explicitly proor anti-domestic credit, which affects private investment. in addition to the usual interest rate effect, monetary policy affects investment through the quantity of credit and its overall effects on financial intermediation. by reducing overall financial intermediation, credit contraction depresses business investment and overall economic activity. the role of the ―state of credit‖ has been emphasized for a long time in the economic literature. keynes (1973) pointed out that ―the banks hold the key position in the transition from a lower to a higher scale of activity… the www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 30 investment market can become congested through shortage of cash. it can never become congested through shortage of saving.well-functioning domestic credit markets facilitate long-term investment by pooling resources, thus resolving the firm‘s problem of mismatches between revenue and expenditure flows. credit markets also stimulate investment by facilitating risk sharing among investors. in particular, limited liability associated with credit financing makes investors more comfortable in undertaking large long-gestation investment projects. as a result, increased access to low-cost credit stimulates domestic investment. therefore, the ―state of domestic credit‖ is an enhancing ―x-factor‖ in the capital accumulation process. the foregoing discussion suggests that a better credit environment, or abundant and affordable credit, is being associated with higher optimal capital stock. this can be formalized by the following equation: k* t = a + bxt + zt  (22) where x is the indicator of the state of credit and z is a vector of other determinants of investment demand. the adjustment to optimal capital stock is as follows: δk t = γ (k * t – kt-1) k 6 (23) where γ is the flexible accelerator parameter assumed to be between 0 and 1. gross investment, the sum of net investment and replacement, is given by: i t = δkt + δkt-1 (24) where δ is the depreciation rate. combining the above three equations yields investment as a function of the ―state of credit‖: 1t = aγ + bγxt + θγzt + ( δ – γ) kt-1 (25) monetary policy also has direct effects on domestic investment through the interest rates. these will be tested empirically in the next section. the empirical analysis also takes into account the effects of other factors of private investment, notably growth, political risk and trade. given that investment is inherently irreversible, undertaking a new investment project carries a certain degree of risk (bernanke, 1983; dixit and pindyck, 1994). this risk will be higher the higher the level of economic and political uncertainty. using various measures of economic and political instability, some studies have found that risk has a quantitatively significant negative effect on investment. international trade may have a positive or a negative effect on domestic investment. if the increase in trade is accompanied by a reduction in the cost of imported inputs and more access to export markets, then trade will stimulate domestic investment in the relevant sectors. however, trade openness may depress domestic private investment due to foreign competition. a number of studies have found that openness exerts a positive effect on domestic investment (see ndikumana (2000) for evidence on sub-saharan african countries). however, an important empirical issue is the difficulty in identifying the exact channels through which the effects of trade openness on investment actually operate. another problem is measurement of openness. in particular, due to the lack of consistent data on trade policy indicators, empirical studies typically rely on measures of trade outcomes (imports plus exports) as proxies of trade policy indicators. in practice, however, a country may experience an increase in trade without any change in trade policy, as in the case of a resource-rich country during commodity price hikes. conversely, trade policy reforms aimed at promoting exports (e.g., reduction in export duties) may not necessarily result in expansion of exports, especially if a country‘s products are not price elastic as is the case of agricultural products. these caveats must be kept in mind while interpreting the results on measure of openness. www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 31 2.21 theoretical framework: theories of financial intermediation the perfect theory of financial intermediary three pillars are at the basis of the modern theory of finance: optimality, arbitrage, and equilibrium. optimality refers to the notion that rational investors aim at optimal returns. arbitrage implies that the same asset has the same price in each single period in the absence of restrictions. equilibrium means that markets are cleared by price adjustment through arbitrage at each moment in time. levine et al (2000). in the neoclassical model of a perfect market, e.g. the perfect market for capital, or the arrow-debreu world, the following criteria usually must be met:  no individual party on the market can influence prices;  conditions for borrowing/lending are equal for all parties under equal circumstances;  there are no discriminatory taxes;  absence of scale and scope economies;  all financial titles are homogeneous, divisible and tradable;  there are no information costs, no transaction costs and no insolvency costs;  all market parties have ex ante and ex post immediate and full information on all factors and events relevant for the (future) value of the traded financial instruments. the arrow-debreu world is based on the paradigm of complete markets. in the case of complete markets, present value prices of investment projects are well defined. savers and investors find each other because they have perfect information on each other‘s preferences at no cost in order to exchange savings against readily available financial instruments. these instruments are constructed and traded costless and they fully and simultaneously meet the needs of both savers and investors. thus, each possible future state of the world is fully covered by a so-called arrow-debreu security (state contingent claim). also important is that the supply of capital instruments is sufficiently diversified as to provide the possibility of full risk diversification and, thanks to complete information, market parties have homogenous expectations and act rationally. in so far as this does not occur naturally, intermediaries are useful to bring savers and investors together and to create instruments that meet their needs. they do so with reimbursement of costs, but costs are by definition an element – or, rather, characteristic – of market imperfection. therefore, intermediaries are at best tolerated and would be eliminated in a move towards market perfection, with all intermediaries becoming redundant: the perfect state of disintermediation. this model is the starting point in the present theory of financial intermediation. all deviations from this model which exist in the real world and which cause intermediation by the specialized financial intermediaries are seen as market imperfections. this wording suggests that intermediation is something which exploits a situation which is not perfect, therefore is undesirable and should or will be temporary. the perfect market is like heaven, it is a teleological perspective, an ideal standard according to which reality is judged. there are different views on how the financial structure affects economic growth exactly levine (2000).  the bank-based view holds that bank-based systems – particularly at early stages of economic development – foster economic growth to a greater degree than market-based systems.  the market-based view emphasizes that markets provide key financial services that stimulate innovation and long-run growth. www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 32  the financial services view stresses the role of banks and markets in researching firms, exerting corporate control, creating risk management devices, and mobilizing society‘s savings for the most productive endeavors in tandem. as such, it does regard banks and markets as complements rather than substitutes as it focuses on the quality of the financial services produced by the entire financial system.  the legal-based view rejects the analytical validity of the financial structure debate. it argues that the legal system shapes the quality of financial services la porta et al., (1998). the legal-based view stresses that the component of financial development explained by the legal system critically influences long-run growth. political factors have been introduced too, in order to explain the relationship between financial and economic development (zingales, 2000). 2.22 modern theories of financial intermediation in order to give firm ground to our argument and to illustrate the paradox, we will first review the doctrines of the theory of financial intermediation. these are specifications, relevant to the financial services industry, of the agency theory, and the theory of imperfect or asymmetric information. basically, we may distinguish between three lines of reasoning that aim at explaining the raison d‘être of financial intermediaries: information problems, transaction costs and regulatory factors. first, and that used in most studies on financial intermediation, is the informational asymmetries argument. these asymmetries can be of an ex ante nature, generating adverse selection, they can be interim, generating moral hazard, and they can be of an ex post nature, resulting in auditing or costly state verification and enforcement. the informational asymmetries generate market imperfections, i.e. deviations from the neoclassical framework. many of these imperfections lead to specific forms of transaction costs. financial intermediaries appear to overcome these costs, at least partially. for example, diamond and dybvig (1983) consider banks as coalitions of depositors that provide households with insurance against idiosyncratic shocks that adversely affect their liquidity position. another approach is based on leland and pyle (1977). they interpret financial intermediaries as information sharing coalitions. diamond (1984) shows that these intermediary coalitions can achieve economies of scale. diamond (1984) is also of the view that financial intermediaries act as delegated monitors on behalf of ultimate savers. monitoring will involve increasing returns to scale, which implies that specializing may be attractive. individual households will delegate the monitoring activity to such a specialist, i.e. to the financial intermediary. the households will put their deposits with the intermediary. they may withdraw the deposits in order to discipline the intermediary in his monitoring function. furthermore, they will positively value the intermediary‘s involvement in the ultimate investment (hart, 1995). also, there can be assigned a positive incentive effect of short-term debt, and in particular deposits, on bankers, for example, qi (1998) and diamond and rajan (2001) show that deposit finance can create the right incentives for a bank‘s management. illiquid assets of the bank result in a fragile financial structure that is essential for disciplining the bank manager. note that in the case households that do not turn to intermediated finance but prefer direct finance, there is still a ―brokerage‖ role for financial intermediaries, such as investment banks. here, the reputation effect is also at stake. in financing, both the reputation of the borrower and that of the financier are relevant. dinç (2001) studies the effects of financial market competition on a bank reputation mechanism, and argues that the incentive for the bank to keep its commitment is derived from its reputation, the number of competing banks and their reputation, and the competition from bond markets. these four aspects clearly interact. www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 33 2.23 an alternative approach of financial intermediation when information asymmetries are not the driving force behind intermediation activity and their elimination is not the commercial motive for financial intermediaries, the question arises which paradigm, as an alternative, could better express the essence of the intermediation process. in our opinion, the concept of value creation in the context of the value chain might serve that purpose. and, in our opinion, it is risk and risk management that drives this value creation. the concept of value creation, introduced by michael porter (1985), can be seen as a dynamic extension of the theory of industrial organization, in the tradition of joseph schumpeter. it represents the other side of the coin, which glitters in the theory of the firm: transaction costs are incurred to create value. it is amazing that the value added approach, now widely recognized and applied in the literature on business organization, management and finance describes the value creation process in banking in his book ―competitive strategies in european banking‖, making reference to porter. however, he does not elaborate on this concept to create an alternative to the existing paradigm of financial intermediation. nor does he go into depth to explain the basic process of value creation by financial intermediaries. david llewellyn‘s concept of contract banking is also based on the value chain idea (llewellyn, 1999). but here too, there emerges no alternative for the mainstream view on financial intermediation. 2.24 theories of monetary policy  the keynesian monetary policy in the keynesian monetary theory, an increase (or decrease) in money supply is attributed to the open market purchase (or sale) of government debt instruments by the central bank. interest once government decides to enter the market it usually purchases or sells securities on a large scale (afolabi, 2003). if the intention is to stimulate a sluggish economy government repurchases securities on a large scale and injects cash into the economy to increase aggregate demand for goods and services, and encourage more output. if the intention is to reduce the high inflationary rate and create a conducive environment, government sells securities on a large scale. a large volume of money withdrawn from circulation and the level of money supply falls, dragging transactions balances of the community to a lower level. consequently general prices fall bringing down the rate of inflation. although the keynesians define financial assets (government securities) as short-term papers, e.g. treasury bills, they consider long-term bonds as a representative of financial assets. naturally the interest return on a long-term financial asset is expected to be higher than that of a short-term financial asset. short-term cyclical disturbances or changes in short-term rates are bound to affect the long-term interest rate of a 1ong-term financial asset. the keynesian theory talked about money, interest rate and their economic importance. money has. its value but it is not neutral to the general level of economic activity. money is a generalized claim against all things that have economic value. in keynes view the rate of interest is determined by the demand and supply money. money supply (ms) is fixed in the short-run and does not vary with interest rate. money demand consists of: md = mt + m + msp where mt = transactions demand for money. m = precautionary demand for money. msp = speculation demand for money (osiegbu, 2005). www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 34  adopted from osiegbu 2005 note that in fig. 1.1 r is measured on the vertical axis and md on the horizontal, m1 + m remain inelastic with respect of changes in r. msp is how people could do better holding more cash than the compensation from financial institutions and vice versa. keynes provided the explanation for holding cash through the concept of liquidity preference. money is the most liquid of all assets and liquidity means for ease and convenience with which an asset (money) can be converted from without loss of value. liquidity preference shows that individual prefers to demand money to hold as cash and all demand increase unit the liquidity preference region is 1ei. liquidity preference operates at very low r when the demand for money is infinitely elastic (below r) (okereke, 2003).  empirical review gertler and gilchrist (1994) revealed that business lending does not decline when policy is tightened. they concluded that the entire decline in total lending comes from a reduction in consumer and real estate loans. kashyap and stein (1995) find evidence that business lending may respond to a tightening of monetary policy. they find that when policy is tightened, both total loans and business loans at small banks fall, while loans at large banks are unaffected. the differential response of small banks may indicate they have less access to alternative funding sources than large banks and so are less able to avoid the loss of core deposits when policy is tightened. gambacorta and iannoti (2005) studied the velocity and asymmetry in response of bank interest rates (lending, deposit, and inter-bank) to monetary policy shocks (changes) from 1985-2002 using an asymmetric vector correction model (avecm) that allows for different behaviours in both the short-run and long-run. the study shows that the speed of adjustment of bank interest rate to monetary policy changes increased significantly after the introduction of the 1993 banking law, interest rate adjustment in response to positive and negative shocks is asymmetric in the short run, with the idea that in the longrun the equilibrium is unique. they also found that banks adjust their loan (deposit) prices at a faster rate during period of monetary tightening (easing) (somoye and ilo, 2009). van den heuvel (2005) in his study shows that monetary policy affects bank lending through two channels. they argued that by lowering bank reserves, contractionary monetary policy reduces the extent to which banks can www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 35 accept reservable deposits, if reserve requirements are binding. the decrease in reservable liabilities will, in turn, lead banks to reduce lending, if they cannot easily switch to alternative forms of finance or liquidate assets other than loans. a study by punita and somaiya in 2006 on the impact of monetary policy on profitability of banks in india between 1995 and 2000 provided some dissenting evidence that lending rate has a positive and significant influence on banks‘ profitability, which indicates a fall in lending rates will reduce the profitability of the banks. it was also found out that bank rate, cash reserve ratio and statutory ratio significantly affect profitability of banks negatively. their findings were the same when lending rate, bank rate, cash reserve ratio and statutory ratio were pooled to explain the relationship between bank profitability and monetary policy instruments in the private sector. amidu and wolfe (2008) examined the constrained implication of monetary policy on bank lending in ghana between 1998 and 2004. there study revealed that ghanaian banks lending behaviour are affected significantly by the countries economic also support and change in money supply. their findings also support the finding of previous studies that the central bank prime rate and inflation rate negatively affect bank lending. prime rate was found statistically significant while inflation was insignificant. based on the firm level characteristics, there study revealed that bank size and liquidity significantly influence bank‘s ability to extend credit when demanded. mohammed and simon (2008) somoye and ilo (2009) investigated the impact of macroeconomic instability on the banking sector lending behaviour in nigeria between 1986 to 2005. their study revealed the mechanism transmission of monetary policy stocks to banks operation. the result of cointegration and vector error correction suggests a long-run relationship between bank lending and macroeconomic instability. 3. research methodology the study uses quasi experimental research design approach for the data analysis. the approach combines theoretical consideration with the empirical observation and extract maximum information from the available data. therefore, the research design in this study is the quasi-experimental which allows us to examine the causal relationship between the dependent and the independent variables. the data in this study will be sourced from the publications of central bank of nigeria statistical bulletin. this constitutes the time series data sourced from the secondary data. the model below is adopted from toby and thomson (2014). 3.1 model specification model i cbla/tcbl = f (intr, mpr, tbr, exr, m2, liqr) ………………………………(1) model ii cblm/tcbl = f (intr, mpr, tbr, exr, m2, liqr) ………………………………(2) transforming equation 1 to 4 above to methodological form cbla/tcbl = β0 + β1intr + β2mpr + β3tbr + β4exr + β5m2 + β6liqr µ ..(3) cblm/tcbl = β0 + β1intr + β2mpr + β3tbr + β4exr + β5m2 + β6liqr µ ………(4) where: cbla/tcbl = percentage of commercial banks lending to the agricultural sector to total commercial bank lending. cblm/tcbl = commercial banks lending to the manufacturing sector to total commercial bank lending. intr = interest rate mpr = monetary policy rate tbr = treasury bill rate www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 36 exr = exchange rate m2 = broad money supply liqr = liquidity ratio β0 = intercept β1 – β6 = coefficient of the explanatory variable µ = error term in analyzing the data, and results of this study, the multiple regressions with the use of statistical package for social sciences (spss) will be used. this is used to test the hypotheses and the variables in the study. 4. data presentation, analysis and discussion of findings table 1: tolerance and variance inflation factor (vif) model i tolerance vif intr .095 10.524 mpr .138 7.249 tbr .151 6.601 exr .382 2.616 m2/gdp .523 1.192 lirq .578 1.729 source: spss print out 22.0 (2017) table1: shows the tolerance value results and variance inflation factors of the variables in the model. the tolerance values are less than 1.00 but above 0.1 in all the variables examined in the model with relation to commercial banks lending. this is inverse to the traditional level and the rule of thumb which is contrary to testing the multicolinearity on the tolerance. the variance inflation factor result shows that interest rate, monetary policy rate, treasury bill being above 5.0 but less than 10.0 while other variables in the model are less than 5.0 and 10.0 as the conventional rule of thumb. table 2: colinearity diagnostic and durbin watson test model eigen val cond index constant variables proportion intr mpr tbr exr m2/gdp liqr 1 6.321 1.000 .00 .00 .00 .00 .00 .00 .00 2 .418 3.890 .00 .00 .00 .01 .26 .01 .00 3 .174 6.030 .01 .00 .00 .02 .14 .09 .02 4 .057 10.497 .00 .01 .00 .01 .11 .35 .19 5 .015 20.543 .26 .00 .45 .22 .00 .12 .01 6 .011 23.589 .31 .08 .05 .63 .00 .40 .17 7. .004 39.158 .42 .91 .53 .12 .48 .03 .60 durbin watson test 1.771 source: spss print out 22.0 (2016) www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 37 the above table illustrates the colinearity diagnostic test result. the result shows an eigen value that corresponds to the highest cond index and the variance constant are less than 0.05 at 5% level of significance. this indicates the significant relationship between the dependent and the independent variables in the long run. the durbin watson statistics of 1.771 approximates 2.000 which signify that there is no serial correlation between the variables in the time series. table 3: effect of monetary policy on commercial banks lending to the agricultural sector: multiple regression result model variables intr mpr tbr exr m2/gdp liqr  .163 .263 -.041 .-060 -.291 -.070 beta () -167 191 -.035 -.637 -.299 -.115 corel .116 .159 -.031 -.667 -.441 -.194 t. test .606 .839 -.160 -4.646 -2.551 -1.028 sig-t .549 .409 .874 .00 .017 .313 constant(0) 15.113 t-test 3.496 t-sig. .002 r .898 89.8% r2 .806 80.6% f-ratio 18.694 f-sig. .000 source: spss print out 22.0 (2017) the estimated regression model shows that with the positive value of 15.113 as constant and regression intercept, the independent variables in the study positively affects the dependent variable at constant. however, the negative coefficient of -.041, -.060, -.291 and -.070 as β coefficient for treasury bill rate, exchange rate, broad money supply and liquidity reserve proved that increase in the variables will reduce bank lending to the agricultural sector of .163 and .263 as β coefficient for interest rate and monetary policy rate shows that increase in the variable will lead to increase on bank lending to the agricultural sector. the correlation coefficient shows 89.8% which means the relationship between the dependent and the independent variable is strong of the variables to the dependent. the r2 proved that 80.6% variation in commercial banks lending to the agricultural sector can be explained by variation in the monetary policy variables examined in this study. the f-statistics and sig. t shows that the model is significant. table 4:effect of monetary policy on commercial banks lending to the manufacturing: multiple regression result model variables intr mpr tbr exr m2/gdp liqr  -.158 .195 -.225 -.067 -.646 -.070 beta () -.100 .416 -.120 -.443 -.414 -.072 corel -.065 -.310 -.098 -.501 -.534 -.115 t. test -.340 1.695 -.152 -3.005 -3.286 -.600 www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 38 sig-t .736 .102 .613 .006 .003 .554 constant(0) 38.924 t-test 5.222 t-sig. .000 r .881 88.1% r2 .776 77.6% f-ratio 15.601 f-sig. .000 source: spss print out 22.0 (2017) the estimated regression model shows that with the positive value of 38.924 as constant and regression intercept, the independent variables in the study positively affects the dependent variable at constant. however, the negative coefficient of -.158, -.225, -.067, -.646 and -.070 as β coefficient for interest rate, treasury bill rate, exchange rate, broad money supply and liquidity reserve proved that increase in the variables will reduce bank lending to the manufacturing sector by 1.8%, 2.2%, 0.6%, 6.4% and 0.7% while the positive β coefficient of .915 for monetary policy rate shows that increase will lead to increase on bank lending to the manufacturing sector by 9.1%. the correlation coefficient shows 88.1% which means the relationship between the dependent and the independent variable is strong of the variables to the dependent. the r2 shows that 77.6 variations in commercial banks lending to the manufacturing sector can be explained by the monetary policy variables examined in the study. the f-statistics and sig. t shows that the model is significant. 4.1 test of hypotheses table5: monetary policy and commercial banks lending to agricultural sector variables t-statistics significant t remark decision intr .606 .549 not significant accept h0 mpr .839 .409 not significant accept h0 tbr -.160 .874 not significant accepth0 exr -4.646 .000 significant reject h0 m2/gdp -2.551 .017 significant reject h0 liqr -1.028 .313 not significant accept h0 source: spss (20.0) table 6: monetary policy and commercial banks lending to manufacturing sector variables t-statistics significant t remark decision intr .180 .858 not significant accept h0 mpr -2932 .007 significant reject h0 tbr 2.619 .014 significant reject h0 exr 7.420 .000 significant reject h0 www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 39 m2/gdp -.060 .952 not significant accept h0 liqr -.313 .757 not significant accept h0 source: spss (20.0) 4.2 discussion of findings the nigerian real sector is tagged ―the preferred sector of the economy‖ and government policies over the years has been how to promote the industry to achieve the growth of the economy. for instance, the government mandated commercial banks to lend significant of its credit to the real sector at a lower cost of credit prior to the abolition of the mandatory sectoral credit facility in 1st october, 1996. the objective was to promote the growth of the sector due to the importance contribution of the sector to the economic growth. other policies through the commercial banks credit include the small and medium equity investment scheme. the objective of this study was to examine monetary policy and commercial banks lending to the real sector of the economy. findings of the study from the two regression models shows that treasury bill rate, exchange rate, broad money supply and liquidity reserve have negative relationship with commercial banks lending to the real sectors of nigerian economy. interest rate was found to have a positive effect on commercial banks lending to the agricultural sector but was found to have a negative effect of commercial banks lending to the manufacturing sector. the negative effect of liquidity reserve and interest rate confirm the expectation of the results as increase in the variables contract bank lending ability. it also confirms the trade-off relationship between earning assets and liquidity reserve in the commercial banks as illustrated by nwankwo (1998). the positive effect of the variables confirm the findings of gambacorta and iannoti (2005) who studied the velocity and asymmetry in response of bank interest rates (lending, deposit, and inter-bank) to monetary policy shocks (changes) from 1985-2002 using an asymmetric vector correction model (avecm) that allows for different behaviours in both the short-run and long-run. the findings of van den heuvel (2005) who argued that by lowering bank reserves, contractionary monetary policy reduces the extent to which banks can accept reservable deposits, if reserve requirements are binding, the decrease in reservable liabilities will, in turn, lead banks to reduce lending, if they cannot easily switch to alternative forms of finance or liquidate assets other than loans, amidu and wolfe (2008) who examined the constrained implication of monetary policy on bank lending in ghana between 1998 and 2004 and mohammed and simon (2008) somoye and ilo (2009) investigated the impact of macroeconomic instability on the banking sector lending behavior in nigeria between 1986 to 2005. the negative effect of broad money supply on commercial banks lending to the real sectors of the economy is contrary to the expectation of the results and the theory of expansionary monetary policy, increase in money supply is expected to enhance bank lending to the various sectors of the economy. the negative effect can be traced to non compliance to monetary policy directives, overregulation, unattractiveness of the sectors to bank lending and increase in liquidity reserve or monetary policy shocks such as the withdrawal of all public funds from the banking sector with the advent of the treasury single account. 5. conclusion and recommendation 5.1 conclusion from the findings of the study, the study concludes as follows;  interest rate has positive but not significant relationship with commercial banks lending to the agricultural sector but negatively related to commercial banks lending to the manufacturing sector of the economy.  monetary policy rate have positive relationship with commercial banks lending to the agricultural sector www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 2018 40 but negatively related to commercial banks lending to the manufacturing sector.  treasury bill rate have negative but not significant relationship with commercial banks lending to the real sectors of the economy.  exchange rate, broad money supply has negative and significant relationship with commercial banks lending to the real sectors of the economy.  the study reveal 80.6% and 77.6% explained variation. the f-ratio of 15.601 and 18.694 and f-probability of 1% level. from the above, the study concludes inductively that there is significant relationship between monetary policy and commercial banks lending to the real sector of nigerian economy. 5.2 recommendation from the findings of the study, we draw the following recommendations:  monetary policy should be formulated to avoid negative outcome as a result of monetary policy measures and mismatch of bank lending with monetary policy, bank lending objectives should be formulated, harmonized and carefully aligned with monetary policy  commercial bank lending objectives should be optimally implemented within the ambit of the monetary policy measures, exchange rate, interest rate, monetary policy rate etc.  monetary policy and monetary policy variables such as interest rate, should answer the objective of bank lending to the real sector of the economy.  there should be policies to revamp the real sector to attract bank lending that will enhance the growth of the sector.  all policies directed towards the re-organization of the real sector should be fully implemented to speedy recovery of the industry. references ashcraft, a., (2005). are banks really special? new evidence from the fdic-induced failure of healthy banks. american economic review (95), 1712–1730. ashcraft, a., (2006). new evidence on the lending channel. journal of money, credit and banking 38(3), 751–775. berger, a. n., & udell, g. f., (1994). ―did risk-based capital allocate bank credit and cause a ‗credit crunch‘ in the united states?‖ journal of money, credit and banking 26(3), part ii: 585–628. bernanke, b. s., & blinder, a. s., (1988). credit, money, and aggregate demand. american economic review papers and proceedings 78(2), 435–439. bernanke, b. s., & blinder, a. s., (1992). the federal funds rate and the channels of monetary transmission. american economic review 82(4), 901–921. bernanke, b. s.,& gertler, m., and gilchrist. s., (1996). the financial accelerator and the flight to quality. the review of economics and statistics 78(1), 1–15. bernanke, b. s.,& gertler, m., (1995). inside the black box: the credit channel of monetary policy transmission. journal of economic perspectives, 9(4), 27–48. borio, c., &zhu, h., (2012). capital regulation, risk-taking and monetary policy: a missing link in the transmission mechanism? journal of financial stability 8(4), 236–251. brunnermeier, m. k., & sannikov, y., (forthcoming). a macroeconomic model with a financial sector. american economic review. www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 2, no. 1; 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vol. 5, no. 1; 2020 issn 2576-1226 e-issn 2576-1234 published by centre for research on islamic banking & finance and business, usa 1 accounting information and market value of quoted manufacturing firms: panel data evidence from nigeria okoro innocent department of accounting faculty of management sciences university of port harcourt, rivers state, nigeria e-mail: innocentokoro35@yahoo.com e.a.l. ibanichuka department of accounting faculty of management sciences university of port harcourt, rivers state, nigeria l.c. micah department of accounting faculty of management sciences university of port harcourt, rivers state, nigeria abstract this study the relationship between accounting information and the market value of quoted firms in nigeria. the general objective was to examine if accounting information have any effect on market value of quoted firms. cross sectional data was sourced from financial statement of 23 manufacturing firm from 2008-2017. market value of the firms was modeled as a function of earnings per share, return on equity and dividend per share. ordinary least square method of cointgration, unit root and granger causality test was used to determine the extent to which human resource cost affect quality of financial report. after cross examination of the validity of the pooled effect, fixed effect and the random effect, the study accepts the fixed effect model. the study found that the independent variables explained 79 percent variation on the market value of the quoted firms. the beta coefficient of the variables indicates return on equity; earnings per share, dividend per share have positive effect on the market value of the quoted firms. from the regression summary, the study concludes that there is significant relationship between accounting information and market value of the quoted firms. the study recommends that management of the firms should formulate dividend policy that enhances the market value of the firms. corporate strategies should be directed toward internal and external factors that affect earnings per share. keywords: accounting information, market value, quoted manufacturing firms, panel data, nigeria . 1. introduction in the absence of adequate financial information, investors would not be in a position to make wise investment decisions, because it will be difficult to distinguish between potentially successful and unsuccessful businesses (sharma, 2014). existing and potential equity share investors often use accounting information to make investment decisions: they often use corporate financial information to review its financial health and operational profitability. this provides information about whether or not investing in the equity share of the company is a wise investment decision. the investors’ decisions to buy or not to take stock depend upon financial information and the more investors use financial information, it is expected that rational decisions are made (shehzaand & ismail, 2014). the stock market reaction to information disclosure has been tested in many occasions in developed markets such as the united state of america and united kingdom. the evidence reported in these studies is largely consistent with the information content hypothesis and efficient market hypothesis, which is that earnings announcements contained value-relevant information and that stock markets react quickly and efficiently to this information (sharma, 2014). the increasing rate of corporate scandals such as eron, worldcom, parmalat, command, flowtax, oceanic bank, intercontinental bank questions the copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 2 relevance of financial information, these scandals illustrate clearly that it is not sufficient to rely on documents as contained in financial information (ibanichuka & alasin, 2018). there have been divergences among scholars on factors that determine market value of quoted firms. the random walk hypotheses are based on the assumption that investors adjust prices rapidly to reflect on the effect of new information. believing in the efficiency of the market, therefore assert that stock prices are essentially random and there is no chance for profitable speculations in the stock market (gupta & basa, 2004). other theories such as capital assets pricing model (capm) and arbitrage pricing methods (apm) attempt to explain internal determinants of asset prices. from the perspective of agency theory as presented by jensen & macklin (1976), managers could be incapable of maximizing shareholders’ wealth because of conflict of interests. retained earnings can be invested in low risk projects because of manager’s interest which may not affect share price as the policy incentive. however, the validity of emh has been questioned as several recent studies have reported evidence of significant abnormal returns generated by trading on the basis of public information. for example , kausar & taffler (2006) found that stocks of uk firms in distress have a publicized going concern audit report which tended to experience significant negative price reactions ranging between -24% and -31% . sponholtz (2005) using the event study method, examined the information content of annual earnings announcements in the danish stock market. utilizing data from 1999 to 2001, sponholtz found significant abnormal price reactions in the period surrounding the announcement. factors that determine market value has well been documented in literature. the study of lucky, akani and anyamaobi (2015) examined internal and external factors that determine equity prices of commercial banks in nigeria, the findings of the study proved that some variables have positive effect while others have negative effect on equity price. olugbenga & atanda (2014) explored the functional relationship between earnings, book values, dividends, cash flow and equity share investment decisions in nigeria the findings was mixed among the independent variables. dastgir et al. (2009) investigated the association between components of income statement, components of cash flow statement and stock returns. glezakos et al. (2012) examined the impact of earnings and book value in the formulation of stock prices and stock investors decisions. from the above problems, divergences and knowledge gaps this study examined the effect of accounting information on the market value of quoted nigeria manufacturing firms. 2. literature review 2.1 accounting information accounting information can be seen as the outcome of accounting systems that measure and routinely disclose audited, quantitative data concerning the financial position and performance of an enterprise. audited balance sheets, income statements, and cash-flow statements, along with supporting disclosures, form the foundation of the financial accounting reports to investors and indeed a wide range of accounting information users. financial statements have the ability to perform a number of functions. they basically provide financial aid to managers in decision making, measurement or evaluation of a firm’s performance, and also to portray a firm’s value. thus, for disclosed financial information to be useful, it must be relevant and faithfully represent what it purports to represent. the usefulness of financial information is enhanced if it is comparable, verifiable, timely and understandable (conceptual framework, 2010). financial information supplies a key quantitative representation of individual corporation that supports a wide range of contractual relationships. according to the american institute of certified public accountants (aicpa. 2005), financial statements must properly reflect the organization’s financial and economic reality, so that the users are not induced to take decisions on misleading information. financial information also enhances the information environment of the reporting entity and those associated with it. the quality of financial disclosure can impact on firms’ cash flows directly, in addition to influencing the cost of capital at which the cash flows are discounted. financial information, such as that conveyed in publicly disclosed accounting reports, is also critical to the analysis of temporal liquidity positions of equity markets. financial information is information which describes an account for a utility. it processes financial transactions to provide external reporting to outside parties such as to stockholders, investors, creditors, and government agencies etc. for financial reporting to be effective, accounting information should be completed as relevant and reliable (hendricks, 1976). the primary purpose of the financial statements is to provide information about a company in order to make better decisions particularly the investors (germon & meek, 2001). 2.2 the concept of market value market value is the cost of purchasing a security on an exchange. it is affected by a number of factors including volatility in the market, current economic conditions, and popularity of the company. according to ronen and yaari (2008), the invention of double entry book keeping in the 14th century led to company’s valuation which is based upon ratios such as price per unit of earnings (from income statement), price per unit of net worth (from balance sheet) and price per unit of cash flow (cash flow statement). the next advance was to price individual price shares rather than the whole company. a price per dividend was the copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 3 next advancement. analysts find it appropriate to use discounted cash flow that is based on time value of money to estimate the intrinsic value of share rather than price per dividend of share prices. market value is based on supply and demand. it is used to refer to as a company’s market capitalization value. it is calculated by multiplying the number of shares issued by the price of the company's share. a company's share price is determined by daily trading between buyers and sellers on the relevant stock exchange. market prices are easy to determine for assets as the constituent values, such as stock and futures prices, are readily available. a valuation would have to be prepared using different methods (ngerebo-a, 2007). market value is the value of an asset/security as determined by the forces of demand for and supply of the assets. it is the perceived or observed value of an asset on the market. it is also known as current value. it is in fact the mutually accepted worth (cost or price depending on the individual) of the asset after negotiation. most assets that have market values have their values determined by specialized markets such as the stock exchange. the acceptance of any asset depends on the perception of the potential investor after comparing the market value to the intrinsic value. an asset is undervalued or under-price or favorably priced if the market value of the asset is less than the intrinsic value. if the intrinsic value of the asset is less the market value, then the asset is overvalued, over-priced or favorably priced. where the latter occurs, the investor would ordinarily be acquiring an asset at more expensive value than he would ordinarily have paid. an investor would acquire an overpriced asset if he expects the asset to record a bullish price movement such that if the anticipated price movement crystallizes, the investor can make capital gain. 2.3 earnings per share earnings per share are considered the most frequently used accounting information in value relevance studies used to examine its significant relationship with share. most of the studies on value relevance of earnings per share and share price results reported to be significant and positive related with share price, this supported by the results found by pathirawasam (2010) in sri-lanka observed earnings per share to have positive value relevance on the market share price of 129 companies selected from 6 major sectors listed at colombo stock exchange and other study done by different researchers including (tharmila, 2013; vijitha, & namalathan (2014) in sri-lanka, by ragab (2006) in egyptian market, miah(2012) in bangladesh, (thompson & adah , 2012; olugbenga & oyerinde, 2014) in nigeria and shamki & rahman (2012) in jordan reported the same results. the most important component of financial reports is the income statement (kallunki, 1996) as it indicates the result of operation of the period. empirical findings by ball and brown (1968) indicated that fifty percent of all available information is embedded in the income statement. value relevance of earnings is ascertained by regressing stock returns on accounting earnings (ball and brown, 1968) or the abnormal stock return on expected earnings (beacver, 1968). while regression of share price on earnings measures the sensitivity of share price to earnings, the other measures the relations of unexpected portion of share price change and earnings (edwards & bell, 1961). change in the value relevance of earnings has been investigated by several studies. collins, maydew & weisis (1997) employed a cross sectional regression over a period of 40 years, found that the incremental value relevance of earnings declined over the time period 1953-1993. they adduce the declined in value relevance of earnings to the shift in value relevance to book value from earning to increasing average size of the firm. lev zarowin (1999) support the finding of declining value relevance of earnings. cheng et al. (1996) found that both earnings and earnings change are value relevant. they employed both levels and changes to examine the effect of earnings performance on the information content of cash flows. they argue that markets look to cash flow as alternative sources of information where earnings number proves insufficient. lipe (1990) concluded that poor retained earnings association is due to lack of earnings persistence. they conclude that current earnings innovations contain information about the future as well as current equity benefits. the lack of timeliness for accounting numbers may also explain the low earning return association. timeliness is the extent to which current earnings incorporate current period economic income (ball et al., 2000). timeliness earnings may be affected by demands of accounting standard of objective and verifiability. these demands reduce the timeliness of earnings and thus reduce the association between earnings and stock returns. their results show that stocks are not sensitive to earnings innovations. easton & harrist (1991) argue that extent research lacked a long term perspective, that poor earnings -return association may due to use of short-term data. they content that poor timeliness of earnings may occur in short rum, but over the long term the correlations between earnings and return increases, if long term data is employed. they show that expanding the return interval and earnings aggregated over long time intervals. there are increases in the return-earnings association. they provide confirmation of correlation between earning and return increase using long term accounting data. beaver, mcannally & stinson (1997) offer different explanation of misspecification of statistical model as responsible for the poor earning return relationship. they argue that price earnings relation is a system of simultaneous equation, thus the explanatory variable (earnings) and the dependent variable (share price) act as if both are endogenously determined as they are affected by information which is difficult to specify. they provide evidence that changes in both variables are endogenous http://www.investopedia.com/university/economics/economics3.asp http://www.investopedia.com/terms/m/marketcapitalization.asp copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 4 implying that the short coming of single equation bias can be mitigated via joint estimation. liu & thomas (2000) support the thesis of misspecification of model as accounting for low earnings response coefficient (erc). using a model in which additional regressors were included in the model in order to reflect information contained in forecast revisions and discount rate change occurring during the year. compared to simple regression model this significantly increases the erc. earnings are made up of two components a cash flow component regarded as an objective part of earnings and accruals which is more inclined to subjective judgment and thus easily manipulated. earnings management refers to the reasonable and legal management decision making and reporting intended to achieve stable and predictable financial results. marqardt & wicdman (2004) investigate the how earnings management impact upon value relevance. using a sample of firms for which there is a priori expectation of earnings management they examine how earnings management impairs the value relevance of accounting information. in situations where managers participate in secondary issues of share, there often exist incentives and opportunities to manage earnings. discretionary accruals are significantly positive in the years of secondary stock offering in firms where managers sell their shares in secondary offering (marquardt & wiedman, 2004). they also provide evidence that discretionary accruals are more positive in the year of secondary offering for firms whose manager participates in secondary offering than firms in which managers do not. there is significant decrease in estimated coefficient of net income and decrease in r2 during year of secondary offering of share for those firm participating managers (marquardt & wiedman, 2004). in situations where the incentives for earnings management is greater, earnings announcement are less informative to investors according to christensen, hoyt and patterson (1999).studies of value of earnings across countries show interesting results. ball et al. (1994) examine the value relevance of earnings in seven countries. they show that accounting earnings indicate significantly greater timeliness in commonlaw countries relative to code-law countries, this they attribute to income conservatism. ali & lee-sheok (2000) examine the relationship between country specific characteristics and measures of value relevance. their study show that value relevance is higher in countries exhibiting features of the british-american model in which tax rules impact on accounting measurements, relative to countries exhibiting features of continental accounting model. they also find that countries that spend more on external auditing services have higher value relevance. the higher use of accrual accounting as opposed to cash flow accounting results in lower value relevance in countries with weak shareholder protections (mingyi, 2000) but for countries with strong shareholder protection there is no significant negative relationship between the use of accrual accounting and value relevance of accounting information. 2.4 book value per share value relevance of accounting information before and after the reforms of international reporting standard(ifrs) examine by karğ ın, s (2013) and reported improvement in the value relevance of book value during the post-ifrs period (20052011).the results found to be consistent compared to the study done by bilgic & ibis (2013). bilgic and ibis used a sample of 113 companies listed in istanbul stock exchange reported value relevance of book value increase after the adoption of new accounting standards. but khanaga (2011) reported value relevance of book value per share declined by using portfolio and regression approach after the forms in accounting standards in bahrain and united arab of emirates. on the other hand value relevance of accounting information reported to be weak during the period of global economic crisis (2005-2009) and during political crisis caused by military dictatorship (1992-1998) in nigeria by olugbenga & oyerinde (2014).but during stock market crisis in nigeria thompson & adah (2012) reported book value per share to have positive and significant relation with share price of cement manufacturing companies listed at nigeria stock exchange. on the other hand during post-recession period book value per share reported to have positive relationship and insignificant impact on the stock prices of bse 200 companies. 2.5 theoretical review the theoretical approach to the relationship between financial accounting information and equity share investment can be discussed in terms of, accounting theories and theory of equity share investment. there are many financial accounting theories. theories of financial accounting consider such things as people’s behavior or people’s needs as regards financial accounting information, or the reasons why people within organizations might elect to supply particular information to particular stakeholder groups (deegan, 2006). this study looks at efficient-market hypothesis (emh), information perspective theory, accounting theory, decision usefulness theory of accounting information and signaling theory of accounting information among others theories. 2.6 efficient market hypothesis efficient-market hypothesis (emh) asserts that financial market is informationally efficient. there are three major forms of the hypothesis: "weak" semi-strong", and "strong". weak emh claims that prices on traded assets (for example, stock bonds, or property) already reflect all past publicly available information. semi-strong emh states that prices reflect all publicly available copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 5 information and that prices instantly change to reflect new public information. strong emh additionally claims that prices instantly reflect even hidden or "insider" information. efficient market theory implies that market will react quickly to new information (goddy, 2010). thus, it is important to know when the accounting report first became publicly known. the accounting report is informative only if it provides data not previously known by the market. 2.7 information perspective informational perspective measures the usefulness of accounting information to individual users without much emphasis on the precise structure of the relationship between accounting data and firm value (bernard, 1995). most of the studies on information perspective assume that information content or usefulness can be determined by observing stock market reactions to specific accounting information items (ball & brown, 1968; benston, 1967; anderson, 1975). these studies further assert that the degree of usefulness can be measured by the extent of volume or price change following release of the information. until the last few years, the information perspective has dominated financial accounting theory and practice. the information perspective relies on a single-person decision theory, where it is the responsibility of an investor to predict future firm performance and make investment decisions. it also depends on efficient securities market theory, where the market can interpret information from any source (beaver, 1973). in this theory, it is accountant’s role to supply useful financial statement information to assist investors. ball & brown (1968) study is the first to document statistically a share price response to reported net income and their methodology is still employed today. the emphasis of information perspective is on contemporary associations between accounting earnings (or book value) and market returns or prices. in particular, it investigates capital market reactions to public disclosures such as earnings announcements, other firm-specific news and economy-wide macroeconomic news. this is synonymous with information content school. 2.8 accounting theory accounting theory is defined as the basic assumptions, definitions, principles, and concepts that underlie accounting rule made by a legislative body and it also includes the reporting of accounting and financial information (deegan, 2006). the basic theories of accounting are held together by the conceptual framework of accounting. the conceptual framework establishes objectives of financial reporting by businesses. by understanding how some basic accounting theories fit into the conceptual framework, one can determine the theoretical underpinnings of financial accounting rules and principles (freedman, 2015). financial accounting standards board (fasb, 1976) defines accounting theory as a coherent system of interrelated objectives and fundamentals that can lead to consistent standards. watts & zimmerman (1986) posit that accounting theory seeks to explain and predict accounting practice. hendriksen (1982) describes an accounting theory as logical reasoning in the form of abroad set of principles that (1) provide a general frame of reference by which accounting practice can be evaluated and (2) guide the development of new practices and procedures. according to him, an accounting theory should provide a general frame of reference against which sound accounting practices can be evaluated. a theory encompasses a set of statements or propositions connected by rules of logic or inferential reasoning. the statements must include testable hypotheses or premises and a conclusion, although one or more of the premises may be based on explicit value judgments. the primary test of a theory, however, is its ability to explain or predict (quintus, 2007). 2.9 empirical review ibanichuka & alasin (2018) examined audit reports and value relevance of accounting information in nigeria quoted commercial banks. data was sourced from financial statement of commercial banks. two multiple regressions were formulated to investigate the effect of audit reports and audit characteristics on stock prices of the commercial banks. the data analysis technique employed is the multiple regression model based on statistical package for social sciences version (22.0). the durbin watson statistics show the presence of multiple serial autocorrelation. the result shows collinearity that corresponds with the eigen value condition index and variance constants are less than the required number, while the variance inflation factors indicate the absence of auto-correlation. the result from model i found that all the audit report variables have positive impact on value relevance while model ii found that audit compensation, audit familiarity and corporate governance have positive effect and audit independence, joint audit and audit size have negative effect on stock prices. the study concludes that the independent variables have significant relationship value relevance of accounting information of nigeria quoted commercial banks. hung et al. (2018) examined the impact of accounting information on financial statements to the stock price of energy enterprises listed on vietnam’s stock market. by using the ols regression model and quintile regression model, the author studies the influence of factors such as return on assets (roa) capital structure (lv), enterprise size (size), current ratio (cr), and accounts receivable turnover (turnover) to stock prices. data from this study were collected from 44 energy enterprises during 2006-2016. the results show that roa, enterprise size (size), current ratio (cr), and accounts receivable turnover (turnover) are positively correlated with the stock price, with an explanation level of 48.47%. capital structure (lv) copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 6 does not affect stock prices. based on the research results, the authors propose some recommendations for investors and enterprises and suggest other research directions as well as adding new factors to the stock price. abayadeera (2010) tested for the value relevance of financial and non-financial information in high-tech industries in australia with a sample size of 91 companies running through various sectors of the australian economy. his studies showed that value relevance declined in earnings but increase in book value and the book value is the most significant factor and earnings are the least significant factor in deciding equity share investment in high-tech industries in australia. king & langli (1998) examined accounting diversity and firm valuation carried out a study on the relationship between financial accounting information (book value of the equity and the earnings per share) and the stock prices of listed companies in three european countries, germany, norway and the united kingdom. the results of their study revealed that both the book value and the earnings per share have significant relation with the stock price and hence equity investment decision. investigating the difference between the inspected countries they found that book value was more relevant in germany and norway, whereas earnings per share were the more relevant factor in the united kingdom. omoye & eriki. (2014) examined the effect of corporate governance mechanism on earnings management of 130 listed companies in nigeria over the period 2005-2010. the study revealed that companies in nigeria prefer to use high earnings management practices. the study also showed that board independence has significant positive influence on the probability of companies that adopt high earnings management. muhammed (2014) investigated the relationship between some sets of corporate governance mechanisms and unethical accounting practice of 25 listed manufacturing firms in nigeria. the study found that board composition, institutional shareholding, managerial shareholding and audit committee significant negative relationship with earnings quality. augustine (2014) examined the effect of audit quality on market value per share (mps) of companies in nigeria. panel data were extracted from the annual reports of 57 companies quoted on the nigerian stock exchange (nse) from 2006 to 2011. audit quality was estimated using audit firm size, audit fees, auditor tenure and audit client importance. the results of the multiple regression showed that audit quality has significant influence on the mps of quoted companies in nigeria. adaramola (2014) examined the value relevance of accounting information in the nigerian stock market. the study used secondary data extracted from the annual accounts of 57 firms from 1991 to 2010. the generalized least squared (gls) regression method was employed and the result showed a significant relationship between accounting information and share prices of companies in nigeria. ajide et al. (2014) examined the effect of earnings management on dividend policy in nigeria for the period 2012. the findings showed that earnings management has negative relationship with dividend policy of a firm and it is not significant in the determination of dividend payout of every firm. alexandra (2015) investigated the level of income smoothing and its impact on the in formativeness of earnings in united kingdom, france and the netherlands. the results showed that companies in united kingdom show less smooth earnings compared to companies in france and the netherlands. junjie gang & chao (2013) empirically analyzed the relationship between accounting information and stock price with a few accounting information indexes. the results, based on 60 listed companies in shanghai stock exchange for 2011, reveal: (1) positive relationship exists between accounting information and stock price, but the significant degree varies; (2) earnings per share and return on equity have the most significant correlation. ngoc et al. (2017) analyzed the relationship between accounting information in the financial statements and the stock returns of listed firms in vietnam stock market. using ols, fem, rem, gls, and gmm regression models, the study examines the relationship of earnings, volatility in the rate of return, size, levering ratios and growth rates to the stock returns of 274 firms in the period from 2012 to 2016. findings from the study show that the rate of return, the change in the rate of return, gearing ratio and growth rate are positively correlated to the stock returns, while the size of firm by assets is negatively related to stock returns. based on the research’s results, the authors also provide some recommendations for investors, firm management and policy makers. mgbame & ohiorenuan (2013) ascertained if accounting information contributes to stock volatility in the nigerian capital market. specifically, the study examines if book value per share, dividend per share and earnings per share have a sign effect on stock volatility in nigeria. to capture stock returns volatility clustering, leptokurtosis and leverage effects on the share price series, the garch models were used. specifically, the garck (1, 1), tgarch (1, 1) and egarch (1, 1) were utilized. using the simple random sampling technique, a sample size of 10 quoted companies was selected using the simple random sampling technique for the period 2000-2010 and this gives a total of 100 company years/data points. secondary data retrieved from the financial statements of the sampled companies were employed for the study. e-views 7.0 was utilized for data estimation. findings reveal that there are enough evidences to reject the assumptions of conditional normality in stock prices data series and accept the existence of stock volatility in nigerian stock market. in addition, an evaluation of the three models shows that bvs as a determinant of stock volatility appeared to be significant in the tgarch (1, 1) and egarch (1,1). also eps appeared to be significant in the tgarch (1,1) and egarch-1( 1,1) while dps as a determinant of stock volatility appeared to be significant in garch (1,1). tgarch (1,1) and egarch (1,1) respectively. copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 7 gornik-tomaszewski, & jermakowicz (2001) investigated the relationship between the book value per share, earnings per share, and stock prices of 77 stock exchange companies of poland between 1996-1998. the results of their study showed that both book value per share and earnings per share have significant and strong relation with stock prices. furthermore, they stated that the explanatory book value is stronger than that of earnings per share. kobana et al. (2000) tested the relative importance of the financial statement variables in explaining equity valuation in canada. the results of their study reveal that the most important financial statement variables in terms of equity valuation in canada are book value and earnings related variables. 3. methodology this study used correlation and ex-post facto research design to examine the effect of accounting information on market value of quoted in nigeria. the population of this study consists of all the listed manufacturing firms on the nigerian stock exchange and have complete financial records on their websites or nigerian stock exchange for the period of 2008– 2017. the data was obtained from the annual reports and accounts of manufacturing firms. model specification in order to achieve the objectives of this study and test of the hypotheses, a functional relationship in form of multiple linear regression model consisting of dependent and independent variables will be formulated. the regression models are presented as follows; pooled regression specification itititit bvpsroeepsmv   3210 1 fixed effect model specification mv = α0 + α1eps + α2roe + α3bvps + ∑ =9i 1αiidumε1it 2 random effect model specification mv = α0 + α1eps + α2roe + α3bvps + μi + ε1it 3 where: mv = market value of nigeria quoted manufacturing firms. 0 = regression intercept eps = earnings per share roe = returns on equity bvps = book value per share  = error term a-priori expectation of the result the explanatory variables are expected to have positive and direct effects on the dependent variables. that is a unit increase in any of the variables is expected to increase market value. this can be express mathematically as  1, 2,  3,> 0. 3.1 technique for data analysis in order to determine the best choice of analysis technique, the study run three types of regression; ordinary least square (ols), fixed effect and random effect regression. all these method have various assumptions and conditions that must be fulfilled in order to achieve efficient estimates. however, the best techniques will be decided by the hausman specification test (either fixed effect or random effect regression) and lagrangian multpiplier test (either random effect or ols). the random effect has the advantage of accounting for the panel effect in the data as opposed to ols, which pools the data and treats it as if it were obtained from a single entity. in order to achieve reliability of the result, robustness tests like multicolinearity test, hausman test, lagrangian multiplier test for random effect and heteroscedasticity test will be conducted (gujirati, 2003). t-test the t-test was used to test the hypothesis that a particular coefficient is significantly different from zero or whether the estimated coefficient value occurred by chance in equation (2). the tests were performed at both 95% and 99% levels of confidence. f-test the f-statistic is important to test the hypothesis that the whole relationship provided by the equation (2) is significantly different from zero, i.e. whether the independent variables’ characteristics scores explain the variation in growth indicators for each of the individual firms. the test will be performed at both 95% and 99% levels of confidence. copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 8 r2 change the r-squared (r2 ) value ranging from ‘0’ to ‘1’ or the ‘corrected r-squared’ (r2 ) which is adjusted for degrees of freedom indicates the explanatory power (goodness of fit) of the model. 4. analysis and discussion of findings table 1. test of fixed and random effect models redundant fixed effects tests effects test statistic d.f. prob. cross-section f 1.529179 (22,192) 0.0681 cross-section chi-square 35.681335 22 0.0328 correlated random effects hausman test test summary chi-sq. statistic chi-sq. d.f. prob. cross-section random 7.415428 6 0.0341 source: computed from e-view windows 9.0 in testing the validity of the models, the fixed effects on the cross section redundant fixed effectlikelihood ratio, the pvalue is 0.000 indicating that the effects are significant. select the random effect and perform the correlated random effectshausman test, testing the random effects model against the fixed effects model. the null hypothesis in that case is that both tests are consistent estimators and the random effects model is efficient. under the alternative hypothesis, only the fixed effect is consistent. since the pvalue is 0.000, the null hypothesis is rejected and, therefore, the fixed effects model is to be preferred. table 2. presentation of formulated pooled effect model results variable coefficient std. error t-statistic prob. roe 0.032480 0.033095 0.981413 0.3275 eps 0.250062 0.123951 2.017426 0.0449 dps 0.005642 0.006452 0.874426 0.3829 c 9.953181 1.835172 5.423568 0.0000 r-squared 0.049825 mean dependent var 14.93914 adjusted r-squared 0.023185 s.d. dependent var 2.146708 s.e. of regression 2.121677 akaike info criterion 4.373452 sum squared resid 963.3238 schwarz criterion 4.481087 log likelihood -476.2665 hannan-quinn criter. 4.416913 f-statistic 1.870285 durbin-watson stat 1.662720 prob(f-statistic) 0.087183 source: computed from e-view windows 9.0 the estimated pooled regression model found that the predictor variables in the model can explain 4 percent variation on the market value of the 23 selected manufacturing firms. the fstatistics and probability confirms that the model is statistically not significant and cannot predict the variation on the market value of the selected quoted firms. the durbin watson statistics proved that there is no presence of serial autocorrelation among the variables. beta coefficient of the variables indicates that, return on equity, earnings per share and dividend per share have positive effect on market value of the quoted manufacturing firms while book value per share have negative effect on market value of the firms. the insignificant effect of the models and the results of the hausman test enable us to analyze the fixed effect model in the tables below. table 3. presentation of formulated fixed effect model results variable coefficient std. error t-statistic prob. roe 0.860146 1.044343 1.356385 0.0366 eps 0.028731 0.160273 0.179262 0.8579 dps 0.914421 0.008112 1.777683 0.0070 c 12.36263 2.094911 5.901265 0.0000 effects specification copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 9 cross-section fixed (dummy variables) r-squared 0.791491 mean dependent var 14.93914 adjusted r-squared 0.573583 s.d. dependent var 2.146708 s.e. of regression 2.066219 akaike info criterion 4.411093 sum squared resid 819.6977 schwarz criterion 4.857006 log likelihood -458.4258 hannan-quinn criter. 4.591145 f-statistic 1.624076 durbin-watson stat 1.905250 prob(f-statistic) 0.000169 source: computed from e-view windows 9.0 the estimated fixed regression model found that the predictor variables in the model can explain 79 percent variation on the market value of the 23 selected manufacturing firms. the fstatistics and probability confirms that the model is statistically significant and can predict the variation on the market value of the selected quoted firms. the durbin watson statistics proved that there is no presence of serial autocorrelation among the variables. beta coefficient of the variables indicates that, return on equity; earnings per share and dividend per share have negative effect on market value of the firms. from the hausman test the fixed effect model results is most appropriate for the study. however, the study analyzes the random effect in the table below to validate the findings of the study. table 4. presentation of formulated random effect model results variable coefficient std. error t-statistic prob. roe 0.037520 0.034969 1.072944 0.0445 eps 0.203111 0.130057 1.561714 0.0198 dps 0.007445 0.006745 1.103839 0.0709 c 10.52168 1.866897 5.635922 0.0000 effects specification s.d. rho cross-section random 0.472147 0.0496 idiosyncratic random 2.066219 0.9504 weighted statistics r-squared 0.441900 mean dependent var 12.18603 adjusted r-squared 0.315038 s.d. dependent var 2.096432 s.e. of regression 2.072931 sum squared resid 919.5673 f-statistic 1.559801 durbin-watson stat 1.726119 prob(f-statistic) 0.040262 unweighted statistics r-squared 0.448637 mean dependent var 14.93914 sum squared resid 964.5282 durbin-watson stat 1.658316 source: computed from e-view windows 9.0 the estimated random regression model found that the predictor variables in the model can explain 44 percent variation on the market value of the 23 selected manufacturing firms. the fstatistics and probability confirms that the model is statistically significant and can predict the variation on the market value of the selected quoted firms. the durbin watson statistics proved that there is no presence of serial autocorrelation among the variables. beta coefficient of the variables indicates that, return on equity, earnings per share and dividend per share. the result above enables to test cross-sectional comparism of random and fixed effect in the table below: table 5.cross-section effect test comparism variable fixed random var. diff prob. decision roe 0.060146 0.037520 0.000743 0.4066 accept h0 eps 0.028731 0.203111 0.008773 0.0626 accept h0 dps 0.014421 0.007445 0.000020 0.1217 accept h0 source: computed from e-view windows 9.0 copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 10 the table above reveals the variance difference among the variables, as shown above that the variables are all statistically not significant which implies that there is a significant difference between fixed and random effect among the variables. table 6. presentation of granger causality test results null hypothesis: obs f-statistic prob. roe does not granger cause mv 164 0.43071 0.6508 mv does not granger cause roe 0.43285 0.6494 eps does not granger cause mv 170 0.27609 0.7591 mv does not granger cause eps 0.03196 0.9685 dps does not granger cause mv 169 0.07117 0.9313 mv does not granger cause dps 0.25032 0.7788 source: computed from e-view windows 9.0 the causality test shows that there is no causal relationship among the variables, we accept null hypotheses. table 7.presentation of panel cointegration test series: mv roe eps dps der ato bvps alternative hypothesis: common ar coefs. (within-dimension) weighted statistic prob. statistic prob. panel v-statistic -2.429724 0.9924 -2.299783 0.9893 panel rho-statistic 4.640154 1.0000 4.548191 1.0000 panel pp-statistic -3.186873 0.0007 -3.047196 0.0012 panel adf-statistic na na na na alternative hypothesis: individual ar coefs. (between-dimension) statistic prob. group rho-statistic 6.156503 1.0000 group pp-statistic -9.556352 0.0000 group adf-statistic na na source: computed from e-view windows 9.0 the results of the cointegration test proved that the variables are cointegrated as the probability coefficient of the variables are less than 0.05, we accept the alternate hypotheses that there is the presence of long run relationship between the dependent and the independent variables. the presence of long run relationship enables us to test for unit root; the table below has the details. table 8. tests of stationarity series: mv method statistic prob.** sections obs null: unit root (assumes common unit root process) levin, lin & chu t* -9.25205 0.0000 23 170 im, pesaran and shin w-stat -3.15566 0.0008 23 170 adf fisher chi-square 86.3823 0.0003 23 170 pp fisher chi-square 145.244 0.0000 23 197 series: roe levin, lin & chu t* -2.84596 0.0022 23 178 im, pesaran and shin w-stat -0.81603 0.2072 23 178 adf fisher chi-square 62.6200 0.0519 23 178 pp fisher chi-square 75.8650 0.0036 23 203 series: eps levin, lin & chu t* -8.07569 0.0000 23 184 copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 11 im, pesaran and shin w-stat -2.06545 0.0194 23 184 adf fisher chi-square 65.5150 0.0308 23 184 pp fisher chi-square 99.3254 0.0000 23 207 series: dps levin, lin & chu t* -5.32150 0.0000 23 183 im, pesaran and shin w-stat -1.16206 0.1226 23 183 adf fisher chi-square 68.5921 0.0170 23 183 pp fisher chi-square 98.0568 0.0000 23 206 source: computed from e-view windows 9.0 the table above presents the summary results of the adf and pp panel unit root tests. the results show that the null hypotheses of a unit root test for first difference series for all the variables can be rejected at all the critical values indicating that the level series which is largely time-dependent and non-stationary can be made stationary at the first difference and maximum lag of one. thus, the reduced form model follows an integrating order of 1(1) process and is therefore a stationary process. it also reveals that the test of stationarity in the residuals from the level series regression is significant at all lags. furthermore, this indicates that the regression is no more spurious but real. that is to say, all the variables are individually stationary and stable. at this level, all the t-statistic became significant at 5 percent. table 9. phillips-peron results (non-parametric) cross id ar(1) variance hac bandwidth obs aluminium extrusion -0.161 0.646540 0.619755 2.00 9 austin laz and company -0.843 0.083477 0.064919 1.00 9 paints and coatings 0.013 2.090620 1.597237 3.00 9 berger paints dropped from test beta glass dropped from test cadbury nigeria -0.475 0.300930 0.049049 8.00 9 cement co. of north dropped from test champion brew. plc -0.229 0.968705 0.574934 6.00 9 premier paints plc dropped from test dangote cement plc -0.447 0.455981 0.210542 4.00 9 dangote flour mills plc 0.260 0.517686 0.507708 1.00 9 dn tyre & rubber plc -0.249 1.806874 1.806874 0.00 9 evans medical plc dropped from test flour mills nig. plc dropped from test p z cussons nigeria plc -0.618 0.295691 0.223230 2.00 9 vitafoam nig plc -0.101 0.232916 0.216321 4.00 9 glaxo smithkline consumer nig. plc -0.442 0.099122 0.048300 8.00 9 honeywell flour mill plc -0.738 0.480678 0.169825 5.00 9 lafarge africa plc dropped from test nestle nigeria plc dropped from test may & baker nigeria plc 0.054 1.171200 0.428968 8.00 9 flour mills plc. -0.432 0.064481 0.064481 0.00 9 nascon allied industries -0.396 0.259262 0.251736 1.00 9 source: computed from e-view windows 9.0 the result of the power for all the test procedure when the underlying time series model is stationary ar, all the procedures produced a reasonably high power over all the sample sizes and order considered except at order 2 where adf (augmented dickey fuller) and kpss produced extremely low power compared to pp. under this condition, philip-peron (pp) has the highest power over all the sample sizes and ar orders considered. the table presents similar analysis on stationary ma, the power of the tests are extremely high over all the sample sizes and orders considered. similar conclusion as in ar was also copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 12 observed here. table 3 presents the power of the mixed model (stationary arma), all the test procedures produced high power over all the sample sizes at order 1 but adf and kpss produced low power over all the sample size at order 2 & 3. 5. discussion of findings this study examined the effect of accounting information on the market value of quoted manufacturing firms in nigeria. findings revealed that there is positive and significant relationship between earnings per share and the market value of the quoted manufacturing firms over the periods covered in this study. this implies that variation in earnings per share of the firms significantly relates to market value of the firms. the coefficient of the variables proved that a unit increase on the variables will lead to 2 percent increase on the market value. this finding confirms the a-priori expectation of the study and validates the fundamentalists’ theory on the effect of information on the stocks prices of quoted firms. the findings of this study confirm the findings of lucky et al on prudential determinants of stock prices of quoted commercial banks in nigeria. it is also in line with the findings of ibanichuka & alasin (2018) that all the audit report variables have positive impact on value relevance while model found that audit compensation, audit familiarity and corporate governance have positive effect and audit independence, joint audit and audit size have negative effect on stock prices but contrary to the findings of abayadeera (2010) that value relevance declined in earnings but increase in book value and the book value is the most significant factor and earnings are the least significant factor in deciding equity share investment in high-tech industries in australia. findings revealed that there is positive and significant relationship between return on equity and the market value of the quoted manufacturing firms over the periods covered in this study. this implies that variation in return on equity of the firms significantly relates to market value of the firms. the coefficient of the variables proved that a unit increase on the variables will lead to 8 percent increase on the market value. this finding confirms the a-priori expectation of the study and validates the fundamentalists’ theory on the effect of information on the stocks prices of quoted firms. the findings of this study confirm the findings of king & langli (1998) that both the book value and the earnings per share have significant relation with the stock price and hence equity investment decision, the findings of omoye & eriki (2014) balance sheet information has significant positive influence on the probability of companies that adopt high earnings management but contrary to the findings of muhammed (2014) that board composition, institutional shareholding, managerial shareholding and audit committee significant negative relationship with earnings quality. findings revealed that there is negative but not significant relationship between book value per share and the market value of the quoted manufacturing firms over the periods covered in this study. this implies that variation in book value per share of the firms does not significantly relate to market value of the firms. the coefficient of the variables proved that a unit increase on the variables will lead to 0.3 percent decrease on the market value. this finding contradicts the a-priori expectation of the study and validates the fundamentalists’ theory on the effect of information on the stocks prices of quoted firms. the findings of this study contradict the findings of king & langli (1998) that both the book value and the earnings per share have significant relation with the stock price and hence equity investment decision, the findings of omoye & eriki, (2014) balance sheet information has significant positive influence on the probability of companies that adopt high earnings management but confirm to the findings of muhammed (2014) that board composition, institutional shareholding, managerial shareholding and audit committee significant negative relationship with earnings quality. 6. conclusion and recommendations 6.1 conclusion the results of study through secondary data analysis revealed that accounting information and market value are correlated and there is a strong and significant relationship between accounting information disclosed in firms’ financial statements and ma rket value. accounting information significantly influenced market value decisions in the listed companies in nigeria. this finding was substantiated by the r2 of 79 percent variation explained by the accounting information variables modeled in the study. the results of the investigation revealed that there is a strong relationship between accounting information and market value of the quoted firms all accounting information variables considered in this study significantly influenced market value of the quoted firms. further, results of study indicated that dividend per share is the strongest determinant of market value investment followed by return on equity and earnings per share significantly affect market value of the quoted firms. from the above, this study conclude that accounting information have significant effect on the market value of quoted firms in nigeria. 6.2 recommendations  base on the positive effect of return on equity on the market value, the study recommend that management of the manufacturing firms should formulate policies that will increase profitability and internal and external factors that affect negatively the profitability of the firms should be discouraged. copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 13  quoted firms should disclose their financial information at every accounting period. this is expected to provide clearer information about the operating and financial performances of companies to equity investors.  accounting regulatory bodies in nigeria and preparers of accounting reports should make efforts toward improving the quality of published financial reports because the reports are widely used by investors in nigeria and foreign investors for investment decision.  base on the negative effect of book value per share on the market value, the study recommend that management of the manufacturing firms should formulate policies that will increase book value per share and internal and external factors that 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(1986).positive accounting theory. englewood cliffs, n.j.: prenticehall. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). american finance & banking review 9(1) (2024), 1-10 1 finance & banking review afbr vol 9 no 1 (2024) p-issn 2576-1226 e-issn 2576-1234 journal homepage: https://www.cribfb.com/journal/index.php/amfbr published by american finance & banking society, usa navigating markets with ai: the next frontier in investment strategy nurjahan akter monira (a)1 (a) lecturer, department of business studies, state university of bangladesh, south purbachal, kanchan, dhaka-1461, bangladesh; e-mail: nurjahan@sub.edu.bd a r t i c l e i n f o article history: received: 24th july 2024 reviewed & revised: 24th july to 12th december 2024 accepted: 12th december 2024 published: 13th december 2024 keywords: artificial intelligence, investment strategies, predictive analytics, financial markets, emerging trends jel classification codes: g11, g17, e44 peer-review model: external peer review was done through double-blind method. a b s t r a c t the financial market is changing rapidly, and to sustain themselves in this dynamic investment world, investors need to adopt various strategies. traditional investment tactics rely entirely on human intuitions and historical data, which may fail to keep pace with the ever-changing nature of investment. if someone fails to adopt the need-based strategies, they will be kept in the market. investors need more complex tools and approaches to make sound investment decisions and withstand the fluctuating market environment. technology has made it easier by providing these tools to analyze large amounts of data and identify trends, thus crafting prudent investment strategies. one of the blessings of technology that is changing the investment world dynamically is artificial intelligence (ai). therefore, this research aims to investigate the multifaceted role of artificial intelligence in investment strategies, emphasizing its predictive capabilities, data management efficiencies, user engagement enhancements, practical applications, and emerging trends. this paper employs a qualitative approach with a significant focus on existing literature and case study analysis to give a comprehensive overview of the impact of ai on investment strategies. the analysis reveals that integrating ai into investment strategies is redesigning the investment landscape, offering unprecedented opportunities such as improved predictive capabilities and risk management, which help make informed decisions. the study's finding provides valuable insights for investors and financial institutions seeking to optimize their strategies with ai in an increasingly data-driven investment environment. © 2024 by the authors. licensee american finance & banking society, usa. this open-access article is distributed under the terms and conditions of the creative commons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0/). introduction ai is the growing capacity of machines used by humans to execute specific functions and tasks within the workplace and broader societal contexts (dwivedi et al., 2021). the financial sector is significantly transforming due to rapid technological advancements, particularly artificial intelligence (ai) (el modni & el kabbouri, 2024). this broad field includes technologies such as data analytics, machine learning (ml), and natural language processing (nlp), all of which hold the potential to change investment strategies fundamentally (rane et al., 2024). in the past decade, the adoption of ai in finance has accelerated, fueled by the vast amounts of big data available and the demand for advanced analytical tools to navigate complex market dynamics (kavin, 2023). for example, machine learning algorithms are adept at uncovering patterns in historical data to forecast future market trends (khan et al., 2020), while natural language processing can analyze unstructured data sources to gauge market sentiment and investor behavior (bae et al., 2023). traditionally reliant on human expertise and historical data, investment strategies increasingly incorporate aipowered tools to efficiently process and analyze vast amounts of digital information (vincent, 2021). these ai technologies empower investor's extensive datasets, identify emerging patterns, and make informed decisions at unprecedented speeds. this capability is especially vital in today's rapidly evolving financial markets, where traditional investment strategies may need to catch up in responsiveness and adaptability (amirzadeh et al., 2022; kavin, 2023). investment strategies often use historical market data to create a diversified portfolio at the start of a trading period. this allows investors to anticipate market fluctuations and allocate capital strategically. by analyzing past trends, professionals can develop informed strategies to maximize returns while minimizing risk (evstigneev et al., 2020). the incorporation of ai enhances predictive accuracy and facilitates the automation of various investment tasks, thereby optimizing overall performance (kavin, 2023). 1corresponding author: orcid id: 0009-0002-4387-2602 © 2024 by the authors. hosting by american finance & banking society. peer review under responsibility of american finance & banking society, usa. https://doi.org/10.46281/amfbr.v9i1.2259 to cite this article: monira, n. a. (2024). navigating markets with ai: the next frontier in investment strategy. american finance & banking review, 9(1), 1-10. https://doi.org/10.46281/amfbr.v9i1.2259 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://www.openaccess.nl/en https://doi.org/10.46281/amfbr.v9i1.2259 https://orcid.org/0009-0002-4387-2602 monira, american finance & banking review 9(1) (2024), 1-10 2 the financial industry is witnessing a paradigm shift as ai increasingly integrates into hedge funds, investment banks, and asset management firms (li et al., 2024). these organizations increasingly leverage ai to improve efficiency, optimize portfolios, and manage risk (anand et al., 2024). traditional asset managers are beginning to incorporate ai tools to enhance their fundamental analysis and client interactions (javaid, 2024). this paradigm shift signifies a technological revolution and a cultural change within the finance industry as firms adapt to the demands of a data-driven landscape. the value of this research lies in its capacity to connect conventional investment strategies with innovative aidriven approaches. although previous studies have focused on individual components of ai in finance, more comprehensive research is needed to bring these findings together into a unified framework. such a framework could illuminate how ai can be effectively harnessed within investment strategies (kumar et al., 2023). while the literature on ai in finance continues to grow, a notable gap exists in understanding its practical applications within investment strategies. many studies focus on theoretical models or specific ai techniques and must address how these technologies can be integrated into real-world investment practices (alessandretti et al., 2018). additionally, ethical concerns and potential risks related to the adoption of ai in finance are often overlooked, necessitating a more nuanced exploration of these issues (osasona et al., 2024). this paper seeks to bridge this gap by conducting an indepth analysis of ai in real-world investment strategies, highlighting its implications for investors and financial institutions. thus, the objective is to thoroughly explore the diverse role of ai in investment strategies, focusing on its predictive capabilities, data management efficiencies, and user engagement enhancements. this study utilizes a qualitative method to obtain information from existing literature reviews and various case studies. by integrating insights from those studies, his research aspires to shed light on the practical applications of ai, emerging trends, and future directions. furthermore, the paper will delve into the challenges and considerations of ai adoption in investment practices, providing a holistic view of this transformative technology. the later parts of this paper include a literature review, materials and methods, discussions, case study analysis, future research opportunities, and a conclusion. the literature review will comprehensively overview ai integration into investment strategies. materials and methods used in this study are qualitative, showing the multifaceted roles of artificial intelligence (ai) in investment strategy. major findings of the study will be discussed in the discussion part. case study analysis will show how ai is reshaping the competitive landscape of the investment strategy. future research opportunities will provide a direction to some areas where research can be conducted. finally, the study will end with the concluding part, which will summarize the key points. literature review the financial landscape is transforming as artificial intelligence (ai) is increasingly integrated into investment strategies, harnessing ai's ability to process extensive datasets, identify patterns, and adapt to ever-changing market dynamics. the following discussion will give a comprehensive overview of this integration. artificial intelligence john mccarthy, a distinguished mathematician and computer scientist, first coined the term "artificial intelligence", which is mentioned in garg’s (2021); kallini and moriarty (2022) study. abele and d’onofrio (2020), along with mich (2020) and madakam et al. (2022), defined artificial intelligence, or machine intelligence, as a general term that is used to describe a machine's capacity to perform tasks that typically require human intelligence. according to kallini and moriarty (2022), lynn parker, director of the division of information and intelligent systems at the national science foundation, emphasizes that ai encompasses a variety of methods and technologies that make software seem intelligent. loureiro et al. (2021) revealed in their study that ai has been integrated into businesses since the 1980s, with companies investing in and developing computer vision systems, robots, expert systems, and related software and hardware. krichen and abdalzaher (2024) identified that the significant advancements in ai result from three primary factors: the availability of large datasets, improved algorithms, and enhanced computational capabilities. figure 1. key components of artificial intelligence natural language processing deep learning machine learning computer vision neural network cognitive computing monira, american finance & banking review 9(1) (2024), 1-10 3 ai applications in investment nichols et al. (2019) studied various ai approaches increasingly integrated into securities trading to enhance efficiency, accuracy, and speed. machine learning, a subfield of ai, has been at the forefront of this revolution, enabling algorithms to learn from data and make predictions. one prominent application of ml in securities trading is the analysis of machine learning in securities trading is the analysis of extensive historical stock data to uncover patterns and trends. moreover, advanced neural networks, a specific form of machine learning, are employed to discover and analyze factors that influence stock price changes, as nabipour et al. (2020) studied. machine learning algorithms are also used to calculate trade prices, with bots executing a significant portion of trades. due to their ability to identify patterns and anomalies in large datasets, ml algorithms empower traders and analysts to make more accurate market predictions. natural language processing (nlp), a subfield of ai, focuses on analyzing and understanding human language, as mah et al. (2022) studied. traditional stock price prediction techniques are being explored for potential advancements through applying nlp. nlp can analyze textual data—such as news articles, financial reports, and social media updates— to extract insights regarding market sentiment and potential price shifts. natural language processing (nlp) can assist traders and investors in rapidly analyzing large volumes of textual information, allowing them to identify trends and deepen their understanding of the financial landscape. mishra et al. (2024) explored that combining ai technology and behavioral sciences will help large financial institutions proactively prevent wrongdoing, shifting their focus from reactive measures to proactive prevention techniques. ai applications in investment strategies can be presented as follows: figure 2. ai applications in investment ai and investment strategies: a powerful combination integrating ai into investment strategies necessitates a thoughtful selection of tools and platforms that are tailored to specific investment goals and portfolio needs. algorithm driven trading algorithmic trading, powered by ai, involves utilizing computer algorithms to automate trading decisions based on predefined criteria. with advancements in artificial intelligence, these systems have become significantly more sophisticated. ai algorithms are capable of analyzing vast datasets at remarkable speeds, enabling them to spot trading opportunities in real time and execute trades with precision. in their study, kalashnikov and kartbayev (2024) found that ai-enhanced trading systems can perform trades at incredible speeds and adjust strategies in real-time, thereby reducing human error and increasing overall efficiency. these ai systems can process market data and execute trades in milliseconds, significantly outperforming human capabilities. this speed is crucial in high-frequency trading (hft), where even milliseconds can impact profitability, as martins (2022) studied. predictive analytics ai's predictive capabilities are one of its most compelling features in the context of investment strategies. the study by kavin (2023) indicated that ai could substantially enhance the accuracy of market forecasts by tapping into data from various sources, including social media sentiment analysis and historical price movements. for instance, machine learning algorithms have been employed to forecast cryptocurrency prices, demonstrating the effectiveness of ai in navigating volatile markets, studied by amirzadeh et al. (2022) and alessandretti et al. (2018). moreover, a hu et al. (2021) study has shown that ai-focused models surpass conventional statistical methods for predicting stock prices and market trends. for example, the incorporation of sophisticated machine learning techniques, such as reinforcement learning and genetic algorithms, has facilitated the creation of more resilient trading strategies that respond to evolving market conditions. these advancements underscore ai's potential to enhance predictive analytics in investment strategies, empowering investors to make better-informed decisions. portfolio optimization portfolio optimization, or portfolio selection, involves identifying the optimal combination of financial assets that aligns with a specific investor's goals, typically aiming to maximize returns. ferreira et al. (2021) mentioned in their study that modern portfolio theory (mpt), developed by markowitz, marked a significant advancement in portfolio optimization methodologies. markowitz established two essential metrics for portfolio performance: expected return and risk. the expected return reflects the anticipated future performance of an asset, often based on past performance. risk, as a measure of uncertainty, is used to model the potential variability of returns. in their study, adebiyi et al. (2022) found that ai can continuously monitor portfolio performance and market conditions, recommending reallocations to optimize returns and mitigate risk. algorithmic trading risk management portfolio optimization sentiment analysis personalized investment advice monira, american finance & banking review 9(1) (2024), 1-10 4 management of risk ai-powered risk management systems can revolutionize investment strategies by leveraging ai's ability to analyze vast datasets and identify patterns. kavin (2023), in a study, found that ai's capability to analyze extensive datasets and identify patterns enables more precise risk assessments and portfolio optimization. for example, ai-enhanced risk management systems can evaluate historical market data to pinpoint potential risks and suggest optimal asset allocations based on market forecasts. furthermore, ai can enhance the detection of market anomalies and fraudulent activities, thereby improving the overall integrity of financial markets, as studied by rostami et al. (2021). the incorporation of ai into risk management not only alleviates possible losses but also boosts the overall performance of investment portfolios. user engagement and personalization the integration of ai into investment strategies also significantly impacts user engagement and personalization. in their study, kavin (2023) and rostami et al. (2021) identified that ai technologies facilitate the development of personalized investment experiences, tailoring recommendations to align with individual investors' unique profiles and preferences. ai can significantly enhance user satisfaction and loyalty, ultimately improving investment outcomes. by leveraging ai to enhance user engagement, investment firms can foster stronger relationships with their clients, leading to increased trust and long-term loyalty. impact of ai on investment strategies in their study, rao and hossain (2024) identified that, historically, ai applications in finance began with algorithmic trading, where predefined criteria guided trade execution. recent progressions in machine learning (ml) and natural language processing (nlp) have broadened ai's role, allowing financial institutions to harness its capabilities for more sophisticated functions such as group asset management and hazard assessment. john et al. (2023) highlighted that ai algorithms can process vast datasets more rapidly than human traders, facilitating high-frequency trading strategies that capitalize on fleeting opportunities. today, ai is integral to various facets of investment strategies, including algorithmic trading, portfolio management, and sentiment analysis. ai algorithms analyze market trends, execute trades, and dynamically adjust strategies in response to rapidly changing market conditions, as studied by el hajj and hammoud (2023). kasaraneni (2021) illustrated ai's ability to enhance asset allocation decisions, improving risk-adjusted returns. ai systems can also identify asset correlations, optimize diversification, and minimize risk. jin et al. (2020) demonstrated that sentiment analysis can predict stock price movements, as positive sentiment often correlates with rising prices. the study conducted by valle-cruz et al. (2022) found that ai's capability to scrutinize news articles and social media sentiment allows investors to gauge market sentiment, improving the overall effectiveness of investment strategies. campbell et al. (2020) also explored that financial markets grow increasingly complex; ai systems can be leveraged to analyze large data sizes, detect trends, and provide actionable intuitions, allowing for more informed investment choices. through machine learning algorithms, investors can assess past data to anticipate future market trends and price changes, as rath et al. (2024) identified. this capability allows asset managers to make decisions based on data insights, optimizing portfolio allocations and enhancing performance. by automating routine tasks and optimizing resource allocation, firms can reduce operational costs and improve profitability, as studied by ionescu and diaconita (2023). artificial intelligence (ai) in investment strategies has significant implications for individual investors and the overall market dynamics. these are discussed below: ai-driven strategies on individual investors barile et al. (2024) studied that ai empowers investors of all levels with more personalized and accessible financial guidance, potentially expanding investment opportunities and promoting financial literacy. ai-powered robo-advisors provide personalized investment recommendations that align with individual risk tolerance and financial objectives. additionally, ai can cut investor costs by automating many aspects of investment management, making professional advice more accessible. ai can decrease the need for human participation by automatically handling routine tasks, leading to lower management fees, as tao et al. (2021) studied. in the study, javaid (2024) found that by leveraging advanced data analytics, ai empowers investors to make faster and more accurate assessments of market conditions. ai on market dynamics and volatility ai can mitigate irrational market behaviors, potentially leading to excellent price stability and reduced speculative trading activity by fostering more data-driven decision-making. conversely, ai-enabled strategies might create coordinated trading activities, amplifying market dynamics when numerous systems react to the same indicators, as youvan (2024) studied. this phenomenon, known as "herding behavior, " can contribute to market volatility and exacerbate price fluctuations. ethical considerations and challenges in ai investments although ai presents numerous benefits for investment strategies, it also faces several implementation challenges. du and xie (2021) identified one significant concern: the potential for algorithmic biases and market manipulation, which can arise from over-reliance on ai systems. mizuta (2020) recommended careful consideration regarding the ethical implications of ai adoption in business. addressing issues like data privacy, transparency, and accountability is crucial for ensuring responsible ai use in investment practices. truby (2020) found that certain investor groups may experience unfair outcomes due to ai systems. ensuring the ai model's fairness is critical to promoting equitable access to financial amenities. monira, american finance & banking review 9(1) (2024), 1-10 5 it is clear from the explanation above that incorporating ai into investment methods offers unprecedented opportunities for enhancing decision-making and improving market outcomes. the financial industry is increasingly adopting ai technology, but issues and ethical concerns must be addressed. financial institutions can fully utilize ai by prioritizing data quality, addressing algorithmic bias, and establishing robust regulatory frameworks while ensuring fairness, transparency, and trust in their applications. implementing ai technologies can lead to substantial cost savings for financial organizations. financial institutions can unlock the full potential of ai and minimize implementation risks by encouraging a culture of ethical ai use. materials and methods this study utilizes a qualitative approach to uncover the nuanced roles that artificial intelligence (ai) plays in investment strategies. this will yield a thorough understanding of how ai reshapes investment strategies, contributing to the broader discourse on its implications for the financial industry. this study is particularly well-suited to the qualitative technique since it allows for a thorough examination of the nuances and complexity of integrating ai into investment plans. the information for this study was obtained by analyzing existing literature reviews, concentrating on articles, conference papers, and various case studies related to ai in investment strategies. the literature review process involved identifying relevant studies, analyzing their findings, and synthesizing the information to draw meaningful conclusions. in addition to the literature review, case studies of six successful ai-driven investment firms were analyzed to illustrate the practical applications of ai in investment strategies. these firms were chosen based on their innovative use of ai and notable performance outcomes. this analysis allowed the extraction of key findings related to predictive analytics, risk management, user engagement, and ethical considerations in ai adoption in investment strategies. discussions the transformative impact of ai on investment strategies is significant, enhancing decision-making and improving market predictions. ai's integration into financial markets offers enhanced predictive capabilities and improved data management, as well as fostering user engagement. however, ethical considerations and potential biases must be addressed. by adopting ai strategically, financial institutions can gain a competitive advantage, attract clients, and strengthen risk management. regulators must establish ethical frameworks for ai usage to promote transparency and accountability. ultimately, the widespread adoption of ai will lead to more stable financial markets and foster innovation across sectors. traditionally, investment strategies were primarily formulated through human intuition, experience, and market analysis. however, the advent of ai brought about a new era characterized by data-driven decision-making and adaptive learning models. algorithmic trading, once reliant on predefined rules, now leverages ai's capacity to dynamically analyze vast datasets, identify patterns, and execute trades with unprecedented speed and accuracy. emerging trends & prospects of ai in investment strategies emerging trends in ai will revolutionize investment strategies by enhancing predictive modeling and data analysis, enabling better-informed choices. the ongoing development of ai technologies in shaping investment strategies will likely expand and offer new opportunities for competitive advantage and innovation. there are plenty of opportunities that ai can bring into investment practices with greater efficiency and innovation. integration with blockchain technology investment techniques have intriguing prospects when blockchain technology and artificial intelligence are combined. blockchain's decentralized structure can improve financial transaction security and transparency, while ai can provide advanced analytics and insights (kumar et al., 2023). this convergence can revolutionize investment practices, enabling more efficient and secure trading environments. focus on ethical ai the growing awareness of ethical considerations in ai adoption will likely shape future investment strategy research and practices. financial institutions will focus more on creating ethical frameworks and norms for ai adoption as they realize the importance of using ai ethically (mizuta, 2020; rollins & cliff, 2020). this focus on ethical ai will enhance trust among investors and support the long-term viability of investing strategies powered by ai. personalized investment solutions the demand for personalized investment solutions is expected to rise as investors look for experiences customized to fit their tastes and objectives. ai technology will be essential to providing these customized solutions, enabling investment firms to understand better and cater to their clients' needs (rostami et al., 2021). ai for enhanced esg (environmental, social, governance) and sustainable investment outcomes investors can evaluate firms' environmental, social, and governance standards by analyzing large datasets with the help of artificial intelligence (ai), which can be a potent tool for esg investing (hariyani et al., 2024). this empowers investors to make more morally sound and knowledgeable investment choices. the use of ai in investment strategies is anticipated to grow as it develops further. emerging trends in ai technology are likely to enhance predictive capabilities investment portfolio selection, and improve decision-making processes (alessandretti et al., 2018; romanko et al., 2023). investors can obtain more reliable and advantageous investing monira, american finance & banking review 9(1) (2024), 1-10 6 results by combining well-established portfolio optimization algorithms with ai-generated stock selection. additionally, (kılıç & türkan, 2023) explored that ai's incorporation into islamic financing is gaining traction, with applications in risk assessment and compliance with shariah principles. this evolution highlights the versatility of ai in catering to diverse investment needs and preferences, further solidifying its role as a transformative force in the financial sector. case study analysis the following cases demonstrate how ai is enhancing traditional investment approaches and reshaping the competitive landscape of the financial industry. let us dive into some case studies showcasing the success of ai-powered investments. renaissance technologies llc renaissance technologies, founded by mathematician jim simons, is renowned for its success in quantitative trading and artificial intelligence (ai) integration, mainly through its medallion fund, which has historically delivered annual returns exceeding 70% in its early years (vinichenko & hrybkova, 2021). the firm employs advanced machine learning and mathematical algorithms to analyze extensive historic market data, identifying lucrative trading opportunities and adapting strategies to evolving market conditions. additionally, renaissance capitalizes on high-frequency trading (hft), executing thousands of trades per second to exploit minor price discrepancies in various securities. this dynamic data-driven approach has positioned renaissance as a leader in the hedge fund industry, consistently generating alpha in a highly competitive environment (cornell, 2020; longo, 2021). two sigma investments, lp one prominent quantitative hedge fund is two sigma investments, which leverages technology and data science to inform its investment strategies and manages over $60 billion in assets. the firm employs diverse artificial intelligence (ai) techniques, which are machine learning algorithms that analyze data from various sources—including financial markets, social media, and alternative datasets—to predict asset price movements. additionally, two sigma utilizes nlp (natural language processing) to gauge market emotion from social media and broadcast articles to enhance its trading strategies. this data-driven approach has resulted in strong performance across its funds, with its flagship fund consistently achieving annualized returns well above market averages (aldridge & avellaneda, 2021). blackrock, inc. among the most significant asset management companies worldwide is blackrock, which developed the aladdin platform, which integrates machine learning with artificial intelligence to boost investment management procedures. the aladdin platform is essential for managing risk, using ai to assess risks across diverse portfolios, enabling investment managers to produce well-informed decisions based on real-time data. additionally, aladdin forecasts market trends and assesses potential investment prospects employing foretelling analytics. this robust platform has become essential for blackrock, managing risk for over $21 trillion in assets and providing a significant competitive advantage in portfolio management and client servicing (anderson & coveyduc, 2020). goldman sachs goldman sachs has integrated artificial intelligence (ai) into its trading and investment strategies through the marquee platform, designed to provide institutional clients with advanced analytics and trading capabilities. marquee leverages data analytics, offering clients access to extensive datasets and utilizing ml (machine learning) systems to identify trading opportunities and optimize portfolios. the platform enhances trade execution through ai, enabling clients to achieve better pricing and minimize market impact. as a result, goldman sachs has seen a rise in client assignation and contentment with marquee, underscoring the effectiveness of ai in enhancing trading performance and operational efficiency (lehalle & raboun, 2022; sironi, 2021). bridgewater associates one of the biggest hedge funds in the world, bridgewater associates was established by ray dalio and is renowned for its methodical and quantitative investment approaches (vinichenko & hrybkova, 2021). the firm incorporates ai with ml to analyze macroeconomic indicators and historical market data, informing investment decisions and asset allocation strategies. additionally, bridgewater employs ai to automate research processes, enabling analysts to concentrate on higher-value tasks. this data-driven approach has resulted in significant long-term returns for investors, highlighting ai's ability to enrich decision-making in a complex investment environment (jensen et al., 2020). citadel llc citadel llc is a prominent global financial institution recognized for its advanced quantitative trading strategies, actively embedding artificial intelligence (ai) and machine learning within its investment workflows (vinichenko & hrybkova, 2021). the firm utilizes ai algorithms to implement dynamic trading strategies, allowing real-time adaptation based on market data and optimizing trade execution and positioning. additionally, citadel employs ai to analyze market microstructure, identifying trends and inefficiencies that can be exploited for profit. this strategic use of ai has bolstered citadel's reputation as one of the most successful hedge funds, consistently generating substantial returns for its investors (romero & fitz, 2021). monira, american finance & banking review 9(1) (2024), 1-10 7 the above case examples illustrate how ai can be successfully used in investment strategies across various financial entities and hedge funds. these firms have enhanced their trading performance, improved risk management, and ultimately generated superior returns by utilizing machine learning, predictive analytics, sentiment analysis, and advanced data processing capabilities. conclusions this study highlights the revolutionizing impact of ai on investment strategies, emphasizing its potential to improve decision-making and market predictions. incorporating ai into investment methods is a significant development in handling markets. by enhancing predictive capabilities, improving data management, and fostering user engagement, ai has the potential to modernize investment judgment. investors must remain cautious of the difficulties in using ai, particularly about moral issues and possible prejudices. investors looking for a competitive edge in a constantly changing financial world will need strategic ai applications. a balanced approach that integrates human intuition with ai capabilities will be crucial to the evolving financial landscape's success. the collaboration between human expertise and ai-driven tools can optimize investment strategies while ensuring ethical standards and transparency. financial institutions must prioritize ongoing education and training to give their staff the skills to use ai efficiently. moral and practical issues must be addressed for the financial sector to fully utilize ai and eventually create more resilient and robust investment methods. ai's advancement indicates that its role in shaping investment strategies will undoubtedly expand, necessitating ongoing analysis and adaptation within the finance sector. embracing innovation while addressing the integration of ai in investment strategies significantly enhances the ability to make decisions by providing data-driven insights that improve investors' predictive accuracy. financial institutions will experience increased efficiency and competitive advantage, enabling them to attract and retain clients in a crowded market. additionally, regulators will benefit from establishing ethical frameworks that promote transparency and accountability in ai usage, strengthening risk management through advanced analytics, and enabling better identification and mitigation of potential risks. ultimately, the broader economy will thrive as these advancements lead to more stable financial markets and foster innovation across sectors. the qualitative approach used in this study is subjective and relies on existing literature and case studies, which may present limitations in terms of data quality. hence, future research could be conducted quantitatively to examine the increasing reliance on ai technologies on market dynamics, liquidity, and volatility. understanding these relationships is vital for developing strategies that mitigate potential systemic risks associated with widespread ai adoption in financial markets. social media sentiment and macroeconomic indicators could also provide richer insights for investors by leveraging alternative data sources. it may also investigate ai's market stability and financial literacy and its long-term implications on investors. author contributions: conceptualization, n.a.m.; methodology, n.a.m.; software, n.a.m.; validation, n.a.m..; formal analysis, n.a.m.; investigation, n.a.m.; resources, n.a.m.; data curation, n.a.m.; writing – original draft preparation, n.a.m.; writing – review & editing, n.a.m.; visualization, n.a.m.; supervision, n.a.m.; project administration, n.a.m.; funding acquisition, n.a.m. authors have read and agreed to the published version of the manuscript. institutional review board statement: ethical review and approval were waived for this study because the research does not deal with vulnerable groups or sensitive issues. funding: the authors received no direct funding for this research. acknowledgments: n/a informed consent statement: informed consent was obtained from all subjects involved in the study. data availability statement: the data presented in this study are available on request from the corresponding author. the data are not publicly available due to restrictions. conflicts of interest: the authors declare no conflict of interest. references abele, d., & d’onofrio, s. 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(2024). emergent phenomena in modern financial systems: unanticipated risks and their mitigation. https://doi.org/10.13140/rg.2.2.28648.48646 publisher’s note: american finance & banking society stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. © 2024 by the authors. licensee american finance & banking society, usa. this article is an open-access article distributed under the terms and conditions of the creative commons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0/). american finance & banking review (p-issn: 2576–1226; e-issn: 2576–1234) by american finance & banking society is licensed under a creative commons attribution 4.0 international license. http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ copyright © cc-by-nc 2020, cribfb | amfbr american finance & banking review; vol. 5, no. 1; 2020 issn 2576-1226 e-issn 2576-1234 published by centre for research on islamic banking & finance and business, usa 27 the dynamics of the exchange rate and extension of monetary trilemma (iran economy case study)** mahmoud allahyarifard phd graduated from phd in economics ferdowsi university of mashhad, iran e-mail: allahyarifard@gmail.com mostafa karimzadeh phd assistant professor of economics ferdowsi university of mashhad, iran e-mail: m.karimzadeh@um.ac.ir mohammad ali falahi phd professor of economics ferdowsi university of mashhad, iran e-mail: falahi@um.ac.ir ali akbar naji meidani phd associate professor of economics ferdowsi university of mashhad, iran e-mail: naji@um.ac.ir abstract simultaneous making policy of interest rates, exchange rates and capital accounts can be extended to trilemma theory, contrary to its earlier theories, provided that the imbalances of the private sector, the government and the capital account adjusted through the policy variables such as the government expenditures, the interest rates on domestic deposits, the interest rates on domestic loans, effective exchange rates, foreign prices and foreign interest rates. on the other hand, the components of the extension of trilemma theory in the form of internal and external imbalances affect the exchange rate. in other words, if the real sector markets of the economy are not cleared through the aforementioned trilemma components, and policy variables, internal and external imbalances will be affected by opposite direction of net domestic assets (δnda) and net foreign assets (δnfa) of the banking system. this is in accordance with the fundamental principles of the monetary approach balance of payments and exchange rate. policy variables do not put pressure on the unofficial exchange rate as long as they have the same effect on the net changes in the domestic and foreign assets of the banking system. the purpose of this study is to consider the effect of internal and external imbalances on exchange rate through the simultaneous equations system, generating impulses in policy variables, and examining reactions in iranian economy. in this paper, the monetary exchange rate determination model is analyzed and examined by using the extension of trilemma theory for macroeconomic data of iran in the form of internal and external imbalances. the results of this study suggest that policy variables can stabilize the unofficial exchange rate (with other conditions being constant) through trading off internal and external imbalances. thus, the economic policymaker can, while independently policing interest rates, capital accounts and government expenditures and other policy variables in this research, maintain exchange rate stability as a strategic variable and anchor the general level of prices. keywords: trilemma, internal and external equilibrium, policy variables trade-off, iran. jel classification: f31, f32, f3. **this article is based on the ph.d. dissertation of first author, entitled "investigating the relationship between internal and external imbalances through the extension of the monetary trilemma (the case study of iran economy)" with the supervisor of dr. mostafa karimzadeh, dr. mohammad ali falahi and consulting of dr. ali akbar naji meidani. mailto:allahyarifard@gmail.com mailto:m.karimzadeh@um.ac.ir mailto:falahi@um.ac.ir mailto:naji@um.ac.ir copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 28 1. introduction the impossibility of simultaneously policing of the exchange rate, the capital account, and the interest rate in a small economy is called trilemma theory. assuming that policymaking for each of the aforementioned variables in the small assumed economy does not affect other countries (in case of being ceteris paribus), the key question is how the transitional mechanism of internal and external imbalances in the real and monetary sectors will effect on the exchange rate? what are the triggers on the exchange rate in the context of trilemma? most studies in the field of trilemma emphasize on these three policy indicators, but policy indicators have been developed in some studies. the most important developmental theories of trilemma focused on foreign exchange reserves (aizenman & sengupta, 2013) so that internal and external imbalances are moderated through open market operations (omos) or foreign exchange operations (fxos) by economic policymakers. the lack of sufficient foreign exchange reserves to balance the real and the monetary sectors on the one hand and the simultaneous policing of exchange rate, interest rate and capital account variables in a small country with an open economy on the other hand is a clear reason for creating balance of payments and foreign exchange crises (krugman, 1979). the mechanism of the transition of internal and external imbalances to the foreign exchange sector through the system of simultaneous equations is examined in the context of the extension of trilemma theory. it should be noted that in trilemma theory, the emphasis is on exchange rate stabilization (exchange rate policy), which is one of the limitations of trilemma ignored when the exchange rate floats. since exchange rate stabilization is important in some small economies as an anchor of price, any variable influencing exchange rate stabilization is important (maurice, 2005). 2. literature review according to bidabad (2005) the items affecting balance of payment (bop), import and export prices, liquidity, interest rates, risk at both home and abroad, customs barriers and restrictions for export and import affect the exchange rate. in this study, bidabad used the equilibrium condition of bop and using the fischer's quantity theory of money (qtm) (assuming the stability of velocity of money, prices and earnings) to determine exchange rate by the imbalances of money and goods markets at home and abroad under specific assumptions. according to mundell (1963); fleming (1962) monetary policy in terms of floating exchange rate and full capital mobility has the most effect on national income compared to fixed exchange rate (in general equilibrium). in sterilization conditions, the volume of the reserves is not effective on the monetary basis, in other words, if the monetary policy is expanded under the fixed exchange rate regime, reducing the reserves having a negative impact on the monetary base reduces the liquidity that should be offset by the injection of new money.the policy should be short-term because, by continuously injecting liquidity in order to counteract the decline in the reserves and its monetary effect, the reserves are continually diminished, whereas in nonsterilization and fixed exchange rate regimes, the reduction of foreign exchange reserves is effective on a monetary basis and the effect of monetary policy is neutralized. fixed exchange rate and the effects of sterilization of the reserves to keep equilibrium is one of the reasons for limiting trilemma in concurrent interest rate and capital account policy making. frankel (1983) view is another important monetary base theory in determination of exchange rate. in general, according to the theory, the factors influencing the exchange rate and bop are the relative supply and demand for money. in this model, for the stability of money demand function, the qtm is used as the basic theory of money demand function (first assumption). according to this view, the economy is permanently in full employment as prices and wages adjusted rapidly (second hypothesis). also the theory of purchasing power parity (ppp) (third assumption) is crucial to determine the exchange rate. in the monetary bop model, the relative increase in the supply of money relative to the demand for money (the increase in the money supply compared to the trading country) is effective in raising the exchange rate. it is therefore inferred that any of the factors affecting money supply and demand (money supply sources including net domestic and foreign assets of the banking system) can lead to exchange rate volatility and force the policy maker to intervene, or without government intervention leading to turbulence, and the currency crisis in the economy as well. the current account deficit is one of the factors influencing the exchange rate in the theoretical literature of the monetary model1. 1 based on the monetary model of exchange rate, one can see how changes in the money supply stimulate the exchange rate.the demand (md) and supply (ms) of money equations in terms of relative equilibrium (based on qtm) are defined as follows for the domestic and foreign country: md= kpy md*= k*p*y k, k*>0 where md is money demand, k is income elasticity of money demand, p is local prices index, y is real national income, ms is money supply and e is the exchange rate (the asterisk (*) represents foreign countries variables). in equilibrium case, equality of supply and demand of domestic and foreign currency, the following equations exist: ms = md ms*=md* copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 29 in the research of mussa (1976) four main points are made in the development of the fundamental principles of the monetary base of bop method:  the exchange rate is the relative value of national currencies rather than national product.  the exchange rate is strongly influenced by the future expectations of asset owners that are affected by the exchange rate, and these expectations are influenced by monetary policy.  real factors, as same monetary factors as, influence the behavior of exchange rate.  the contradiction in the nature of fixed exchange rate policy (trilemma), though reduced by the advent of managed floating exchange rates, but it has not been entirely eliminated. this paper deals with some applications of rational expectations in exchange rates. according to maurice (2005) studies, the choice of a fixed exchange rate regime in the periphery economies makes monetary policy serve to stabilize the exchange rate. in their work, the reasons for choosing a fixed exchange rate regime despite the monetary policy sacrifice are:  unpredictable exchange rate volatility is detrimental, and most economists believe that exchange rate uncertainty will reduce international trade, reduce investment and harm human capital.  fixed exchange rate avoids inflationary pressures on the economy, which may be due to government budget deficits, wage policy and pricing by private sector. therefore, the fixed exchange rate prevents the incentives to follow the macroeconomic expansionary policies of the government.  the fixed exchange rate regime is seen as the anchor of prices after a period of price volatility in some economies to determine price expectations of the goods and services for the next economic activity period. aizenman & ito (2014) examined the potential effect of divergence on open door policies (capital mobility) in the context of the macroeconomic trilemma. they found that emerging countries in the past 15 years (since the date of the survey) have adopted a combination of policy indicators of trilemma with the least relative deviation of policies. they also found that countries most likely to deviate from policy indicators are likely to be in a foreign exchange or debt crisis. however, under developing and emerging countries with the most relative deviation from the policies are less likely to be disrupted in the event of a foreign exchange or banking crisis. maurice (2015) examines resilience of emerging market economies to financial and monetary shocks of foreign origin through the monetary policies of these countries. in other words, how the emerging countries' interest rate policy is driven by foreign financial and monetary shocks is important in this study. the trilemma first brings to mind that the countries with a floating exchange rate have a much better position than those countries that sacrifice their monetary policy, although the floating exchange rate regime by itself does not protect countries' economies from foreign and monetary shocks. the study shows that, despite the potential economic benefits of global integration, globalization weakens economic management. in other words, the trade-off efficiency of monetary policy indicators for achieving multiple domestic goals is undermined. ray's (2016) study also suggests that the exchange rate regime (whether fixed or floating) affects the correlation between the short-term interest rates of periphery and center countries, so that in the floating exchange rate regime, the interest rates of these countries are less correlated and in the fixed exchange rate regime, the interest rates are higher. magas (2018) study shows that the resilience of the economy to external shocks depends not only on the structure of trilemma but also on other macroeconomic components. in this regard, the stability of the budget and the repayment of external debt is of particular importance. the problem of reaction to external impulses is not limited to trilemma. the debt crisis of portugal and greece is one of the recently confirmed examples of the use of the european currency (euro money) as domestic currency, whereas the czech republic, despite being a traditional conservative non-euro european member, has relative independence in interest rate policy, and it resists foreign shocks well through its floating exchange rate and interest rate margins. 3. methodology in this paper, we try to analyze the effect of internal and external imbalances on exchange rate fluctuations in line with macroeconomic theories in real and monetary equilibrium conditions based on trilemma framework. extending of the trilemma theory in determining the exchange rate, applying the economic relations governing the structure of general equilibrium in the k, k*>0 given the relative supply and demand of money in terms of equilibrium (based on the above equations) and ppp, the following equation can be obtained: e = p/p* ms/ms*= k.p.y/ k*.p*.y* the above equation can be rewritten as the following equation by ppp equation and replacing it with the equilibrium equations of money supply and demand and solving its reduced form of exchange rate as follows: ms/ms*= k.y.e / k*.y* e = )ms/ ms*(/)k.y/ k*.y*( copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 30 markets for goods and services and money and how they relate to each other and having a purely theoretical framework based on the applicable principles of the national accounts system (2008) and practical and applied monetary economic theories is achieved. assuming that the real sector markets are not cleared under this model so that it affects the net changes in the assets (domestic and foreign assets) of the banking system multiplies velocity of money, and it effects on the exchange rate as well, the main question in this paper is, what is the role of policy variables in imbalances so as to stabilize the exchange rate? the exchange rate fluctuations resulting from the model presented in this paper separates the role of the trilemma factors into two parts of internal and external imbalances affecting the exchange rate. internal imbalances, including the private sector and the public sector deficits increase unofficial exchange rate and external imbalances (balance of payments surplus) reduce it. in other words, this paper attempts to apply policy variables such as government expenditures, interest rates on domestic deposits, interest rates on domestic loans, export, import, capital inflows and outflows effective exchange rate, and analyzes opposite effects through trading off internal and external imbalances in the model. 3. exchange rate determination 3.1 real economy sector equilibrium the equilibrium condition in the real sector of the economy is obtained by the following equation in the macro-economic: i – s + g – t + ex im – rf = 0 (1) i: private sector investment costs, s: private savings, g: government expenditures (both investment and consumption), t: net indirect taxes, ex: export, im: import and rf: net foreign transfer payments. the equation shows that the balance of aggregate supply and aggregate demand, which means that the sum of the following items at macroeconomic level must be equal to zero:  net (deficit or surplus) private sector savings or borrowings (i-s)  government financial budget (deficit or surplus) (g t)  net (deficit or surplus bop) external sector (ex im – rf) 3.2 monetary sector equilibrium the equilibrium condition in the monetary sector of the economy is obtained by the following equation: nfa + ncg + ncp + nk = m2 = td + dd + cu (2) on the left side of the above equation, liquidity uses (m2) include net foreign assets (nfa), net domestic assets (nda) (including net claims on government (ncg), net claims on private sector (ncp) and net capital account of the banking system (nk) (in the form of non-returnable assets). liquidity items to the right of the equation include time deposits (tds), demand deposits (dds) and money (banknotes and coins) in circulation (cu). for convenience, the value of nk in the ncp can be considered and the following equation can be used to define liquidity: m2 = ncp + ncg + nfa (3) 3.3 the relationship between the real and the monetary sector according to fisher definition, the qtm is defined as the following equation (mankio, 107: 2016): m.v=p.t = t (4) here, m: supply (or demand for money), v: velocity of money, p: price level, t: quantity of goods or services traded, t: value of goods and services traded in the economy. in other words, persons (2012) in his book, purchasing power of money, describes the relationship between money and transactions in the economy, while other economists in qtm explain the relationship between income and money. in other words, the following can be said: m.v = p.t = t = p.as = p.ad = as = ad (5) ad: aggregate demand in economy at constant price, as: aggregate supply in economy at constant price, as: aggregate supply in nominal price, and ad: aggregate demand in economy in nominal price. according to the above equations, multiplying the amount of money by the velocity of money is equal to the value of transactions in the economy. substituting equation (3) into equation (4) or (5) can be written as follows: copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 31 m.v = v[ncp + ncg +nfa] = p.t = p.as = as (6) in order to connect a relationship between the real economy sector (goods and services) and the monetary sector in the economy, the above equation is differentiated. assuming v remains unchanged, the following equation can be obtained: v.δm = v.δncp + v. δncg +v.δnfa (7) the right side of the equation (7) can be divided into two groups of banking system assets: nda and nfa. in other words, equation (7) can be rewritten as equation (8): v.δm = v.δnda+v.δnfa (8) on the left side of the equation (8), the changes in the supply or demand of money multiply by the velocity of money, can be divided into two parts the sum of the changes of the domestic (δms) and foreign (δms*) money supply (in the domestic money) multiply by the velocity of money (v). in other words, the left of equation (8) can be written as: v .δm = v( δms +δms*) (9) since the result of changes in domestic money supply multiply by the domestic velocity of money comes from the changes in net domestic assets of the banking system multiply by the velocity of money (v.δnda), and the result of changes in the foreign money supply multiply by the foreign velocity of money caused by the changes in the net foreign assets of the banking system multiply by the velocity of money (in domestic money), so by using the equation (8) and (9), we can write the following equations: v. δms= v.δnda (10) v.e.δms*=v.δnfa (11) assuming, the foreign prices stability, only one foreign currency in outside the world that can be converted into domestic currency by the exchange rate (e), given the stability of the domestic-to-foreign money demand ratio (k.y/ k*.y* = 1), purchasing power parity (ppp= p/p*) validity, so in accordance with the monetary model exchange rates, the following equations can be defined for the exchange rate. e=ms/ ms*/ k. y/ k*. y*= nda/nfa (12) v.δe= v.δnda/ v.δnfa (13) by simplifying algebraic equation (12) and taking the logarithm and the derivative from the both sides, the following equation is obtained: (14) the equation shows that the percentage of exchange rate changes, in case ceteris paribus mentioned in this study, is directly related to the percentage of nda and inversely related to the percentage nfa of the banking system. it is now possible to examine each of the components of the liquidity utilization arises from what part of the real economy changes in equilibrium. by comparing the components of changes in the monetary sector to the imbalances in the real sector, one can infer the concept of the reasons for the imbalances in the money sector resulting from the imbalances in the real sector of the economy as follows: (i – s) ≡ v.δncp (g – t) ≡ v.δncg (15) (ex – im – rf) ≡ v.δnfa the above accounting equations mean that: e nda nfa  copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 32  private sector deficit (deficit or surplus), (i-s) by using the banking system resources, causes changes in ncp of banking system to the same extent.  government budget surplus (or deficit), (g-t), causes changes in ncg of banking system to the same extent.  surplus (or deficit) foreign sector, (ex-im-rf) in foreign currency, causes changes in nfa of the banking system to the same extent. here, inserting the accounting equation (15) into equation (13) then we can arrive at equation (16): v.δe= (i-s) + (g-t) /)ex-im-rf) (16) the right-hand side of equation (16) suggests the relationship between exchange rate, income, and bop through absorption method (pilbim, 1998). in other words, although internal and external imbalances in the case of non-trade-off the nda and the nfa affect the liquidity, under these circumstances, it can have an opposite effect on the exchange rate. the equation (16) highlights an important issue in determining of the exchange rate, so that the greater the foreign exchange reserves due to the bop surplus (external imbalances) than the private and public sector imbalances (internal imbalances), the unofficial exchange rate expectations decrease, and conversely, the greater the internal imbalance than the external imbalance, the unofficial exchange rate market expectations increase as well. the above equation somehow illustrates the extension of the trilemma theory (allahyarifard et al., 2019), the effect of internal (i-s) + (g-t) and external (ex-im-rf) imbalances on the effect of money changes multiplied by velocity of money2. equation (17) shows the variables that influence the behavior of the principal components of equation (16): v.δe = (i (il, irolpv) – s (id, y)) + (g – t(y))/($.)(eex.ex$((eex.p*/p), irxoild, y) – eem.im$((eem.p*/p), (ex$ + tx$ -tm$)) + eexf.tx$((ideexf .id*), p) – eemf.tm$(ideemf. id*))) (17) equation (17) shows the reduced form of the equilibrium exchange rate in terms of both the monetary and real sector economy equilibrium. in equation (17) il: interest rates on domestic loans, irolpv: obligated loan, id: interest rates on domestic deposits, y national income or gdp at nominal prices, y: national income or gdp at constant prices (as a production capacity), eex: effective exchange rate of export, irxoild: oil export, eem: effective exchange rate of import, eexf: effective exchange rate of production factor export, eemf: effective exchange rate of production factor import, p: domestic prices index, p*: foreign prices index and id*: interest rate on foreign deposits. the $ suffix is to express variables in foreign currency. 3.4 exchange rate dynamics based on krugman's (1991) target zone regime, the exchange rate is determined by the following equation. (18) where ek is the (log of the) spot price of foreign exchange, m the domestic money supply, v a shift term representing velocity shocks, and the last term is the expected rate of depreciation. since, krugman (1991) considers the equation (18) for the mathematical modeling of exchange rate under a target zone regime such that m changes caused by omo and fxo are assigned to keep the minimum and maximum targeting intervals [ , ]e e . in the model, there are two fundamental factors that affect the exchange rate, money supply (m) to stabilize the exchange rate in the minimum and maximum intervals and velocity shift term (v). if the exchange rate is within the minimum and maximum range, the value of m is constant and exchange rate expectations are e [ds]/ dt =0. under these conditions, the exchange rate fluctuations between the minimum and maximum depend on the transfer rate (v) and m, which is similar to (12) and (14). 4. empirical application to study the effect of internal and external imbalances on the exchange rate and policy influencing variables on the behavior of model endogenous variables in different scenarios and how they trade-off with one another in the iran economy, it is necessary to use a system of simultaneous equations. the time series data of iran's macroeconomic variables3 in the current study are from 1959 to 2016 ad (according to 1338-1396 hijri shamsi). the equations have been tested several times, and the best ones have 2 the extension of the trilemma (allahyarifard et al., 2019) is deduced as follows: v .δm = )i – s) + )g – t) + )ex – im – rf( 3 the data in this study are derived from the bank of iran time series macroeconomic variables database.   /ke m v e ds dt   copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 33 been estimated. it should be borne in mind that endogenous and exogenous variables (policy variables) are divided into two parts: flow and inventory, so the balance between the left and right variables of the structural equations is considered in this study. 4.1 system of simultaneous equations since the exchange rate equation (equation 17) is a function of the components of internal and external imbalances derived from the extension of the trilemma theory. thus, it can be shown in the context of a system of equations that the internal imbalances include the imbalance of the private sector investment-national savings, government deficit and the external sector imbalances, including bop, affecting the unofficial exchange rate. 4.1.1 system of equations the equation (19) to (26) is the structural equation of the equation (17). (19) the above equation confirms the effect of internal and external imbalances on the exchange rate. (20) investment equation (equation (20)) as a result of economics theory, the inverse function of the interest rate. (21) according to the keynesian model, the savings equation is considered as a function of national income. (22) the equation of government tax revenue is considered as a function of national income according to economic theories. (23) in the above equation, the export at constant prices (in foreign currency) is shown as a function of the effective export exchange rate and the gdp at constant prices as a production capacity (24) (25)     irem c(1) c(2)* irem( 1) c(3)*d(iripv irsv irgv irgrtv) c(4)*d(irxv / ireex irmv / ireem irxfyv / ireexfy irmfyv / ireemfy) iv : c, irem 2 , iripv irsv irgv irgrtv , irxv / ireex irmv / ireem irxfyv / ireexfy irmfyv / ire                   emfy , irird, irirl                       iripv  c 10 c 11 *iripv 1 c 12 *irolpv c 13 * irirl irirl 1 c 14 *d92 iv : c, iripv 2 , irolpv 1 , irirl irirl 1 , d92                  irsv c(20) c(21)*irird c(22)*irgdpmv( 1) iv : c, irird 1 , irgdpmv                         irgrtv c 30 c 31 *irgrtv 1 c 32 *d irgdpmv c 33 *d89 c 34 *d91 iv : c, irgrtv 2 , irgdpmv irgdpmv 1 , d89, d91                  irxdfcpi (c(40) c(41)*irxdfcpi( 1) c(42)*(irxoild / fcpi irxoild( 1) / fcpi( 1)) c(43)*ireex*fcpi / irpgdpm c(44)*d(irgdpm) iv : c, irxdfcpi 2 , irxoild / fcpi, ireex*fcpi 1 / irpgdpm 1 , irgdpm / irgdpm 1 , ireexfy, i              reemfy         irmdcifp (c(50) c(51)*irmdcifp( 1) c(52)*(ireem*fcpi / irpgdpm) c(53)*d(irxd irxfyv / ireexfy irmfyv / ireemfy) iv : c, ireem 1 , fcpi 1 , irpgdpm 1 , irxd irxfyv / ireexfy irmfyv / ireemfv                                     irxfyv c 60 c 61 *irxfyv 1 c 62 * irird fir *ireexfy c 63 *d91 c 64 *d88 c 65 *d93 c 66 *d92 iv : irird 1 , fir 1 , ireexfy 1 , d91, d88, d93, d92             copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 34 foreign currency imports at constant prices are considered as a function of the effective exchange rate of import and export earnings. export and import of factor income from abroad (equations 25 and 26) according to frankel (1983) are considered as a function of the difference between domestic interest rates. (26) model accounting equations to tight the closure includes: irxd ≡ irxdfcpi*fcpi (27) the above accounting equation shows the relationship between nominal exports (million dollars) and real exports (million dollars). irxv≡ (ireex* irxd)/1000 (28) the above equation indicates the relationship between the nominal exports (billion rials) and the nominal exports (million dollars). irmd≡ irmdcifp*ircifp (29) the above equation indicates that the relationship between nominal imports (million dollars) and real imports (million dollars). irmv≡ (ireem* irmd)/1000 (30) the above equation indicates the relationship between nominal imports (billion rials) and nominal imports (million dollars). irgdpmv≡ ircv+ iriv+ irgv+ irxvirmv+ irdisv+ irnitv (31) the above equation illustrates the relationship between nominal gdp and its accounting components (billion rials). irpgdpm≡ irgdpmv/irgdpm (32) the above equation indicates the relationship between real gdp and nominal gdp, agregate price deflator. irgdpm≡ (ircv+ iriv+irgv+ irxvirmv+ irdisv+ irnitv)/irpgdpm (33) the above equation illustrates the relationship between real gdp and its accounting components (billion rials). endogenous variables 1 irem market exchange rate, rials/dollar 2 irgrtv government tax revenue, billion rials 3 iripv private investment at current prices, billion rials 4 irmd import at current prices, million dollar 5 irmv import at current prices, billion rials 6 irsv private saving at current prices, billion rials 7 irmdcifp real import, million dollars 8 irmfyv nominal import of factor income from abroad, billion rials          irmfyv (c(70) c(71)*irmfyv( 1) c(72)*(irird fir *ireemfy) c(73)*d(irgdpmv) iv : c, irmfyv 2 , irird 1 fir 1 *ireemfy 1 , irgdpmv            copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 35 9 irpgdpm gross domestic product price deflator 10 irxfyv nominal export of factor income from abroad, billion rials 11 irxd export, million dollars 12 irxdfcpi real export, million dollars 13 irxv nominal export, billion rials 14 irgdpm real gross domestic product at market prices, billion rials 15 irgdpmv nominal gross domestic products at market price, billion rials exogenous variables 1 fcpi average oecd consumer price index 2 fir average oecd interest rate (banking system) 3 ircv nominal private consumption, billion rials 4 ircpi consumer price index 5 ircifp import cif price index 6 irdisv nominal discrepancies, billion rials 7 ireem effective exchange rate for import 8 ireemfy effective exchange rate for import of factor income from abroad 9 ireex effective exchange rate for export 10 ireexfy effective exchange rate for export of factor income from abroad 11 irgv nominal government consumption, billion rials 12 irnitv nominal net indirect taxes, billion rials 13 irolpv government budget obligatory loans granted to private sector 14 irird saving deposits weighted average interest rate (banking system) 15 irirl loans weighted average interest rate (banking system) 16 irxoild export of oil, million dollars 17 d88 dummy variable for the 1388 18 d89 dummy variable for the 1389 19 d91 dummy variable for the 1391 20 d92 dummy variable for the 1392 21 d93 dummy variable for the 1393 4.1.2 structural equations identification in general, before estimating the parameters of the model equations, it is necessary to identify the order (necessary condition) and the rank condition (necessary and sufficient condition) for consistent estimation4. as can be seen in equations (19) to (33) there is a stochastic equation or an accounting equation for each endogenous variable in equation (19). the absence of linear combination in the vectors of the instrumental variables and other independent variables determines the rank condition. in other 4 if the structural equation has an endogenous variable (y1) on the left, an endogenous variable (g1) and an independent variable (k1) on the right, so that the endogenous variable to the right of the equation is correlated with the error term, then the estimation of the model equation coefficients is inconsistent under the ols method. if there is a structural equation for each right endogenous variable to describe its behavior then it is called a complete system of equations. assuming that k independent variables exist in the system of equations, then the minimum number of independent variables necessary for consistent estimation in the structural equations is obtained through the order condition for identification. the order condition is obtained from 2 1k g provided k2 = kk1; k2 is the number of the independent variables outside the equation examined for identification in the equation system that affect the behavior of the endogenous variables to the right of the equation. it should keep in mind that the order condition is necessary to identify and the rank condition is sufficient as well. also, without using the matrices used to obtain the rank order, the two-stage least squares (2sls) method can have a consistent estimate for the parameters, so that in the first step, the endogenous variables of the equation are obtained using the other independent variables affecting the behavior of the endogenous variable are estimated by the ols method and secondly, by estimating the variables in the first step, the endogenous variable to the left of the equation is estimated. therefore, the order condition identification requirement in the 2sls method is sufficient for consistent estimation of model equations (baltagi, 2008: pp.256: 277). in the model examined in this paper, equation (19) has 7 endogenous variables on the right and 9 structural equations that each equation is estimated from at least one independent variable outside of equation (19). therefore, the order condition is over-identified which can be estimated by using the 2sls method. the recent issue is also mentioned in chapter15 of the book econometrics analyzes (green, 2002: 393) that "it is unusual for a model to pass the order but not the rank condition". copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 36 words, if the model of the m equations and the m endogenous variables can only have at least one non-zero determinant of the matrix (m-1) * (m-1) related to the coefficients of the endogenous and predetermined variables outside the examined equation but included in other model equations is identified (gujarati, 2004). the model has 8 random equations, 7 accounting equations, 15 endogenous variables (m = 15) and 28 pre-determined explanatory variables (k = 33)5. so the model equations (equation19 to 26) are over-identified. 4.1.3 stationary of the variables consideration as can be seen in the table (1), some variables are at least first-order integrated i(1), and the first differences are used in the regression equations for being stationary. therefore, in order to avoid spurious regressions in the system of equations, first-order difference is used. according to table (2), all the parameters of lagged variables of the structural equations are approximately equal to one, and mathematically if the lagged variable is moved to the left of the equation then the endogenous variable difference is obtained6. in other hand, after numerous and repeated reviews this solution can be solved first, i(1) and random walk by first order difference through insertion of first order lagged dependent variable to the right, then by using the residual inverse through weighted least squares method (wlss) eliminate variance heterogeneity of the residuals that have more than first-order integrated i (1)7. table 1. generalized dickey-fuller unit root test on the level of the model variables variable augmented dickey-fuller test statistic prob.* t-statistic irem 1.579045 0.9707 -1.946764 iripv -4.655605 0.0000 -1.947975 irsv 0.317437 0.7732 -1.947975 irgv 6.668408 1.0000 -1.947520 irxv 2.965434 0.9990 -1.947975 irmv -.225549 0.5997 -1.947975 irxfyv 3.373523 0.9997 -1.947975 irmfyv -4.31828 0.0001 -1.947975 irolpv -2.309784 0.0214 -1.946654 irirl 0.665009 0.8568 -1.946654 irird 1.518375 0.9668 -1.946764 irgdpmv 1.390017 0.9569 -1.947975 irxdfcpi -0.930043 0.3095 -1.946654 irxoild -0.760627 0.3824 -1.946654 fcpi -1.157899 0.2222 -1.946996 ireex 5.273733 1.0000 -1.946654 irpgdpm 2.875961 0.9987 -1.947975 irmdcifp -1.575963 0.1074 -1.946764 ireem 2.595083 0.9972 -1.947975 irxd .177568 0.7341 -1.946654 ireexfy 1.270808 0.9467 -1.946654 5 number of independent variables in the model (26) + number of lagged endogenous variables (7) = number of explanatory and predetermined variables (k = 33). the 26 independent variables included: 5 dummy variables + 5 weighted variables (residuals of the model equations) to eliminate heteroskedasticity + 16 policy variables. 6 the stability of the endogenous variables of the structural equations of this model, without considering the lagged endogenous variable on the right of the equations, can be examined by engle-granger method. the stability results are discussed in table (3). 7 economic theories refer to possible equilibrium relationships between variables, but do not explain the relevant adjustment processes at work. if there is an equilibrium relationship, then the variables specified in the relationship should be cointegrated. testing for cointegration is, in fact, the test of equilibrium relation, and hence of whether the model is well defined. when the variables are cointegrated, the estimates of the long-run equilibrium parameters are consistent and highly efficient. indeed these estimates are "super consistent", converging even more quickly in probability to the true parameter values than the least-squares estimator in the standard case. this consistency property does not require the absence of correlation between the right-hand-side variables and the error term, unlike consistency results in the usual classical regression-model context (perman, 1991). copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 37 ireemfy 7.721210 0.9999 -1.947248 fir -0.574141 0.4643 -1.946654 source: obtained from results of the research some economic events and structural failures in some variables were corrected through dummy variables. the statistics of f and its probability are highly acceptable such that the standard deviation error statistics, t, and significant probability close to zero confirm the parameters (see table 2). 4.2 estimation of the system of equations by ols, 2sls and 3sls methods since the explanatory variables in the simultaneous equations are correlated with the error term, so the ols parameter estimation is not consistent with classical econometric issues8, so it is necessary to use the 2sls or 3sls (iv) variables to estimate the regression equations parameters. three-stage least squares method (3sls) is a version of two-stage least squares (2sls) in the seemingly unrelated regression equations (sur). on the other hand, if the structural equation error term has heteroskedasticity and the correlation between error terms with each other structural equation is recognized, then 3sls is more efficient (less variance) than 2sls9. if there is no correlation between the error terms of the simultaneous equations, then the results of the estimators in the 2sls and 3sls methods are the same. another point is that since 2sls is a single-equation estimation method it is not possible to examine the covariance between the residuals of the equations. table 2. results of estimates and statistics by ols, 2sls and 3sls methods variable type of estimates coefficient std. error t-statistic prob. intercept ols 261.45 28.39 9.21 0.0000 2sls 306.40 66.93 4.59 0.0000 3sls 264.95 78.77 3.36 0.0008 8 the estimators are consistent when the assumption that xt is non-random, or no correlation between the explanatory variables and the disturbance component is proved. that is, despite the autocorrelation with increasing sample size, the variance of the estimating parameters tends to zero, ie: 𝑝𝑙𝑖𝑚(�̂�) = 𝛽 9 2sls is a single equation estimator that does not take into account the covariances between the residuals of simultaneous equations, so this method is generally not efficient. in contrast, 3sls is a systematic method for simultaneous estimation of all coefficients of the model, after simultaneous estimation of all coefficients, the weights are formed, and the model is again estimated using the estimated weight matrix. system estimators such as 3sls consider zero constraints of each structural equation as the variance-covariance matrix of the whole system of equations residuals. the first two stages of 3sls are similar to 2sls, and the third stage uses feasible generalized least squares (fgls) in the same way as sur. 3sls uses the 2sls residuals for consistent estimation of the structural equation (σ) covariance matrices. in 3sls, structural equations overlap like sur, in mathematical terms. so consider: y = z u  1 1 1 1 2 2 2 2 0 0 0 0 0 0 . ; ; ; . . . . . . . 0 0 0 g g g g y z u y z u y z u z u y                                                     where in: u with 0 mean and ti variance-covariance indicating the correlation between the residuals of the structural equations. ', ( )ij i j ij te u u i     , and the marker represents the kronecker variance residual covariance. if there is no correlation between the residuals of the structural equations with each other then 0ij  , as a diagonal matrix, therefore the estimators of the least squares and ordinary least squares are similar (baltagi, 2008: pp.256: 277). copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 38 irem(-1) ols 1.014 0.002 484.84 0.00000 2sls 1.011 0.003 296.53 0.0000 3sls 1.016 0.007 144.93 0.0000 d(iripvirsv+ irgv irgrtv) ols 0.001 0.00008 13.11 0.0000 2sls 0.001 0.0001 9.42 0.0000 3sls 0.0009 0.00002 4.01 0.0000 d(irxv/ireex) (irmv/ireem) + (irxfyv/ireexfy)(irmfyv/ireemfy) ols -13.79 2.39 -5.77 0.0000 2sls -17.55 5.64 -3.11 0.0030 3sls -14.42 6.62 -2.18 0.0299 intercept ols 7067.74 7243.03 0.98 0.3337 2sls 6309.48 7795.32 0.81 0.4220 3sls 6284.52 7423.56 0.85 0.3984 iripv(-1) ols 1.08 0.01 104.60 0.0000 2sls 1.07 0.02 63.97 0.0000 3sls 1.07 0.02 2567 0.0000 irolpv ols 0.56 0.06 9.12 0.0000 2sls 0.69 0.14 5.13 0.0000 3sls 0.69 0.13 5.38 0.0000 (irirl-irirl(-1)) ols -12039.17 5279.18 -2.28 0.0267 2sls -16725.79 6975.73 -2.40 0.0202 3sls -16710.36 6655.21 -2.51 0.124 d92 ols -467599.5 58073.07 -8.05 0.0000 2sls -518314.8 77059.63 -6.73 0.0000 3sls -518246.5 72536.69 -7.05 0.0000 intercept ols -250670.9 17986.51 -13.94 0.0000 2sls -312893 33811.88 -9.25 0.0000 3sls -244555.1 35909.34 -6.81 0.0000 irird ols 38276.33 2628.25 14.56 0.0000 2sls 47386.45 4947.54 9.58 0.0000 3sls 37959.78 5217.06 7.28 0.0000 irgdpmv(-1) ols 0.39 0.008 49.15 0.0000 2sls 0.37 0.015 25.02 0.0000 3sls 0.39 0.01 25.58 0.0000 intercept ols -892.62 2313.75 -0.39 0.7012 2sls -962.83 2363.62 -0.41 0.6855 3sls -893.82 2254.57 -0.40 0.6920 irgrtv(-1) ols 1.16 0.02 53.55 0.0000 2sls 1.16 0.02 52.34 0.0000 3sls 1.16 0.02 54.88 0.0000 d(irgdpmv) ols 0.04 0.007 5.27 0.0000 2sls 0.04 0.007 4.99 0.0000 3sls 0.04 0.007 5.24 0.0000 d89 ols -94729.88 16077.64 -5.89 0.0000 2sls -94958.33 16242.40 -5.85 0.0000 3sls -95007.14 15496.55 -6.13 0.0000 d91 ols -53079.03 16217.26 -3.27 0.0019 2sls -53565.12 16387.80 -3.27 0.0019 3sls -53941.74 15634.96 -3.45 0.0006 intercept ols -1520.59 160.35 -9.48 0.0000 2sls -1395.74 154.00 -9.06 0.0000 3sls -1763.34 452.68 -3.89 0.0001 copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 39 irxdfcpi(-1) ols 1/00 0.003 334.40 0.0000 2sls 1/00 0.002 450.74 0.0000 3sls 1/00 0.009 115.07 0.0000 irxoild/fcpi-irxoild(1)/fcpi(-1) ols 0.83 0.1 57.13 0.0000 2sls 0.83 0.01 71.37 0.0000 3sls 0.84 0.03 25.25 0.0000 ireex*fcpi/irpgdpm ols 0.17 0.03 5.69 0.0000 2sls 0.14 0.03 4.52 0.0000 3sls 0.22 0.09 2.36 0.0188 d(irgdpm) ols 0.03 0.003 13.46 0.0000 2sls 0.003 0.001 23.32 0.0000 3sls 0.03 0.007 4.46 0.0000 intercept ols 112846.9 5624.06 20.06 0.0000 2sls 119149.1 6066.96 19.64 0.0000 3sls 83608.23 20792.606 4.02 0.0001 irmdcifp(-1) ols 0.91 0.02 47.64 0.0000 2sls 0.90 0.02 43.47 0.0000 3sls 0.97 0.06 15.83 0.0000 (ireem*fcpi/irpgdpm) ols -14.16 0.65 -21.86 0.0000 2sls -14.90 0.69 -21.39 0.0000 3sls -10.62 2.44 -4.35 0.0000 d(irxd+irxfyv/ireexfyirmfyv/ireemfy) ols 1.43 0.08 19.18 0.0000 2sls 1.52 0.08 19.00 0.0000 3sls 1.12 0.26 4.34 0.0000 intercept ols -369.85 212.73 -1.74 0.0883 2sls -298.12 255.62 -1.17 0.2491 3sls -311.13 239.03 -1.30 0.1937 irxfyv (-1) ols 0.96 0.02 50.32 0.0000 2sls 0.95 0.03 31.04 0.0000 3sls 0.95 0.03 33.17 0.0000 irird-fir*ireexfy ols -0.25 0.03 -7.85 0.0000 2sls -0.24 0.06 -4.13 0.0001 3sls -0.24 0.05 -4.50 0.0000 d91 ols 28230.86 1302.04 21.68 0.0000 2sls 28438.76 1337.61 21.26 0.0000 3sls 28446.82 1251.62 22.73 0.0000 d88 ols -15367.00 1305.66 -11.77 0.0000 2sls -15224.69 1327.01 -11.47 0.0000 3sls -15251.71 -1241.11 -12.29 0.0000 d93 ols -22578.59 1645.75 -13.72 0.0000 2sls -22255/00 1868.64 -11.91 0.0000 3sls -22285.11 1748.68 -12.74 0.0000 d92 ols 17001.52 1449.77 11.73 0.0000 2sls 17405.01 1464.6 11.88 0.0000 3sls 17316.56 1367.71 12.66 0.0000 intercept ols 5.96 0.15 38.51 0.0000 2sls 5.62 0.18 30.84 0.0000 3sls 4.93 1.32 3.73 0.0002 irmfyv(-1) ols 1.04 0.005 210.96 0.0000 2sls 1.05 0.006 184.17 0.0000 3sls 1.06 0.04 25.76 0.0000 (irird fir*ireemfy) ols 0.008 0.001 40.61 0.0000 copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 40 2sls 0.007 0.0002 31.35 0.0000 3sls 0.006 0.001 5.56 0.0000 d(irgdpm) ols 0.001 0.00006 25.98 0.0000 2sls 0.001 0.000006 202.62 0.0000 3sls 0.001 0.00005 2.35 0.0191 source: obtained from results of the research according to the table (2), r-squared and adjusted r-squared show very good explanatory power of the equations. the use of lagged first order endogenous variables on the right of the equations increases r-squared (r2). dorbin-watson's statistics show good quality model equations specifications and no serial correlation in the residuals. it should be noted that in cases of the high r-squared, it is not necessary to consider the dorbin-watson's statistic on the problem of the serial correlation of the residuals, this is not. however, acceptable either weak serial correlation or when the statistic falls within the uncertain limits of serial correlation in the dorbin-watson's table. note that the dorbin-watson's statistic is not usable for the expression of the residuals due to the existence of an endogenous lagged variable on the right of the equation. it should keep in mind that if r2 is high, the estimates of the equations in the two methods ols and 2sls are very close to each other (gujarati, 2004, p. 879). in order to examine the residual stability, prior to simulating the actual data, it is necessary to examine the dickey-fuller unit root test according to the table (3). table 3. group unit root test: summary series: resid04, resid06, resid08, resid09, resid10, resid11, resid12, resid13 date: 05/27/19 time: 02:37 sample: 1338 1395 exogenous variables: none automatic selection of maximum lags automatic lag length selection based on sic: 0 to 8 newey-west automatic bandwidth selection and bartlett kernel cross method statistic prob.** sections obs null: unit root (assumes common unit root process) levin, lin & chu t* -18.0355 0.0000 8 432 null: unit root (assumes individual unit root process) adf fisher chi-square 407.884 0.0000 8 432 pp fisher chi-square 933.188 0.0000 8 443 ** probabilities for fisher tests are computed using an asymptotic chi -square distribution. all other tests assume asymptotic normality. source: obtained from results of the research according to the statistics of the table (3) based on the engle-granger method, the residuals of the regression equations of the model were evaluated for stability, the results show both common or individual do not have any unit root. 4.3 simulation after estimating the parameters, the model was solved statically for the ex-post simulation by using the broyden method. the time searies of the main equation of the proposed model for real (squared) and simulated (starred) information is shown in figure (1). copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 41 figure (1): an informal exchange rate trend chart based on real and simulated information source: obtained from results of the research 4.4 model evaluation to evaluate the model, the root mean square error (rmsp (e)) method, which represents the percentage error of the simulated variable in the model, was used as follows: 2 1 ( ) ( ) 100. m t i t e y rmsp e m    (34) et = yt – ŷ: simulated variable error yt: the actual variable ŷ: simulated variable table 4. root mean square error of simulated error (rmsp (e)) 1998-2016 irmfyv irxfyv irmv irxv irgrtv irsv iripv irem type of estimation 34.09 41.25 48.64 15.64 17.88 40.28 10.79 13.58 ols 34.27 41.25 50.61 15.73 17.87 46.86 10.64 14.02 2sls 35.47 43.00 43.50 13.03 16.99 40.39 10.64 13.28 3sls irpgdpm irmdcifp irxdfcpi irmd irxd irgdpmv 0.000001 48.64 15.64 48.64 15.64 12.59 ols 0.00001 50.61 15.73 50.61 158.73 12.97 2sls 0.00001 43.50 13.02 43.50 13.02 10.98 3sls source: obtained from results of the research table (4) shows the root mean square error of the endogenous variables for the 18-year period ending in 2016, which illustrates the appropriate model explanation. 4.5 impulse analysis after simulation of endogenous variables through comparative static solution of the model and examining the validity of the model, by generating impulse in each of the exogenous variables, several scenarios can be defined with respect to impulse and response of the endogenous variables. the analysis shows that despite the imbalances in the real sectors of the economy, the 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 40 45 50 55 60 65 70 75 80 85 90 95 irem irem (baseline) irem copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 42 unofficial market exchange rate does not fluctuate if internal and external imbalances are cleared through the trade-off private, government and bop imbalances. the response of the impulses considered varies according to the type of relationship of the exogenous variables. various scenarios with the assumption that other conditions are stable (ceteris paribus) over the 18-year period ending in 2016 are shown in table (5). table 5. exchange of imbalances in real sector due to shocks (ols / 2sls / 3sls 1% impulse foreign deposit interest rate 10% impulse foreign prices 10% impulse effective exchange rare 1% impulse domestic loan interest rate 1% impulse domestic deposit interest rate 10% impulse on government spending type of estimation -1.07 ols iripv -1.48 2sls -1.48 3sls 2.70 ols irsv 3.37 2sls 2.78 3sls 0.62 2.11 0.60 ols irgrtv 0.54 2.11 0.57 2sls 0.72 1.72 0.63 3sls 11.11 13.53 0.83 ols irxv 10.97 13.53 0.80 2sls 11.18 12.71 0.80 3sls 3.25 -0.12 1.74 ols irmv 3.29 -0.47 1.77 2sls 384 -5.63 1.32 3sls 5.36 1.87 ols irxfyv 5.14 1.79 2sls 5.24 1.83 3sls -0.11 017 1.16 0.36 ols irmfyv -0.10 0.11 1.10 0.33 2sls -0.09 0.21 0.73 0.30 3sls -0.03 -0.26 -1.30 0.13 ols irem -0.03 -0.28 -1.68 0.16 2sls -0.03 -0.35 -1.10 0.09 3sls source: obtained from results of the research according to table (5), a 10% increase in government expenditures, after trading off internal and external imbalances, has an effect on the unofficial exchange rate about 0.09% to 0.16% (in case ceteris paribus). in other words, under general equilibrium as long as the government expenditures shocks are offset through external sector imbalances, it will not have an involuntary effect on the unofficial exchange rate. the impact of other policy variable shocks on unofficial exchange rates such as interest rates on domestic deposits, interest rates on domestic loans, effective exchange rates on exported-imported goods and services, exporedimported factor income from abroad, foreign prices, and foreign interest rates can be similarly analyzed. 5. concluding remarks the main purpose of this paper is to provide a theoretical framework for examination of the relationship between internal and external imbalances and the unofficial exchange rate. based on the extension of the trilemma theory in general equilibrium framework, the trade-off between the real sector imbalances of the economy reduces the impact of internal and external imbalances on the unofficial exchange rate. in other words, this paper shows that the policy variables affecting the real economy components so that internal and external imbalances have moderated each other, it is then possible to avoid high volatili ty of the copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 43 exchange rate as one of the key elements of the trilemma theory. trading off financial imbalances in the private, public and foreign sectors of the economy enables the equilibrium of the real sector to be maintained without involuntary shock (with other factors remaining constant), and the unofficial exchange rate is less volatile. failure to clear internal and external imbalances in the real sector of the economy, the imbalances in the form of changes in the net domestic and foreign assets of the banking system is transferred to the unofficial exchange rate. the use of simultaneous equations for time series data of macroeconomic variables of iran proves the above theory so that any impulse in the policy variables confirms the effect on the exchange rate. in other words, a 10 percent increase in government expenditures, will increase the unofficial exchange rate fluctuation by 0.9-0.16 percent. any impulse is driven by other policy variables, such as rising domestic interest rates (which lead to increased national savings or reduced demand for real balances) or increasing tax revenues or affecting the external sector, then the imbalances in the real sector of the economy can be moderated by the increase in government expenditures. the issue of trade-off between the imbalances can be analyzed in the form of different impulses in policy variables and the response of real-sector endogenous variables in different scenarios. simply put, the purpose of this article is to illustrate the important point that, as long as macroeconomic policy-making has a neutral effect on the financial markets of the private sector, the government sector and the external sector, it does not cause real and currency fluctuations. from a theoretical point of view, this can be seen as a new approach to the development of the trilemma theory that has a realistic and practical view of equilibrium in the real, monetary and foreign exchange rate sectors. the econometric study of the empirical application in this paper suggests a strong confirmation of the recent expression. references aizenman, j., & sengupta, r. 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(2008). prepared under the auspices of the inter-secretariat working group on national accounts, 1, 456-458. appendices 0 10,000 20,000 30,000 40,000 40 45 50 55 60 65 70 75 80 85 90 95 actuals irem (baseline) irem 0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 40 45 50 55 60 65 70 75 80 85 90 95 actuals irgdpm (baseline) irgdp m 0 4,000,000 8,000,000 12,000,000 16,000,000 40 45 50 55 60 65 70 75 80 85 90 95 actuals irgdpmv (baseline) irgdp mv 0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 40 45 50 55 60 65 70 75 80 85 90 95 actuals irgrtv (baseline) irgrtv -1,000,000 0 1,000,000 2,000,000 3,000,000 4,000,000 40 45 50 55 60 65 70 75 80 85 90 95 actuals iripv (baseline) irip v 0 50,000 100,000 150,000 200,000 250,000 40 45 50 55 60 65 70 75 80 85 90 95 actuals irmd (baseline) irmd 0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 40 45 50 55 60 65 70 75 80 85 90 95 actuals irmdcifp (baseline) irmdcifp 0 10,000 20,000 30,000 40,000 50,000 40 45 50 55 60 65 70 75 80 85 90 95 actuals irmfyv (baseline) irmfyv 0 1,000,000 2,000,000 3,000,000 4,000,000 40 45 50 55 60 65 70 75 80 85 90 95 actuals irmv (baseline) irmv 0 1 2 3 4 5 6 40 45 50 55 60 65 70 75 80 85 90 95 actuals irpgdpm (baseline) irp gdp m -2,000,000 0 2,000,000 4,000,000 6,000,000 40 45 50 55 60 65 70 75 80 85 90 95 actuals irsv (baseline) irsv 0 40,000 80,000 120,000 160,000 40 45 50 55 60 65 70 75 80 85 90 95 actuals irxd (baseline) irxd 0 50,000 100,000 150,000 200,000 40 45 50 55 60 65 70 75 80 85 90 95 actuals irxdfcpi (baseline) irxdfcp i -20,000 0 20,000 40,000 60,000 80,000 40 45 50 55 60 65 70 75 80 85 90 95 actuals irxfyv (baseline) irxfyv 0 1,000,000 2,000,000 3,000,000 4,000,000 40 45 50 55 60 65 70 75 80 85 90 95 actuals irxv (baseline) irxv ols-simulation system: sys3slsh estimation method: three-stage least squares date: 05/26/19 time: 14:35 sample: 1339 1395 included observations: 57 total system (unbalanced) observations 451 linear estimation after one-step weighting matrix coefficient std. error t-statistic prob. c(1) 257.4782 78.53644 3.278456 0.0011 c(2) 1.016612 0.006980 145.6551 0.0000 c(3) 0.000946 0.000237 4.000208 0.0001 c(4) -13.79725 6.597782 -2.091194 0.0371 c(10) 6502.746 7431.449 0.875031 0.3821 c(11) 1.073701 0.015968 67.24165 0.0000 copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 45 c(12) 0.693183 0.129148 5.367339 0.0000 c(13) -16667.99 6654.533 -2.504757 0.0126 c(14) -518010.6 73536.49 -7.044265 0.0000 c(20) -247194.3 35944.07 -6.877193 0.0000 c(21) 38446.01 5208.951 7.380759 0.0000 c(22) 0.382802 0.014729 25.98960 0.0000 c(30) -893.5623 2254.571 -0.396334 0.6921 c(31) 1.159795 0.021133 54.88123 0.0000 c(32) 0.036973 0.007056 5.239906 0.0000 c(33) -95011.44 15496.55 -6.131134 0.0000 c(34) -53945.09 15634.96 -3.450286 0.0006 c(40) -1752.126 454.1764 -3.857810 0.0001 c(41) 1.008546 0.008766 115.0503 0.0000 c(42) 0.840617 0.033307 25.23851 0.0000 c(43) 0.218115 0.093692 2.327999 0.0204 c(44) 0.030519 0.006828 4.469704 0.0000 c(50) 84002.14 20788.60 4.040778 0.0001 c(51) 0.967116 0.061199 15.80282 0.0000 c(52) -10.65886 2.439674 -4.368968 0.0000 c(53) 1.121065 0.257734 4.349702 0.0000 c(60) -287.3049 238.2357 -1.205969 0.2285 c(61) 0.949651 0.028643 33.15526 0.0000 c(62) -0.243415 0.053905 -4.515581 0.0000 c(63) 28374.06 1249.203 22.71372 0.0000 c(64) -15191.66 1239.338 -12.25789 0.0000 c(65) -22132.75 1743.549 -12.69408 0.0000 c(66) 17320.84 1366.833 12.67224 0.0000 c(70) 4.929394 1.323247 3.725226 0.0002 c(71) 1.067234 0.041424 25.76360 0.0000 c(72) 0.006378 0.001278 4.990199 0.0000 c(73) 0.001141 0.000485 2.352898 0.0191 determinant residual covariance 1.45e-06 equation: (irem)/residirem^2= (c(1)+c(2)*irem(-1)+ c(3)*d(iripvirsv +irgv-irgrtv)+ c(4)*d(irxv/ireex-irmv/ireem+ irxfyv/ireexfy -irmfyv/ireemfy))/residirem^2 instruments: c irem(-2) (iripv-irsv+irgv-irgrtv) (irxv/ireexirmv /ireem+ irxfyv/ireexfy-irmfyv/ireemfy) irird irirl observations: 56 r-squared 0.999889 mean dependent var 0.060141 adjusted r-squared 0.999882 s.d. dependent var 0.183909 s.e. of regression 0.001996 sum squared resid 0.000207 durbin-watson stat 1.950318 equation: iripv = c(10) + c(11)*iripv(-1) + c(12)*irolpv+ c(13)* (irirl -irirl(-1)) + c(14)*d92 copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 46 instruments: c iripv(-2) irolpv(-1) (irirl-irirl(-1)) d92 observations: 56 r-squared 0.997424 mean dependent var 481023.0 adjusted r-squared 0.997222 s.d. dependent var 977225.2 s.e. of regression 51503.05 sum squared resid 1.35e+1 1 durbin-watson stat 2.124041 equation: irsv/residirsv^2 = (c(20) + c(21)*irird + c(22)*irgdpmv( -1))/residirsv^2 instruments: c irird(-1) (irgdpmv) observations: 57 r-squared 0.998510 mean dependent var 0.000158 adjusted r-squared 0.998455 s.d. dependent var 0.000581 s.e. of regression 2.28e-05 sum squared resid 2.82e-08 durbin-watson stat 1.560718 equation: (irgrtv) = (c(30) + c(31) *irgrtv(-1)+ c(32)*d(irgdpmv))+ c(33)*d89+ c(34)*d91 instruments: c irgrtv(-2) (irgdpmv-irgdpmv(-1)) d89 d91 observations: 56 r-squared 0.994865 mean dependent var 97808.20 adjusted r-squared 0.994462 s.d. dependent var 212364.7 s.e. of regression 15803.64 sum squared resid 1.27e+1 0 durbin-watson stat 3.253614 equation: (irxdfcpi)/(residirxdfcpif^2)= (c(40)+ c(41)*irxdfcpi(-1) +c(42)*(irxoild/fcpi-irxoild(-1)/fcpi(-1))+ c(43)*ireex*fcpi /irpgdpm+ c(44)* d(irgdpm))/(residirxdfcpif^2) instruments: c irxdfcpi(-2) irxoild/fcpi ireex(-1)*fcpi(1)/irpgdpm( -1) (irgdpm)/irgdpm(-1) ireexfy ireemfy observations: 56 r-squared 1.000000 mean dependent var 1.273640 adjusted r-squared 1.000000 s.d. dependent var 8.750115 s.e. of regression 0.001857 sum squared resid 0.000176 durbin-watson stat 1.871593 equation: (irmdcifp)/(residirmdcifpf^2)=(c(50)+c(51)*irmdcifp(-1) +c(52)*(ireem*fcpi/irpgdpm)+c(53)*d(irxd+irxfyv/ireexfy -irmfyv/ireemfy))/(residirmdcifpf^2) instruments: c ireem(-1) fcpi(-1) irpgdpm(-1) (irxd+irxfyv/ireexfy -irmfyv/ireemfy) observations: 57 r-squared 0.998256 mean dependent var 0.000613 adjusted r-squared 0.998158 s.d. dependent var 0.001492 s.e. of regression 6.41e-05 sum squared resid 2.17e-07 durbin-watson stat 2.095896 equation: irxfyv =c(60)+ c(61)*irxfyv (-1)+c(62)* (irirdfir*ireexfy) copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 47 + c(63)*d91+c(64)*d88 + c(65)*d93 + c(66)*d92 instruments: irird(-1) fir(-1) ireexfy(-1) d91 d88 d93 d92 c observations: 57 r-squared 0.995999 mean dependent var 9075.868 adjusted r-squared 0.995519 s.d. dependent var 18647.67 s.e. of regression 1248.256 sum squared resid 7790720 0 durbin-watson stat 1.553226 equation: (irmfyv)/resid07^2= (c(70) + c(71)*irmfyv(-1) + c(72) *(irird fir*ireemfy)+ c(73)*d(irgdpmv))/resid07^2 instruments: c irmfyv(-2)/resid07^2 (irird(-1) fir(-1)*ireemfy(-1)) /resid07^2 (irgdpmv)/resid07^2 observations: 56 r-squared 0.999999 mean dependent var 72.69083 adjusted r-squared 0.999999 s.d. dependent var 389.7440 s.e. of regression 0.431112 sum squared resid 9.664583 durbin-watson stat 1.749032 copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 48 -2 -1 0 1 2 40 45 50 55 60 65 70 75 80 85 90 95 d(irem)/residirem residuals -300,000 -200,000 -100,000 0 100,000 200,000 300,000 40 45 50 55 60 65 70 75 80 85 90 95 iripv residuals -8 -6 -4 -2 0 2 4 40 45 50 55 60 65 70 75 80 85 90 95 irsv/resid03 residuals -120,000 -80,000 -40,000 0 40,000 80,000 40 45 50 55 60 65 70 75 80 85 90 95 irgrt v residuals -.015 -.010 -.005 .000 .005 .010 40 45 50 55 60 65 70 75 80 85 90 95 irxdfcpi/resid05^2 residuals -400,000 -200,000 0 200,000 400,000 600,000 40 45 50 55 60 65 70 75 80 85 90 95 irmdcifp residuals -4,000 -2,000 0 2,000 4,000 6,000 8,000 40 45 50 55 60 65 70 75 80 85 90 95 irxfyv residuals -3 -2 -1 0 1 2 3 4 40 45 50 55 60 65 70 75 80 85 90 95 irmfyv/resid07^2 residuals 3sls structural equation residual correlation table resid04 resid06 resid08 resid09 resid10 resid11 resid12 resid13 resid04 1.00 0.00 -0.17 0.05 -0.18 -0.03 -0.16 -0.01 resid06 0.00 1.00 -0.28 -0.37 0.05 -0.18 0.07 0.04 resid08 -0.17 -0.28 1.00 0.07 0.25 -0.03 0.09 -0.11 resid09 0.05 -0.37 0.07 1.00 0.08 -0.06 -0.24 0.00 resid10 -0.18 0.05 0.25 0.08 1.00 -0.05 0.29 0.17 resid11 -0.03 -0.18 -0.03 -0.06 -0.05 1.00 -0.01 0.02 resid12 -0.16 0.07 0.09 -0.24 0.29 -0.01 1.00 -0.01 resid13 -0.01 0.04 -0.11 0.00 0.17 0.02 -0.01 1.00 copyright © cc-by-nc 2020, cribfb | amfbr www.cribfb.com/journal/index.php/amfbr american finance & banking review vol. 5, no. 1; 2020 49 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 40 45 50 55 60 65 70 75 80 85 90 95 irem irem (baseline) irem 3sls copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). 0 10,000 20,000 30,000 40,000 1340 1350 1360 1370 1380 1390 actuals irem (baseline) irem 0 500 ,000 1 ,000 ,00 0 1 ,500 ,00 0 2 ,000 ,00 0 2 ,500 ,00 0 3 ,000 ,00 0 1340 1350 1360 1370 1380 1390 actuals irgdpm (baseline) irgdpm 0 2 ,500 ,00 0 5 ,000 ,00 0 7 ,500 ,00 0 10,000,0 00 12,500,0 00 15,000,0 00 1340 1350 1360 1370 1380 1390 actuals irgdpmv (baseline) irgdpmv 0 200 ,000 400 ,000 600 ,000 800 ,000 1 ,000 ,00 0 1 ,200 ,00 0 1340 1350 1360 1370 1380 1390 actuals irgrtv (baseline) irgrtv -1 ,000 ,00 0 0 1 ,000 ,00 0 2 ,000 ,00 0 3 ,000 ,00 0 4 ,000 ,00 0 1340 1350 1360 1370 1380 1390 actuals iripv (baseline) iripv -200 ,000 -100 ,000 0 100 ,000 200 ,000 300 ,000 400 ,000 1340 1350 1360 1370 1380 1390 actuals irmd (baseline) irmd -500 ,000 0 500 ,000 1 ,000 ,00 0 1 ,500 ,00 0 2 ,000 ,00 0 2 ,500 ,00 0 3 ,000 ,00 0 1340 1350 1360 1370 1380 1390 actuals irmdcifp (baseline) irmdcifp 0 10,000 20,000 30,000 40,000 1340 1350 1360 1370 1380 1390 actuals irmfyv (baseline) irmfyv -4 ,000 ,00 0 -2 ,000 ,00 0 0 2 ,000 ,00 0 4 ,000 ,00 0 6 ,000 ,00 0 1340 1350 1360 1370 1380 1390 actuals irmv (baseline) irmv 0 2 4 6 8 1340 1350 1360 1370 1380 1390 actuals irpgdpm (baseline) irpgdpm -1 ,000 ,00 0 0 1 ,000 ,00 0 2 ,000 ,00 0 3 ,000 ,00 0 4 ,000 ,00 0 5 ,000 ,00 0 1340 1350 1360 1370 1380 1390 actuals irsv (baseline) irsv 0 40,000 80,000 120 ,000 160 ,000 1340 1350 1360 1370 1380 1390 actuals irxd (baseline) irxd 0 50,000 100 ,000 150 ,000 200 ,000 1340 1350 1360 1370 1380 1390 actuals irxdfcpi (baseline) irxdfcpi -20 ,000 0 20,000 40,000 60,000 80,000 1340 1350 1360 1370 1380 1390 actuals irxfyv (baseline) irxfyv 0 1 ,000 ,00 0 2 ,000 ,00 0 3 ,000 ,00 0 4 ,000 ,00 0 1340 1350 1360 1370 1380 1390 actuals irxv (baseline) irxv 3sls simulation american finance & banking review 8(1) (2023), 1-13 1 finance & banking review afbr vol 8 no 1 (2023) p-issn 2576-1226 e-issn 2576-1234 available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/amfbr published by cribfb, usa solidity and immutability of behavioural finance theory in capital market investment: a global perspective ejem chukwu agwu (a)1 (a) lecturer, department of banking and finance, abia state university, uturu, nigeria; e-mail: ecjah71@yahoo.com a r t i c l e i n f o article history: received: 2nd may 2023 revised: 27th july 2023 accepted: 5th august 2023 published: 27th august 2023 keywords: behavioural finance, random walk, stock return, investors, autocorrelation test. jel classification codes: c32, c58, g14, g41 a b s t r a c t this study evaluated the argument that the capital market is efficient such that all information from both the past, present, and unpublished have already been reflected in the market price of security as a guide for investors in the market and that the behavior of the same investors could affect the performance of the market. to address the above concern, the researcher employed various suitable final metric tools such as the normality/random walk test, variance ratio test, egarch models, etc., to analyze the daily historical data from prominent capital markets, each from all the continents around the world. from the results of these tools employed, none of the markets under study follow the random walk theory within the scope of the study. the results of egarch and volatility clustering tests also revealed that all the countries under study exhibited the property of stock returns distribution called volatility clustering or volatility pooling, a kind of heteroscedasticity, suggesting the nonconformity of the random walk theory. the failure of the various results to corroborate the random walk theory shows that investors are rational and unpredictable. these results have rightly positioned the behavioral finance theory as a veritable tool that can guide economic agents on capital market investment decisions. that means the behavior of investors makes share prices deviate from the economic fundamentals or assumptions. considering the above findings, the researcher boldly advocates for a paradigm shift to behavioral finance theory, where emotions and psychology or mindsets of investors influence the investment decision-making process and financial markets, hence a veritable guide for decisions on stock market investments. therefore, the researcher suggested that emotional and psychological checks be carried out on all stock market investors, mainly when an innovation or new policy is promulgated. © 2023 by the authors. licensee cribfb, usa. this article is an open access article distributed under the terms and conditions of the creative commons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0/). introduction most scholarly papers on the performance and behaviour of capital market returns around the world are inundated and anchored on the efficient market hypothesis and have resulted in endless controversy on whether the market is efficient in any of its forms. a good number of scholars have the belief that the market should always follow a random walk theory, where no investor usurps the information available to make abnormal profit since all information both from previous and current as well as information available and knowable in the future have already reflected in the market price of the security. however, some scholars are of the opinion that the behaviour of investors could affect the performance of the market, hence the behavioural finance theory, that sees investors as both rational and exhibit behavioural biasness while evaluating and pricing securities and that financial markets are informationally inefficient (kumar, 2017). the random walk hypothesis was first formalized by a french mathematician bachelier (1900) who presented convincing evidence that commodity speculation in france was a "fair game" meaning that neither buyers nor sellers could expect to make profit. the induction for random walk hypothesis is a variation on the economists’ classical efficiency argument which holds that $100 bill will never be found lying on the sidewalk because someone else would have packed it up first. this intuition incited study on the issue and for the past century it has been exhaustively debated upon. pearson (1905) become perplexed by the problem of the random walk and after making some analytical observations appealed to the readers of nature for a solution as the problem was of considerable interest to him. the random walk, also known as the drunkard’s walk, is central to probability 1corresponding author: orcid id: 0000-0003-4970-6947 © 2023 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/amfbr.v8i1.2071 to cite this article: agwu, e. c. (2023). solidity and immutability of behavioural finance theory in capital market investment: a global perspective. american finance & banking review, 8(1), 1-13. https://doi.org/10.46281/amfbr.v8i1.2071 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/amfbr.v8i1.2071 https://orcid.org/0000-0003-4970-6947 agwu, american finance & banking review 8(1) (2023), 1-13 2 theory and still occupies the quantitative mind today. rayleigh (1905) responded to the appeal of pearson and his contributions led pearson to conclude that "the most probable place to find a drunkard who is capable of keeping on his feet is somewhere near his starting point. the random walk theory in the field of finance and precisely stock market, it is contended that stock prices take a random and unpredictable path. the chance of a stock future price going up is the same as its going down implying that stock prices change randomly, thus making it impossible to predict. malkiel (1973) a princeton university professor of economics through his book, “a random walk down wall street" popularized the random walk hypothesis using a hypothetical stock whose closing price was determined by a conflict. thus, the random walk theory is based on the occurrence of an unpredictable event determined by a series of random events. furthermore, the concept of efficient stock markets stemmed into a chance discovery. in 1958 maurice kendall, a british statistician, presented a controversial paper to the royal statistical society on the behavior of stock and commodity prices. kendall had expected to find regular price cycles, but to his surprise they did not seem to exist. each series appeared to be a wandering one, almost as if once a week the demon of chance drew a random number… and added it to be current price to determine the next week’s price. in other words, the price and commodities seemed to follow a random walk of stocks (brealey & myers, 2003). this means that market efficiency is consistent with a market in which there are no transactions costs in trading securities; all available information is costless to all market participants, and all participants in the market are rational in decision, suggesting that all agree on the implications of current information for the current price and distributions of future prices of each security (fama, 1970). rossi and gunardi (2018) contend that the stock market is an important principle used to measure efficiency as the correlation between prices and all the information present in a market. reily (1989) sees an efficient market as one in which security prices adjust rapidly to the infusion of new information and current stock prices fully reflect all available information, including the risks involved. thus, the stock market is said to be efficient if information is widely and cheaply available to investors such that share prices are fair. a fair share price is one which reflects all available, relevant, and ascertainable information in the market. the efficient market hypothesis may be expressed in several alternative ways, and differences between these alternative representations can easily become rather esoteric, technical, and subtle (cuthbertson & nitzsche, 2001). the implication is that security prices adjust instantly and without bias to any new information released to the market and that expected return is compatible with the risk involved (afego, 2012). an efficient stock market results from the presence of numerous, rational profit maximizing investors, who are actively competing with one another, and these resulted in three variants of efficient market hypothesis (weak, semistrong and strong forms (wong & kwong, 1984; dimson & mussavian, 1998; sharpe et al., 1999). the efficient market hypothesis (emh), alternatively known as the efficient market theory, is a hypothesis that states that share prices reflect all information and consistent alpha generation is impossible. according to the emh, stocks always trade at their fair value on exchanges, making it impossible for investors to purchase undervalued stocks or sell stocks for inflated prices. therefore, it should be impossible to outperform the overall market through expert stock selection or market timing that is a type of investment or trading strategy. it is the act of moving in and out of a financial market or switching between asset classes based on predictive methods and the only way an investor can obtain higher returns is by purchasing riskier investments. the appraised values of security are based on the assessment made by independent investors. while the assessment made by independent investors dependent on the background and information available to him (afego, 2012). financial information is the building blocks from which the analysts construct research analysis that form the basis for their investment recommendations. in such a market, the current price of security obviously "fully reflects" all available information. but the speed and way the market adjusts to the relevant information on dividend and bonus issues declaration has been punctuated by untimely release of information and poor behavior of the authorities. the excruciating influence of timidity could emanate from insecurity of investors due to the intending insider trading and fall in investors’ confidence, deter trading activities and the performance of the market. in an efficient information market, prices of shares adjust quickly to new information and enable more informed and efficient investment choices. in such markets, investors do not care about various trading strategies by fundamentalists, technicalist or chartists to beat the market with the bid of earning abnormal returns. but in the nigeria capital market, the case is the reverse. in most cases, investors pay extra money to acquire additional information and sometimes go as far as sourcing for insider information on the values of companies listed with the exchange. so far, before certain information is announced, some investors have already traded on the information, causing disparities in available information among market participants (cuthbertson & nitzsche, 2001). fama (1965) opined that successive price changes in individual securities are independent depicting that the history of the series cannot be used to predict the future in any meaningful way. fama (1970) categorized three types of efficient markets as weak-form, semi-strong and strong form efficiency. the least form covers all past information concerning prices and returns; the semi-strong form covers all publicly available information while the strong form covers all information be it private and public. the strong form of the efficient market hypothesis states that current market prices instantaneously and fully reflect all pertinent information including everything that is known whether it is public or private so that no group of investors has monopolistic access to any information that could be usurped to beat the market. the various forms of the efficient market have been tested in several empirical studies by finance and economics scholars and have resulted to unending controversy globally and nigeria in particular on whether capital market return is efficient or inefficient in any of the efficient market hypothesis forms, some empirical literature reviewed reveal that actually that past share prices cannot be used as a predicting factor to ascertain future share prices movement in stock market, indicating that successive price changes in the market follow a random walk (olowe, 1999; ajao & osayuwu, 2012; gay, 2016), whereas greater number of the studies found that the capital market returns are inefficient in any of the forms (cooray & wickremasinghe, 2007; chien-chang et al., 2010; afego, 2012; gambia, 2102; gourdari, 2013; ogbulu, 2016; adebanjo et al., 2018). the plethora https://www.investopedia.com/terms/m/markettiming.asp agwu, american finance & banking review 8(1) (2023), 1-13 3 of studies that aligned to the random walk inefficiency seem to have demystified the highly revered efficiency market hypothesis, hence emphasis is suggested for paradigm shift to behavioural finance theory. the rest of this paper is organized as follows: section 2 reviews some theoretical and empirical literature. section 3 provides data and methods of analysis. section 4 analyses and discusses the findings of the stud y. section 5 concludes and recommends. literature review there exist several studies on whether capital market returns follow any of the forms of the efficient market hypothesis and have resulted to unending controversies on the efficiency of the market, hence many researchers have advocated for a paradigm shift to behavioural theory as basis of capital market investment. the study employed daily historical data from prominent capital markets each from all the continents of the world: nigeria, south africa, usa, germany, united arab emirate and china. results of the analysis revealed that none of the markets follows the random walk theory, hence investors cannot use the past data about the markets to predict their outcome. since all the markets under study do not follow random walk, demystifying the efficient market hypothesis, meaning that the behaviours of investors, heavily influenced by share prices deviated from the economic fundamentals or assumptions. this means that the psychology of investors influence investment decision-making process and financial markets. therefore, the researcher advises among others to place more emphasis on the theory of behavioural finance as a guide for decision concerning stock market investments. applying correlation analysis and monthly stock returns data over the period january 1981 and december 1992, olowe (1999), studied weak form efficiency of the nigerian stock market to examine if share prices on the nigerian stock market adjust to historical price information. the study research revealed that the nigerian market is efficient in weak form. with cointegration and granger causality tests augmented dickey fuller (adf-1979, 1981), phillips-perron (pp1988), dicky-fuller generalized least square (df-gls-1996) and elliot-rothenberg-stock (ers – 1996) tests. cooray and wickramasighe (2007) investigated weak and semi strong form of the efficiency in four south asian stock markets such as india, sri lanka, pakistan, and bangladesh. after the analysis, semi-strong form efficiency was not supported as their tests indicate a high degree of interdependence among the south asian stock markets. chien-chong, jung-de, and chi-chuan (2010) employed a state-of-the-art panel data stationarity test which incorporates multiple structural breaks to whether the efficient market hypothesis holds in stock markets under different economic development levels using january 1999 to may 2007. after the empirical analysis, it was observed that using general forms of cross-sectional dependence as well as controlling for finite-sample bias, the real stock price series appear to be stationary in 32 developed and 26 developing countries. again, real stock price indices are stationary processes that are inconsistent with the efficient market hypothesis. employing seven (7) parametric tools; autocorrelation test, the adf and p-p unit root tests, variance ratio test, the normality/random test, the granger causality test arch-garch test and regression test, ogbulu (2016) investigated the efficiency level of nigerian stock exchange (nse) across different data estimation intervals (daily, weekly, monthly and quarterly aggregate stock price data using the nse all share index series from 1999 to 2013) with reference to the weak form variant of emh. the result found that on balance the nse is weak form inefficient when daily, weekly, monthly, and quarterly prices are examined irrespective of the estimation interval and the parametric test employed in the tests. adebanjo, awonusi, and eseyin (2018) looked at the weakform efficiency of the nigerian stock market. employing partial autocorrelation (pacf) test to test for independence of stock prices, the runs test, and the distribution patterns to test for randomness of stock prices and the one-sample kolmogorov smirnov test to examine the observable trend in the pattern of stock price movements. after the analysis, the movements of stock prices in the stock market were observed to be independent. the movements of stock prices in the stock market were not random. also was an observable trend in the pattern of stock prices movement in the stock market. the result of the partial auto correlation test showed that the movements of the stock prices are independent. again, the result of the runs test and the distribution patterns also show that the movements of stock prices were not completely random. applying serial correlation technique and runs test, ajao and osayuwu (2012) investigated the efficacy of the weak form of efficient market hypothesis in the nigerian capital market. the study covered all securities traded on the floor of the nigerian stock exchange and the month end value of the all-share index from 2001-2010. the serial correlation technique was used to test for independence of successive price movement and the distributive pattern whereas runs test was applied to test for randomness of share price movement and found that the correlation coefficients did not violate the two-standard error test. again, the box-ljung statistic revealed that none of the serial correlation coefficients was significant, and the box pierce q-statistics indicated that the overall significance of the serial correlation test was poor while the result of the distribution pattern shows that stock price movements are approximately normal. on that premise, it was concluded that successive price changes of stocks traded on the floor of the nigerian capital market are independent and random. therefore, the nigerian capital market is efficient in the weak form. afego (2012) employed non-parametric runs test to examine the weak-form efficient market hypothesis for the nigerian stock market with emphasis on random walks in the monthly index returns over the period 1984-2009. the results observed that index returns on the nigerian stock exchange (nse) exhibited a predictable component, indicating that traders can earn superior returns by employing trading rules. the statistically significant deviations from randomness also suggest sub-optimal allocation of investment capital within the economy. the results generally contradict the weak form of the efficient market hypothesis. gimba (2012) used autocorrelation test to investigate the weak form emh of the nse using daily and weekly nse all share index (asi) and five most traded banks stock of nse from january 2007 to december 2009 for the daily and from june 2005 to 2009 for the weekly data. the results found that nigerian capital market is weak form is inefficient. agwu, american finance & banking review 8(1) (2023), 1-13 4 applying box-jenkins arima models, gay (2016) investigated the relationship between stock market prices and macroeconomic variables (exchange rate and oil price) and found no relationship between present and past stock returns, affirming that bric markets exhibited weak form efficiency within the scope of the study. goudarzi (2013) employed adf test and garch model to investigate market efficiency in india stock market through modeling one asset return series. the results found that underlying series is stationary, mean reverting, suggesting that the indian stock market is weak form inefficient. efficient market hypothesis controversy and emergence of behavioural finance before the emergence of modern portfolio selection, bernoulli and cramer in the 18th century reached the conclusion that decisions under condition of uncertainty could not be made solely based on expected (mean) return. subsequently, various economists have tried to evaluate investments with the aid of two (or more) indicators based on the distribution of returns. generally, one index reflects the profitability of the investment while the other is based on the dispersion of the distribution of returns and reflects the investment’s risk. the most common profitability distribution of returns; the risk index is usually based on the variance of the distribution, its range, and so on. as result of the bernoulli and cramer observation and various economists’ attempts to bridge the gap, rules of thumb and intuitive judgment were also employed by portfolio managers, until dr harry m. markowitz infused a high degree of sophistication into portfolio construction by developing meanvariance models for the selection of portfolio. dr harry m. markowitz is credited with developing the first modern portfolio analysis model since the basic elements of modern portfolio theory emanate from a series of propositions concerning rational investor behaviour set by markowitz (brealey & myers, 2003; ross et al., 2009; bhalla, 2011). however, the prepositions of markowitz’s model were attacked because the discussion was centered on pricing portfolio in the market which stated that the expected return of a portfolio is a linear function of the standard deviation. hence, for the purpose of pricing or determining the prices of individual securities in the capital market, the security market line (sml) was introduced. this model, which is also known as capital asset pricing model (capm) was developed by william f sharpe and john linter in 1963 and 1964 as a testable model for determining the value of individual securities or portfolio. this model is a significant departure from the efficient market model, which as discussed earlier focused attention on the risk-return features of the portfolio. the capm contends that the expected return on any asset is a linear function of its systematic risk (brealey & myers, 2003; ross et al., 2009). again, the capm was flawed due to the sighted limitations, thus the theory of arbitrage pricing by stephen ross in 1976. stephen ross clearly argued that in a situation where different portfolios with multiple factors (betas) exist, capm with one-factor model (one beta) may not be able to produce the desired results (actual returns) for efficient portfolio. he further emphasized that apt is a multifactor model (multiple betas model) that accommodates all types of security investments. meanwhile, in apt, there may be one or more macroeconomic factors that may measure the systematic (non diversifiable) risk of an asset. the fundamental logic of apt is that investors always indulge in ‘arbitrage’ whenever the find differences in the returns of assets with similar risk features. broadly speaking, the apt allows the actual return to be influenced by a numbers of market wide variables or factors such as interest rates, the exchange rate, change in inflation, change in output etc. the sensitivity of the return on asset to each of these factors is known as the ‘factor beta’ (brealey & myers, 2003; ross et al., 2009). despite the efforts made by dr markowitz, william sharpe, john linter, stephen ross, and others, yet the argument based on capital market investment and share pricing remains unending controversy. therefore, behavioural finance which applies scientific research on cognitive and emotional biases is considered as alternative to understand financial decisions. cognitive refers to how people think. thus, behavioural finance emerges from a large psychology literature documenting that people make systematic errors in the way that they think: they are overconfident; they put too much weight on recent experience, etc. in addition, behavioural finance considers limits to arbitrage. even though misevaluations of financial assets are common, not all of them can be arbitraged away. in the absence of such limits a rational investor would arbitrage away price inefficiencies, leaving prices in a non-equilibrium state for protracted periods of time. behavioural finance might help us to understand some of the apparent anomalies. however, critics say it is too easy to use psychological explanations whenever there is something we do not understand. moreover, critics contend that behavioural finance is more a collection of anomalies than a true branch of finance and that these anomalies will eventually be priced out of the market or explained by appealing to market microstructure arguments (copur, 2015; kumar, 2017; ogbulu, 2019). the theory is therefore an innovation in the field of finance, a departure from the efficient market hypothesis. behavioral finance sees the different factors of an investor’s behavior like judgment, emotional, social, intellectual factors, and restricted cognitive capabilities which are important drivers of the stock market. that investors are not always rational; emotions, heuristic and behavioral biases are significantly inherent with investment decisions (barberis &thaler, 2003; bakar & yi, 2016; baker et al., 2019; bhatia et al., 2020; trifan, 2020). this is irrational behavior which happens due to misrepresenting in perception and false judgment of investors that he or she is a perfect rational investor of the stock market (babajide & adetiloye, 2012). the repeated pattern of irrational behavior in the decision-making process includes inconsistency, inability, or incompetency in the way of investment choices under uncertain conditions (bernstein, 1996; jain et al., 2015). the irrational behavior makes them biased that deviates the market from its actual position. these investors are behaviorally biased for investment patterns which in return create over reaction and under reaction in the market (zahera & bansal, 2018). every single investor prefers to invest in more profitable and highly liquidated stocks. they always act wisely in choosing the stocks and being an investor, it must be clear where investors should invest. but they are psychologically biased in their personal decisions and do not make fair judgments that would ultimately cause changes in investment decisions. consequently, the disposition effect has been incurred in the market (frydman et al., 2014). behavioral biases (herd bias, anchoring, mental accounting, and overconfidence bias) have a strong relationship with the https://journals.sagepub.com/doi/full/10.1177/21582440221097394#bibr24-21582440221097394 https://journals.sagepub.com/doi/full/10.1177/21582440221097394#bibr25-21582440221097394 https://journals.sagepub.com/doi/full/10.1177/21582440221097394#bibr32-21582440221097394 https://journals.sagepub.com/doi/full/10.1177/21582440221097394#bibr138-21582440221097394 https://journals.sagepub.com/doi/full/10.1177/21582440221097394#bibr20-21582440221097394 https://journals.sagepub.com/doi/full/10.1177/21582440221097394#bibr31-21582440221097394 https://journals.sagepub.com/doi/full/10.1177/21582440221097394#bibr73-21582440221097394 https://journals.sagepub.com/doi/full/10.1177/21582440221097394#bibr73-21582440221097394 https://journals.sagepub.com/doi/full/10.1177/21582440221097394#bibr147-21582440221097394 https://journals.sagepub.com/doi/full/10.1177/21582440221097394#bibr147-21582440221097394 https://journals.sagepub.com/doi/full/10.1177/21582440221097394#bibr56-21582440221097394 agwu, american finance & banking review 8(1) (2023), 1-13 5 decision building process of investors (kartašova, 2013; parveen et al., 2020). overconfidence investors and managers notably drive the firm value upward with lack of precise directions (shah et al., 2018) theoretical framework this study is anchored on the efficient market hypothesis (emh), theory of behavioural finance, prospect theory and risk aversion theory. the efficient market hypothesis (emh) this is also known as the random walk theory (kendall, 1953), and is of the view that equity value of a listed firm reflects all data or information regarding the business value, indicating that market responds to all the available or possible-to-know information. efficient market as presented by eugene fama in 1965, suggested that stocks always trade at fair value, implying that prices adjust rapidly and, on average, without bias to new information (fama, 1976). numerous scholarly papers have been anchored on this theory since the presentation, to justify the assumptions inherent in the model. this has increasingly attracted reasonable attacks on the assumed deficiencies in the theory mostly as regards return predictability (rossi, 2016). in practice, certain information may affect stock prices more quickly than other information, leading to discrepancies in the response rates and researchers have made frantic efforts to separate these responses rates or information into different types, information about past prices, publicly available information, and all information. there are the weak form (if it fully incorporates the information in the past stock prices); the semi-strong form (if prices reflect (incorporate) all publicly available information, including information such as published accounting statement for firm as well as historical price information); and the strong form (reflect all information relevant to the firm, including information available only to company insiders) (fama, 1976; brealey & myers, 2003; ross et al., 2009; bhalla, 2011; rossi & guardi, 2018). behavioural finance theory this is an innovation in the field of finance, a departure from the efficient market hypothesis. this theory believes that the pattern of behaviour, whether overconfidence, overreactions, over representation, perceptions of investors are the same, hence such attitude do heavily influence share price from reflecting the economic fundamentals or beliefs or assumptions. it borders on how psychology influences investment decision-making process and financial markets, hence deviation of investors from traditional economic assumptions (sewell, 2007; kumar, 2017). contrary to the emh that sees investors as trying to outsmart each other in the market to make abnormal profit thereby making prices of securities return to equilibrium market value, also does not see all investors to be rational, rather assume that markets make unbiased forecast for future (copur, 2015; kumar, 2017), the behavioural finance theory adjudges investors as both rational and exhibit behavioural biasness while evaluating and pricing securities. the theory assumes that financial markets are informationally inefficient (muradoglu & harvey, 2012; kumar, 2017). it seeks to explain certain psychological influences and biases that alter the logical reasoning of the people or investors. the biases of behavioural finance are that: it makes investors to totally adhere to the information that suites their beliefs (confirmation bias): investors experiences from previous or past trading influence them to take a position, even when such decision is not rational (experience bias): it makes investors to avoid taking risks completely even when it promises high returns (aversion bias); it makes investors to overestimate their capacity or marketing prowess, hence make decisions ignoring factual evidence (overconfidence); it gives investors the propensity to keep securities even when the prices are dwindling, hoping that the prices will definitely appreciate in future (disposition bias); it makes investors to always patronize or invest in familiar firms, firms they can attest to, rather than going into unfamiliar market (familiarity bias); investors making budget or spending could be at variance depending on the circumstances confronting them, thus not in permanent disposition (mental accounting) (saba & syed, 2014; copur, 2015; trifan, 2020). prospect theory this is an aspect of behavioural finance developed by amos tversky and daniel kahneman in 1992 that emphasizes more psychological accuracy on how decisions are taken vis a vis the expected utility theory (tversky & kahneman, 1992). the theory is of the opinion that losses and gains are evaluated separately, that individual investors take decisions relying on perceived gains rather than perceived losses. this theory modifies the analytical description of rational risk averse investors found in standard financial theory, hence known as loss aversion theory. this implies that if difference choices present themselves to an investor with equal magnitude; one based on potential benefits or gains, the other on possible losses, the former option will be preferred. here, choices are independent and singular, the chances of gain or loss is assumed to be equal rather than probability being presented (tversky & kahneman, 1992; bodie et al., 2013; pahlevi & oktaviani, 2018). prospect theory explains the risk avoidance tendency of investors relating to hold loser stock and sell winning one. it is expressed by shefrin and statman (1985) that price of stocks is a reason of disposition to avoid risk. the disposition effect is greatly dealt with prospect theory, regret aversion, self-control, and mental accounting bias. investors make decisions to reduce losses and gain more to encourage them to hold losers’ stocks too long and sell the winning ones too early. on the other hand, herding behavior is another phenomenon in which an investor ignores his or her own market information and follows the market participants. they observe the others’ information and discourage their own information (bikhchandani et al., 1992). in financial markets, investors herd the other’s actions or stock market movement and completely ignore their private information. it is the human behavior that mimics the actions of major investors rather than private information (lee et al., 2011). this behavior is due to investors’ sentiments that are connected with behavioral finance (lópez-cabarcos et al., 2020). these sentiments are highly sensitive on account of upgrade and downgrade announcements, implying the analyst to yield the worthwhile trading indications to uninformed traders in the market (kim et al., 2019). these sentiments are https://journals.sagepub.com/doi/full/10.1177/21582440221097394#bibr75-21582440221097394 https://journals.sagepub.com/doi/full/10.1177/21582440221097394#bibr101-21582440221097394 https://journals.sagepub.com/doi/full/10.1177/21582440221097394#bibr126-21582440221097394 https://journals.sagepub.com/doi/full/10.1177/21582440221097394#bibr130-21582440221097394 https://journals.sagepub.com/doi/full/10.1177/21582440221097394#bibr33-21582440221097394 https://journals.sagepub.com/doi/full/10.1177/21582440221097394#bibr33-21582440221097394 https://journals.sagepub.com/doi/full/10.1177/21582440221097394#bibr87-21582440221097394 https://journals.sagepub.com/doi/full/10.1177/21582440221097394#bibr87-21582440221097394 https://journals.sagepub.com/doi/full/10.1177/21582440221097394#bibr90-21582440221097394 https://journals.sagepub.com/doi/full/10.1177/21582440221097394#bibr90-21582440221097394 https://journals.sagepub.com/doi/full/10.1177/21582440221097394#bibr80-21582440221097394 agwu, american finance & banking review 8(1) (2023), 1-13 6 pessimistic due to the release of bad news, significantly affecting the stock returns’ response to downgrade announcements. thus, investor’s sentiment is one possible cause of stock market reactions to change the analyst recommendations. risk aversion theory is based on the phenomenon of risk avoidance by the investor (bailey & ball, 2006). financial decisions related to investment in stocks have a great concern with a high level of risk of losses (aydin et al., 2005). these financial decisions are correlated with the risk factor, especially in the purchase or sale of investment (noussair et al., 2014). it contributes to the perceived risk of an investment. perceived risk is referred to as the uncertainty and consequences related to a particular investment (schiffman et al., 2011). awais et al. (2016) defined that perception of risk and investments are negatively related to each other. materials and methods this study employed various econometric tools such as descriptive statistics, unit root tests (augmented dickey fuller (adf) and philip-perron (p-p)), autocorrelation test, pairwise granger causality test, normality/random walk test, and variance ratio test (vrt) and egarch models. it employed daily historical data from may 18, 2015 to june 6th, 2022, from prominent capital markets each from all the continents around the world; africa: nigeria all share index (asi-ng) and south africa johannesburg all share (jse-sa); america: usa dow jones industrial average (dji-usa); europe: germany dax (dax-ger); middle east: united arab emirate uae) dfm general (dfm-uae); asia/pacific: china csi 1000 (csi-ch). the price data were converted into compound returns by taking logarithms: 𝑅𝑡 = ln (𝑝𝑡/𝑝𝑡−1) where 𝑅𝑡, is the current market returns, 𝑝𝑡 is the current market index price, 𝑝𝑡−1 is the previous market index price. according to brooks (2008), for egarch, model, the conditional covariance is given by: ln (𝜎𝑡 2) = ω + βln (𝜎𝑡−1 2 ) + γ 𝜇𝑡−1 √𝜎𝑡−1 2 + α( |𝜇𝑡−1| √𝜎𝑡−1 2 − √ 2 𝜋 ) where, 𝜔, β, α, γ are constant parameters, log (𝜎𝑡 2) = the one period ahead volatility forecast, 𝜔 = the mean level,β = persistence parameter, α = volatility clustering coefficient, log (𝜎𝑡−1 2 ) = the past variance, γ = the leverage effect. the above model ensures that even when the parameters are negative, 𝜎𝑡 2 will be positive and the asymmetry or the leverage effect measure, γ, will be negative even when the relationship between volatility and log returns is negative. the egarch is symmetric when = 0, when γ < 0 then positive shocks (good news) generate less volatility than bad news (negative shocks); in other way round, bad news or negative shocks magnify more volatility than good news or positive shock of the same magnitude. when γ > 0, it implies that positive innovations or shocks are more destabilizing than negative innovations or shocks (black, 1976; christie, 1982). in other words, negative value of 𝛾 is called the ‘sign effect’. the choice of egarch framework is to accommodate examination of conditional variance (volatility), asymmetric effect and volatility persistence. the ∝ parameter represents the symmetric effect of the model, if ∝ is positive, then the conditional volatility tends to rise (fall) when the absolute value of the standardized residuals is larger (smaller), hence magnitude effect’. the garch effect β measures the persistence in conditional volatility. when β is relatively large, then volatility takes a long time to fizzle out or decay or die out following mayhem in the market or economy in general. succinctly, the egarch model has a good number of advantages over the normal garch specification. first, since the log (𝜎𝑡 2) is modeled, then even the parameters 𝜎𝑡 2 will be positive. there is thus no need to artificially impose non-negativity constraints on the model parameters. second, asymmetries are allowed under the egarch formulation, since if the relationship between volatility and returns is negative, γ, will be negative (brooks, 2008). results and discussions table 1. descriptive statistics for stock of selected countries under study. asi_ng jse_sa dji_usa dax_ger dfm_uae csi_ch mean 0.000285 0.000118 0.000348 0.000165 -5.44e-05 -0.000123 median -0.000100 0.000000 0.000700 0.000600 0.000200 0.000900 maximum 0.062300 0.071900 0.113700 0.109800 0.073200 0.066200 minimum -0.049100 -0.090400 -0.129300 -0.122400 -0.082900 -0.087900 std. dev. 0.009662 0.012676 0.011929 0.012986 0.011510 0.018312 skewness 0.373743 -0.515504 -0.633512 -0.401560 -0.513715 -0.882702 kurtosis 7.491546 9.277415 24.47933 13.27723 11.70983 6.611110 jarque-bera 1515.216 3107.676 34433.15 7956.694 5672.606 1161.268 probability 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000 observations 1754 1843 1785 1797 1770 1725 https://journals.sagepub.com/doi/full/10.1177/21582440221097394#bibr23-21582440221097394 https://journals.sagepub.com/doi/full/10.1177/21582440221097394#bibr18-21582440221097394 https://journals.sagepub.com/doi/full/10.1177/21582440221097394#bibr99-21582440221097394 https://journals.sagepub.com/doi/full/10.1177/21582440221097394#bibr122-21582440221097394 https://journals.sagepub.com/doi/full/10.1177/21582440221097394#bibr17-21582440221097394 agwu, american finance & banking review 8(1) (2023), 1-13 7 table 1 above shows the descriptive statistics explaining the distributional features of stock returns for the selected countries in this study. the results for respective countries suggest a low average daily stock returns series. the standard deviations recorded are 0.9%, 1.2%, 1.1%, 1.2%, 1.1% and 1.8% for nigeria, south africa, usa, germany, uae, and china respectively, which are closely related suggesting relatively high volatility in each country. the difference between the values of the minimum and maximum are also relatively high in various countries, suggesting high volatility in price changes in each country. the values of the skewness and kurtosis are greater than normal (for null hypothesis, skewness = 0 and kurtosis = 3) for respective countries. for kurtosis which is greater than 3 showing leptokurtic distribution (the tendency of financial asset returns to have distribution that exhibit fat tails and excess peakedness at the mean) which is because of volatility clustering in the return series for the select countries in this study. positive skewness recorded in all the countries indicates that all their returns distribution is skewed to the right of their mean with long right tail, suggesting there are tendencies that large positive returns occur more than large negative returns in the various markets. this shows that large movements in stock returns do not follow with the same magnitude of negative movement. in sum, skewness greater than zero and kurtosis greater than 3 are sufficient evidence supporting presence of asymmetry and volatility clustering in the stock return series of respective countries, also the deviation from normality support weak form inefficiency. jarque-bera values are expected to be zero under null hypothesis, but the results here revealed that the values for all the countries in this study are greater than zero, also the associated probability values are highly significant at 1%; sufficient evidence of abnormal distribution, supporting deviation from random walk, hence weak form inefficient for the respective countries. next is the unit root test, a popular macroeconomic technique used for the test of stationarity of time series data due to the dependent nature of most economic variables. this study used adf, and p-p unit root tests as shown below. table 2. unit root test unit root stat& prob. asi_ng jse_sa dji_usa dax_ger dfm_uae csi_ch adf test -31.90581 (0.0000) -42.30078 (0.0000) -18.3469 (0.0000) -42.85463 (0.0000) -21.60995 (0.0000) -37.85180 (0.0000) p-p test -32.73587 (0.0000) -42.36418 (0.0000) -364.9594 (0.0001) -42.86291 (0.0000) -38.19370 (0.0000) -37.94114 (0.0000) results of adf and p-p unit root tests on table 2 revealed rejection of null hypothesis at 1 % significant level, supporting deviation from random walk which is consistent with most financial time series data. the results affirm the weak form inefficiency in the stock return series of all the countries. the researcher then proceeded to autocorrelation (ac) and partial autocorrelation (pac) tests; a special correlation test that examines the relationship between successive values of the same variable and not necessarily between two or more variables. the test is shown in table 3 below. table 3. autocorrelation test ac & pac test (1-36) asi_ng jse_sa dji_usa dax_ger dfm_uae csi_ch q-statistics range 123.17 to 195.23 432.32 to 519.09 50.313 to 426.57 50.313 to 426.57 498.26 to 662.44 14.714 to 107.13 probability 0.000 0.000 0.000 0.000 0.000 0.000 ac &pac coefficient. range -0.002 to 0.265 -0.012 to 0.078 -0.001 to 0.080 -0.001 to 0.206 -0.002 to 0.080 -0.008 to 0.092 table 3 above revealed that the individual ac and pac coefficients at different lags from 1-36 are significantly different from zero for all price series in the selected countries, also the associated probability values suggest that successive autocorrelation of the prices are incredibly significant from 1-36, showing rejection of serial correlation for series in the select countries. this suggests that there is an existence of volatility clustering in the price series, also that the price series in all the markets do not follow random walk. table 4. variance ratio test (vrt) vrt prob asi_ng jse_sa dji_usa dax_ger dfm_uae csi_ch joint tests 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 individual test 2 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 4 0.0000 0.0000 0.0002 0.0000 0.0000 0.0000 8 0.0000 0.0000 0.0037 0.0000 0.0000 0.0000 16 0.0000 0.0000 0.0201 0.0000 0.0000 0.0000 table 4 above shows the test of random walk using the variance ratio test (vrt) done under the null hypothesis of stock returns (martingale process) for all the six countries under study. the results revealed that both joint and individual (lags 2-16) variance tests were rejected at 1% significant level, suggesting that price series do not follow a martingale process, hence do not follow random walk, or is not weak form efficient. agwu, american finance & banking review 8(1) (2023), 1-13 8 table 5. causality test select countries null hypothesis prob nigeria asi asi_ng does not granger cause asi_nig_1 0.0000 south africa jse ftse_sa does not granger cause jse_sa_1 0.0000 usa dji dji_usa does not granger cause dji_usa_1 0.0000 germany dax dax_ger does not granger causedar_ger_1 0.0000 uae dfmg dfm_uae does not granger cause dfm_uae_1 0.0000 china csi 1000 csi_ch does not granger cause csi_ch_1 0.0000 granger causality tests for all the select countries in table 5 above reject the null hypotheses of no causal direction found between successive variables (prices regressed on their lagged value), suggesting deviation from random walk assumption for the return series; meaning that the various markets are not efficient in the weak form. then the researcher moved to check the relationship between the successive variables using ordinary least square (ols) model as shown below. table 6. arch effect test arch test asi_ng jse_sa dji_usa dax_ger dfm_uae csi_ch f-statistic 0.0000 0.0000 0.0000 0.0096 0.0000 0.0000 obs*r-squared 0.0000 0.0000 0.0000 0.0096 0.0000 0.0000 table 6 above shows that the f-version and the lm-statistics are incredibly significant, indicating the presence of arch effects in the returns of all capital markets of the countries under study. -.06 -.04 -.02 .00 .02 .04 .06 .08 15 16 17 18 19 20 21 22 asi ng figure 1. volatility clustering test for nigeria capital market returns -.12 -.08 -.04 .00 .04 .08 15 16 17 18 19 20 21 22 jse sa figure 2. volatility clustering test for south africa capital market returns agwu, american finance & banking review 8(1) (2023), 1-13 9 -.15 -.10 -.05 .00 .05 .10 .15 15 16 17 18 19 20 21 22 dji usa figure 3. volatility clustering test for usa capital market returns -.15 -.10 -.05 .00 .05 .10 .15 15 16 17 18 19 20 21 22 dax ger figure 4. volatility clustering test for germany capital market returns -.12 -.08 -.04 .00 .04 .08 15 16 17 18 19 20 21 22 dfm uae figure 5. volatility clustering test for uae capital market returns agwu, american finance & banking review 8(1) (2023), 1-13 10 -.10 -.08 -.06 -.04 -.02 .00 .02 .04 .06 .08 15 16 17 18 19 20 21 22 csi ch figure 6. volatility clustering test for china capital market returns a cursory look at figures 1-6 revealed as follows; that nigeria and south africa exhibited wide swings for almost all the period under study though at a reduced rate in south africa, suggesting that in the two african countries, periods of high volatility are followed be the same magnitude of volatility for a prolonged period. for the usa market, it exhibited a period of relative tranquility from may 2015 to last quarter of 2019, intercepted with high volatility close to the end of 2019 to 2020. it then witnessed another calmness from 2020 to 2022. germany and uae appear to be relatively calm in their respective markets, though with seemingly exceptionally low volatility in uae as indicated in the small positive and negative returns. it followed with high volatility occasioned by large positive and negative returns close to end of 2019 (short and long) then return to period of calmness from 2020 to 2022. china showed period of high volatility from 2015 to 2016, then at a reduced rate from 2016 to 2017. thereafter china market exhibited a prolonged period with high volatility due to large positive and negative from 2017 to 2022.the implication of the above stylized movements is that all the countries under study exhibited property of stock returns distribution called volatility clustering or volatility pooling; a kind of heteroscedasticity. this means that volatility shocks in the current period influence the expectation of volatility in some periods in the future. therefore, persistent volatility clustering suggests weak form inefficiency (okpara, 2010). finally, to parameterize the suspected arch effects, the researcher employed egarch. table 7. estimation of models using egarch parameter estimates asi_ng jse_sa dji_usa dax_ger dfm_uae csi_ch mean eqn 𝝎 -3.38e-05 *0.8581 -0.000159 *0.5014 0.000456 *0.0082 8.27e-05 *0.7191 -0.000245 *0.2556 -0.000232 *0.5339 variance eqn 𝝎 -1.414485 *0.0000 -0.470631 *0.0000 -0.665371 *0.0000 -0.321961 *0.0000 -0.581535 *0.0000 -0.332935 *0.0000 𝜶 0.347470 *0.0000 0.140742 *0.0000 0.266303 *0.0000 0.110266 *0.0000 0.229345 *0.0000 0.156009 *0.0000 𝜸 0.064907 *0.0000 -0.127483 *0.0000 -0.156859 *0.0000 -0.140435 *0.0000 -0.076695 *0.0000 -0.048037 *0.0000 𝜷 0.877592 *0.0000 0.959430 *0.0000 0.951391 *0.0000 0.973487 *0.0000 0.955486 *0.0000 0.973788 *0.0000 log likelihood 5896.634 5685.763 6017.993 5588.811 5698.353 4709.026 dw stat 1.879809 2.079733 2.301931 2.001128 2.011089 1.933793 aic -6.716801 -6.163606 -6.736127 -6.213480 -6.432037 -5.452784 sic -6.698091 -6.145638 -6.717682 -6.195136 -6.413465 -5.433817 arch lm test 0.6936 0.2390 0.6489 0.3767 0.4996 0.6379 *probability values table 7 shows that the leverage effects or asymmetric parameter 𝛾 are negative and significant for usa. south africa, germany, uae, and china markets, suggesting presence of leverage effects in the markets, implying that bad or negative news cause more volatility than good or positive news of the same magnitude. for nigeria, the asymmetric coefficient 𝛾 is positive and significant, indicating that good news has more impact on volatility than bad news of equal magnitude. this contradicts or invalidates the leverage effect theory which states that the effect of bad news on volatility is higher than the effect of good news of the same magnitude. furthermore, the persistent parameter β is positive and significant, also are relatively large for all the markets under study, indicating that the various capital market volatility is persistent, confirming that volatility takes a long time to die following the crisis in the respective markets. magnitude effect (∝) (volatility clustering) coefficient of egarch is positive and significant. that means the conditional volatility will rise or fall when the absolute value of the standardized residual is larger (smaller). hence, persistent volatility clustering suggests weak form inefficiency. however, since the lagged values of the return series are positively and significantly different from agwu, american finance & banking review 8(1) (2023), 1-13 11 zero and the error terms (by the rule of thumb, dw<2) are not independently distributed. the researcher affirms that the various capital stock markets are weak form inefficient. table 7 above also found that the archlm tests for the serial correlations were insignificant at 5% critical level for all the countries under study, suggesting that the asymmetry models are sufficient in modeling the serial correlation structure in the conditional mean and variance. this indicates there is no further arch effect in the estimated arch-garch models, as well as suggesting that the models are correctly specified. the aic and sic were found to maintain small criterion value for all the variants of arch in the countries under study, affirming the suitability of the models, hence are best fit models. conclusions this study is aimed at placing more emphasis on behavioural finance theory as a guide for investment in the capital market. this does not completely deem totally demystifying the efficient capital hypothesis as a theory of capital market investment. to achieve this, the study made use of various econometric tools and made the following observation: that there is high volatility in each country under study. also, large movements in stock returns do not follow with the same magnitude of negative movement. it was found that there is an existence of volatility clustering in the price series, also that the price series in all the markets do not follow random walk. it was discovered that all the countries under study exhibited property of stock returns distribution called volatility clustering or volatility pooling, a kind of heteroscedasticity. this means that volatility shocks in the current period influence the expectation of volatility in some periods in the future. it was revealed that for usa. south africa, germany, uae, and china markets, there are presence of leverage effects in the markets, implying that bad or negative news cause more volatility than good or positive news of the same magnitude., whereas in nigeria, the good news has more impact on volatility than bad news of equal magnitude, contradicting or invalidating the leverage effect theory which states that the effect of bad news on volatility is higher than the effect of good news of the same magnitude. it was also found that the conditional volatility will rise or fall when the absolute value of the standardized residual is larger (smaller). hence, persistent volatility clustering suggests weak form inefficiency. this study focused on the unending controversy that information is freely available and instantaneously reflected on the prices of assets, hence forms a guide on the investment decision of the capital market. this argument lies in the random walk theory that the market is efficient such that all information from both the past, present, and unpublished have already reflected in the market price of the security, hence basis for the efficient market hypothesis. though efficient market hypothesis argument has stood the test of time in the field of finance, scholars are of the opinion that the behaviour of investors could affect the performance of the market, hence the behavioural finance theory, that sees investors as both rational and exhibit behavioural biasness while evaluating and pricing securities and that financial markets are informationally inefficient (kumar, 2017). this, therefore, forms the foundation of this study to ascertain the solidity and the immutability of the behavioural finance theory in capital market investment. to address the above concern, the researcher employed various tools that are suitable for financial time series. from the results of these tools employed, none of the markets under study follow the random walk theory within the scope of the study, hence rational investors cannot use the past data or information about the market to predict the outcome of the market. the results of egarch and volatility clustering tests also revealed that all the countries under study exhibited property of stock returns distribution called volatility clustering or volatility pooling, a kind of heteroscedasticity. this means that volatility shocks in the current period influence the expectation of volatility in some period in the future, suggesting nonconformity of the random walk theory. this of course is the reason the global market is dynamic and unpredictable. the failure of the various results to corroborate the random walk theory shows that investors are rational and unpredictable. these results have placed more emphasis on behavioural finance theory as a veritable tool that can guide economic agents on capital market investment decisions. that means the behaviour of investors makes share prices deviate from the economic fundamentals or assumptions. considering the above findings, the researcher boldly advocates for a paradigm shift to behavioural finance theory, where emotions and psychology or mindsets of investors influence investment decision-making process and financial markets, hence a veritable guide for decision on stock market investments. therefore, the researcher went ahead to suggest that emotional and psychological checks be carried out on all investors of the stock market, mostly when an innovation or new policy is promulgated. the researcher suggests further studies should have been on all the well-developed capital markets around the world both developed, emerging, developing and underdeveloped nations. this will help to validate possible inferences, theories and policy making. the study is limited to nigeria, south africa, usa, germany, united arab emirate, china, and nigeria stock markets. the researcher had wished it was extended to all developed capital markets around the world but was hindered by unavailability of data to the researchers. author contributions: conceptualization, e.c.a.; methodology, e.c.a.; software, e.c.a.; validation, e.c.a.; formal analysis, e.c.a.; investigation, e.c.a.; resources, e.c.a.; data curation, e.c.a.; writing – original draft preparation, e.c.a.; writing – review & editing, e.c.a.; visualization, e.c.a.; supervision, e.c.a.; project administration, e.c.a.; funding acquisition, e.c.a. authors have read and agreed to the published version of the manuscript. institutional review board statement: ethical review and approval were waived for this study, due to that the research does not deal with vulnerable groups or sensitive issues. funding: the authors received no direct funding for this research. acknowledgments: n/a informed consent statement: informed consent was obtained from all subjects involved in the study. data availability statement: the data presented in this study are available on request from the corresponding author. the data are not publicly available due to restrictions. conflicts of interest: the authors declare no conflict of interest. agwu, american finance & banking review 8(1) (2023), 1-13 12 references adebanjo, j. f., awonusi, f., & eseyin, o. 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